Optelecom-nkf (OPTC) 10-Q 2001 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

FORM 10–Q

Quarterly Report Under Section 13 or 15(d)
 of the Securities Exchange Act of 1934

For Quarter Ended June 30, 2001                   Commission File No.

Optelecom, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	52-1010850
(State of Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)
9300 Gaither Road Gaithersburg, MD	20877
(Address of Principal Executive Offices)	(Zip Code)
(301) 840–2121
Registrant's Telephone Number, Including Area Code
NONE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.

             Yes ý No o

Common Stock Outstanding as of August 14, 2001                 2,830,611

OPTELECOM, INC.
FORM 10-Q

CONTENTS

PART I.		FINANCIAL INFORMATION
	ITEM 1	UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
		Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000
		Consolidated Statements of Operations for the Three Months Ended June 30, 2001 and 2000
		Consolidated Statements of Operations for the Six Months Ended June 30, 2001 and 2000
		Consolidated Statement of Comprehensive Loss for the Three Months Ended June 30, 2001 and 2000
		Consolidated Statement of Comprehensive Loss for the Six Months Ended June 30, 2001 and 2000
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000
		Notes to Consolidated Financial Statements
	ITEM 2	MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II		OTHER INFORMATION

OPTELECOM, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND DECEMBER 31, 2000
(Unaudited)

ASSETS			2001			2000
Current Assets:
	Cash and cash equivalents		$	122,022		$	233,928
	Accounts and contracts receivable		1,904,678			3,471,767
	Inventories, net		2,880,935			1,802,692
	Prepaid expenses and other assets		184,223			111,081
		Total current assets	5,091,858			5,619,468
Property and equipment, at cost less accumulated depreciation			965,296			1,108,333
Other assets			144,740			144,691
TOTAL ASSETS			$	6,201,894		$	6,872,492
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
	Bank line-of-credit payable		$	1,316,327		$	668,536
	Accounts payable		1,770,582			1,057,295
	Accrued payroll		214,745			226,260
	Other current liabilities		321,030			501,431
	Current portion of leases payable		46,330			46,330
	Current portion of notes payable		875,002			750,000
		Total current liabilities	4,544,016			3,249,852
LONG-TERM LIABILITIES:
	Notes payable		60,000			560,003
	Capital lease		1,131			25,960
	Deferred rent liability		56,515			77,679
TOTAL LIABILITIES			4,661,662			3,913,494
STOCKHOLDERS' EQUITY:
	Common stock, $.03 par value-shares authorized, 15,000,000; issued and outstanding, 2,824,239 and 2,809,725 shares as of June 30, 2001 and December 31, 2000, respectively		84,711			84,292
	Discount on common stock		(11,161		)	(11,161		)
	Additional paid-in capital		10,054,350			10,033,138
	Deferred compensation expense		(20,794		)	(26,862		)
	Foreign currency translation adjustment		263,743			202,896
	Treasury stock, 162,672 shares, at cost		(1,265,047		)	(1,265,047		)
	Accumulated (deficit)		(7,565,570		)	(6,058,258		)
TOTAL STOCKHOLDERS’ EQUITY			1,540,232			2,958,998
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	6,201,894		$	6,872,492

See notes to consolidated financial statements.

OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
(Unaudited)

		2001			2000
Revenues		$	2,573,435		$	2,380,019
Cost of goods sold		1,532,422			1,435,246
Gross profit		1,041,013			944,773
Operating expenses:
	Engineering	377,980			292,339
	Selling and marketing	643,593			466,260
	General and administrative	747,965			845,892
	Total operating expenses	1,769,538			1,604,491
Operating loss		(728,525		)	(659,718		)
Other expenses:
	Interest expense	54,314			84,654
	Total other expenses	54,314			84,654
Loss before benefit for income tax		(782,839		)	(744,372		)
Benefit for income tax		-			(140,000		)
Net loss		$	(782,839	)	$	(604,372	)
Basic loss per share		$	(0.28	)	$	(0.28	)
Diluted loss per share		$	(0.28	)	$	(0.28	)
Weighted Average Shares Outstanding		2,821,000			2,168,661

See notes to consolidated financial statements.

OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)

		2001			2000
Revenues		$	5,628,367		$	4,780,915
Cost of goods sold		3,290,770			2,753,908
Gross profit		2,337,597			2,027,007
Operating expenses:
	Engineering	918,306			505,780
	Selling and marketing	1,213,193			872,506
	General and administrative	1,604,392			1,537,008
	Total operating expenses	3,735,891			2,915,294
Operating loss		(1,398,294		)	(888,287		)
Other expenses:
	Interest expense	109,018			166,524
	Total other expenses	109,018			166,524
Loss before benefit for income tax		(1,507,312		)	(1,054,811		)
Benefit for income tax		-			(200,000		)
Net loss		$	(1,507,312	)	$	(854,811	)
Basic loss per share		$	(0.53	)	$	(0.40	)
Diluted loss per share		$	(0.53	)	$	(0.40	)
Weighted Average Shares Outstanding		2,820,729			2,113,412

See notes to consolidated financial statement.

OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED JUNE 30,
(Unaudited)

	2001			2000
Net Loss	$	(782,839	)	$	(604,372	)
Foreign Currency Translation Adjustments	14,064			94,754
Comprehensive Loss	$	(768,775	)	$	(509,618	)

See notes to consolidated financial statements.

OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)

	2001			2000
Net Loss	$	(1,507,312	)	$	(854,811	)
Foreign Currency Translation Adjustments	60,847			106,862
Comprehensive Loss	$	(1,446,465	)	$	(747,949	)

See notes to consolidated financial statements.

OPTELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)

		2001			2000
Cash Flows From Operating Activities
Net loss		$	(1,507,312	)	$	(854,811	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization	209,812			393,373
	Loss on sale/disposal of fixed assets	1,568			8,604
	Stock based compensation	6,068			(13,214		)
Change in assets and liabilities:
	Accounts and contracts receivable	1,567,089			333,556
	Inventories	(1,078,243		)	(225,048		)
	Prepaid expenses and other assets	(73,142		)	71,604
	Other assets	(49		)	(103,020		)
	Accounts payable	713,287			(48,824		)
	Accrued payroll	(11,515		)	35,147
	Deferred rent	(21,164		)	(17,902		)
	Deferred taxes	-			(228,288		)
	Other current liabilities	(180,401		)	(19,685		)
Net cash used in operating activities		(374,002		)	(668,508		)
Cash Flows From Investing Activities
	Proceeds from sale of equipment	-			7,375
	Capital expenditures	(68,343		)	(135,142		)
Net cash used in investing activities		(68,343		)	(127,767		)
Cash Flows From Financing Activities
	Borrowings on bank line-of-credit payable	6,698,358			3,049,266
	Payments on bank line-of-credit payable	(6,050,567		)	(3,121,881		)
	Payments on long term debt	(375,001		)	(250,000		)
	Payments on capital lease	(24,829		)	(22,415		)
	Proceeds from issuance of common stock	21,631			272,410
	Proceeds from exercise of stock options	-			1,038,644
Net cash  provided by financing activities		269,592			966,024
Effect of currency translations		60,847			106,862
Net (decrease) increase in cash and cash equivalents		(111,906		)	276,611
Cash and cash equivalents - beginning of period		$	233,928		$	51,314
Cash and cash equivalents - end of period		$	122,022		$	327,925
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest		$	109,018		$	156,063

See notes to consolidated financial statements.

OPTELECOM, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.          Basis of Presentation

             The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading.

             In the opinion of management, the unaudited accompanying financial statements reflect all necessary adjustments and reclassifications (all of which are of a normal, recurring nature) that are necessary for fair presentation for the periods presented.  It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 2000.

2.          Line of Credit

             Optelecom has a revolving credit agreement with a bank whereby it may borrow up to $1,700,000 with interest at the bank's prime rate plus 1.5%, which was 8.5% at June 30, 2001.  The total amount of borrowings that may be outstanding at any given time is based on the sum of a percentage of certain eligible accounts receivable plus a percentage of qualifying inventory.  The maximum allowable borrowing against inventory is $600,000.

             Optelecom is required to comply with certain financial ratios including maintaining a minimum current ratio, a minimum cash flow to fixed obligations as well as a maximum debt-to-worth ratio.  The Company was in violation of its cash flow covenants at June 30, 2001.  The bank, however, has provided a waiver of such covenants at December 31, 2000 through the term of the agreement.

             The Company executed a Forbearance Agreement with its bank on July 18, 2001 which extended the line-of-credit through August 31, 2001. The Company expects to reach an agreement with its bank, under similar terms, to extend the line-of-credit past August 31, 2001.  As of June 30, 2001, the Company had approximately $330,000 available under the line-of-credit.

3.          Bank Term Note

             Optelecom has a promissory note agreement with a bank that is collateralized by substantially all the assets and contracts of the Company. The remaining principal, $937,500 is being paid at a monthly rate of $62,500 with the term ending August, 2002. The interest rate is at prime plus 1% and was 8.0% at June 30, 2001.

4.          Inventory

             Inventory consisted of the following:

	June 30, 2001		December 31, 2000
Production materials (Net of allowance for obsolescence of $244,998 at June 30, 2001 and $259,867 at December 31, 2000)	$	1,495,222	$	821,688
WIP	735,541		344,694
Finished goods	650,172		636,310
Total	$	2,880,935	$	1,802,692

5.          Earnings Per Share

             Basic earnings per share is computed using the weighted average number of common shares outstanding.  Diluted earnings per share is computed using the weighted average number of shares outstanding and the treasury stock computation method for stock options, provided they are not antidilutive.  The following is a reconciliation of the basic and diluted earnings per share.

	Three Months ended June 30,
	2001			2000
Net Loss	$	(782,839	)	$	(604,372	)
Weighted average shares – basic	2,821,000			2,168,661
Loss per share – basic	$	(0.28	)	$	(0.28	)
Weighted average shares – basic	2,821,000			2,168,661
Effect of dilution - stock options	-			-
Weighted average shares – diluted	2,821,000			2,168,661
Loss per share – diluted	$	(0.28	)	$	(0.28	)

	Six Months ended June 30,
	2001			2000
Net Loss	$	(1,507,312	)	$	(854,811	)
Weighted average shares – basic	2,820,729			2,113,412
Loss per share – basic	$	(0.53	)	$	(0.40	)
Weighted average shares – basic	2,820,729			2,113,412
Effect of dilution - stock options	-			-
Weighted average shares – diluted	2,820,729			2,113,412
Loss per share – diluted	$	(0.53	)	$	(0.40	)

6.          Business Unit Information

             Optelecom restructured its operations in the third quarter of 2000 into two business segments: the Optical Products unit (OP) which develops, manufactures, and sells optical fiber-based data communication equipment to both commercial and Government clients, and the Video Communications unit (VC) which is focused on the delivery and distribution of video systems over Category5 (CAT5) copper cabling as the transmission medium.

		Three Months Ended June 30, 2001
		Optical Products Division			Video Comm  Products Division			Corporate and Other	Total
Revenues		$	2,326,934		$	292,416		-	$	2,619,350
Intersegment revenues		(45,915		)	-			-	(45,915		)
	Total Revenues	2,281,019			292,416			-	2,573,435
Depreciation & Amortization		101,946			5,709			—	107,655
Operating Loss		(548,136		)	(180,389		)	—	(728,525		)
Assets at June 30, 2001		5,776,282			325,022			100,590	6,201,894
Capital expenditures		45,406			2,371			-	47,777

		Three Months Ended June 30, 2000
		Optical Products  Division			Video Comm Products Division			Corporate and Other		Total
Revenues		$	1,861,165		$	518,854		-		$	2,380,019
Intersegment revenues		-			-			-		-
	Total Revenues	1,861,165			518,854			-		2,380,019
Depreciation & Amortization		93,189			5,583			94,936		193,708
Operating Loss		(342,985		)	(221,797		)	(94,936	)	(659,718		)
Assets at Dec. 31, 2000		6,419,845			993,918			(541,271	)	6,872,492
Capital expenditures		36,000			-			-		36,000

		Six Months Ended June 30, 2001
		Optical Products Division			Video Comm Products  Division			Corporate  and  Other	Total
Revenues		$	4,989,160		$	768,115		-	$	5,757,275
Intersegment revenues		(128,908		)	-			-	(128,908		)
	Total Revenues	4,860,252			768,115			-	5,628,367
Depreciation & Amortization		198,226			11,586			-	209,812
Operating Loss		(1,055,350		)	(354,085		)	11,141	(1,398,294		)
Assets at June 30, 2001		5,776,282			325,022			100,590	6,201,894
Capital expenditures		64,691			3,663			-	68,354

		Six Months Ended June 30, 2000
		Optical Products Division			Video Comm Products Division			Corporate  and  Other		Total
Revenues		$	3,737,098		$	1,043,817		-		$	4,780,915
Intersegment revenues		-			-			-		-
	Total Revenues	3,737,098			1,043,817			-		4,780,915
Depreciation & Amortization		192,214			11,289			189,870		393,373
Operating Loss		(408,026		)	(290,391		)	(189,870	)	(888,287		)
Assets at Dec. 31, 2000		6,419,845			993,918			(541,271	)	6,872,492
Capital expenditures		135,142			-			-		135,142

7.          New Accounting Pronouncements

             Effective January 1, 2001, Optelecom adopted SFAS No. 133, issued by FASB, "Accounting for Derivative Instruments and Hedging Activities", (as amended by SFAS No. 137).  This statement requires companies to record derivatives on their balance sheet as assets or liabilities, measured at fair value.  Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedging accounting.  The Company had no derivative or hedging activity in any of the periods presented and therefore there is no impact of these Standards on its financial position or the results of its operations.

8.          Legal Proceedings

             See Part II - Other Information, Item 1 - Legal Proceedings, on page 12 for a discussion of the Company's litigation activities.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             Except for the historical financial information contained herein, the following discussion and analysis may contain "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Such statements include declarations regarding the intent, belief or current expectations of the Company and its management.  Prospective investors are cautioned that any such forward looking statements are not guarantees of future performance and involve a number of risks and uncertainties; actual results could differ materially from those indicated by such forward looking statements.

             The following discussion should be read in conjunction with the Financial Statements and Notes thereto.

OVERVIEW

             Optelecom offers integrated multi-media products for communicating video, audio, and other data over both copper wire and optical network systems.  Optelecom has two business segments: the Optical Products unit (OP) which designs, manufactures, and sells optical fiber-based data communication equipment to both commercial and Government clients, and the Video Communications unit (VC) which is focused on the delivery and distribution of video systems over Category5 (CAT5) copper cabling as the transmission medium.

             The Optical Products unit addresses business opportunities in the worldwide optical communication equipment marketplace, specializing in optical fiber transmission technologies.  The majority of its current and future revenues are derived from several niche markets that leverage the advantages of fiber optic telecommunications to solve their transmission requirements.  Presently, the vertical markets served include communications systems for highway traffic monitoring, advanced air traffic control video monitor displays, security surveillance and control systems, and manufacturing process and control communications.  Verticals that offer future sources of revenue include Video Teleconferencing, Healthcare, and Broadcasting market opportunities.

             The Video Communications unit addresses worldwide markets in financial market data information and business television services.  Their products include multi-media applications utilizing unshielded twisted-pair copper or “structured” Category 5 (CAT5) cabling for in-house computer data networking applications.  The Video Communications Unit offers technical consulting and various product solutions ranging from complex integration of video delivery to the individual user desk, to video distribution technologies for multiple users.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000

REVENUE

             The revenue for the three months ended June 30, 2001 was $2,573,435 compared to revenue of $2,380,019 for the same period of 2000, representing an 8% increase over last year.

             Revenue for the Optical Products Unit increased by $419,854 or 23% to $2,281,019.  This increase is attributed to last year’s focus of increasing sales channels both domestically and internationally.  Sales to integrators, distributors and OEMs increased substantially.

             The Video Communications Unit had revenue of $292,416, a reduction of $226,439, or 44% from the first quarter of 2000.  The decrease is related to lack of backlog at the beginning of the quarter as a result of delays in customer projects.

GROSS PROFIT

             Gross margin was $1,041,013 for the three months ended June 30, 2001 compared to $944,773 for the same period of 2000.  The increase in gross profit of $96,240 is due primarily to increased sales volume.

             The Optical Products Unit’s gross profit was $939,549 or 40% compared to $783,916, or 42%, in 2000.  Lower gross margin was partially due to increased costs in optical components, due to the market shortage in such components.

             The Video Communications Unit’s gross profit totaled $101,464, or 35%, compared to $160,856, or 31%, in the same period of 2000.  Higher gross margins are attributed to an increase in revenues realized on products produced by Optelecom as opposed to higher-cost third-party suppliers.

ENGINEERING

             The engineering costs for the second quarter of 2001 were $377,980 compared to $292,339 in the second quarter of 2000.  The increase of $85,641 is primarily due to increased personnel costs and consulting/outside services associated with the development of the compressed DV product, a cost effective transmission product for the MPEGII video delivery marketplace.

SELLING AND MARKETING

             Selling and marketing costs increased to $643,593 for the second quarter of 2001 from $466,260 incurred in the same quarter of 2000.  A key reason for the increase was greater commission expense due to the higher sales level in Optical Products.  Marketing costs were also greater than in 2000, due to spending for literature, marketing materials, integrator support programs, and advertising for the Optical Products Unit.

GENERAL AND ADMINISTRATIVE

             General and administrative costs were $747,965 for the second quarter of 2001 compared to $845,891 for the same period in 2000.  This $97,926 decrease in costs is partially due to the reassignment of certain personnel from corporate to operational functions.

OTHER EXPENSES

             Interest expense of $54,314 for the second quarter of 2001 compared to $84,654 for the same period last year.  Interest expense was lower primarily due to the lower principal balance of the Company’s term note and a reduction in the interest rate.

SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

REVENUE

             The revenue for the six months ended June 30, 2001 was $5,628,367 compared to revenue of $4,780,915 for the same period of 2000, representing an 18% increase over last year.

             Revenue for the Optical Products Unit increased by $1,123,155 or 30% to $4,860,252.  This increase is attributed to last year’s focus of increasing sales channels both domestically and internationally.  Sales to integrators, distributors and OEMs increased substantially.

             The Video Communications Unit had revenue of $768,115, a reduction of $275,703, or 26% from the first six months of 2000.  The decrease is related to lack of backlog at the beginning of the quarter as a result of delays in customer projects.

GROSS PROFIT

             Gross margin was $2,337,597,  or 42% for the six months ended June 30, 2001 compared to $2,027,007, or 42% for the same period of 2000.  The increase in gross profit of $310,590 is due primarily to the increased volume in sales.

             The Optical Products Unit’s gross profit was $2,063,911 or 41% compared to $1,649,100, or 44%, in 2000.  Lower gross margin was partially due to increased costs in optics, due to the market shortage in optics.

             The Video Communications Unit’s gross profit totaled $262,545, or 34%, compared to $377,906, or 36%, in the same period of 2000.  Lower gross margins were primarily due to increased use of third-party products in the system solutions sold in Q1.  Gross margins on third party products are considerably lower than margins on internally manufactured products.  As previously mentioned, this situation reversed in Q2 but the effect of Q1 margins still resulted in lower margins for the six-month period.

ENGINEERING

             The engineering costs for the first six months of 2001 were $918,306 compared to $505,780 for the first six months of 2000.  The increase of $412,526 is primarily due to increased personnel costs and consulting/outside services associated with the development of the compressed DV product, a cost effective transmission product for the MPEGII video delivery marketplace.

SELLING AND MARKETING

             Selling and marketing costs increased to $1,213,193 for the first six months of 2001 from $872,506 incurred in the same period of 2000.  A key reason for the increase was greater commission expense due to the higher sales level in Optical Products.  Marketing costs were also greater than in 2000, due to spending for literature, marketing materials, integrator support programs, and advertising for the Optical Products Unit.

GENERAL AND ADMINISTRATIVE

             General and administrative costs were $1,604,392 for the first six months of 2001 compared to $1,537,008 for the same period in 2000.  This $67,384 increase in costs is partially due to higher compensation expense from personnel hired in the second half of 2000 and continued costs associated with the implementation and training of the Company’s new financial accounting and ERP software.

OTHER EXPENSES

             Interest expense of $109,018 for the first six months of 2001 compared to $166,524 for the same period last year.  Interest expense was lower primarily due to the lower principal balance of the Company’s term note and a reduction in the interest rate.

LIQUIDITY AND CAPITAL RESOURCES

             The Company had cash and cash equivalents of $122,022 at June 30, 2001 compared to $233,928 at December 31, 2000.

             During the first six months of 2001, the Company used $374,002 in operating activities compared to the $668,508 used in operating activities in 2000. For the first two quarters of 2001, the Company had a net loss of $1,507,312.  After adding back adjustments such as depreciation, loss on disposal of fixed assets, and stock based compensation, to reconcile the net loss to net cash used by operating activities, the net cash usage was $1,289,864.  Working capital decreased by $915,862:  a $1,567,089 decrease in accounts receivable and a $713,287 increase in accounts payable were partially offset by an increase in inventory of $1,078,243 and a decrease in other current liabilities of $180,401.

             The Company invested $68,343 in 2001 in capital equipment compared to the $135,142 invested in 2000.

             During the first and second quarter of 2001, several employees participated in a stock purchase plan, providing $20,645 in funds to the Company.  In addition, $1,000 in funds were generated from the exercise of employee stock options.  These funds were used for operating activities.

             The Company believes that its current cash, cash from operations and borrowings under its bank line-of-credit are adequate to fund its operations for the next twelve months. The Company is currently in negotiations with its bank to extend the line-of-credit.  Furthermore, the Company will pursue additional funding, either public or private debt or equity financing.

PART II – OTHER INFORMATION

             ITEM 1 - LEGAL PROCEEDINGS

             On June 2, 2000, Optelecom was granted a preliminary injunction against Anthony DeVito, former Optelecom Vice President of Sales and Marketing and Meridian, Inc.  Specifically, DeVito is enjoined from using Optelecom trade secrets and confidential information during the pendency of any litigation, and Meridian was enjoined from employing DeVito in any capacity until September 28, 2000. A trial is currently scheduled for October 2001.  The Company intends to pursue this issue until a final satisfactory resolution is achieved.

             From time to time, the Company is involved in legal proceedings and litigation arising in the ordinary course of business.  As of the date of this report, except as described above, the Company is not a party to any litigation or other legal proceeding that, in the opinion of management, could have a material adverse effect on the Company's business, financial condition or results of operations.

             ITEM 2 - CHANGES IN SECURITIES

                           None.

             ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

               ��           None

             ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

             ITEM 5 - OTHER INFORMATION

                           None

             ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

                           None

             ITEM 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE

                           See Note 5 to the financial statements.

SIGNATURES

             Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		OPTELECOM, INC.
Date:	August 14, 2001	/s/  Clyde Heintzelman
		Clyde Heintzelman, President and Chief Executive Officer
Date:	August 14, 2001	/s/  James Armstrong
		James Armstrong, Controller