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TABLE OF CONTENTS
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2009

Commission file number 0-8828

OPTELECOM-NKF, INC.

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code:
(301) 444-2200.

Securities registered pursuant to Section 12(b) of the Act:
None.

Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.03 Par Value.

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes o    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act: (Check one):

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

         At June 30, 2009, shares of the registrant's Common Stock, $0.03 Par Value, held by persons other than "affiliates" of the registrant had an aggregate market value of $14,034,239 based on the average closing bid and asked prices as reported by the National Association of Securities Dealers Automated Quotation System for such date.

         At March 12, 2010, the registrant had outstanding 3,676,006 shares of Common Stock, $.03 Par Value.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Proxy Statement for the 2010 Annual Meeting of Shareholders are incorporated by reference into Part III.

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OPTELECOM-NKF, INC.
FISCAL YEAR 2009 FORM 10-K ANNUAL REPORT

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PART I

FORWARD LOOKING STATEMENTS

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

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

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

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future revenues;



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expected sales levels and cash flows;



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acquisitions or divestitures of businesses;



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debt payments and related interest rates;



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fluctuations in foreign currency amounts and rates;



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performance issues with key suppliers;



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product performance and the successful execution of internal plans;



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successful negotiation of major contracts;



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effective tax rates, deferred tax assets and timing and amounts of tax payments;



•

the results of any audit or appeal process with the Internal Revenue Service; and



•

anticipated costs of capital investments.

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

Item 1.    BUSINESS

        Optelecom-NKF, Inc., manufacturer of Siqura® advanced video surveillance solutions, provides a full range of network products based on an open technology platform that simplifies integration and installation. Our Siqura solutions offer a blend of ease of use and processing power, enabling end users to optimize the effectiveness of their surveillance systems while reducing the total cost of ownership. Products and solutions are developed and tested for professional and mission critical applications, such as at highway departments, airports, seaports, casinos, public transport authorities, hospitals, city

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centers, shopping centers, military bases, and corporate and government campuses. Founded in 1972, Optelecom-NKF is committed to providing its customers with expert technical advice and support.

        The Optelecom-NKF corporate headquarters is in Germantown, Maryland, USA, with European corporate offices in Gouda, the Netherlands, and sales or support offices covering the Americas, France, Spain, the UK, Germany, Italy, Dubai, and Singapore.

HISTORY

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

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

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

        The Company has received a going concern opinion from its auditors. Its continuation as a going concern is dependent upon obtaining the financing necessary to operate its business and pay its debt. We cannot assure you that we will be able to access any financing in sufficient amounts or at all when needed. Our inability to obtain sufficient working capital funding will have an immediate material adverse effect upon our financial condition and our business.

ORGANIZATION, MARKETS AND PRODUCTS

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

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

        Optelecom-NKF is committed to providing its customers with competitively priced, highly reliable, quality equipment and solutions, along with outstanding technical advice and support. All products are developed and tested for real applications, particularly those that need to operate in challenging environmental conditions and across large distances between individual transmission sites. We are ISO 9001:2008 certified and dedicated to the ongoing improvement of our products and processes, applying a high level of quality monitoring to increase customer satisfaction.

        We sell our products worldwide through direct sales, commercial integrators and resellers. Management expects the primary sales channel to continue to be the commercial integrator with an

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increasing emphasis on developing key accounts on a direct basis. In addition, several vendors incorporate the Company's products in their product offerings allowing the Company to penetrate markets we do not address directly.

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

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

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

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

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

Video over IP solutions

Codecs/Servers for High-quality Video Compression

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

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

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Cameras

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

Software Management Solutions

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

Network Video Recording (i-NVR)

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

Video Network Equipment

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

Video over Fiber Optics

MC Series

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

9000 Series

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

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Electro Optics Products

        In addition to our two primary product categories of Video over IP and Video over Fiber Optics the Company operates an Electro Optics (EO) group focused on Interferometric Fiber Optic Gyro coils and manufacturing innovative optical devices, primarily to U.S. government defense industry customers. In EO, emphasis has been placed on fabrication of precision-wound coils of optical fiber used as the sensing elements of fiber optic gyroscopes. EO also produces precision wound coils for applications ranging from optical fiber dispensers used in remote vehicle control systems to precision optical fiber coils for communications systems. EO represented 2% of the Company's revenue in 2009.

RESEARCH AND DEVELOPMENT

        In recent years the Company has focused on the development of products being applied to the IP Video marketplace. These products may permit us to increase our penetration of the markets we serve and expand into new markets. In previous years the Company increased its research and development staffing and used these additional resources to continue expanding its existing IP product lines. Our research and development expense is classified as a component of Engineering in our financial statements and for the years ended 2009 and 2008 was $4.1 million and $5.5 million respectively.

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

QUALITY MANAGEMENT SYSTEM

        The Company maintains a Quality Management System fully compliant with ISO9001:2008 and maintains an ongoing certification to this standard. In keeping with our continuous improvement objectives, we continually implement enhancements to our quality performance metrics which track internal product defects, out-of-box failures, customer concerns, product repairs and new product introduction issues. With the goal of increasing customer satisfaction, management has continued to stress the importance of the Quality Management System and continues to utilize numerous quality tools, including a corrective action process, internal quality control audits and senior management reviews. Additionally, the Quality Management System provides for proper controls, conducts material review meetings, performs Mean Time Between Failure calculations to determine product reliability and works closely with suppliers to reduce incoming material defects. The U.S. and Netherlands-based facilities synchronize quality processes by standardizing many company-wide procedures.

        In keeping with our Company's commitment to quality products and services we adhere to the following corporate quality policy: Quality is the responsibility of every Optelecom-NKF employee and focuses on everything we do to maintain our competitive edge. Our commitment to quality includes a customer focus, individual ownership for quality, measurement and feedback systems, maintaining an ISO 9001:2008 compliant quality management system, and continual review of our quality objectives.

MANUFACTURING

        Both the US and the Netherlands-based facilities perform routine and specialized manufacturing, assembly, and product testing functions. We use equipment to automatically assemble components onto printed circuit boards at high speed, thereby lowering manufacturing costs and reducing the time-to-market for new product designs. We also maintain a quality assurance function and testing area that performs quality inspections along with optical and electrical testing. Raw materials and supplies used in our business include sheet metal, optical materials, plastic products, and various electronic components, most of which are available from numerous sources. Although the number of companies from which we can obtain optical emitters and detectors for use in our circuit assemblies is limited,

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availability is presently not a significant factor in our ability to provide products. However, suppliers have generally reduced inventory levels as a result of the economic downturn which can cause delays in the Company receiving certain components. In 2009, we continued to focus on decreasing the manufacturing defect rate, making throughput cycle-time improvements, and striving toward work-in-progress (WIP) reductions as the result of embracing lean concepts. This progress is all part of continuous, long-term improvement efforts.

COMPETITION

        We compete with other companies of roughly equal size that have similar or more resources as well as with much larger companies with greater resources. Our competitors include many privately held companies and some public corporations. The Company historically competes in two primary market segments, traffic monitoring and security surveillance. The competition in these markets often has established mature sales channels that allow for continued market penetration in both domestic and international markets. Management believes that the expansion of the Company's IP product offering through its sales and distribution channels worldwide will be the basis for future development.

SEASONALITY

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

EMPLOYEES

        At December 31, 2009, the Company had 160 full time equivalent employees worldwide, including 48 in manufacturing, 55 in sales and marketing, 33 in research, development and engineering, 3 in Electro Optics, and 21 in general management, quality management, finance and administration. We expect a decrease in headcount over the next 12 months.

CORPORATE

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

Item 1A.    RISK FACTORS

Fluctuations in financial performance and recent losses could harm our ability to increase revenue and become profitable.

        We have experienced and may continue to experience fluctuations in our quarterly and annual operating results. For the year ended December 31, 2009, our financial performance included lower levels of revenue and gross profit compared to the year ended December 31, 2008. Our revenue declined approximately 20% during the year while gross profit declined from $27.2 million to $20.7 million. Factors that may cause operating results to vary and negatively impact our ability to become profitable include, but are not limited to, the shift by our customers from fiber optic to IP products, the need to transition our U.S. sales model to respond to the market shift to IP products, changing technology, new product transitions, delays in new product introductions, competition, shortages of system components, changes in the mix of products and services sold, economic factors, and timing of planned expenditures in facilities and research and development. The current economic

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environment is marked by significant instability and continued economic weakness may be expected for the near future. As a result of the impact of these and other factors, we may not be able to become profitable in the near future and past financial performance should not be considered to be a reliable indicator of the future performance in any particular fiscal period. We are somewhat limited in our ability to reduce expenses quickly in response to any revenue shortfalls. Therefore, our business, financial condition, and operating results could be adversely affected if we do not achieve increased revenues.

We may not be able to continue as a going concern.

        Our financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have not made any adjustments to our financial statements as a result of the going concern modification to the report of our independent registered public accounting firm. If we become unable to continue as a going concern, we could have to liquidate our assets, which means that we are likely to receive significantly less for those assets than the values at which such assets are carried on our financial statements Any shortfall in the proceeds from the liquidation of our assets would directly reduce the amounts, if any, that holders of our common stock could receive in liquidation.

        There can be no assurance that our plans will be successful, and other unforeseeable actions may become necessary. Any inability to obtain financing or raise capital may require us to reduce the level of our operations. Such actions would have a material adverse effect on us, our business, and operations and result in charges that would be material to our business and results of operations.

Our current capital may not provide the funds necessary for our short and long-term cash requirements and we may not be able to secure additional funding.

        Our current capital resources including operating cash flows may not generate the funds needed for our short and long-term cash requirements. Accordingly, we would be required to seek additional funding. In those circumstances, we would look to increase our debt and/or pursue equity financing. There can be no assurance that additional financing will be available in a timely manner or on acceptable terms. If issuing equity securities raises additional funds, further dilution to existing stockholders will result. If adequate funds are not available when needed, we may be required to delay, scale back or eliminate product development, sales and marketing, and overhead costs or potentially be unable to make debt payments or meet other obligations.

The current economic environment has had a negative impact on our business and we may be required to restructure our operations.

        During 2009, our business experienced the effects of negative macroeconomic conditions, further aggravated by customer specific challenges and disruptions in the financial and credit markets globally. The affects on our business is spread across our customer segments and geographies with a particular focus in the U.S. Uncertainty around current macroeconomic and industry conditions persists, particularly the effect these conditions and a sustained lack of liquidity in the capital markets will continue to have on the capital spending of our customers. We are uncertain of the impact this may have in future periods on the spending or financial position of our customers. We can not be certain how long these conditions will continue and the magnitude of their effects on our business and results of operations. Consequently, these conditions have negatively affected our business and made our forecasting and planning more difficult. We expect the near term market conditions to be challenging and we continue to seek longer term market opportunities.

        During this period of uncertainty, we plan to balance our strategy of continued product development and manage our workforce and operating costs carefully to ensure that they are aligned

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with our business and market opportunities. To that end, during 2009 and 2008, we effected staff reductions and we continue to explore additional organizational changes and staff reductions that will allow us to better manage our operations and reduce operating costs. These organizational changes increase the risk that objectives will not be met due to the allocation of valuable limited resources to implement changes. Further, due to the uncertain nature of any of these undertakings, these efforts may not be successful and we may not realize anticipated benefits from these efforts.

We issued $23.1 million of senior and subordinated notes in connection with our acquisition of NKF.

        In connection with the acquisition of NKF, we issued $23.1 million of senior and subordinated notes. The issuance of these notes substantially increased our principal payment obligations and we may not have enough cash to repay the notes when due. By incurring indebtedness, the related risks that we face intensify. The degree to which we are leveraged could materially and adversely affect our ability to successfully obtain financing for working capital or other purposes and could make us more vulnerable to industry downturns and competitive pressures. The current economic environment is marked by limited availability of credit in the business sector and we may be required to pursue equity or other financing, if available at all, to refinance the acquisition debt on less than favorable terms. At December 31, 2009, we have an outstanding balance of $14.7 million on this debt. The senior note of $1.9 million was paid in full in March 2010 and the subordinated note is due in full on March 8, 2011.

Our obligations under the promissory note issued to Draka Holding N.V. in connection with the acquisition of NKF are secured by the majority of our assets.

        On March 5, 2010, we entered into an amended and restated subordinated promissory note with Draka Holding N.V., pursuant to which Draka agreed to extend the term of the note to March 8, 2011. The current principal amount under the note is €9.1 million Euros ($12.5 million at the prevailing exchange rate on the transaction date). Our obligations under the note are secured by the assets of the Company and a pledge of 65% of the shares of Optelecom-NKF Holding B.V., our holding company in The Netherlands. Fair value of this 65% approximates $14.0 million at December 31, 2009. We do not expect to be able to generate sufficient cash from operations to pay the note when it becomes due. Accordingly, if we are unable to secure financing or equity to refinance the note, Draka could foreclose on its security interest and liquidate the assets securing our obligations under the note.

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

        For the year ended December 31, 2009, approximately 20% of our revenues were accounted for by sales to five commercial customers. This is similar to the prior year when five customers represented 29% of our revenues. In the event of a reduction, delay or cancellation of orders from one or more significant customers or if one or more significant customers selects products from one of our competitors for inclusion in future projects, our business, financial condition and operating results could be materially and adversely affected. There can be no assurance that current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers. The loss of one or more of our current significant customers could materially and adversely affect our business, financial condition and operating results.

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

        The markets in which we sell our products are highly competitive and characterized by rapidly changing technologies. We face significant competition from a large number of domestic and international competitors, some of which are larger and have larger product development, research and

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

Our management structure is globally integrated.

        Our corporate structure globally integrates the management functions into one group to address the continually changing technology trends within the industry. The Company was previously established as individually and separately-managed units at our U.S. global headquarters and European operating facilities. Global integration includes product development, manufacturing, sales processes, finance and information technology. The challenges involved in this structure include the following:

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Coordinating manufacturing operations in a rapid and efficient manner;



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Combining product offerings and product lines effectively and quickly;



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Integrating sales efforts so that customers can do business easily with the combined company;



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Bringing together the companies' marketing efforts so that the industry receives useful information about our products and services;



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Coordinating research and development activities to enhance introduction of new products and technologies; and



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Ensuring employee compatibility in diverse global offices and markets.

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

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

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

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

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operating and product development results, may have a significant impact on the market price of our Common Stock.

        We have not paid any cash dividends since our inception and we do not anticipate paying any cash dividends in the foreseeable future. In addition, dilution will occur upon the exercise of outstanding stock options or issuance of additional stock. Further dilution could be significant if we experience additional requirements to fund operations and decide to complete a future equity financing.

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

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

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Potential Deferment or Cancellation of Purchases and Orders by Customers:  Uncertainty about current and future global economic conditions may cause businesses and governments to defer or cancel purchases in response to tighter credit, decreased cash availability and declining consumer confidence. If future demand for our products declines, it will adversely impact our financial results.



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Customers' Inability to Obtain Financing to Make Purchases from the Company and/or Maintain Their Business:  Some of our customers require substantial financing in order to fund their operations and make purchases from the Company. The inability of these customers to obtain sufficient credit to finance purchases of our products and/or meet their payment obligations to us could have an adverse impact on our financial results. In addition, if the financial crisis results in insolvencies for our customers, it will adversely impact our financial results.

We face risks related to our international operations and revenue.

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

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currency fluctuations;



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our ability to comply with customs, import/export and other trade compliance regulations of the countries in which we do business, together with any unexpected changes in such regulations;



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difficulties in establishing and enforcing our intellectual property rights;



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tariffs and other trade barriers;



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political, legal and economic instability in foreign markets;



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difficulties in staffing and management;



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language and cultural barriers;



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seasonal reductions in business activities in the countries where our international customers are located;



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integration of foreign operations;



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longer payment cycles;



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greater difficulty in accounts receivable collection; and

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•

potential adverse tax consequences.

        Net revenue from International and U.S. based business accounted for 72% and 28%, respectively, of the Company's total revenue in 2009. Within the U.S. based business sales to customers in Canada, South and Central America were 12% in 2009. We expect that revenue from customers outside the United States will continue to account for a significant portion of our total net revenue.

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

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

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

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

Item 1B.    UNRESOLVED STAFF COMMENTS

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

Item 2.    PROPERTIES

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

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

Item 3.    LEGAL PROCEEDINGS

        None.

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PART II

Item 4.    MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        The Company's Common Stock, representing its only class of publicly traded securities, is traded on the NASDAQ Global Market under the symbol OPTC. The following are the highest and lowest closing bid prices for the Common Stock as reported by NASDAQ during each quarter for the two years ended December 31, 2009 and 2008, respectively. These quotations may not necessarily reflect actual transactions:

        At March 12, 2010, the closing price of our Common Stock was $2.55.

        There were 3,676,006 shares of Common Stock outstanding as of March 12, 2010, and 470 record holders as of such date. The Company has never declared or paid any cash dividends on its Common Stock and does not expect to do so in the foreseeable future. The Company intends to use any future earnings to finance its operations or repay its debt obligations.

        The following is information on the Company's equity compensation plans as of December 31, 2009.

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Item 5.    SELECTED CONSOLIDATED FINANCIAL DATA

        The following table sets forth selected historic consolidated financial data for the periods and dates indicated. This information is derived from the Company's audited consolidated financial statements. The information set forth below is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements, the related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        Optelecom-NKF, Inc., manufacturer of Siqura® advanced video surveillance solutions, provides a full range of network products based on an open technology platform that simplifies integration and installation. Our Siqura solutions offer a blend of ease of use and processing power, enabling end-users to optimize the effectiveness of their surveillance systems while reducing the total cost of ownership. All products and solutions are developed and tested for professional and mission-critical applications, such as at highway departments, airports, seaports, casinos, public transport authorities, hospitals, city centers, shopping centers, military bases, and corporate and government campuses.

        Founded in 1972, all Optelecom-NKF IP surveillance solutions are marketed under the Siqura® name. Our corporate headquarters is in Germantown, Maryland, USA, with European corporate offices in Gouda, the Netherlands, and sales offices or support covering the Americas, France, Spain, the UK, Germany, Italy, Dubai, China and Singapore.

        Optelecom-NKF provides competitively priced, highly reliable, top quality equipment and solutions, along with technical advice and support. All products are developed and tested for real applications, particularly those that need to operate in challenging environmental conditions and across large distances between individual transmission sites. We are ISO 9001:2008 certified and dedicated to the ongoing improvement of our products and processes, applying a high level of quality monitoring to increase customer satisfaction.

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

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

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

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

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

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

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

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

        Through the twelve months ended December 31, 2009, our financial performance included lower levels of revenue and gross profit compared to the year ended December 31, 2008. Our revenue declined 20% during the year while gross profit declined from $27.2 million to $20.7 million resulting in a net loss of $2.4 million. During 2009, our business experienced the effects of negative macroeconomic conditions, further aggravated by customer specific challenges and disruptions in the financial and credit markets globally. The affects on our business are spread across our customer segments and geographies with a particular focus in the U.S.

        Uncertainty around current macroeconomic and industry conditions persists, particularly the effect these conditions and a sustained lack of liquidity in the capital markets will continue to have on the capital spending of our customers. We are uncertain of the impact this may have in future periods on the spending or financial position of our customers. We can not be certain how long these conditions will continue and the magnitude of their effects on our business and results of operations. Consequently, these conditions have negatively affected our business and made our forecasting and planning more difficult. We expect the near term market conditions to be challenging and we continue to seek longer term market opportunities.

        During this period of uncertainty, we plan to balance our strategy of continued product development and manage our workforce and operating costs carefully to ensure that they are aligned with our business and market opportunities. To that end, during 2009 and 2008, we effected staff reductions which resulted in restructuring charges of approximately $127 thousand and $525 thousand, respectively, in severance costs.

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        Our continuation as a going concern is dependent upon obtaining the financing necessary to operate the business. If we cannot find sources of additional financing to fund our working capital needs, we will be unable to obtain sufficient capital resources to operate the business. We continue to work toward refinancing our debt obligations which come due in March 2011. However, there is no guarantee that financing will be available for all or part of our outstanding debt. As a result, the Company announced it has authorized its investment banker, Seale & Associates, to expand its role and conduct a broad evaluation of strategic options.

RESULTS OF OPERATIONS

        Revenue for 2009 was $36.2 million, a decrease of 20% when compared to 2008. Information regarding the Company's U.S. and international based operations is included in the following table. For the purposes of this table and the following discussion, revenue classified as U.S. based includes Canada, Central and South America.:

        Our international operations include the impact from foreign currency translation. On average, the Dollar was stronger in 2009 with an average exchange rate to the Euro of 1.39 compared to 1.47 in 2008. The result of a strengthening Dollar as it relates to our consolidated financial results is that we translated Euro and Pound Sterling sales and related expenses at proportionally lower U.S. Dollar equivalents.

        Overall, 2009 revenue from our international operations accounted for 72% of total revenue. Revenue in our European based operations decreased 14% to $26.2 million while international operating expenses decreased 7% during the year. The result is a 65% decrease in international operating profits which totaled $1.3 million in 2009. Excluding the impact of foreign exchange rates the international revenue decrease would have been 8% while the operating expenses would have decreased 2%. Our strongest region is Northern Europe representing almost 36% of the Company's worldwide revenue.

        Revenue in our U.S. based operations totaled $10.0 million in 2009 representing a 33% decline from 2008. U.S. operating expenses decreased 13% during the year. The result is an increased U.S. loss from operations in 2009 totaling $3.1 million. The U.S. business continues to be negatively impacted by a number of factors including the macro economic environment, a sales model that is often dependent upon third party representatives and dependence on a shrinking legacy fiber optic product market. The Mid-Atlantic, Northeast and Southeast collectively represent about 68% of the total U.S. business.

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

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