You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes.



The following discussion contains forward-looking statements that involve risks
and uncertainties, such as statements of our plans, objectives, expectations and
intentions. Our actual results could differ materially from those discussed in
the forward-looking statements. Please also see the cautionary language at the
beginning of this Annual Report on Form 10-K regarding forward-looking
statements.

The following discussions also include use of the non-GAAP term "gross margin,"
as well as other non-GAAP measures discussed in more detail under the heading
"Non-GAAP Financial Measures."  Gross margin is determined by deducting the cost
of sales from operating revenue. Cost of sales includes manufacturing direct and
indirect labor, materials, services, fixed costs for rent, utilities and
depreciation, and variable overhead. Gross margin should not be considered an
alternative to operating income or net income, both of which are determined in
accordance with GAAP. We believe that gross margin, although a non-GAAP
financial measure, is useful and meaningful to investors as a basis for making
investment decisions. It provides investors with information that demonstrates
our cost structure and provides funds for our total costs and expenses. We use
gross margin in measuring the performance of our business and have historically
analyzed and reported gross margin information publicly. Other companies may
calculate gross margin in a different manner.

Potential Impact of COVID-19



In March 2020, the WHO declared the outbreak of COVID-19 as a pandemic based on
the rapid increase in global exposure. COVID-19 has spread throughout world,
including the United States, and continues to spread as additional variants
emerge. As a result of the COVID-19 pandemic, our employees at our facilities in
China, Latvia, and the U.S. were subject to stay-at-home orders during a portion
of fiscal 2021, which restrictions have been lifted as of the date of this
Annual Report on Form 10-K. In addition to stay-at-home orders, many
jurisdictions also implemented socially distancing and other restrictions and
measures to slow the spread of COVID-19. These restrictions significantly
impacted economic conditions in the U.S. in 2020 and continued into 2021.
Beginning in the spring of 2021, we have seen some restrictions lift as vaccines
have become more available. Despite these stay-at-home orders and other measures
and restrictions implemented in the areas in which we operate, as a critical
supplier to both the medical and defense industries, we were deemed to be an
essential business; thus, regardless of the stay-at-home orders, our workforce
was permitted to work from our facilities and our business operations have
generally continued to operate as normal. Nonetheless, despite the lifting of
these stay-at-home orders, out of concern for our workforce, our U.S.- and
Latvia-based non-manufacturing employees have continued to work remotely to some
extent. In the case of our manufacturing staff in the United States, China, and
Latvia, we have staggered shifts to reduce contact within shifts and between
different shifts, where possible, and have minimized interaction and physical
proximity between employees working within the same building. To date, we have
not seen any significant direct financial impact of COVID-19 to our business.
However, the COVID-19 pandemic continues to impact economic conditions, which
could impact the short-term and long-term demand from our customers and,
therefore, has the potential to negatively impact our results of operations,
cash flows, and financial position in the future. Management is actively
monitoring this situation and any impact on our financial condition, liquidity,
and results of operations. However, given the daily evolution of the COVID-19
pandemic and the global responses to curb its spread, we are not presently able
to estimate the effects of the COVID-19 pandemic on our future results of
operations, financial, or liquidity in fiscal 2022 or beyond.


                                       22

Effect of Certain Events Occurring at Our Chinese Subsidiaries



In April 2021, we terminated several employees of our China subsidiaries, LPOIZ
and LPOI, including the General Manager, the Sales Manager, and the Engineering
Manager, after determining that they had engaged in malfeasance and conduct
adverse to our interests, including efforts to misappropriate certain of our
proprietary technology, diverting sales to entities owned or controlled by these
former employees and other suspected acts of fraud, theft and embezzlement. In
connection with such terminations, our China subsidiaries have engaged in
certain legal proceedings with the terminated employees.

We have incurred various expenses associated with our investigation into these
matters prior and subsequent to the termination of the employees and the
associated legal proceedings. These expenses, which included legal, consulting
and other transitional management fees, totaled $718,000 during the year ended
June 30, 2021. Such expenses were recorded as "Selling, general and
administrative" expenses in the accompanying Consolidated Statement of
Comprehensive Income (Loss).

We also identified a further potential liability in the amount of $210,000,
which we may incur in the future due to the actions of these employees. This
amount has been accrued as of June 30, 2021, pending further investigation, and
included in "Other Expense, net" in the accompanying Consolidated Statement of
Comprehensive Income (Loss).

Knowing that employee transitions in international subsidiaries can lead to
lengthy legal proceedings that can interrupt the subsidiary's ability to
operate, compounded by the fact that our officers could not travel to China to
oversee the transitions because of the travel restrictions imposed by COVID-19,
we chose to enter into severance agreements with certain of the employees at the
time of termination. Pursuant to the severance agreements, LPOIZ and LPOI agreed
to pay such employees severance of approximately $485,000 in the aggregate, to
be paid over a six-month period.  After the execution of the severance
agreements, we discovered additional wrongdoing by the terminated employees. As
a result, LPOIZ and LPOI have not yet paid the severance payments and have
disputed the employees' rights to such payment.  However, based on the
likelihood that the courts in China will determine that our subsidiaries will
ultimately be obligated to pay these amounts, we have accrued for these payments
as of June 30, 2021, and such expenses were recorded as "Selling, general and
administrative" expenses in the accompanying Consolidated Statement of
Comprehensive Income (Loss).

We have transitioned the management of LPOI and LPOIZ to a new management team
without any significant detrimental effects on their ability to operate. We do
not expect any material adverse impact to the business operations of LPOI or
LPOIZ as a result of the transition.

We expect to incur additional legal fees and consulting expenses in future periods as we continue to pursue our legal options and remedies; however, such future fees are expected to be at lower levels than have been incurred to date.



Although we have taken steps to minimize the business impacts from the
termination of the local management employees and transition to new management
personnel, we experienced some short-term adverse impacts on LPOIZ's and LPOI's
domestic sales in China and results of operations in the three-month period
ended June 30, 2021, which we anticipate may continue for the next one to two
quarters. We have not experienced, nor do we anticipate, any material adverse
impact on LPOIZ's or LPOI's production and supply of products to LightPath

for
LightPath's customers.

Results of Operations

Operating Results for Fiscal Year Ended June 30, 2021 compared to the Fiscal Year Ended June 30, 2020:

Revenues:


Revenue for fiscal 2021 was approximately $38.5 million, an increase of 10%, as
compared to $35.0 million in fiscal 2020. Revenue generated by infrared products
was approximately $21.0 million in fiscal 2021, an increase of 16%, as compared
to the prior fiscal year. The increase in revenue is attributed to increases in
sales of both molded and diamond-turned infrared products to customers in the
industrial market, including a key customer with an annual supply agreement,
which agreement was renewed for a higher dollar value during fiscal 2021.
Industrial applications, firefighting cameras, and other public safety
applications continue to be the primary drivers of the increased demand for
infrared products, including thermal imaging assemblies. More recently, we have
seen an increase in demand for medical and temperature sensing applications,
such as fever detection. Demand for temperature sensing applications have been
accelerated by COVID-19, and although the demand has leveled off since the
initial spike, it remains elevated.


                                       23


Revenue generated by PMO products was approximately $15.9 million for fiscal
2021, an increase of 8%, as compared to the prior fiscal year. The increase in
revenue is primarily attributed to a significant increase in sales through
catalog and distribution channels, which were negatively impacted during the
second half of fiscal 2020 due to the impact of COVID-19 on colleges and
universities. This increase was partially offset by a decrease in sales to
customers in the telecommunications market, for which orders began to slow down
in the second half of fiscal 2021. We believe this slowdown to be temporary;
however, we expect it to continue for at least two more quarters, as customers
align their inventory levels to the next phase of their 5G rollout.

Revenue generated by specialty products was approximately $1.6 million in fiscal
2021, a decrease of approximately 29% as compared to fiscal 2020. This decrease
is primarily due to NRE project revenue as well as sales of certain legacy
specialty products in fiscal 2020 not recurring in fiscal 2021. NRE revenue is
project based and the timing of any such projects is wholly dependent on our
customers and their project activity.

Cost of Sales and Gross Margin:
Gross margin for fiscal 2021 was approximately $13.4 million, a decrease of 3%,
as compared to approximately $13.8 million in fiscal 2020. Total cost of sales
was approximately $25.0 million for fiscal 2021, compared to $21.1 million for
fiscal 2020, an increase of 18%. Gross margin as a percentage of revenue was 35%
for fiscal 2021, compared to 40% for the prior fiscal year. Margins for PMO
products have generally been strong, although the decrease in sales for the
fourth quarter of fiscal 2021, as compared to the fourth quarter of fiscal 2020,
resulted in some inefficiencies due to under-utilized capacity. However, margins
for our infrared products have been below our target levels. During fiscal 2021,
we began high-volume delivery of several key infrared OEM projects, which orders
consisted of products with both our molded as well as diamond turned BD6
material. As is typical of scaling new products into volume production, we
experienced a number of technical challenges, both related to the fabrication of
the components, as well as some of the value-added activities such as coating
and assembly. While such early-stage problems are common, we expect to resolve
the issues, improve production yields and elevate the products to their target
gross margin levels.

Selling, General and Administrative:
For fiscal 2021, Selling, General and Administrative ("SG&A") costs were
approximately $12.0 million, an increase of approximately $3.0 million, or 34%,
as compared to the prior fiscal year. SG&A for fiscal 2021 included the
following non-recurring expenses: (i) $1.2 million of expenses associated with
the previously described events that occurred at our Chinese subsidiaries,
including severance, legal and consulting fees, (ii) approximately $400,000 of
additional compensation to our former Chief Executive Officer, as previously
disclosed in the Current Report on Form 8-K filed with the SEC on November 18,
2020, and (iii) approximately $150,000 of additional stock compensation recorded
as certain RSUs vested upon the retirement of two directors. The remaining
increase of $1.3 million is due to an increase in recruiting costs associated
with the changes to our executive leadership team, as well as an increase in
outside consulting services for projects related to operational improvements,
and an increase in personnel-related costs associated with filling key
positions.

New Product Development:
New product development costs were approximately $2.2 million in fiscal 2021, an
increase of approximately 26%, as compared to approximately $1.7 million in the
prior fiscal year. This increase was primarily due to the addition of
engineering employees and outside services in order to support the demand for
optical design.

Other Expense:
Interest expense was approximately $215,000 for fiscal 2021, compared to
approximately $339,000 in the prior fiscal year. The decrease in interest
expense is due to lower interest rates and a 17% reduction in our total debt,
including finance lease obligations, and excluding operating lease liabilities,
as of June 30, 2021, as compared to the end of the prior fiscal year.

Other expense, net, was approximately $194,000 in for fiscal 2021, compared to
approximately $175,000 for fiscal 2020. Net losses on foreign exchange
transactions were lower for fiscal 2021, however fiscal 2021 also includes
expenses of $210,000 that we accrued, pending further investigation, related to
the previously described events that occurred at our Chinese subsidiaries. We
execute all foreign sales from our U.S. facilities and inter-company
transactions in U.S. dollars, partially mitigating the impact of foreign
currency fluctuations. Assets and liabilities denominated in non-United States
currencies, primarily the Chinese Yuan and Euro, are translated at rates of
exchange prevailing on the balance sheet date, and revenues and expenses are
translated at average rates of exchange for the year. During fiscal 2021, we
incurred net foreign currency transaction losses of approximately $1,000,
compared to $214,000 for fiscal 2020.

Income Taxes:
During the fiscal 2021, we recorded income tax expense of approximately
$934,000, compared to approximately $764,000 in fiscal 2020, primarily related
to income taxes from our operations in China. Income taxes for fiscal 2021 and
2020 also included Chinese withholding taxes of $500,000 and $200,000,
respectively, associated with intercompany dividends declared by LPOIZ, payable
to us as the parent company. While this repatriation transaction resulted in
some additional Chinese withholding taxes, LPOIZ currently qualifies for a
reduced Chinese income tax rate; therefore, the total tax on those earnings was
still below the normal income tax rate.  The remaining income tax provision for
fiscal 2021 resulted from an increase in the valuation allowance on our U.S.
deferred tax assets. Please refer to Note 9, Income Taxes, in the Notes to the
Consolidated Financial Statements in this Annual Report on Form 10-K for
additional information related to each of our tax jurisdictions.


                                       24


Net Income (Loss):

Net loss for fiscal 2021 was approximately $3.2 million, or $0.12 basic and
diluted loss per share, compared to net income of approximately $867,000, or
$0.03 basic and diluted earnings per share, for fiscal 2020. The decrease in net
income for fiscal 2021, as compared to fiscal 2020, is primarily attributable to
a $4.0 million decrease in operating income resulting from lower gross margin,
and higher operating expenses, including the aforementioned $2.0 million of SG&A
and Other expenses related to expenses incurred in connection with the
previously described events that occurred at our Chinese subsidiaries, the
payment of additional compensation to our former Chief Executive Officer, and
additional stock compensation as a result of the retirement of two of our
directors. Non-operating items include a favorable difference in foreign
exchange gains and losses of approximately $213,000, and an unfavorable
difference of approximately $170,000 in the provision for income taxes.

Weighted-average common stock shares outstanding were 26,314,025 for both basic
and diluted in fiscal 2021, compared to 25,853,419 and 27,469,845 basic and
diluted, respectively, in fiscal 2020. The increase in the weighted-average
basic common shares was due to the issuance of shares of Class A common stock
(i) under the 2014 ESPP, (ii) upon the exercises of stock options, and (iii)
underlying vested RSUs. Potential dilutive common stock equivalents were
excluded from the calculation of diluted shares for fiscal 2021, as their
effects would have been anti-dilutive due to the net loss in that period.

Liquidity and Capital Resources


At June 30, 2021, we had working capital of approximately $12.3 million and
total cash and cash equivalents of approximately $6.8 million. Greater than 50%
of our total cash and cash equivalents was held by our foreign subsidiaries in
China and Latvia. Cash and cash equivalents held by our foreign subsidiaries in
China and Latvia were generated in-country as a result of foreign earnings.
Historically, we considered unremitted earnings held by our foreign subsidiaries
to be permanently reinvested. However, during fiscal 2020, we began declaring
intercompany dividends to remit a portion of the earnings of our foreign
subsidiaries to us, as the U.S. parent company. It is still our intent to
reinvest a significant portion of earnings generated by our foreign
subsidiaries, however we also plan to repatriate a portion of their earnings.

In China, before any funds can be repatriated, the retained earnings of the
legal entity must equal at least 50% of the registered capital. During fiscal
2021 and 2020, we repatriated approximately $4 million and $2 million,
respectively, from LPOIZ. Based on retained earnings as of December 31, 2020,
the end of the prior statutory tax year, LPOIZ had an additional $5.6 million
available and LPOI did not have any earnings available for repatriation. Based
on our previous intent, we had not historically provided for future Chinese
withholding taxes on the related earnings. However, during fiscal 2020 we began
to accrue for these taxes on the portion of earnings that we intend to
repatriate.

Loans payable as of June 30, 2021 consisted of the term loan in the original
principal amount of approximately $5.8 million (the "BankUnited Term Loan")
issued in favor of BankUnited, N.A. ("BankUnited") and an equipment loan with a
third party. Details of the loans are as follows:

BankUnited Loans



On February 26, 2019, we entered into the Loan Agreement (the "Loan Agreement")
with BankUnited for the BankUnited Term Loan, a revolving line of credit up to a
maximum amount of $2 million (the "BankUnited Revolving Line"), and a
non-revolving guidance line of credit up to a maximum amount of $10 million (the
"Guidance Line" and together with the BankUnited Revolving Line and BankUnited
Term Loan, the "BankUnited Loans"). On May 6, 2019, we entered into that certain
First Amendment to Loan Agreement, effective February 26, 2019, with BankUnited
(the "Amendment" and, together with the Loan Agreement, the "Amended Loan
Agreement").  On September 9, 2021, we entered into a letter agreement with
BankUnited (the "Letter Agreement"). The Letter Agreement: (i) reduces the fixed
charge coverage ratio to 1.0 for the quarter ending September 30, 2021 and to
1.1 for the quarter ended December 31, 2021; (ii) modifies the calculation for
both the fixed charge coverage ratio and the total leverage ratio to provide for
adjustments related to expenses incurred in connection with the events at LPOI
and LPOIZ, which expenses must be approved by BankUnited; (iii) terminates the
Guidance Line; and (iv) requires approval from BankUnited prior to our being
able to draw upon the Revolving Line, subject to our compliance with the fixed
charge coverage ratio for the quarters ending September 30, 2021 and December
31, 2021. The Letter Agreement also granted us a waiver of default arising prior
to the Letter Agreement for our failure to comply with the fixed charge coverage
ratio measured on June 30, 2021. Based on the waiver, we are no longer in
default of the Amended Loan Agreement. Finally, in connection with the Letter
Agreement, we paid BankUnited a fee equal to $10,000.

Our obligations under the Amended Loan Agreement are collateralized by a first
priority security interest (subject to permitted liens) in all of our assets and
the assets of our U.S. subsidiaries, GelTech, Inc. ("GelTech") and ISP, pursuant
to a Security Agreement granted by GelTech, ISP, and us in favor of BankUnited.
Our equity interests in, and the assets of, our foreign subsidiaries are
excluded from the security interest.

BankUnited Revolving Line



Amounts borrowed under the BankUnited Revolving Line may be repaid and
re-borrowed at any time prior to February 26, 2022, at which time all amounts
will be immediately due and payable.   Pursuant to the Letter Agreement,
advances from the BankUnited Revolving Line will require specific lender
approval, which will not be granted in the absence of compliance with all
applicable covenants, as amended.  The advances under the BankUnited Revolving
Line bear interest, on the outstanding daily balance, at a per annum rate equal
to 2.75% above the 30-day LIBOR.  Interest payments are due and payable, in
arrears, on the first day of each month.  There were no amounts outstanding
under the BankUnited Revolving Line as of June 30, 2021.


                                       25


BankUnited Term Loan

Pursuant to the Amended Loan Agreement, BankUnited advanced us $5,813,500 to
satisfy in full the amounts owed to our previous lender for financing related to
the acquisition of ISP, and to pay the fees and expenses incurred in connection
with closing of the BankUnited Loans. The BankUnited Term Loan is for a 5-year
term, but co-terminus with the BankUnited Revolving Line should the BankUnited
Revolving Line not be renewed beyond February 22, 2022. Management expects the
BankUnited Revolving Line to be renewed. The BankUnited Term Loan bears interest
at a per annum rate equal to 2.75% above the 30-day LIBOR. Equal monthly
principal payments of $48,445.83, plus accrued interest, are due and payable, in
arrears, on the first day of each month during the term. Upon maturity, all
principal and interest shall be immediately due and payable. As of June 30,
2021, the applicable interest rate was 2.84% and the outstanding balance on the
BankUnited Term Loan was approximately $4.5 million.

Guidance Line



Prior to the Letter Agreement, the Amended Loan Agreement provided that
BankUnited, in its sole discretion,  could make loan advances to us under the
Guidance Line up to a maximum aggregate principal amount outstanding not to
exceed $10,000,000, which proceeds could have been used for capital expenditures
and approved business acquisitions. Such advances were required to be in minimum
amounts of $1,000,000 for acquisitions and $500,000 for capital expenditures,
and would have been limited to 80% of cost or as otherwise determined by
BankUnited. Amounts borrowed under the Guidance Line could not be re-borrowed.
The advances under the Guidance Line would bear interest, on the outstanding
daily balance, at a per annum rate equal to 2.75% above the 30-day LIBOR.
 Interest payments would be due and payable, in arrears, on the first day of
each month. On each anniversary of the Amended Loan Agreement, monthly principal
payments would become payable, amortized based on a ten-year term. There were no
amounts outstanding under the Guidance Line at June 30, 2021.  The Guidance Line
was terminated after the end of fiscal 2021 in accordance with the Letter
Agreement.

General Terms


The Amended Loan Agreement contains customary covenants, including, but not
limited to certain financial covenants.  Generally, we must maintain a fixed
charge coverage ratio of 1.25 to 1.00 and a total leverage ratio of 4.00 to
1.00.   The Letter Agreement granted us a waiver of default arising prior to the
Letter Agreement from our failure to comply with the fixed charge coverage ratio
measured on June 30, 2021. Based on the waiver, we are no longer in default of
the Amended Loan Agreement.  As of June 30, 2021, we were in compliance with all
other covenants.

Equipment Loan

In December 2020, ISP Latvia entered into an equipment loan with a third party
(the "Equipment Loan"), which party is also a significant customer. The
Equipment Loan is subordinate to the BankUnited Loans and is collateralized by
certain equipment. The initial advance under the Equipment Loan was 225,000 EUR
(or USD $275,000), payable in equal installments over 60 months, the proceeds of
which were used to make a prepayment to a vendor for equipment to be delivered
at a future date. The Equipment Loan bears interest at a fixed rate of 3.3%. An
additional 225,000 EUR (or USD $275,000) is expected to be drawn when the final
payment is due to the vendor for the equipment.

For additional information regarding the BankUnited Loans and the Equipment Loan, see Note 17, Loans Payable, to the Notes to the Consolidated Financial Statements to this Annual Report on Form 10-K.



We believe we have adequate financial resources to sustain our current
operations in the coming year.  We have established milestones that will be
tracked to ensure that as funds are expended we are achieving results before
additional funds are committed.  We anticipate sales growth in future years,
primarily from the engineered solutions we plan to focus on.

We generally rely on cash from operations and equity and debt offerings, to the
extent available, to satisfy our liquidity needs and to maintain our ability to
repay the BankUnited Term Loan and Equipment Loan. There are a number of factors
that could result in the need to raise additional funds, including a decline in
revenue or a lack of anticipated sales growth, increased material costs,
increased labor costs, planned production efficiency improvements not being
realized, increases in property, casualty, benefit and liability insurance
premiums, and increases in other costs. We will also continue efforts to keep
costs under control as we seek renewed sales growth. Our efforts are directed
toward generating positive cash flow and profitability. If these efforts are not
successful, we may need to raise additional capital. Should capital not be
available to us at reasonable terms, other actions may become necessary in
addition to cost control measures and continued efforts to increase sales. These
actions may include exploring strategic options for the sale of the Company, the
sale of certain product lines, the creation of joint ventures or strategic
alliances under which we will pursue business opportunities, the creation of
licensing arrangements with respect to our technology, or other alternatives.

Cash Flows - Operating:
Cash flow provided by operations was approximately $4.7 million for fiscal 2021,
compared to approximately $3.7 million for fiscal 2020. The increase in cash
flow from operations is primarily due to improved receivables and inventory
management, despite the increase in sales compared to the prior fiscal year. In
addition, accounts payable and accrued liabilities increased in fiscal 2021, as
compared to fiscal 2020, primarily due to the previously described events that
occurred at our Chinese subsidiaries, for which certain expenses have been
incurred but not yet paid.

We anticipate continued improvement in our cash flows provided by operations in
future years, as we continue to focus on managing our receivables, payables and
inventory, while continuing to grow our sales and improve gross margins, with
moderate increases in general, administrative, sales and marketing and new

product development costs.


                                       26


Cash Flows - Investing:
During fiscal 2021, we expended approximately $3.2 million for capital
equipment, as compared to approximately $2.4 million during fiscal 2020. Our
capital expenditures during fiscal 2021 were primarily related to the continued
expansion of our infrared coating capacity as well as increasing our lens
pressing and dicing capacity to meet current and forecasted demand. During
fiscal 2020, our capital expenditures were primarily related to continued
expansion of our infrared glass capacity, increasing coating capacity and
capabilities, and adding press capacity.

Cash Flows - Financings:
Net cash used in financing activities was approximately $843,000 in fiscal 2021,
compared to $622,000 in fiscal 2020. Cash used in financing activities for
fiscal 2021 reflects approximately $1.3 million in principal payments on our
loans and finance leases, offset by proceeds of approximately $275,000 from the
Equipment Loan, and approximately $173,000 in proceeds from the exercise of
stock options and from the sale of Class A common stock under the 2014 ESPP.
Cash used in financing activities for fiscal 2020 reflects approximately $1.1
million in principal payments on our loans and finance leases, offset by
proceeds of approximately $400,000 from the BankUnited Revolving Line, and
approximately $47,000 in proceeds from the exercise of stock options and from
the sale of Class A common stock under the 2014 ESPP.

We anticipate a similar level of capital expenditures during fiscal 2022; however, the total amount expended will depend on sales growth opportunities and other circumstances.



How We Operate:

We have continuing sales of two basic types: sales via ad-hoc purchase orders of
mostly standard product configurations (our "turns" business) and the more
challenging and potentially more rewarding business of customer product
development. In this latter type of business, we work with customers to help
them determine optical specifications and even create certain optical designs
for them, including complex multi-component designs that we call "engineered
solutions." This is followed by "sampling" small numbers of the product for the
customers' test and evaluation. Thereafter, should a customer conclude that our
specification or design is the best solution to their product need; we negotiate
and "win" a contract (sometimes called a "design win") - whether of a "blanket
purchase order" type or a supply agreement. The strategy is to create an annuity
revenue stream that makes the best use of our production capacity, as compared
to the turns business, which is unpredictable and uneven. This annuity revenue
stream can also generate low-cost, high-volume type orders. A key business
objective is to convert as much of our business to the design win and annuity
model as is possible. We face several challenges in doing so:

?

Maintaining an optical design and new product sampling capability, including a high-quality and responsive optical design engineering staff;



?
The fact that as our customers take products of this nature into higher volume,
commercial production (for example, in the case of molded optics, this may be
volumes over one million pieces per year) they begin to work seriously to reduce
costs - which often leads them to turn to larger or overseas producers, even if
sacrificing quality; and

?
Our small business mass means that we can only offer a moderate amount of total
productive capacity before we reach financial constraints imposed by the need to
make additional capital expenditures - in other words, because of our limited
cash resources and cash flow, we may not be able to service every opportunity
that presents itself in our markets without arranging for such additional
capital expenditures.

Despite these challenges to winning more "annuity" business, we nevertheless
believe we can be successful in procuring this business because of our unique
capabilities in optical design engineering that we make available on the
merchant market, a market that we believe is underserved in this area of service
offering. Additionally, we believe that we offer value to some customers as a
source of supply in the U.S. should they be unwilling to commit to purchase
their supply of a critical component from foreign merchant production sources.
For information regarding revenue recognition related to our various revenue
streams, refer to Critical Accounting Policies and Estimates in this Annual

Report on Form 10-K.


                                       27

Our Key Performance Indicators:



Usually on a weekly basis, management reviews several performance indicators.
Some of these indicators are qualitative and others are quantitative. These
indicators change from time to time as the opportunities and challenges in the
business change. They are mostly non-financial indicators, such as units of
shippable output by product line, production yield rates by major product line,
and the output and yield data from significant intermediary manufacturing
processes that support the production of the finished shippable product. These
indicators can be used to calculate such other related indicators as fully
yielded unit production per-shift, which varies by the product and our state of
automation in production of that product at any given time. Higher unit
production per shift means lower unit cost, and, therefore, improved margins or
improved ability to compete, where desirable, for price sensitive customer
applications. The data from these reports is used to determine tactical
operating actions and changes. We believe that our non-financial production
indicators, such as those noted, are proprietary information.

Financial indicators that are usually reviewed at the same time include the major elements of the micro-level business cycle:



?

sales backlog;



?

revenue dollars and units by product group;



?

inventory levels;



?

accounts receivable levels and quality; and



?

other key indicators.


These indicators are similarly used to determine tactical operating actions and
changes and are discussed in more detail below. Management will evaluate these
key indicators as we transition to our new strategic plan to determine whether
any changes or updates to our key indicators are warranted.

Sales Backlog:
We believe our sales growth has been and continues to be our best indicator of
success. Our best view into the efficacy of our sales efforts is in our "order
book." Our order book equates to sales "backlog." It has a quantitative and a
qualitative aspect: quantitatively, our backlog's prospective dollar value and
qualitatively, what percent of the backlog is scheduled by the customer for
date-certain delivery. Historically, we evaluated our backlog on a 12-month
basis, which examined orders required by a customer for delivery within a
one-year period. To better align with our strategic focus on longer-term
customer orders and relationships, beginning in fiscal 2021, management began
evaluating our total backlog, which includes all firm orders requested by a
customer that are reasonably believed to remain in the backlog and be converted
into revenues. This includes customer purchase orders and may include amounts
under supply contracts if they meet the aforementioned criteria. Generally, a
higher total backlog is better for us.

Our total backlog remained near the same level as the prior fiscal year, while
we also increased our sales by 10%, compared to the prior year, maintaining our
strong booking performance. Our total backlog as of June 30, 2021 was
approximately $21.3 million, compared to $21.9 million as of June 30, 2020.
Backlog growth rates for fiscal 2021 and 2020 are as follows:


                              Change
                    Change    From
          Total     From      Prior
          Backlog   Prior     Quarter
Quarter   ($ 000)   Year End  End

 Q1 2020   $16,567   -9%       -9%
 Q2 2020   $22,559   24%       36%
 Q3 2020   $22,772   26%       1%
 Q4 2020   $21,908   21%       -4%
 Q1 2021   $20,866   -5%       -5%
 Q2 2021   $23,835   9%        14%
 Q3 2021   $19,498   -11%      -18%
 Q4 2021   $21,329   -3%       9%




The increase in our total backlog from the first quarter to the second quarter
of both fiscal 2021 and 2020 was largely due to the renewal of a large annual
contract during the second quarter of the respective fiscal year, which we began
shipping against during the third quarter of the respective fiscal year. The
timing of this renewal is similar to the prior fiscal year. The timing of other
annual and multi-year contract renewals may vary, and may substantially increase
backlog levels at the time the orders are received, and backlog will
subsequently be drawn down as shipments are made against these orders.


                                       28


We continue to experience a growing demand for infrared products used in the
industrial, defense and first responder sectors. Demand for infrared products
continues to be fueled by interest in lenses made with our new BD6 material. We
expect to maintain moderate growth in our visible PMO product group by
continuing to diversify and offer new applications, with a cost competitive
structure; however, we believe that the terminations of certain of our employees
at our China subsidiaries, LPOIZ and LPOI, and transition to new management
personnel, could adversely impact the domestic sales in China of these
subsidiaries over the next one to two quarters, which would affect potential
growth in our PMO lens business for that period. Our former employees, including
management personnel, maintained relationships with certain of our customers in
China and we expect that until our new employees establishes relationships with
these customers, of which there can be no assurance, domestic sales in China may
be adversely impacted.

Revenue Dollars and Units by Product Group:

The following table sets forth revenue dollars and units by our three product groups for the three and twelve months ended June 30, 2021 and 2020:




                                 (unaudited)


                                 Three Months EndedJune 30,  Year Ended June 30,


                                                                                         Quarter  Year-to-date


                                 2021          2020          2021          2020          % Change % Change



Revenue
PMO                               $2,941,270    $3,893,162    $15,882,189   $14,639,687   -24%     8%
Infrared Products                 4,975,947     4,793,246     20,971,080    18,052,856    4%       16%
Specialty Products                415,099       420,732       1,611,552     2,275,420     -1%      -29%
Total revenue                     $8,332,316    $9,107,140    $38,464,821   $34,967,963   -9%      10%




Units
PMO                 323,404   1,050,668   3,139,774   3,198,672   -69%  -2%
Infrared Products   122,127   150,194     579,563     384,344     -19%  51%
Specialty Products  8,901     7,876       32,980      41,443      13%   -20%
Total units         454,432   1,208,738   3,752,317   3,624,459   -62%  4%




Three months ended June 30, 2021 compared to three months ended June 30, 2020
Our revenue decreased by 9% in the fourth quarter of fiscal 2021, as compared to
the same quarter of the prior fiscal year, primarily as a result of a decrease
in demand for PMO products, partially offset by a slight increase in sales of
infrared products.

Revenue from the PMO product group for the fourth quarter of fiscal 2021 was
$2.9 million, a decrease of 24%, as compared to the same quarter of the prior
fiscal year. The decrease in revenue is primarily attributed to decreases in
sales to customers in the telecommunications market, partially offset by an
increase in sales through our catalog and distribution channels. The increase in
catalog and distribution sales reflects a recovery from the initial impact of
COVID-19 on colleges and universities. Sales of PMO units decreased by 69%, as
compared to the prior year period, however, average selling prices increased
145%. The increase in average selling prices is due to a significant decrease in
telecommunications products unit sales, which typically have higher volumes and
lower average selling prices. The unit volume for telecommunications products
decreased by approximately 93% as compared to the prior year period due to a
slowdown in orders, which we believe will continue for at least two more
quarters, as customers align their inventory levels to the next phase of their
5G rollout.

Revenue generated by the infrared product group for the fourth quarter of fiscal
2021 was $5.0 million, an increase of 4%, as compared to same quarter of the
prior fiscal year. The increase in revenue is primarily driven by sales
diamond-turned infrared products, while sales of BD6-based molded infrared
products decreased. The increase in sales of diamond-turned infrared products
was primarily due to the timing of order shipments against a large-volume annual
contract, for which shipments were lower in the fourth quarter of the prior
fiscal year. Demand for BD6-based infrared products has leveled off,
particularly for temperature sensing applications, demand for which was
previously accelerated by COVID-19. Demand for industrial applications,
firefighting and other public safety applications continues to be strong. Molded
infrared products are higher in volume and lower in average selling prices than
diamond-turned infrared products. Due to the lower mix of molded infrared
products sold during the fourth quarter of fiscal 2021, sales of infrared units
decreased by 19%, as compared to the prior year period, and average selling
prices increased 28%.

Our specialty products revenue decreased by 1%, as compared to the same period of the prior fiscal year, and represented 5% of total revenue for both the fourth quarters of fiscal 2021 and 2020.




                                       29

Year ended June 30, 2021 compared to year ended June 30, 2020 Our revenue increased by approximately $3.5 million, or 10%, for fiscal 2021, as compared to fiscal 2020, with increases in both infrared and PMO product sales.



Revenue from the PMO product group increased for fiscal 2021 was $15.9 million,
an increase of 8%, as compared to fiscal 2020. The increase in revenue is
primarily attributed to a significant increase in sales through catalog and
distribution channels, which were down during the second half of fiscal 2020 due
to the impact of COVID-19 on colleges and universities. This increase was
partially offset by a decrease in sales to customers in the telecommunications
market, for which orders began to slow down in the second half of fiscal 2021.
We believe this slowdown to be temporary, however we expect it to continue for
at least two more quarters, as customers align their inventory levels to the
next phase of their 5G rollout. Sales of PMO units decreased by 2%, as compared
to the prior fiscal year, however, average selling prices increased 11%, due to
the decrease in telecommunications products sales, which typically have higher
volumes and lower average selling prices. The unit volume for telecommunications
products decreased by 4%, as compared to the prior fiscal year.

Revenue generated by the infrared product group for fiscal 2021 was $21.0
million, an increase of approximately 16%, as compared to the prior fiscal year.
The increase in revenue is attributed to increases in sales of both molded and
diamond-turned infrared products to customers in the industrial market,
including a key customer with an annual supply agreement which was renewed for a
higher amount during fiscal 2021. During fiscal 2021, sales of infrared units
increased by 51%, as compared to the prior year period, and average selling
prices decreased 23%. The increase in units and decrease in average selling
prices are driven by an increase in sales of molded infrared products, including
products made with our new BD6 material, which are higher in volume and lower in
prices than diamond-turned infrared products. Industrial applications,
firefighting cameras, and other public safety applications continue to be the
primary drivers of the increased demand for infrared products, including thermal
imaging assemblies. During fiscal 2021, we saw an increase in demand for medical
and temperature sensing applications, such as fever detection. Demand for
temperature sensing applications was accelerated by COVID-19, and although the
demand has leveled off since the initial spike, it remains elevated.

In fiscal 2021, our specialty products revenue decreased by $664,000, or 29%, as
compared to prior fiscal year, primarily due to NRE project revenue as well as
sales of certain legacy specialty products in fiscal 2020 not recurring in
fiscal 2021. NRE revenue is project based and the timing of any such projects is
wholly dependent on our customers and their project activity.

Inventory Levels:
We manage inventory levels to minimize investment in working capital but still
have the flexibility to meet customer demand to a reasonable degree. We review
our inventory for obsolete items quarterly. While the mix of inventory is an
important factor, including adequate safety stocks of long lead-time materials,
an important aggregate measure of inventory in all phases of production is the
quarter's ending inventory expressed as a number of days' worth of the quarter's
cost of sales, also known as "days cost of sales in inventory," or "DCSI." It is
calculated by dividing the quarter's ending inventory by the quarter's cost of
goods sold, multiplied by 365 and divided by 4. Generally, a lower DCSI measure
equates to a lesser investment in inventory, and, therefore, more efficient use
of capital. The table below shows our DCSI for the immediately preceding eight
fiscal quarters:

Fiscal
Quarter               Ended      DCSI (days)
Q4-2021               6/30/2021  126
Q3-2021               3/31/2021  119
Q2-2021               12/31/2020 142
Q1-2021               9/30/2020  154
Fiscal 2021 average              135
Q4-2020               6/30/2020  146
Q3-2020               3/31/2020  160
Q2-2020               12/31/2019 121
Q1-2020               9/30/2019  142
Fiscal 2020 average              142



Our average DCSI for fiscal 2021 was 135, compared to 142 for fiscal 2020. The
decrease in DCSI is driven by the increase in sales and a decrease in inventory
levels, due to an increased focus on inventory management. In the prior fiscal
year, inventory levels had increased in part due to strategic buys of certain
raw materials to reduce lead times and meet increasing demand for infrared
glass. For the second half of 2020, the increase in inventory was also driven by
the shift in customer order activity due to COVID-19, where we were given short
notice to delay shipments of some products and accelerate the manufacturing and
shipment of other products. As we continue to see increasing demand for both
infrared and PMO products, we expect DCSI to return to a range of between 110 to
120.


                                       30


Accounts Receivable Levels and Quality:
Similarly, we manage our accounts receivable to minimize investment in working
capital. We measure the quality of receivables by the proportions of the total
that are at various increments past due from our normally extended terms, which
are generally 30 days. The most important aggregate measure of accounts
receivable is the quarter's ending balance of net accounts receivable expressed
as a number of days' worth of the quarter's net revenues, also known as "days
sales outstanding," or "DSO." It is calculated by dividing the quarter's ending
net accounts receivable by the quarter's net revenues, multiplied by 365 and
divided by 4. Generally, a lower DSO measure equates to a lesser investment in
accounts receivable and, therefore, more efficient use of capital. The table
below shows our DSO for the preceding eight fiscal quarters:

Fiscal
Quarter               Ended      DSO (days)
Q4-2021               6/30/2021  51
Q3-2021               3/31/2021  53
Q2-2021               12/31/2020 63
Q1-2021               9/30/2020  60
Fiscal 2021 average              57
Q4-2020               6/30/2020  62
Q3-2020               3/31/2020  66
Q2-2020               12/31/2019 70
Q1-2020               9/30/2019  67
Fiscal 2020 average              66




Our average DSO for fiscal 2021 was 57, compared to 66 for fiscal 2020. The
improvement in fiscal 2021 reflects our increased focus on collections, and
tightening of payment terms policies. The decrease in the second half of fiscal
2021 also reflects a higher sales mix to customers with shorter payment terms.
We strive to have a DSO no higher than 60.

Other Key Indicators:
Other key indicators include various operating metrics, some of which are
qualitative and others are quantitative. These indicators change from time to
time as the opportunities and challenges in the business change. They are mostly
non-financial indicators, such as on time delivery trends, units of shippable
output by major product line, production yield rates by major product line, and
the output and yield data from significant intermediary manufacturing processes
that support the production of the finished shippable product. These indicators
can be used to calculate such other related indicators as fully-yielded unit
production per-shift, which varies by the particular product and our state of
automation in production of that product at any given time. Higher unit
production per shift means lower unit cost, and, therefore, improved margins or
improved ability to compete where desirable for price sensitive customer
applications. The data from these reports is used to determine tactical
operating actions and changes. Management also assesses business performance and
makes business decisions regarding our operations using certain non-GAAP
measures. These non-GAAP measures are described in more detail below under the
heading "Non-GAAP Financial Measures".

Non-GAAP Financial Measures



We report our historical results in accordance with GAAP; however, our
management also assesses business performance and makes business decisions
regarding our operations using certain non-GAAP financial measures. We believe
these non-GAAP financial measures provide useful information to management and
investors that is supplementary to our financial condition and results of
operations computed in accordance with GAAP; however, we acknowledge that our
non-GAAP financial measures have a number of limitations. As such, you should
not view these disclosures as a substitute for results determined in accordance
with GAAP, and they are not necessarily comparable to non-GAAP financial
measures that other companies use.

EBITDA:


EBITDA is a non-GAAP financial measures used by management, lenders, and certain
investors as a supplemental measure in the evaluation of some aspects of a
corporation's financial position and core operating performance. Investors
sometimes use EBITDA as it allows for some level of comparability of
profitability trends between those businesses differing as to capital structure
and capital intensity by removing the impacts of depreciation and amortization.
EBITDA also does not include changes in major working capital items, such as
receivables, inventory, and payables, which can also indicate a significant need
for, or source of, cash. Since decisions regarding capital investment and
financing and changes in working capital components can have a significant
impact on cash flow, EBITDA is not a good indicator of a business's cash flows.
We use EBITDA for evaluating the relative underlying performance of our core
operations and for planning purposes. We calculate EBITDA by adjusting net
income to exclude net interest expense, income tax expense or benefit,
depreciation, and amortization, thus the term "Earnings Before Interest, Taxes,
Depreciation and Amortization" and the acronym "EBITDA."


                                       31


The following table adjusts net income to EBITDA for the three and twelve months
ended June 30, 2021 and 2020:


                                          (unaudited)


                                            Quarter Ended June 30,      Year Ended June 30,


                                          2021           2020         2021          2020

Net income (loss)                          $(2,913,210)   $656,952     $(3,185,251)  $866,929
Depreciation and amortization              900,964        837,123      3,509,436     3,424,438
Income tax provision                       (49,671)       90,442       933,915       763,998
Interest expense                           48,863         66,184       215,354       339,446
EBITDA                                     $(2,013,054)   $1,650,701   $1,473,454    $5,394,811
% of revenue                               -24%           18%          4%            15%




Our EBITDA for the quarter ended June 30, 2021 was a loss of approximately $2.0
million, compared to earnings of $1.7 million for the quarter ended June 30,
2020. The decrease in EBITDA in the fourth quarter of fiscal 2021 was primarily
attributable to lower gross margin and increased SG&A and Other expenses,
including approximately $1.3 million of expenses incurred related to the
previously described events that occurred in our Chinese subsidiaries, as well
as certain director and personnel matters that occurred during the period as
discussed above, as well as increased new product development costs. In
addition, there was an unfavorable difference of approximately $112,000 in
foreign exchange gains and losses.

Our EBITDA for fiscal 2021 was approximately $1.5 million, compared to
approximately $5.4 million for fiscal 2020. The decrease in EBITDA for fiscal
2021 is primarily attributable to increased SG&A and Other expenses, including
approximately $2.0 million of expenses incurred related to the previously
described events that occurred in our Chinese subsidiaries, as well as certain
officer, director, and personnel matters that occurred during the period as
discussed above, and increased new product development costs. These increased
costs were partially offset by a favorable difference of approximately $213,000
in foreign exchange gains and losses.

Off Balance Sheet Arrangements

We do not engage in any activities involving variable interest entities or off balance sheet arrangements.

Critical Accounting Policies and Estimates



The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of income and expense during the
reporting periods presented. Our critical estimates include the allowance for
trade receivables, which is made up of allowances for bad debts, allowances for
obsolete inventory, valuation of compensation expense on stock-based awards and
accounting for income taxes. Although we believe that these estimates are
reasonable, actual results could differ from those estimates given a change in
conditions or assumptions that have been consistently applied. We also have
other policies that we consider key accounting policies, such as our policy for
revenue recognition, however, the application of these policies does not require
us to make significant estimates or judgments that are difficult or subjective.

Management has discussed the selection of critical accounting policies and
estimates with our Board, and the Board has reviewed our disclosure relating to
critical accounting policies and estimates in this Annual Report on Form 10-K.
The critical accounting policies used by management and the methodology for its
estimates and assumptions are as follows:

Allowance for accounts receivable is calculated by taking 100% of the total of
invoices that are over 90 days past due from the due date and 10% of the total
of invoices that are over 60 days past due from the due date for U.S.- and
Latvia-based accounts and 100% on invoices that are over 120 days past due for
China-based accounts without an agreed upon payment plan. Accounts receivable
are customer obligations due under normal trade terms. We perform continuing
credit evaluations of our customers' financial condition. Recovery of bad debt
amounts which were previously written off is recorded as a reduction of bad debt
expense in the period the payment is collected. If our actual collection
experience changes, revisions to our allowance may be required. After attempts
to collect a receivable have failed, the receivable is written off against the
allowance. To date, our actual results have been materially consistent with our
estimates, and we expect such estimates to continue to be materially consistent
in the future.


                                       32



Inventory obsolescence allowance is calculated by reserving 100% for items that
have not been sold in two years or that have not been purchased in two years.
These items, as identified, are allowed for at 100%, as well as allowing 50% for
other items deemed to be slow moving within the last twelve months and allowing
25% for items deemed to have low material usage within the last six months.
Items of which we have greater than a two-year supply are also reserved at 25%
to 100%, depending on usage rates. The parts identified are adjusted for recent
order and quote activity to determine the final inventory allowance. To date,
our actual results have been materially consistent with our estimates, and we
expect such estimates to continue to be materially consistent in the future.

Revenue is generally recognized upon transfer of control, including the risks
and rewards of ownership, of products or services to customers in an amount that
reflects the consideration we expect to receive in exchange for those products
or services. The performance obligations for the sale of optical components and
assemblies are satisfied at a point in time. We generally bear all costs, risk
of loss, or damage and retain title to the goods up to the point of transfer of
control of products to customers. Shipping and handling costs are included in
the cost of goods sold. Revenues from product development agreements are
recognized as performance obligations are met in accordance with the terms of
the agreements and upon transfer of control of products, reports or designs to
the customer. Product development agreements are generally short term in nature,
with revenue recognized upon satisfaction of the performance obligation, and
transfer of control of the agreed-upon deliverable. Invoiced amounts for
value-added taxes ("VAT") related to sales are posted to the balance sheet and
are not included in revenue.

Stock-based compensation is measured at grant date, based on the fair value of
the award, and is recognized as an expense over the employee's requisite service
period. We estimate the fair value of each stock option as of the date of grant
using the Black-Scholes-Merton pricing model. Our directors, officers, and key
employees were granted stock-based compensation through our Amended and Restated
Omnibus Incentive Plan, as amended (the "Omnibus Plan"), through October 2018
and after that date, the 2018 Stock and Incentive Compensation Plan (the
"SICP"). Most options granted under the Omnibus Plan and the SICP vest ratably
over two to four years and generally have ten-year contract lives. The
volatility rate is based on four-year historical trends in common stock closing
prices and the expected term was determined based primarily on historical
experience of previously outstanding options. The interest rate used is the U.S.
Treasury interest rate for constant maturities. The likelihood of meeting
targets for option grants that are performance based are evaluated each quarter.
If it is determined that meeting the targets is probable, then the compensation
expense will be amortized over the remaining vesting period.

Goodwill and intangible assets acquired in a business combination are recognized
at fair value using generally accepted valuation methods appropriate for the
type of intangible asset and reported separately from goodwill. Purchased
intangible assets other than goodwill are amortized over their useful lives
unless these lives are determined to be indefinite. Purchased intangible assets
are carried at cost, less accumulated amortization. Amortization is computed
over the estimated useful lives of the respective assets, generally two to
fifteen years. We periodically reassess the useful lives of intangible assets
when events or circumstances indicate that useful lives have significantly
changed from the previous estimate. Definite-lived intangible assets consist
primarily of customer relationships, know-how/trade secrets and trademarks.
 They are generally valued as the present value of estimated cash flows expected
to be generated from the asset using a risk-adjusted discount rate. When
determining the fair value of our intangible assets, estimates and assumptions
about future expected revenue and remaining useful lives are used. Goodwill and
intangible assets are tested for impairment on an annual basis and during the
period between annual tests if events or changes in circumstances indicate that
the carrying value of goodwill may not be recoverable.

We assess the qualitative factors to determine whether it is more likely than
not that the fair value of its reporting unit is less than its carrying amount
as a basis for determining whether it is necessary to perform the goodwill
impairment analysis. If we determine that it is more likely than not that its
fair value is less than its carrying amount, then the goodwill impairment test
is performed. The fair value of the reporting unit is compared to its carrying
amount, and if the carrying amount exceeds its fair value, then an impairment
charge would be recognized for the amount by which the carrying amount exceeds
the reporting unit's fair value, up to the total amount of goodwill allocated to
that reporting unit.

Accounting for income taxes requires estimates and judgments in determining
income tax expense for financial statement purposes. These estimates and
judgments occur in the calculation of tax credits, benefits, and deductions, and
in the calculation of certain tax assets and liabilities, which arise from
differences in the timing of the recognition of revenue and expense for tax and
financial statement purposes. We assessed the likelihood of the realization of
deferred tax assets and concluded that a valuation allowance is needed to
reserve the amount of the deferred tax assets that may not be realized due to
the uncertainty of the timing and amount of taxable income in certain
jurisdictions. In reaching our conclusion, we evaluated certain relevant
criteria, including the amount of pre-tax income generated during the current
and prior two years, as adjusted for non-recurring items, the existence of
deferred tax liabilities that can be used to realize deferred tax assets, the
taxable income in prior carryback years in the impacted jurisdictions that can
be used to absorb net operating losses and taxable income in future years. Our
judgments regarding future profitability may change due to future market
conditions, changes in U.S. or international tax laws and other factors. These
changes, if any, may require material adjustments to these deferred tax assets,
resulting in a reduction in net income or an increase in net loss in the period
when such determinations are made, which, in turn, may result in an increase or
decrease to our tax provision in a subsequent period.

In the ordinary course of global business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Some of these
uncertainties arise as a consequence of cost reimbursement and royalty
arrangements among related entities, which could impact our income or loss in
each jurisdiction in which we operate. Although we believe our estimates are
reasonable, no assurance can be given that the final tax outcome of these
matters will not be different than that which is reflected in our historical
income tax provisions and accruals. In the event our assumptions are incorrect,
the differences could have a material impact on our income tax provision and
operating results in the period in which such determination is made. In addition
to the factors described above, our current and expected effective tax rate is
based on then-current tax law. Significant changes during the year in enacted
tax law could affect these estimates.

Impact of recently issued accounting pronouncements that have recently been
issued but have not yet been implemented by us are described in Note 2, Summary
of Significant Accounting Policies, to the Notes to the Consolidated Financial
Statements to this Annual Report on Form 10-K, which describes the potential
impact that these pronouncements are expected to have on our financial
condition, results of operations and cash flows.


                                       33

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