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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14 of
the Securities Exchange Act of 1934

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Preliminary Proxy Statement

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Definitive Proxy Statement

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Definitive Additional Materials

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Soliciting Material Pursuant to §240.14a-11(c) or §240.14a-12

Precision Optics Corporation, Inc.
(Name of Registrant as Specified In Its Charter)

 
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PRECISION OPTICS CORPORATION, INC.
22 East Broadway
Gardner, Massachusetts 01440

October 15, 2003

To the Shareholders:

        The Board of Directors and Officers of Precision Optics Corporation, Inc. invite you to attend the 2003 Annual Meeting of Stockholders to be held Tuesday, November 11, 2003, at 10:00 a.m. at the offices of Ropes & Gray LLP, One International Place, Boston, Massachusetts.

        A copy of the Proxy Statement and the Company's 2003 Annual Report to Stockholders are enclosed.

        If you cannot be present at the meeting, please mark, date, and sign the enclosed proxy card and return it as soon as possible in the enclosed envelope.

PRECISION OPTICS CORPORATION, INC.
22 East Broadway
Gardner, Massachusetts 01440

NOTICE OF 2003 ANNUAL MEETING OF STOCKHOLDERS
November 11, 2003

        The 2003 Annual Meeting of Stockholders of Precision Optics Corporation, Inc. (the "Company") will be held on Tuesday, November 11, 2003, at 10:00 a.m. at the offices of Ropes & Gray LLP, Boston, Massachusetts, for the following purposes:

        All stockholders of record at the close of business on Tuesday, September 30, 2003, are entitled to notice of and to vote at the meeting.

        Stockholders are requested to sign and date the enclosed proxy and return it in the enclosed envelope. The envelope requires no postage if mailed in the United States.

October 15, 2003

PRECISION OPTICS CORPORATION, INC.

Annual Meeting of Stockholders
November 11, 2003

PROXY STATEMENT

INFORMATION CONCERNING SOLICITATION AND VOTING

General

        This Proxy Statement and form of proxy are furnished in connection with the solicitation of proxies by the Board of Directors of Precision Optics Corporation, Inc., a Massachusetts corporation (the "Company"), for the 2003 Annual Meeting of Stockholders of the Company to be held on November 11, 2003, at 10:00 a.m. at the offices of Ropes & Gray LLP, One International Place, Boston, Massachusetts, and any adjournments thereof, for the purposes set forth in the notice of meeting. The Company was incorporated in 1982, and its principal executive offices are at 22 East Broadway, Gardner, Massachusetts 01440 (telephone 978-630-1800). This Proxy Statement and form of proxy are first being distributed to stockholders on or about October 15, 2003.

Stockholders Entitled to Vote

        As of September 30, 2003, the Company had outstanding 1,752,052 shares of Common Stock, $0.01 par value (the "Common Stock"). Each share of Common Stock entitles the holder of record thereof at the close of business on September 30, 2003 to one vote in person or by proxy on the matters to be voted upon at the meeting.

Voting Procedures

        Consistent with Massachusetts law and the Company's by-laws, the holders of a majority of the shares entitled to be cast on a particular matter, present in person or represented by proxy, constitutes a quorum as to such matter. Votes cast by proxy or in person at the annual meeting will be counted by persons appointed by the Company to act as election inspectors for the meeting.

        If the enclosed form of proxy is properly signed and returned and not revoked, the shares represented thereby will be voted at the annual meeting. If the stockholder specifies in the proxy how the shares are to be voted, they will be voted as specified. If the stockholder does not specify how the shares are to be voted, such shares will be voted in favor of the proposals described in Proposal Number 1 and Proposal Number 2 below.

        Any stockholder has the right to revoke his or her proxy at any time before it is voted by: (1) attending the meeting and voting in person, (2) by filing with the Clerk of the Company a written instrument revoking the proxy or (3) delivering to the Clerk another newly executed proxy bearing a later date.

Required Vote

        The election of the Class I directors described in Proposal Number 1 requires a plurality of votes cast. Should either person so named below as nominee for the Board of Directors be unable or unwilling to serve as director, the persons named in the form of proxy for the annual meeting may, in their discretion,


vote for such other person or may vote to fix the number of directors at such number less than five, as the Board of Directors may recommend.

        The approval of the Amended and Restated 1997 Incentive Plan of the Company described in Proposal Number 2 requires the affirmative vote of a majority of the shares represented and entitled to vote at the meeting.

        Abstentions and broker "non-votes" are counted as present and entitled to vote for purposes of determining a quorum, but will not be counted as votes properly cast for purposes of determining the outcome of voting on any matter. A broker non-vote occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power for that particular item and has not received instructions from the beneficial owner. Under the rules of the New York Stock Exchange applicable to member firms, brokers (i) will have discretionary authority to vote shares held in their name for the election of directors even if they do not receive instructions from the beneficial owners and (ii) will not have discretionary authority to vote shares held in their name for the approval of the Amended and Restated 1997 Incentive Plan.

Voting on Other Matters

        At the date hereof, the Company's management has no knowledge of any business other than that described in the notice for the annual meeting which will be presented for consideration at such meeting. If any other business should come before such meeting, the persons appointed by the enclosed form of proxy may, in their discretion, vote all such proxies in accordance with their own judgment. The persons appointed by the enclosed form of proxy also may, in their discretion, vote all proxies with respect to matters incident to the conduct of the meeting.

Costs of Proxy Solicitation

        The Company will bear all the costs of the solicitation of proxies. The Board of Directors may arrange with brokerage houses and other custodians, nominees, and fiduciaries to forward solicitation materials to the beneficial owners of the stock held of record by such persons, and the Company may reimburse them for the reasonable out-of-pocket expenses incurred in so doing. In addition to the solicitation of proxies by use of the mails, the Company may use the services of some of its directors, officers and regular employees (who will receive no compensation therefor in addition to their regular salaries) to solicit proxies personally or by mail or telephone.


PROPOSAL NUMBER 1. ELECTION OF DIRECTORS

        The Company's Board of Directors is divided into three classes that are as nearly equal in number as possible, with staggered terms of office. Only one class is elected each year. Each director serves a three year term and until his or her successor has been duly elected and qualified. The Board of Directors has fixed the number of directors at five. At the annual meeting it is intended that the Company's Class I directors (Richard E. Forkey and Edward A. Benjamin) be re-elected as Class I directors to hold office until the annual meeting of stockholders in 2006 and until their respective successors have been duly elected and qualified. The directors in Class II (Austin W. Marxe and Joel R. Pitlor) will hold office until the annual meeting of stockholders in 2004, and the director in Class III (Robert R. Shannon) will hold office until the annual meeting of stockholders in 2005 (and in each case, until their respective successors have been duly elected and qualified).

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        The names, ages, principal occupations for at least the last five years, and certain other information regarding the directors, including the nominees are as follows:

Name and Year First Elected Director
   Age
   Principal Occupation; Directorships of Other Public Companies
Richard E. Forkey (1982)   63   President, Chief Executive Officer, Treasurer and a director of the Company since founding the Company in 1982; Clerk of the Company from May 1983 to June 1990.
Edward A. Benjamin (1990)   65   Clerk of the Company from June 1990 to January 1998. Mr. Benjamin is a Trustee of the Board of Trustees of New England Zenith Fund, a Member of the Board of Managers of New England Variable Annuity Fund I, a Trustee of the Board of Trustees of CDC Nvest Funds, AEW Real Estate Income Fund, and Loomis Sayles Funds, and a Director of Coal, Energy Investments & Management, LLC. Mr. Benjamin was a partner in the law firm of Ropes & Gray LLP, Boston, Massachusetts, from 1969 to 1998.
Austin W. Marxe (1998)*   63   Mr. Marxe has been the Managing Director of Special Situations Fund III, L.P., a registered investment company based in New York City, and several other affiliated and predecessor investment funds, since 1990.
Joel R. Pitlor (1990)*   64   Since 1979, Mr. Pitlor has been President of J.R. Pitlor, a management consulting firm that provides strategic business planning, which Mr. Pitlor founded. Mr. Pitlor has provided business planning consultation to the Company since 1983. Mr. Pitlor is also a director of Uroplasty, Inc.
Robert R. Shannon (1990)*   71   Since 1969, Mr. Shannon has been a Professor at the Optical Sciences Center of the University of Arizona and Director of the Center from 1983 to July 1992. Mr. Shannon is also a Director of Aerospace Corporation.
*
Directors whose terms do not expire this year.

        All of the stockholders holding shares of the Company's Common Stock are entitled to cast one vote in person or by proxy for each share standing in their names and are entitled to elect two Class I directors at the 2003 Annual Meeting. If a nominee is not available as a candidate when the election occurs, the persons named in the proxy may, in their discretion, vote for the election of such other person as the Board of Directors may designate or to reduce the number of directors correspondingly. The Company has no reason to believe that the nominees will not be available for election.

Board of Directors

        During the fiscal year ended June 30, 2003, the Company's Board of Directors held four meetings. The Board of Directors has a standing Audit Committee composed of Messrs. Benjamin and Shannon.

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The function of the Audit Committee is to provide assistance to the Board of Directors in fulfilling its responsibility to the stockholders, potential stockholders and the investment community in respect of corporate accounting, reporting practices of the Company, and the quality and integrity of the financial reports of the Company. The Audit Committee held four meetings during the fiscal year ended June 30, 2003 and acted by unanimous written consent on one occasion. The Board does not have standing nominating or compensation committees. Each director attended at least 75% of the meetings of the Board of Directors, with the exception of Mr. Marxe. Each of the Audit Committee members attended at least 75% of the meetings of the Audit Committee in the last year.

        Information as to ownership of the Company's securities by the nominee for director is included under the heading "Security Ownership of Certain Beneficial Owners and Management."

Director Compensation

        The Company pays each director who is not also an employee of the Company $250 per Board or committee meeting that the director attends and reimburses the director for travel expenses.

        During the fiscal year ended June 30, 2003, the Company also issued, pursuant to its 1997 Incentive Plan, stock options exercisable for a total of 834 shares of the Company's Common Stock to each of Messrs. Benjamin, Pitlor, Marxe and Shannon. Each of these options is immediately exercisable at a price per share of $1.74.

        THE BOARD OF DIRECTORS RECOMMENDS THE ELECTION OF THE NOMINEES DESCRIBED IN PROPOSAL NUMBER 1.


PROPOSAL NUMBER 2. APPROVAL OF AMENDED AND RESTATED 1997 INCENTIVE PLAN

        The Board of Directors has approved and proposes that stockholders approve certain amendments to the Precision Optics Corporation, Inc. 1997 Incentive Plan (the "1997 Incentive Plan"). The primary purpose of amending the 1997 Incentive Plan is to increase the total number of shares of Common Stock that may be issued under the 1997 Incentive Plan from 200,000 to 300,000. The proposed Amended and Restated 1997 Incentive Plan also contains certain other changes intended to provide clarification or eliminate unnecessary language. The Board of Directors believes that approval of the Amended and Restated 1997 Incentive Plan will advance the interests of the Company by continuing to provide eligible participants the opportunity to receive a broad variety of equity-based and cash incentives ("Awards"). As of September 30, 2003, 84,004 shares of Common Stock remained available for future Awards under the 1997 Incentive Plan.

Participation in Plan.

        The grant of Awards under the 1997 Incentive Plan to eligible participants is subject to the discretion of the plan Administrator, which is currently the Board of Directors. As of the date of this proxy statement, there has been no determination by the Administrator with respect to future awards under the 1997 Incentive Plan, except for the grant to each non-employee director on the date of each annual meeting of shareholders of a stock option exercisable for 834 shares of Common Stock. Accordingly, future Awards are not determinable. The following table sets forth information with respect to the grant of stock options to the executive officers named in the Summary Compensation Table, to all current executive officers as a

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group, to all non-executive directors as a group, and to all other employees as a group during the last fiscal year:


Amended Plan Benefits
1997 Incentive Plan

Name and Position
   Securities
Underlying
Options Granted($)
   Weighted Average
Exercise Price Per
Share ($/share)
Richard E. Forkey, President and Chief Executive Officer   0     n/a
Jack P. Dreimiller, Senior Vice President, Finance, Chief Financial Officer and Clerk   0     n/a
All current executive officers as a group   0     n/a
All non-executive directors as a group   3,336   $ 1.74
All non-executive officer employees as a group   0     n/a

Summary of the 1997 Incentive Plan.

        The following summary is a description of the 1997 Incentive Plan, as proposed to be amended, and is qualified in its entirety by reference to the full text of the 1997 Incentive Plan attached to this proxy statement as Appendix A. Terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the 1997 Incentive Plan.

        Administration.    The 1997 Incentive Plan is administered by the Administrator, which may be the Board of Directors or a committee thereof (the "Committee"). The Board is currently the plan's Administrator. Subject to the terms of the 1997 Incentive Plan, the Administrator has authority to interpret the 1997 Incentive Plan; determine eligibility for and grant Awards; determine, modify or waive the terms and conditions of any Award; and otherwise do all things necessary to carry out the purposes of the 1997 Incentive Plan. In the case of any Award intended to be eligible for the performance-based compensation exception under Section 162(m), the Administrator shall exercise its discretion consistent with qualifying the Award for such exception.

        Eligibility and Participation.    In general, the Administrator will select participants in the 1997 Incentive Plan from among key employees of the Company and its affiliates who, in the opinion of the Administrator, are in a position to make a significant contribution to the success of the Company or its affiliates. The Administrator also has discretion to include as participants in the 1997 Incentive Plan members of the Company's Board of Directors and other persons who provide services to the Company or its affiliates. As of September 30, 2003, approximately 40 persons were eligible to receive Awards under the 1997 Incentive Plan, including the Company's two executive officers and four non-employee directors. The maximum number of shares for which stock options may be granted to any person, the maximum number of shares subject to stock appreciation rights granted to any person, and the aggregate maximum number of shares of Stock which may be delivered to any person pursuant to Awards that are not stock options or stock appreciation rights are each limited to 100,000 over the life of the 1997 Incentive Plan. In addition, no more than $2 million may be paid to any individual with respect to any annual cash performance-based bonuses and no more than $2 million in cash performance-based bonuses may be paid to any individual with respect to multi-year performance periods ending in the same year. No Award constituting an incentive stock option within the meaning of Section 422 of the Internal Revenue Code (an "ISO") may be

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granted under the 1997 Incentive Plan after September 15, 2007, but ISO Awards previously granted may extend beyond such date.

        Types of Awards.    The Administrator, in its discretion, may award (i) options to purchase Common Stock, (ii) stock appreciation rights, (iii) restricted or unrestricted Stock, (iv) promises to deliver Common Stock or other securities in the future, (v) convertible securities, (vi) cash bonuses, and (vii) cash bonuses or loans to help defray the costs of the foregoing Awards.

        Deductibility of Performance Awards.    Certain payments to executive officers under the 1997 Incentive Plan may be eligible for treatment as "performance-based" compensation under Section 162(m) of the Internal Revenue Code ("Section 162(m)"). Section 162(m) generally limits to $1 million the annual corporate income tax deduction for compensation paid to the chief executive officer or any of the four other highest paid executive officers of a publicly-held corporation which is not "performance-based" compensation. The 1997 Incentive Plan is intended to enable the Company to comply with Section 162(m) by allowing Awards granted under the 1997 Incentive Plan to qualify as performance-based compensation. (See "Certain Federal Income Tax Consequences"). Under current regulations, in those cases where an Award under the 1997 Incentive Plan would qualify for the Section 162(m) performance-based exception in part by reason of being conditioned upon one or more of the specific performance criteria described below (see "Performance Criteria"), continued availability of the exception will depend upon re-approval by stockholders of the material terms of the performance criteria not later than the first stockholder meeting that occurs in the fifth year following the year in which the stockholders previously approved such terms. By approving the proposed amended 1997 Incentive Plan, stockholders will also be re-approving the material terms of the performance criteria.

        Performance Criteria.    Awards under the 1997 Incentive Plan may be conditioned upon satisfaction of specified performance criteria. In the case of any such Award that is intended to qualify for exemption from the deduction limitation rules of Section 162(m) (an "Exempt Award"), the criteria used in connection with the Award shall be one or any combination of the following (determined either on a consolidated basis or, as the context permits, on a divisional, subsidiary, line of business or geographical basis or in combinations thereof): (i) sales; revenues; assets; expenses; earnings before or after deduction for all or any portion of interest, taxes, depreciation or amortization, whether or not on a continuing operations or an aggregate or per share basis; return on equity, investment, capital or assets; gross margin; inventory level or turns; one or more operating ratios; borrowing levels, leverage ratios or credit rating; market share; capital expenditures; cash flow; stock price; stockholder return; or other objective operating contributions; or (ii) acquisitions or divestitures (in whole or in part); joint ventures and strategic alliances; spin-offs, split-ups and the like; reorganizations; recapitalizations, restructurings, financings (issuance of debt or equity) and refinancings; or other transactions that involve a change in the equity ownership of the Company. A Performance Criterion measure and any targets with respect thereto determined by the Administrator need not be based upon an increase, a positive or improved result or avoidance of loss. In the case of an Exempt Award, the Committee will preestablish the particular performance goals in writing no later than 90 days after the commencement of the period of service to which the performance relates (or earlier if so required under applicable regulations) and will certify prior to payment whether the performance goal or goals have been attained. If the performance goal with respect to an Exempt Award is not attained, no other Award shall be provided in substitution. To date, the Company has not granted any Exempt Awards.

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        Rules Applicable to Awards.    Neither ISOs nor, except as the Administrator otherwise expressly provides, other Awards may be transferred other than by will or by the laws of descent and distribution, and during a Participant's lifetime ISOs (and, except as the Administrator otherwise expressly provides, other non-transferable Awards requiring exercise) may be exercised only by the Participant. The Administrator may determine the time or times at which an Award will vest or become exercisable. Without limiting the foregoing, the Administrator may at any time accelerate the vesting or exercisability of an Award, regardless of any adverse or potentially adverse tax consequences resulting from such acceleration. Unless the Administrator expressly provides otherwise, immediately upon the cessation of the Participant's Employment, an Award requiring exercise will cease to be exercisable and will terminate, and all other Awards to the extent not already vested will be forfeited, except that: (a) Stock Options and SARs held by the Participant or the Participant's permitted transferee, if any, immediately prior to the cessation of the Participant's Employment, to the extent then exercisable, will remain exercisable for the lesser of (i) a period of 30 days or (ii) the period ending on the latest date on which such Stock Option or SAR could have been exercised, and will thereupon terminate; (b) Stock Options and SARs held by a Participant or the Participant's permitted transferee, if any, immediately prior to the Participant's death, to the extent then exercisable, will remain exercisable for the lesser of (i) the period ending 90 days after the Participant's death or (ii) the period ending on the latest date on which such Stock Option or SAR could have been exercised and will thereupon terminate, and (c) Stock Options and SARs held by a Participant or the Participant's permitted transferee, if any, immediately prior to the cessation of the Participant's Employment will immediately terminate upon such cessation if the Administrator in its sole discretion determines that such cessation of Employment has resulted for reasons which cast such discredit on the Participant as to justify immediate termination of the Award.

        Stock Options.    The Administrator will determine the exercise price, if any, of each Award requiring exercise. Unless the Administrator determines otherwise, each stock option will have an exercise price not less than the fair market value of the Stock subject to the stock option, determined as of the date of grant. A stock option intended to be an ISO granted to a person who owns (or by application of attribution rules is deemed to own) more than 10% of the total combined voting power of all classes of stock of the Company will have an exercise price equal to 110% of such fair market value. Options awarded under the 1997 Incentive Plan will not be ISOs except as expressly provided otherwise.

        Effect of Certain Transactions.    In the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of a majority of the Company's outstanding Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of all or substantially all of the Company's assets or a dissolution or liquidation of the Company, all outstanding Awards requiring exercise will cease to be exercisable, and all other Awards to the extent not fully vested (including Awards subject to performance conditions not yet satisfied or determined) will be forfeited, as of the effective time of such transaction; provided, however, that immediately prior to the consummation of such a transaction, the vesting or exercisability of Awards shall be accelerated unless, in the case of any Award, the Administrator provides for one or more substitute or replacement awards from, or the assumption of existing Awards by, the acquiring entity (if any) or its affiliates.

        Equitable Adjustment.    In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capital structure, the Administrator will make appropriate adjustments to the maximum number of shares that may be delivered under the 1997 Incentive Plan, to the maximum share limits under the 1997 Incentive Plan, to the number and kind of shares of

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stock or securities subject to Awards then outstanding or subsequently granted, to any exercise prices relating to Awards, and to any other provision of Awards affected by such change. In connection with the one-for-six reverse split of the Company's Common Stock that was consummated on January 29, 2003, the Administrator made such adjustments accordingly. The Administrator also may make such adjustments to take into account other distributions or events, if the Administrator determines that adjustments are appropriate to avoid distortion in the operation of the 1997 Incentive Plan and to preserve the value of Awards; provided, however, that no such adjustment shall be made to the maximum share limits, or otherwise to an Award intended to be eligible for the performance-based exception under Section 162(m), except to the extent consistent with that exception.

        Amendment.    Subject to the Administrator's obligation to exercise its discretion consistent with qualifying Awards for the performance-based exception under Section 162(m) if such Awards are intended to so qualify, the Administrator may at any time or times amend the 1997 Incentive Plan or any outstanding Award for any purpose which may at the time be permitted by law, or may at any time terminate the 1997 Incentive Plan as to any further grants of Awards, provided that, except to the extent expressly required or permitted by the 1997 Incentive Plan, no such amendment will, without the approval of the stockholders of the Company, effectuate a change for which stockholder approval is required in order for the 1997 Incentive Plan to continue to qualify under Section 422 of the Internal Revenue Code or for Awards to be eligible for the performance-based exception under Section 162(m).

        Other Compensation.    The existence of the 1997 Incentive Plan and the grant of Awards will not affect the Company's right to pay other bonuses or compensation in addition to Awards under the 1997 Incentive Plan.

        Price of Common Stock.    The closing price of the Company's Common Stock on NASDAQ on October 7, 2003 was $2.15.

Certain Federal Income Tax Consequences.

        The following discussion summarizes certain federal income tax consequences of the issuance and exercise of stock options awarded under the 1997 Incentive Plan and is based on the law as in effect on September 30, 2003. The summary does not address all federal tax consequences, nor does it cover state, local or non-U.S. tax consequences.

        In general, a participant realizes no taxable income on either the grant or the vesting of a stock option. The exercise of an option that does not qualify as an ISO results in ordinary income (generally subject to withholding if the option was awarded to an Employee) equal to the difference (the "Option Spread") between the value of the stock purchased and the option exercise price. A corresponding deduction is available to the Company. In general, the ordinary income associated with the exercise is measured and taken into account at the time of exercise. Any subsequent sale of stock purchased under a nonstatutory option may result in a capital gain or loss.

        The exercise of an ISO does not produce ordinary taxable income. However, because the Option Spread constitutes "alternative minimum taxable income" (measured and taken into account, in general, at the time of exercise), exercise of an ISO may result in an alternative minimum tax liability. In addition, shares purchased under an ISO ("ISO Shares") are subject to special tax holding rules. If a participant holds on to ISO Shares for at least two years from the date of the ISO grant and at least one year after exercise, any gain or loss recognized for tax purposes upon a subsequent sale of the shares will be a

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long-term capital gain or loss. However, a disposition of ISO Shares by the participant within either of these special holding periods (a so-called "disqualifying disposition") results in ordinary compensation income in the year of the disposition equal, in general, to the Option Spread at the time the option was exercised. The ordinary income realized upon a disqualifying disposition of ISO Shares is deductible to the Company but is not subject to withholding. Any additional gain recognized for tax purposes in a disqualifying disposition will be taxed as short-term or long-term capital gain.

        An ISO that is exercised by the participant more than three months following termination of employment (one year, if termination occurred by reason of total and permanent disability) is treated for tax purposes as a nonstatutory option. ISOs granted to a participant under the 1997 Incentive Plan (together with ISOs granted to the participant after 1986 under any other plans of the Company and certain affiliates) are also treated as nonstatutory options to the extent that, in the aggregate, they first become exercisable in any calendar year for shares of Stock having a fair market value (determined at time of grant) in excess of $100,000.

        Under Section 162(m) of the Code, in general, the deduction a public corporation may claim for remuneration in any year to the corporation's chief executive officer or any of its other four top officers (ranked by pay) is limited to $1,000,000. Stock-option related deductions are, in general, subject to this limit. An exception to the $1,000,000 deduction limit applies to certain qualified performance-based compensation, including compensation under certain stock options, but the exception is not available with respect to an award unless, among other requirements, the award is made by a committee of the Board of Directors of the corporation consisting solely of two or more "outside directors" (as defined). As the Board of Directors of the Company is currently constituted, awards under the 1997 Incentive Plan would not satisfy this requirement. The Board of Directors would therefore be required to become qualified for Section 162(m) purposes before the performance-based exception would apply to awards made pursuant to the 1997 Incentive Plan.

        Under the so-called "golden parachute" provisions of the Code, certain Awards vested or paid in connection with a change of control of the Company may also be non-deductible to the Company and may be subject to an additional 20% federal excise tax. Non-deductible "parachute payments" will in general reduce the $1 million limit on deductible compensation under Section 162(m) of the Code, to the extent such limit is applicable to remuneration paid under the 1997 Incentive Plan or otherwise.

        THE BOARD OF DIRECTORS RECOMMENDS STOCKHOLDERS VOTE FOR THE AMENDED AND RESTATED 1997 INCENTIVE PLAN DESCRIBED IN PROPOSAL NUMBER 2.

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EQUITY COMPENSATION PLAN INFORMATION

        The following table provides information about the Company's Common Stock that may be issued upon the exercise of options, warrants and rights under all of its existing equity compensation plans as of June 30, 2003, including, but not limited to, the 1989 Stock Option Plan and the 1997 Incentive Plan:

 
   Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
   Weighted-average
exercise price of
outstanding options,
warrants and rights
   Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in first column)
  
Equity compensation plans approved by shareholders   116,102   $ 13.68   99,004 (1)
Equity compensation plans not approved by shareholders   9,168 (2)(3)(4) $ 8.08   n/a  
   
 
 
 
Total   125,270   $ 13.27   99,004  
(1)
Includes 99,004 shares of Common Stock available for future grants under the Company's 1997 Incentive Plan. No shares are available for future grants under the Company's 1989 Stock Option Plan.

(2)
Includes 2,500 shares of Common Stock issuable upon exercise of outstanding options granted to Mr. Benjamin in connection with his service on the Board of Directors. These options may be exercised at a price of $8.25 per share and expire on December 15, 2004.

(3)
Includes 2,500 shares of Common Stock issuable upon exercise of outstanding options granted to Mr. Shannon in connection with his service on the Board of Directors. These options may be exercised at a price of $8.25 per share and expire on December 15, 2004.

(4)
Includes 4,168 shares of Common Stock issuable upon exercise of outstanding options granted to Werner Thiel in connection with his service as a consultant to the Company. Options exercisable for 3,334 shares may be exercised at a price of $7.78125 and expire on July 13, 2005. Options exercisable for 834 shares may be exercised at a price of $8.25 and expire on December 14, 2004.


EXECUTIVE OFFICERS

        The Company's executive officers as of June 30, 2003 were as follows:

Name and Year First Elected Director
   Age
   Principal Occupation; Directorships of Other Public Companies
Richard E. Forkey   63   President, Chief Executive Officer, Treasurer
Jack P. Dreimiller   55   Senior Vice President, Finance, Chief Financial Officer and Clerk

        Mr. Forkey has been the President, Chief Executive Officer, Treasurer, and a director of the Company since he founded the Company in 1982. He was the Clerk of the Company from May 1983 to June 1990.

        Mr. Dreimiller has been Senior Vice President, Finance and Chief Financial Officer since April 1992 and Clerk since January 1998.

10



COMPENSATION AND OTHER MATERIAL TRANSACTIONS

Executive Compensation

Summary Compensation Table

        The following table sets forth all compensation for the last three completed fiscal years awarded to, earned by, or paid to the Company's Chief Executive Officer at June 30, 2003 and the executive officers during the fiscal year ended June 30, 2003 whose total annual salary and bonuses for the fiscal year ended June 30, 2003 exceeded $100,000 for all services rendered in all capacities to the Company and its subsidiaries (the "Named Executive Officers").

 
   Annual Compensation
   Long Term Compensation
  
 
    
    
    
    
   Awards
   Payouts
  
Name and Principal Position
at Fiscal Year End
   Year
   Salary($)
   Bonus($)
   Other Annual
Compensation($)
   Securities
Underlying
Options
(Number)
   All Other
Compensation($)
  
Richard E. Forkey
President, Chief Executive Officer and Treasurer		   2003
2002
2001		   195,000
195,000
195,000		   -0-
-0-
-0-		   12,250
12,250
11,750		 (1)
(1)
(1)		 -0-
-0-
-0-		   6,692
6,692
6,692		 (2)
(2)
(2)

Jack P. Dreimiller
Senior Vice President Finance, Chief Financial Officer and Clerk
 
2003
2002
2001
 
164,611
162,499
150,710
 
-0-
-0-
-0-
 
3,166
3,187
2,705
(3)
(3)
(3)
-0-
667
-0-
 
2,025
2,025
2,025
(4)
(4)
(4)
(1)
Includes $9,250 for car expense for each of 2003, 2002 and 2001.

(2)
Represents premiums for a life insurance policy and a disability insurance policy.

(3)
Represents Company's matching contribution to Profit Sharing Plan.

(4)
Represents premiums for a life insurance policy.

Option Grants in Last Fiscal Year

        There were no individual grants of stock options made by the Company during the fiscal year ended June 30, 2003 to its Named Executive Officers.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

        The following table summarizes for each of the Named Executive Officers (i) the total number of shares received upon exercise of stock options during the fiscal year ended June 30, 2003, (ii) the aggregate dollar value realized upon such exercise, (iii) the total number of unexercised options, if any, held at June 30, 2003 and (iv) the value of unexercised in-the-money options, if any, held at June 30, 2003. In-the-money options are options where the fair market value of the underlying securities exceeds the exercise or base price of the option. The aggregate value realized upon exercise of a stock option is the difference between the aggregate exercise price of the option and the fair market value of the underlying stock on the date of exercise. The value of unexercised, in-the-money options at fiscal year-end is the difference between the exercise price of the option and the fair market value of the underlying stock on June 30, 2003, which was $2.34 per share. With respect to unexercised, in-the-money options, the

11


underlying options have not been exercised, and actual gains, if any, on exercise will depend on the value of the Company's Common Stock on the date of exercise.

 
    
    
   Fiscal-Year-End Option Values
 
    
    
   Unexercised Options
at Fiscal-Year-End
   Value of Unexercised
In-the-Money Options
at Fiscal-Year-End ($)
Name
   Shares Acquired on
Exercise (Number)
   Value
Realized($)
   Exercisable
(Number)
   Unexercisable
(Number)
   Exercisable
   Unexercisable
Richard E. Forkey   -0-   -0-   -0-   -0-   -0-   -0-
Jack P. Dreimiller   -0-   -0-   17,001   334   -0-   -0-

Long Term Incentive Plans—Awards in Last Fiscal Year

        The Company made no awards under a long term incentive plan in the fiscal year ended June 30, 2003.

Employment Contracts and Termination of Employment Arrangements

        The Company has no employment contracts in place with any Named Executive Officers. The Company also has no compensatory plan or arrangement with respect to any Named Executive Officer where such plan or arrangement will result in payments to such Named Executive Officer upon or following his resignation, retirement, or other termination of employment with the Company and its subsidiaries, or as a result of a change-in-control of the Company or a change in the Named Executive Officers' responsibilities following a change-in-control.

Section 16(a) Beneficial Ownership Reporting Compliance

        To the Company's knowledge, based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company during the fiscal year ended June 30, 2003 and Forms 5 and amendments thereto furnished to the Company with respect to such fiscal year, no person required to file reports under Section 16(a) of the Securities Exchange Act of 1934 failed to file such reports on a timely basis during or with respect to such fiscal year.


CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The Company has an arrangement with J.R. Pitlor ("J.R. Pitlor"), a company wholly owned by Mr. Pitlor, a Director of the Company, under which Mr. Pitlor provides consulting services to the Company for a fee currently not to exceed $2,000 a month. These consulting services consist primarily of advice regarding marketing, strategic planning and other general business issues. Either party may terminate this arrangement at will. The Company paid J.R. Pitlor for consulting services aggregate fees of $24,000 for fiscal year 2002 and $24,000 for fiscal year 2003.

        The Company leases its facility in Gardner, Massachusetts from Equity Assets, Inc. ("Equity"), a company wholly owned by Mr. Forkey, the President and Treasurer and a Director of the Company. The Company is currently a tenant-at-will paying rent of $9,000 per month.

        The Company has paid legal fees to Ropes & Gray LLP, a law firm of which Mr. Benjamin, a Director of the Company, is a retired partner, of approximately $117,000 for fiscal year 2002, and $144,000 for fiscal year 2003.

12


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth information regarding the Company's Common Stock owned as of the close of business on September 30, 2003, the record date for the 2003 Annual Meeting, by the following persons: (i) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's directors and nominees for director who beneficially owns the Company's or its subsidiaries' Common Stock, other than directors' qualifying shares, (iii) each of the Company's Named Executive Officers who beneficially own the Company's or its subsidiaries' Common Stock, and (iv) all executive officers and directors, as a group, who beneficially own the Company's or its subsidiaries' Common Stock. The information on beneficial ownership in the table and footnotes thereto is based upon data furnished to the Company by, or on behalf of, the persons listed in the table.

Name and Address
Of Beneficial Owner
   Amount and Nature of
Beneficial Ownership(1)
   Percent of Class(2)
  
David M. Greenhouse
c/o Special Situations Fund III, L.P.
153 East 53rd Street
New York, NY 10022		   146,002 (3) 8.33 %
Directors and Officers          
Edward A. Benjamin*
c/o Ropes & Gray
One International Place
Boston, MA 02110		   11,171 (4) **  
Richard E. Forkey*
c/o Precision Optics Corporation, Inc.
22 East Broadway
Gardner, MA 01440		   295,378   16.86 %
Austin W. Marxe*
c/o Special Situations Funds
153 East 53rd Street
New York, NY 10022		   150,172 (5) 8.55 %
Joel R. Pitlor*
19 Chalk Street
Cambridge, MA 02139		   34,260 (6) 1.95 %
Robert R. Shannon*
7040 E. Taos Place
Tucson, AZ 85715		   11,671 (4) **  
Jack P. Dreimiller
c/o Precision Optics Corporation, Inc.
22 East Broadway
Gardner, MA 01440		   21,168 (7) 1.20 %
All officers and directors as a group, including those named above (6 persons)   523,820 (8) 29.13 %
*
Director

13

**
The percentage of shares beneficially owned by such person does not exceed one percent of the Company's Common Stock.

(1)
Represents shares with respect to which each beneficial owner listed has or will have, upon acquisition of such shares upon exercise or conversion of options, warrants, conversion privileges or other rights exercisable within sixty days, sole voting and investment power.

(2)
Percentages are calculated on the basis of the amount of outstanding Common Stock plus, for each person or group, any securities that such person or group has the right to acquire within sixty days pursuant to options, warrants, conversion privileges or other rights.

(3)
Represents (i) 35,134 shares owned of record by Special Situations Private Equity Fund, L.P. ("SSPEF"); (ii) 65,567 shares owned of record by Special Situations Fund III, L.P. ("SSF III"); (iii) 24,834 shares owned of record by Special Situations Technology Fund, L.P. ("SSTF"); and (iv) 20,467 shares owned of record by Special Situations Cayman Fund, L.P. ("SSCF"). SSPEF, SSF III, SSTF and SSCF are affiliated investment funds. David Greenhouse and Austin Marxe, a director of the Company, are principals of the investment funds and their respective investment advisers, M.G. Advisers, L.L.C., SST Advisers, L.L.C. AWM Investment Company, Inc.

(4)
Includes 10,837 shares which may be acquired within sixty days upon the exercise of outstanding stock options.

(5)
Includes (i) 146,002 shares owned by certain affiliated investment funds of which Mr. Marxe is a principal (see footnote (3) above) and (ii) 4,170 shares which may be acquired within sixty days upon exercise of outstanding stock options awarded to Mr. Marxe personally in his capacity as a Director of the Company.

(6)
Includes 3,544 shares which may be acquired within sixty days upon the exercise of outstanding stock options.

(7)
Includes 17,001 shares which may be acquired within sixty days upon the exercise of outstanding stock options.

(8)
Includes 46,389 shares which may be acquired within sixty days upon the exercise of outstanding stock options.


INDEPENDENT PUBLIC ACCOUNTANTS

Independent Public Accountants

        KPMG LLP has been selected to serve as independent auditors of the Company for the fiscal year ending June 30, 2004, and also served as the principal accountants of the Company for the fiscal year ended June 30, 2003. A representative of KPMG LLP is expected to be present at the annual meeting to respond to appropriate questions and will have the opportunity to make a statement if such representative so desires.

Change in Independent Public Accountants

        As previously disclosed on a current report on Form 8-K filed with the Securities and Exchange Commission on July 2, 2002 (the "Form 8-K"), the Company dismissed Arthur Andersen LLP ("Arthur

14


Andersen") as its independent accountants on July 1, 2002. The Company's Audit Committee and Board of Directors approved this action.

        The report of Arthur Andersen on the Company's financial statements for the fiscal year ended June 30, 2001, contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.

        During the Company's fiscal year ended June 30, 2002 and through July 1, 2002, there were no disagreements, resolved or unresolved, with Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Arthur Andersen, would have caused Arthur Andersen to make reference thereto in connection with its reports on the financial statements.

        During the Company's fiscal year ended June 30, 2002 and through July 1, 2002, Arthur Andersen did not advise the Company as to any of the matters described in Item 304(a)(1)(iv)(B) of Regulation S-B promulgated under the Securities Act of 1933, as amended.

        The Company has been unable, after reasonable efforts, to have Arthur Andersen review and respond to the above disclosure; however, Arthur Andersen provided a letter dated July 2, 2002 stating that it was in agreement with the disclosure included in paragraphs 2, 3 and 4 of the Form 8-K, which disclosure is substantially the same as the above disclosure.

        On July 16, 2002, the Company engaged KPMG LLP as its new independent accountant. The Company's Audit Committee and Board of Directors approved this action. The decision to engage KPMG LLP followed the Company's evaluation of proposals from several accounting firms.

        During the Company's fiscal year ended June 30, 2002 and through July 16, 2002, neither the Company nor any person on the Company's behalf consulted with KPMG LLP regarding: (i) the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on the Company's financial statements, or (ii) any matter that was the subject of a disagreement or event described in Item 304(a)(1)(iv) of Regulation S-B.

Audit Fees

        The aggregate fees billed or estimated to be billed for professional services rendered by the Company's independent auditors for the audit of the Company's annual financial statements for the fiscal year ended June 30, 2003 and for the reviews of the financial statements included in the Company's quarterly reports on Form 10-QSB for that fiscal year were $86,240.

Financial Information Systems Design and Implementation Fees

        The Company's independent auditors did not perform any financial information systems design or implementation work for the Company during the fiscal year ended June 30, 2003.

All Other Fees

        The aggregate fees billed for nonaudit-related tax services rendered by the Company's independent auditors for the fiscal year ended June 30, 2003 were $10,975.

15



AUDIT COMMITTEE REPORT

        The Audit Committee is composed of Messrs. Benjamin, and Shannon, each of whom is "independent" as defined in Rule 4200(a)(15) of the National Association of Securities Dealers' listing standards. The Board of Directors has adopted a written charter for the Audit Committee.

        The Audit Committee has submitted the following report:

        The Audit Committee has reviewed and discussed with management the audited consolidated financial statements for the fiscal year ended June 30, 2003, and has discussed with the Company's independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 (SAS 61). SAS 61 requires independent auditors to communicate to the Audit Committee various matters, including, if applicable: (1) methods used to account for certain unusual transactions; (2) the effect of certain accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus; (3) the process used by management in formulating certain accounting estimates and the basis for the auditor's conclusions regarding the reasonableness of those estimates and (4) disagreements with management over the application of accounting principles and certain other matters. The Audit Committee has received the written disclosures and the letter from the Company's independent accountants required by Independence Standards Board Standard No. 1 (requiring auditors to make written disclosures to, and to discuss with, the Audit Committee, various matters relating to the auditor's independence), has discussed with the accountants their independence and has considered whether the provision of non-audit services by the accountants is compatible with maintaining that independence. Based on the foregoing and further review and discussion, the Audit Committee has recommended to the Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 2003 for filing with the Securities and Exchange Commission.


SHAREHOLDER PROPOSALS

        Stockholders may present proposals for inclusion in the 2004 Proxy Statement and form of proxy relating to that meeting provided they are received by the Clerk of the Company no later than June 17, 2004 and are otherwise in compliance with applicable Securities and Exchange Commission regulations.

        If a Stockholder who wishes to present a proposal at the Company's 2004 Annual Meeting that will not be included in the Company's proxy statement for such Annual Meeting fails to notify the Company of his or her desire to do so by August 31, 2004, then the proxies that the Board of Directors solicits for the 2004 Annual Meeting will include discretionary authority to vote on the Stockholder's proposal, if such proposal is properly brought before the meeting.

16

Appendix A

PRECISION OPTICS CORPORATION, INC.

1997 INCENTIVE PLAN

Amended and Restated as of November 11, 2003

1.     DEFINED TERMS

        Exhibit A, which is incorporated by reference, defines the terms used in the Plan and sets forth certain operational rules related to those terms.

2.     PURPOSE

        The Plan has been established to advance the interests of the Company by giving selected Employees, directors and other persons (including both individuals and entities) who provide services to the Company or its Affiliates equity-based or cash incentives through the grant of Awards.

3.     ADMINISTRATION

        The Administrator has discretionary authority, subject only to the express provisions of the Plan, to interpret the Plan; determine eligibility for and grant Awards; determine, modify or waive the terms and conditions of any Award; prescribe forms, rules and procedures (which it may modify or waive); and otherwise do all things necessary to carry out the purposes of the Plan. In the case of any Award intended to be eligible for the performance-based compensation exception under Section 162(m), the Administrator shall exercise its discretion consistent with qualifying the Award for such exception. The Administrator may delegate to senior management the authority to grant Awards, other than Awards to the President.

4.     LIMITS ON AWARDS UNDER THE PLAN

        a.    Number of Shares.    A maximum of 300,000 shares of Stock may be delivered in satisfaction of Awards under the Plan.

        b.    Type of Shares.    Stock delivered by the Company under the Plan may be authorized but unissued Stock or previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock will be delivered under the Plan.

        c.    Section 162(m) Limits.    The maximum number of shares of Stock for which Stock Options may be granted to any person over the life of the Plan shall be 100,000. The maximum number of shares of Stock subject to SARs granted to any person over the life of the Plan shall be 100,000. For purposes of the preceding two sentences, the repricing of a Stock Option or SAR shall be treated as a new grant to the extent required under Section 162(m). The aggregate maximum number of shares of Stock delivered to any person over the life of the Plan pursuant to Awards that are not Stock Options or SARs shall also be 100,000. However, Stock Options and SARs that are granted with an exercise price that is less than the fair market value of the underlying shares on the date of the grant will also be subject to the limits imposed by the preceding sentence. Subject to these limitations, each person eligible to participate in the Plan shall be eligible in any year to receive Awards covering up to the full number of shares of Stock then available for Awards under the Plan. No more than $2,000,000 may be paid to any individual with respect to any Cash Performance Award. In applying the limitation of the preceding sentence: (A) multiple Cash Performance

A-1


Awards to the same individual that are determined by reference to performance periods of one year or less ending with or within the same fiscal year of the Company shall be subject in the aggregate to one $2,000,000 limit, and (B) multiple Cash Performance Awards to the same individual that are determined by reference to one or more multi-year performance periods ending in the same fiscal year of the Company shall be subject in the aggregate to a separate limit of $2,000,000.

5.     ELIGIBILITY AND PARTICIPATION

        The Administrator will select Participants from among those key Employees, directors and individuals or entities (other than Employees or directors) providing services to the Company or its Affiliates who, in the opinion of the Administrator, are in a position to make a significant contribution to the success of the Company and its Affiliates. Eligibility for ISOs is limited to Employees of the Company or of a "parent corporation" or "subsidiary corporation" of the Company as those terms are defined in Section 424 of the Code.

6.     RULES APPLICABLE TO AWARDS

        a.    ALL AWARDS    

A-2

        b.    AWARDS REQUIRING EXERCISE    

A-3

        c.    AWARDS NOT REQUIRING EXERCISE    

        Awards of Restricted Stock and Unrestricted Stock may be made in return for either (i) services determined by the Administrator to have a value not less than the par value of the awarded shares of Stock, or (ii) cash or other property having a value not less than the par value of the awarded shares of Stock plus such additional amounts (if any) as the Administrator may determine payable in such combination and type of cash, other property (of any kind) or services as the Administrator may determine.

7.     EFFECT OF CERTAIN TRANSACTIONS

        a.    MERGERS, ETC.    

        In the event of (i) a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of a majority of the Company's then outstanding voting common stock by a single person or entity or by a group of persons and/or entities acting in concert, (ii) a sale or transfer of all or substantially all the Company's assets, or (iii) a dissolution or liquidation of the Company (any of the foregoing, a "covered transaction"), all outstanding Awards requiring exercise will cease to be exercisable, and all other Awards to the extent not fully vested (including Awards subject to performance conditions not yet satisfied or determined) will be forfeited, as of the effective time of the covered transaction; provided, however, that immediately prior to the consummation of such covered transaction the vesting or exercisability of Awards shall be accelerated unless, in the case of any Award, the Administrator provides for one or more substitute or replacement awards from, or the assumption of the existing Award by, the acquiring entity (if any) or its affiliates.

        The Administrator may provide in the case of any Award that the provisions of the preceding paragraph shall also apply to (i) mergers or consolidations involving the Company that do not constitute a covered transaction, or (ii) other transactions, not constituting a covered transaction, that involve the acquisition of the Company's outstanding Stock.

A-4

        b.    CHANGES IN AND DISTRIBUTIONS WITH RESPECT TO THE STOCK    

8.     CONDITIONS ON DELIVERY OF STOCK

        The Company will not be obligated to deliver any shares of Stock pursuant to the Plan or to remove any restriction from shares of Stock previously delivered under the Plan until: the Company's counsel has approved all legal matters in connection with the issuance and delivery of such shares; if the outstanding Stock is at the time of delivery listed on any stock exchange or national market system, the shares to be delivered have been listed or authorized to be listed on such exchange or system upon official notice of issuance; and all conditions of the Award have been satisfied or waived. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act. The Company may require that certificates evidencing Stock issued under the Plan bear an appropriate legend reflecting any restriction on transfer applicable to such Stock, and the Company may hold the certificates pending lapse of the applicable restrictions.

9.     AMENDMENT AND TERMINATION

        Subject to the last sentence of Section 3, the Administrator may at any time or times amend the Plan or any outstanding Award for any purpose which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of Awards; provided, that (except to the extent expressly required or permitted by the Plan) no such amendment will, without the approval of the stockholders of the Company, effectuate a change for which stockholder approval is required in order for the Plan to continue to qualify under Section 422 of the Code and for Awards to be eligible for the performance-based exception under Section 162(m).

10.   NON-LIMITATION OF THE COMPANY'S RIGHTS

        The existence of the Plan or the grant of any Award shall not in any way affect the Company's right to award a person bonuses or other compensation in addition to Awards under the Plan.

11.   GOVERNING LAW

        The Plan shall be construed in accordance with the laws of the Commonwealth of Massachusetts.

A-5

EXHIBIT A

        The following terms, when used in the Plan, shall have the meanings and be subject to the provisions set forth below:

        "Administrator": The Board or, if one or more has been appointed, the Committee. The Administrator may delegate ministerial tasks to such persons as it deems appropriate.

        "Affiliate": Any corporation or other entity owning, directly or indirectly, 50% or more of the outstanding Stock of the Company, or in which the Company or any such corporation or other entity owns, directly or indirectly, 50% of the outstanding capital stock (determined by aggregate voting rights) or other voting interests.

        "Award": Any or a combination of the following:

        "Board": The Board of Directors of the Company.

        "Code": The U.S. Internal Revenue Code of 1986 as from time to time amended and in effect, or any successor statute as from time to time in effect.

A-6


        "Committee": A committee of the Board comprised solely of two or more outside directors within the meaning of Section 162(m). The Committee may delegate ministerial tasks to such persons (including Employees) as it deems appropriate.

        "Company": Precision Optics Corporation, Inc.

        "Employee": Any person who is employed by the Company or an Affiliate.

        "Employment": A Participant's employment or other service relationship with the Company and its Affiliates. Employment will be deemed to continue, unless the Administrator expressly provides otherwise, so long as the Participant is employed by, or otherwise is providing services in a capacity described in Section 5 to the Company or its Affiliates. If a Participant's employment or other service relationship is with an Affiliate and that entity ceases to be an Affiliate, the Participant's Employment will be deemed to have terminated when the entity ceases to be an Affiliate unless the Participant transfers Employment to the Company or its remaining Affiliates.

        "ISO": A Stock Option intended to be an "incentive stock option" within the meaning of Section 422 of the Code.

        "Participant": An Employee, director or other person providing services to the Company or its Affiliates who is granted an Award under the Plan.

        "Performance Award": An Award subject to Performance Criteria. The Committee in its discretion may grant Performance Awards that are intended to qualify for the performance-based compensation exception under Section 162(m) and Performance Awards that are not intended so to qualify.

        "Performance Criteria": Specified criteria, the satisfaction of which is a condition for the grant, exercisability, vesting or full enjoyment of an Award. For purposes of Awards that are intended to qualify for the performance-based compensation exception under Section 162(m), a Performance Criterion will mean an objectively determinable measure of performance relating to any or any combination of the following (determined either on a consolidated basis or, as the context permits, on a divisional, subsidiary, line of business, project or geographical basis or in combinations thereof): (i) sales; revenues; assets; expenses; earnings before or after deduction for all or any portion of interest, taxes, depreciation or amortization, whether or not on a continuing operations or an aggregate or per share basis; return on equity, investment, capital or assets; gross margin; inventory level or turns; one or more operating ratios; borrowing levels, leverage ratios or credit rating; market share; capital expenditures; cash flow; stock price; stockholder return; or other objective operating contributions; or (ii) acquisitions and divestitures (in whole or in part); joint ventures and strategic alliances; spin-offs, split-ups and the like; reorganizations; recapitalizations, restructurings, financings (issuance of debt or equity) and refinancings; or other transactions that involve a change in the equity ownership of the Company. A Performance Criterion measure and any targets with respect thereto determined by the Administrator need not be based upon an increase, a positive or improved result or avoidance of loss.

        "Plan": Precision Optics Corporation, Inc. 1997 Incentive Plan as from time to time amended and in effect.

        "Section 162(m)": Section 162(m) of the Code.

        "Stock": Common stock of the Company, par value $.01 per share.

A-7

PRECISION OPTICS CORPORATION, INC.

Dear Shareholder,

        Please take note of the important information enclosed with this Proxy Ballot. The Proposals which are discussed in detail in the enclosed proxy materials require your immediate attention and approval.

        Your vote counts, and you are strongly encouraged to exercise your right to vote your shares.

        Please mark the boxes on this proxy card to indicate how your shares will be voted. Then sign the card, detach it and return your proxy vote in the enclosed postage paid envelope.

        Your vote must be received prior to the Annual Meeting of Stockholders on November 11, 2003.

        Thank you in advance for your prompt consideration of these matters.

    Very truly yours,

 
 
Precision Optics Corporation, Inc.
    DETACH HERE   ZPOPC2    

PRECISION OPTICS CORPORATION, INC.

COMMON STOCK PROXY

        The undersigned, revoking any previous instructions, hereby acknowledges receipt of the Notice and Proxy Statement dated October 15, 2003. In connection with the Annual Meeting mentioned below, the undersigned hereby appoint(s) Richard E. Forkey and Jack P. Dreimiller as attorneys of the undersigned, each with power to act alone and with full power of substitution, to act and to vote all shares of stock which the undersigned is entitled to vote at the Annual Meeting of Stockholders of Precision Optics Corporation, Inc. to be held on November 11, 2003, at 10:00 A.M. at the offices of Ropes & Gray LLP, One International Place, Boston, Massachusetts, and at any adjournments or postponements thereof, upon the matters set forth in the proxy statement for such Annual Meeting. The foregoing attorneys are authorized to vote, in their discretion, upon such other business as may properly come before the meeting or any adjournments or postponements thereof.

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS. WHEN THIS PROXY IS PROPERLY EXECUTED, THE SHARES REPRESENTED HEREBY WILL BE VOTED AS SPECIFIED BY THE SHAREHOLDER(S) ON THE REVERSE SIDE HEREOF. IF NO DIRECTION IS GIVEN, THE SHARES WILL BE VOTED FOR THE ELECTION OF THE CLASS I DIRECTOR NOMINEES DESCRIBED IN PROPOSAL NUMBER 1 AND FOR THE AMENDED AND RESTATED 1997 INCENTIVE PLAN DESCRIBED IN PROPOSAL NUMBER 2.

PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE
ENCLOSED ENVELOPE.

        Please sign exactly as your name appears on the books of the Company. Joint owners should each sign personally. Trustees and other fiduciaries should indicate the capacity in which they sign, and where more than one name appears, a majority must sign. If a corporation, this signature should be that of an authorized officer who should state his or her title.

HAS YOUR ADDRESS CHANGED?   DO YOU HAVE ANY COMMENTS?


 


 


 

PRECISION OPTICS CORPORATION
C/O EQUISERVE TRUST COMPANY, N.A.
P.O. BOX 8694
EDISON, NJ 08818-8694

    DETACH HERE   ZPOPC2    
ý
PLEASE MARK VOTES AS IN THIS EXAMPLE.

PRECISION OPTICS CORPORATION, INC.

1.
Election of two Class I Directors. The nominees for the Board of Directors to serve for a three-year term as Class I Director:

NOMINEES: (01) Richard E. Forkey and (02) Edward A. Benjamin

FOR NOMINEES o       WITHHELD FROM NOMINEES   o


 
 
o For all nominees except as written above.    
2.
Approval of the Amended and Restated 1997 Incentive Plan:

FOR o       AGAINST o       ABSTAIN o    
Signature:       Date:    
   
     

Signature:
 
 
 
Date:
 
 
   
     


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INFORMATION CONCERNING SOLICITATION AND VOTING
PROPOSAL NUMBER 1. ELECTION OF DIRECTORS
PROPOSAL NUMBER 2. APPROVAL OF AMENDED AND RESTATED 1997 INCENTIVE PLAN
Amended Plan Benefits 1997 Incentive Plan
EQUITY COMPENSATION PLAN INFORMATION
EXECUTIVE OFFICERS
COMPENSATION AND OTHER MATERIAL TRANSACTIONS
Executive Compensation
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
INDEPENDENT PUBLIC ACCOUNTANTS
AUDIT COMMITTEE REPORT
SHAREHOLDER PROPOSALS