10-K ~~SECURITIES AND EXCHANGE COMMISSION~~
Securities and Exchange Commission
Washington, D.C. 20549 (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from..................to .............................

INRAD, Inc. ~~----------------------------------------------------------- (Exact~~
(Exact name of registrant as specified in its charter) New Jersey 22-2003247 - ------------------------------------ ----------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 181 Legrand Avenue, Northvale, NJ, 07647 ---------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (201) 767-1910 ----------------------------------------------------------------- (Registrant's telephone number, including area code) Securities Registered Pursuant None to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------------------------ ------------------------------------

Common Stock, par value $0.01 Per Share ~~- -------------------------------------------------------------------------------- (Title~~
(Title of class) ~~________________________________________________________________________________ (Title of class)~~

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ~~[ X ]~~ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý

Aggregate market value of the registrant's Common Stock, par value $0.01 per share, held by non-affiliates as of March ~~11, 1997~~15, 2003 was approximately ~~$96,000.~~ $2,647,000

Common shares of stock outstanding as of March ~~11, 1997: 2,109,271~~15, 2003:
5,279,090 shares

INDEX Page ---- Part I Item 1. Business......................................1 Item 2. Properties....................................7 Item 3. Legal Proceedings.............................7 Item 4. Submission of Matters to a Vote of Security Holders...........................7 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............8 Item 6. Selected Financial Data.......................9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................9 Item 8. Financial Statements and Supplementary Data.......................15 Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure.....................15 Part III Item 10. Directors and Executive Officers of the Registrant............................16 Item 11. Executive Compensation.......................18 Item 12. Security Ownership of Certain Beneficial Owners and Management.............18 Item 13. Certain Relationships and Related Transactions.....................20 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........21 Signatures.....................................................24

		Page
Part I
Item 1.	Business	1
Item 2.	Properties	10
Item 3.	Legal Proceedings	10
Item 4.	Submission of Matters to a Vote of Security Holders	10
Part II
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	11
Item 6.	Selected Financial Data	12
Item 7.	Management's Discussion and Analysis of Financial Condition	12
Item 7A.	Discussion about market risk	19
Item 8.	Financial Statements and Supplementary Data	19
Item 9.	Changes In and Disagreements With Accountants On Accounting and Financial Disclosure	19
Part III
Item 10.	Directors and Executive Officers of the Registrant	20
Item 11.	Executive Compensation	22
Item 12.	Security Ownership of Certain Beneficial Owners and Management	22
Item 13.	Certain Relationships and Related Transactions	24
Item 14.	Controls & Procedures	25
Part IV
Item 13A.	Form 8K Filed	26
Item 14B.	Exhibits, Financial StatementSchedules, and Reports on Form 8-K	26
Signatures	28

PART I Item 1. Business. INRAD, Inc., (the "Company" or "INRAD"), incorporated in New Jersey in 1973, designs, develops, manufactures and markets crystals and products incorporating crystals which are used primarily for controlling and augmenting laser radiation. These products, which represent INRAD's core business, are designed either for incorporation by original equipment manufacturers in their lasers and laser systems, for use by scientists and engineers in their research and development with lasers, or

This Annual Report contains forward-looking statements as ~~stand-alone subsystems or instruments for general use with lasers. These products are sold under the INRAD trademark, which has been registered~~that term is defined in the United States Patent Office. In order to effectively utilize lasers, it is often necessary to control, modify, or augment the laser beam. The Company's products perform these functions with lasers which are currently being used in communications, medicine, surveying, military range finding and target illumination, materials processing, color separation, printing and a wide variety of research applications, including applications in laser fusion, isotope separation and spectroscopy. INRAD also manufactures precision optics and optical assemblies for its customers. Most of these optics are supplied with reflective and antireflective optical coatings produced in INRAD's Thin Film Department. INRAD's company-funded research and development program is supplemented by federally funded R&D grants and contracts in technical areas related to INRAD's core business. Products The Company's products include: crystals; crystal components such as Q-switches, polarizers, waveplates and rotators; integrated systems such as harmonic generators, electronic devices for laser components and laser pulsewidth measuring instruments; and opto-mechanical assemblies and optical components.federal securities laws. The Company ~~sells crystals as blanks or as precision polished elements. Wherever possible, the Company emphasizes the manufacture and sale of its components, integrated systems, and instruments~~wishes to insure that incorporate its own crystals. The Company also performs research and development for industry and government in the area of crystal and laser technology. The following table illustrates the Company's sales for each major category of its product line during the past three years: 1 Year Ended December 31, ----------------------- 1996 1995 1994 ------------------------------------------------------ Category Sales % Sales % Sales % - -------- ----- - ----- - ----- - $ $ $ Crystals & Crystal Components 3,563,983 62 3,263,759 60 3,578,014 60 Systems & Instruments 1,677,092 29 1,083,670 20 1,415,702 24 Contract Research & Development 489,930 9 1,084,609 20 1,002,203 16 ------- - --------- -- ---------- -- TOTAL $5,731,005 100 $5,432,038 100 $5,995,919 100 ========== === ========== === ========== === Although the growth of crystals, including new crystals grown at high temperatures, will continue to be an integral part of the Company's business, the Company believes that laser manufacturers and users will increase their demand for components, systems and computer-based instruments more rapidly than they will increase their demand for unpackaged crystals. The Company's manufacturing and marketing effortsany forward-looking statements are ~~being directed to this anticipated change in demand. Products Manufactured~~accompanied by the Company Single Crystals The Company produces, by various techniques, some 38 types of crystals which, because of their purity, internal structure, and high perfection have unique optical, electronic or electro-optical properties. Crystals are a form of solid matter having a regular internal structure, with atoms and molecules arranged in a precise way to form a solid internal pattern that repeats itself over and over again in all directions. Crystal Components Electro-optic and nonlinear crystal devices can alter the intensity, polarization or wavelength of a laser beam. The Company has developed and manufactures a line of Q-switches, harmonic generators, and associated electronics. These devices are sold individually to scientists throughout the world as well as on an OEM basis to laser manufacturers. Harmonic Generation Systems and Instruments Harmonic generation systems enable the users of lasers to convert the fundamental frequency of the laser to another frequency required for a specific end use. A harmonic, which is a multiple of the fundamental frequency, is obtained by passing a laser beam through a suitable nonlinear crystal. Harmonic generators are also used to mix the output frequency of one laser with that of another 2 laser to produce a different frequency. Harmonic generators are presently useful in spectroscopy, lithography, semiconductor processing, optical data storage and scientific research. Following the development of microprocessor-based tunable lasers, which automatically produce a range of frequencies, the Company developed a product called the Autotracker. When used in conjunction with these lasers, the Autotracker automatically generates tunable ultraviolet light for use in spectroscopic applications. An Infrared Autotracker was then designed to cover the wavelength region from 1.5 to 4.5 microns. Further product developments are planned to extend the wavelength region of tunability to 11 microns using a group of new crystals now being developed and grown at INRAD. In 1991, the Company introduced an Autotracker specifically designed to work with Titanium Sapphire lasers. These lasers are an advance in solid state tunable sources and are now being marketed by many major laser manufacturers. In 1994, the Company introduced a new harmonic generator for use with ultrafast lasers having pulsewidths in the femtosecond and picosecond ranges. This product is sold on an OEM basis to the world's largest manufacturer of ultrafast lasers. The Company has developed and produces a line of Autocorrelators which can measure extremely short laser pulses. Accurate measurement of pulsewidth is important in studies of chemical and biological reactions, as well as in the development of high speed electronics, ultrafast lasers and laser diodes for communications. The Model 5-14LD Autocorrelator is capable of measuring laser pulsewidths from 100 femtoseconds to 75 picoseconds from any type of laser system, and has the highest sensitivity of any commercial autocorrelator. The Model 5-14BX Autocorrelator can measure in real time the pulsewidth of high repetition rate lasers. By using a combination of precision mechanical and optical engineering in conjunction with a computer interface, this autocorrelator is ideal for setting up and monitoring fast and ultrafast lasers. Precision Optics The Company also produces a line of precision optical components used in laser and other optical systems. These include lenses, windows, polarizers, retardation plates, Brewster windows, attenuation systems, rotators and gimbal mounts. Optical Coatings In order to meet performance requirements, most optical components require thin film coatings on their surfaces. Depending on the design, optical coatings can refract, reflect, or transmit specific wavelengths. INRAD uses computerized coating equipment and has built its coating facility within a temperature and humidity controlled clean room. 3 The Company's coating facility produces a wide variety of sophisticated coatings on many different substrates for use in its own products, as well as for customers who purchase coated optics manufactured by the Company to their specifications. Research and Development The Company's research and development activities currently focus on developing new proprietary products as well as new end uses for its existing products. The Company is primarily engaged in research on crystal growth, harmonic generation, and electro-optics. This combination allows the Company to introduce new products based on crystals developed within the Company. A staff of eleven scientists and engineers, including four at the Ph.D. level, enables the Company to develop new crystals, devices and instruments and also to participate in sponsored research. Company-funded research expenditures during the years ended December 31, 1996, 1995, and 1994 were $170,750 (3.3% of net product sales), $305,626 (7.0% of net product sales), and $365,856 (7.3%),respectively. In 1990 the Company established a Federal Research and Development Program Groupmeaningful cautionary statements in order to ~~augment its own funded R&D efforts. This group actively seeks government support in technical areas in which~~comply with the Company has expertise, and has promise for the development of new commercial products in which the government has requirements. Scientific, manufacturing and support personnel from within the Company are assigned to the Federal R&D Group to carry out government funded programs. The Federal R&D Programs Group has been particularly successful in winning awards under the Federal Small Business Innovative Research (SBIR) Program. These programs have led to several inventions and the Company has been awarded six U.S. patents, has filed several patent applications and is preparing additional applications. The Company is seeking strategic partners to commercialize someterms of the ~~technologies developed from~~safe harbor provided by the Private Securities Litigation Reform Act of 1995. The events described in the forward-looking statements contained in this Annual Report may not occur. Generally these ~~programs. During 1996, 1995~~statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits of acquisitions to be made by us, projections involving anticipated revenues, earnings, or other aspects of our operating results. The words "may", "will", "expect", "believe", "anticipate", "project", "plan", "intend", "estimate", and ~~1994, the Company was awarded funded R&D programs totaling approximately $152,000, $316,000,~~"continue", and ~~$573,000, respectively. The programs range in duration from six~~their opposites and similar expressions are intended to ~~twenty-four months. All programs~~identify forward-looking statements. We caution you that these statements are ~~monitored for technical accomplishments~~not guarantees of future performance or events and are subject to ~~final audit~~a number of uncertainties, risks, and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may affect our results include, but are not limited to, the risks and uncertainties discussed in Items 1, 7 and 7A. Any one or more of these uncertainties, risks, and other influences could materially affect our results of operations and whether forward-looking statements made by the sponsoring government agency or its designated audit agency. Revenues from contract research and development were $489,930, $1,084,609, and $1,002,203 during the years ended December 31, 1996, 1995, and 1994, respectively. The Company expectsus ultimately prove to ~~continue seeking new government-sponsored programs, as well as joint programs with certain of its customers, in technical areas related to its core business. 4~~ ~~Markets In 1996, 1995 and 1994~~be accurate. Readers are further cautioned that the Company's ~~domestic product sales were made~~financial results can vary from quarter to end users in the following market areas: Market 1996 1995 1994 ------ ---- ---- ---- Industrial 66% 67% 45% Universities 13% 7% 10% National Laboratories 8% 9% 7% Government 13% 17% 38% --- ---- ---- Total Domestic 100% 100% 100% ==== ==== ==== In recognition of the sharp reductions in the U.S. defense budgets, the Company has refocused its marketing strategy to place a greater emphasis on industrial, medical and scientific applications. This change in emphasis has resulted in a larger percentage of sales to industrial users in 1996 and 1995. The Company does not have similar information about the end use of products sold abroad. Foreign sales accounted for 16% of total product sales in 1996, 19% in 1995, and 24% in 1994. Worldwide, the Company has approximately 210 customers, one of which accounted for 11% of net product sales in 1996, 1995 and 1994. Another accounted for 12% and 11% of net product sales in 1996 and 1995, respectively. Additionally, one other customer accounted for over 10% of net product sales in 1995, and another accounted for over 10% of net product sales in 1994. One foreign customer accounted for over 10% of net product sales in 1994. No foreign customer accounted for over 10% of product sales in either 1996 or 1995. Long-Term Contracts Certain of the Company's orders from customers provide for periodic deliveries at fixed prices over a period which may be greater than one year. In such cases the Company attempts to obtain firm price commitments from its raw material suppliers for the materials necessary to fulfill the order. Marketing The Company markets its products domestically through its own sales staff, supervised by the Vice President - Marketing and Sales. Independent sales agents are used in major overseas markets, including Canada, Europequarter, and the ~~Pacific Rim.~~financial results for any period may not necessarily be indicative of future results. The current sales staff consists of four degreed professionals plus support personnel. The Company plans, subject to availability of resources, to implement a significant sales and marketing program in 1997, including additional sales staff, increased advertising and trade show participation, development of additional 5 marketing materials, and greatly increased contact with existing and potential customers. Backlog The Company's order backlog as of December 31, 1996 included approximately $1,672,000 of product orders and $75,000 of contract R&D, most of whichforegoing is ~~scheduled~~not intended to be ~~completed~~an exhaustive list of all factors that could cause actual results to differ materially from those expressed in 1997. On December 31, 1995, the backlog included $1,470,000 of product orders and $413,000 of contract R&D. Competition The Company believes that there are relatively few companies which offer the wide range of products soldforward-looking statements made by the Company. ~~Within each product category, however, there is competition. Although price is the principal factor~~Our actual results, performance and achievements could differ materially from those expressed or implied in certain product categories, the principal means of competition in most product categories are not only price, but also include product design, product performance, quality and customer service. Based on its performancethese forward-looking statements. We undertake no obligation to date, the Company believes that it can compete successfully in terms of price, product design, product performance, quality and customer service although no assurances can be given in this regard. Employees As of December 31, 1996, the Company had 58 full-time employees. The Company provides health, dental, disability and life insurance, a 401(k) plan, sick leave and paid holidays and vacations to its employees and has paid year-end bonuses to employees in certain years. None of its employees are covered by a collective bargaining agreement. The Company believes that its relations with its employees are good. Patents and Licenses The Company holds United States patents for: a chemical process involving the use of zeolites for regioselective photochlorination; a composite membrane for the photochemical degradation of organic contaminants in ground water; a chemical process for selective functionalization of fullerenes; a unique chemical reactor; and zeolite membranes able to effect separations at high temperatures. The Company is seeking strategic partners to commercialize, licensepublicly update or ~~sell the technologies patented by INRAD. Although the Company has relied in the past on its manufacturing and technological expertise, rather than on~~revise any ~~patents, to maintain its position in the industry, it is now additionally seeking patent protection for inventions resulting~~forward looking statements, whether from its research programs. The Company takes precautionary and protective measures to safeguard its design, technical and manufacturing data and relies on nondisclosure agreements with its employees to protect its proprietary information. 6 Regulation Foreign sales of certain of the Company's products may require export licenses from the United States Department of Commerce. Such licenses are generally available to all but a limited number of countries. Although the manufacture, sale and use of lasers are subject to extensive federal and state regulations which indirectly affect the Company, there are no federal regulations nor any unusual state regulations which directly affect the manufacturenew information, future events, or sale of the Company's products other than those which generally affect companies engaged in manufacturing operations in New Jersey. Sales in the European Community for electronic instruments require EC certification; the Company is now engaging in obtaining such certification. Item 2. Properties. The Company occupies approximately 31,000 square feet of space located at 181 Legrand Avenue, Northvale, New Jersey pursuant to a net lease expiring on October 31, 2001. The Company has an option to renew the lease for one additional term of five years. The 1996 annual rent was approximately $237,000. The Company also paid real estate taxes and insurance premiums which aggregated approximately $45,000 during 1996. Item 3. Legal Proceedings. There is no material litigation pending against the Company as of the date hereof. Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable. 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters (a) Market Information. The Company's common stock, par value $.01 per share, is traded in the OTC Bulletin Board under the symbol INRD. The following table sets forth the range of selling prices for the Common Stock in each fiscal quarter from the quarter ended March 31, 1995, through the quarter ended December 31, 1996 as reported by the National Association of Securities Dealers Nasdaq System: Sales Price ---------------- High Low ---- --- Quarter ended March 31, 1996............................9/16 1/4 Quarter ended June 30, 1996.............................7/16 1/4 Quarter ended September 30, 1996........................5/16 5/16 Quarter ended December 31, 1996..........................3/8 1/4 Quarter ended March 31, 1995.............................1/2 1/2 Quarter ended June 30, 1995..............................3/4 3/8 Quarter ended September 30, 1995.........................3/4 3/8 Quarter ended December 31, 1995..........................3/4 3/8 (b) Holders. As of March 11, 1997, there were 181 record owners of the Common Stock. (c) Dividends. The Company did not pay any cash dividends on its Common Stock during the years ended December 31, 1996, 1995 or 1994. Payment of dividends will be at the discretion of the Company's Board of Directors and will depend, among other factors, upon the earnings, capital requirements, operations and financial condition of the Company. The Company's loan agreement with its bank currently prohibits it from paying dividends. The Company does not anticipate paying cash dividends in the immediate future. (d) Recent Sales of Unregistered Securities. In January 1996, the Company issued a total of 2,700 shares of its common stock to its employees. The issuance was exempt from registration as either not involving a sale or as an exempt private placement pursuant to Section 4(2) of the Securities Act. 8 Item 6. Selected Financial Data The following data is qualified in its entirety by the financial statements presented elsewhere in this Annual Report on Form 10-K. As of December 31, or For the Year Ended December 31, ------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- $ $ $ $ $ Revenues 5,731,005 5,432,038 5,995,919 6,244,774 5,684,259 Net Loss (373,774) (968,878) (873,394) (1,807,106) (1,534,151) Net Loss Per Share (0.18) (0.46) (0.41) (1.27) (1.10) Dividends Paid None None None None None Total Assets 4,715,205 5,296,044 6,083,264 7,535,448 7,909,697 Long-Term Obligations 2,351,561 2,359,131 934,420 1,689,965 662,265 Shareholders' Equity 1,434,693 1,808,467 2,677,345 3,550,739 4,299,888 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.otherwise.

The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the notes thereto presented elsewhere herein. The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future.

INRAD, Inc., (the "Company" or "INRAD"), incorporated in New Jersey in 1973, develops, manufactures and markets products for use in many Photonics Industry sectors via its four related product categories: Custom Optics, Crystals and Components, Systems, and Thin Film Services. Its current customers include leading corporations in the following industries: Commercial Laser Systems, Semiconductor Inspection and Process Control Equipment, Fiberoptic Telecommunication Instruments, and Defense Electro-Optics. The Company's customers also include researchers at National Laboratories and Universities worldwide.

INRAD manufactures precision custom optics, crystals, and components. Glass and crystal substrates are processed using modern manufacturing equipment and techniques to prepare, polish, and deposit thin films, thereby producing elements used in advanced photonic systems. In addition, the Company grows crystals with electro-optic, nonlinear, and optical properties for use in its standard products and custom products. The majority of our Crystals, Crystal Components, and System products supplied are used in laser systems and defense electro-optical systems. The majority of our custom optical components and thin film services are used in inspection and process control systems and defense EO systems. The balance of the products are used by the research community.

The Company announced in 2002 that it is intent on implementing a plan to transform the Company into a portfolio of businesses serving the Photonics industry. A merger and acquisitions

advisory firm, The DAK Group, was employed in the fourth quarter of 2002 to assist management in this process. Capital needed to make the acquisitions or mergers will be through the issuance of equity-based instruments, necessary to achieve this plan.

No assurances can be given that we will be able to identify and attract appropriate acquisition targets or raise the capital required.

Custom optic manufacturing is a major product area for the Company. INRAD specializes in high-end precision components. Because of its specialized capability in the growth and handling of crystal materials, the Company maintains a strong market position in birefringent crystal components, in processing substrate materials such as quartz, calcite, lithium niobate, and magnesium fluoride, all of which are widely used in the semiconductor inspection and defense electro-optics industries. INRAD has in-house thin film deposition capability and highly developed assembly techniques, thus strengthening our product offerings for these sectors.

The Company also grows crystals and finishes them for several applications. Electro-optic and nonlinear crystals are produced for commercial laser systems. Several of these same nonlinear crystals are incorporated into devices that are designed and marketed by INRAD as standard products. The crystal product line also includes materials that have unique transmission and absorption characteristics, enabling them to be used as filters in defense systems.

In addition, INRAD offers a product line of laser accessory products. Most employ nonlinear crystals to perform the function of wavelength conversion or pulsewidth measurement.

In summary, the Company is a supplier to original equipment manufacturers in the Photonics industry. Particular strengths include strong capability in crystal growth, crystal handling, precise finishing of crystal and glass materials for optical applications, and thin film deposition.

The following table summarizes the Company's product sales by product categories and contract research and development sales during the past three years:

		Year Ended December 31,
Category		2002 Sales		%	2001 Sales		%	2000 Sales		%
Crystals and Components		$	2,289,098	40	$	2,823,256	35	$	2,953,000	37
Custom Optics			2,036,807	38		3,211,793	40		3,145,956	40
Systems & Instruments			1,155,816	21		1,850,988	23		766,000	10

Subtotal			5,481,721	99		7,886,037	98		6,864,956	87
Contract Research & Development			87,397	1		189,168	2		1,045,011	13

	TOTAL	$	5,569,118	100	$	8,075,205	100	$	7,909,967	100

The Company produces precision optical components and assemblies for its OEM customers. The Company is known in the Photonics industry for its expertise in manufacturing polarizing components, either from birefringent crystals or by combining glass substrates and optical thin films. Custom components include waveplates, beam displacers, rotators, and phase shift plates. One major polarizing product line consists of Polarizing Beam Splitter (PBS) assemblies for a wide variety of wavelength regions. The polarizer product area is complemented by a diverse offering of plano elements, including

etalons, windows, wedges, and prisms. The Company's customers include leading corporations in their industries.

To meet performance requirements, most optical components require thin film coatings on their surfaces. Depending on the design, optical coatings can refract, reflect, or transmit specific wavelengths. The Inrad coating facility produces a wide variety of sophisticated coatings on many different substrates for use in its own products, as well as for customers who purchase custom coated optics manufactured by the Company to their specifications. Wavelength range coverage includes ultraviolet, visible, and near infrared.

The Company expanded its thin film department in 2000 and 2001 by hiring additional staff, installing state-of-the-art chambers, and upgrading the coating facility. The company is now able to offer ion-assisted deposition (IAD) coatings as part of its repertoire. This deposition technique provides higher performance coatings, that are more resistant to laser damage and harsh environmental conditions. Thus, the Company is better able to serve its laser systems, optical inspection, telecommunications and defense customers. The Company's infrared coating product line has also been strengthened by the addition of modern equipment, dedicated solely to the mid-IR wavelength region.

The Company produces crystals that, because of their internal structure, have unique optical, non-linear, or electro-optical properties. Electro-optic and nonlinear crystal devices can alter the intensity, polarization or wavelength of a laser beam. The Company has developed and manufactures a line of Q-switches, harmonic generators, and associated electronics. These devices are sold on an OEM basis to laser manufacturers and individually to researchers throughout the world. In 2002, the Company developed and introduced a new line of miniature Q-switches, designated the IMP series. Additionally, the Company introduced a series of high speed and quick rise-time Q-switch electronic drivers designated the RapidPulse series.

Harmonic generation systems enable the users of lasers to convert the fundamental frequency of the laser to another frequency required for a specific end use. Harmonic generators are currently used in spectroscopy, semiconductor processing, medical lasers, optical data storage and scientific research.

Many commercial lasers have automatic tuning features, allowing them to produce a range of frequencies. The INRAD Autotracker, when used in conjunction with these lasers, automatically generates tunable ultraviolet light or infrared light for use in spectroscopic applications.

The Company produces a Harmonic Generator for use with ultra fast lasers having pulsewidths in the femtosecond and picosecond regime. This product is sold on an OEM basis to manufacturers of ultra fast lasers and to researchers in the scientific community.

The Company markets a line of Autocorrelators that can measure extremely short laser pulses. Accurate measurement of pulsewidth is important in studies of chemical and biological reactions, as well as in the development of high-speed electronics, ultra fast lasers and laser diodes for communications. Since January 2000, a strategic alliance has been in effect with A.P.E. of Berlin, Germany, to market a product line of five Autocorrelators in the U.S., manufactured by A.P.E. In 2002, the Company was instrumental in conceptualizing and introducing an OEM autocorrelator that measures the pulsewidth of ultrafast laser excitation pulses used in Multi-Photon Excitation microscopy right at the surface of the specimen under test.

The Company's research and development activities currently focus on developing new proprietary crystal products, improving growth processes, and on new manufacturing process technologies for optical components. This combination allows the Company to introduce new products based on crystals, and to enhance its capabilities and productivity in optical component manufacturing.

Company-funded internal research and development expenditures during the years ended December 31, 2002, 2001, and 2000 were $134,424 (2.4% of product sales), $201,603 (2.6% of product sales), and $369,463 (5.4% of net product sales).

Contract R&D programs are typically fixed price contracts and provide for recovery of direct costs and an allocation of indirect costs, and, depending on their terms, recovery of general and administrative costs. The programs range in duration from six to twenty-four months. All programs are monitored for technical accomplishments and are subject to final audit by the sponsoring government agency or its designated audit agency. These programs are typically not profitable, but are pursued when the technology to be advanced is in line with the Company's future product plans.

Contract research and development revenues were $87,397, $189,168, and $1,045,011 for the years ended December 31, 2002, 2001 and 2000, respectively. Related contract R&D expenditures, including allocated indirect costs, were $63,098, $63,530, and $1,188,647. The decline in Contract R&D revenues in 2002 was expected and is part of a strategic re-focusing by the Company of its resources onto sales of products and non-R&D services.

In 2002, 2001 and 2000 the Company's product sales were made to customers in the following market areas:

		2002			2001			2000
	Laser Systems		35	%		33	%		31	%
	Semiconductor		28	%		26	%		19	%
	Telecomm		5	%		12	%		20	%
	Other		5	%		5	%		3	%

Total Industrial			73	%		76	%		73	%
Government/Defense			18	%		11	%		17	%
Universities & National Laboratories			9	%		13	%		10	%

Total (%)			100	%		100	%		100	%

Total ($)		$	5,482,000		$	7,886,000		$	6,864,000

Export sales, primarily to customers in Europe, the Near East and Japan, amounted to 19.0%, 31.4%, and 38.4% of product sales in 2002, 2001 and 2000, respectively. No foreign customer accounted for more than 10% of product sales in 2002. One foreign customer accounted for 10.7% of product sales in 2001 and for 13% of product sales in 2000. In 2002 one U.S. customer accounted for 13.4% of product sales. One U.S. customer accounted for 17.7% of product sales in 2001, one U.S. customer accounted for over 13% and another for 12.2% of product sales in 2000.

Within the Laser Systems customer sector, sales in 2002 were down 35% from the prior year, reflecting the impact of declines in laser systems shipments for semiconductor inspection equipment and telecommunications applications. 2001 had been an exceptionally strong year for the Company and its products serving these sectors. The Company competes for market share to increase its revenue levels for these products, and the Company continues to develop, and to seek to acquire, complementary products to broaden its product lines. The laser industry is expected to experience

renewed growth as new applications are demonstrated continually. The Company also serves the laser industry as a supplier of custom optics and as such continues to seek opportunities to increase revenues from this customer sector.

Demand in the Semiconductor Tools market for the Company's products continued to be weak in 2002, as that customer sector continued to be in the grip of the deepest cyclical downturn in decades with its attendant drop-off in capital spending on new tools and instruments. Sales in 2002 were off 25% from the prior year. Nevertheless, the optical and x-ray inspection segment of the semiconductor industry offers continued opportunities for Inrad's capabilities in precision optics, crystal products, and monochrometers.

The Telecommunications customer sector experienced a precipitous downturn in 2001, and remained "dead" throughout 2002, with virtually no new sales of miniature waveplates, and limited sales of components for inspection instruments. The Company's future participation as a supplier to the network component manufacturers will depend upon the technology approaches employed at the time the industry recovers. In the meantime, Inrad has an ongoing program to improve manufacturing capabilities and productivity through process re-engineering and acquisition of complementary capabilities. Such improvements are important to optimizing cost structure in this highly competitive market sector.

The Company is a provider of specialty crystals for defense electro-optical systems, in particular missile warning sensors and systems intended to protect aircraft, and laser systems. The Company produces proprietary product lines of ultra-violet band-pass filter crystals. The volume of shipments of these crystals depends on the Defense Department budget and its priorities, and the timing of contracts from the U.S. and foreign governments to the Company's customers. In the post- 9/11 era, government spending priorities for such systems have risen sharply and deployment has been accelerated. Additionally, U.S. political leaders have proposed adapting such systems as well to the protection of commercial aircraft. The Company's sales for such products to this customer sector increased by 14% in 2002, and bookings are expected to increase significantly in 2003, with ramp-up of shipments and revenues throughout the year. Revenues from this source are expected to continue at a historically high rate for several years. The Company also provides custom optics and infrared crystals to the defense sector. Demand for these products is expected to remain high.

The University and National Laboratories customer sector weakened significantly in 2002, as research budgets and priorities changed rapidly. However, this sector remains an important source of revenues and new product introduction opportunities for the Company.

Certain of the Company's orders from customers provide for periodic deliveries at fixed prices over a period that may be greater than one year. In such cases the Company attempts to obtain firm price commitments from its raw material suppliers for the materials necessary to fulfill the order.

The Company markets its products domestically through its own sales staff, supervised by the Vice President—Marketing and Sales, and two Vice Presidents of Business Development. Independent sales agents are used in countries in major non-US markets, including Canada, Europe, the Near East and Japan.

The Company increased its sales and marketing staff to four professionals and two support personnel during 2002.

The Company's order backlog as of December 31, 2002 included $1,300,000 of product orders and approximately $28,000 of R&D contracts. Backlog on December 31, 2001 included $1,541,000 of product orders and approximately $89,000 of contract R&D; On December 31, 2000, the backlog included $3,448,000 of product orders and $200,000 of contract R&D. The Contract R&D backlog has declined as forecast in keeping with the Company's strategic refocusing of operations onto sales of products and non-R&D services.

The Company believes that there are relatively few companies that offer the wide range of products sold by the Company. However, within each product category, there is competition.

Changes in the Photonics industry have had an effect on suppliers of custom optics. As end users have introduced products requiring large volumes of optical components, suppliers have responded either by carving out niche product areas or by ramping up their own manufacturing capacity and modernizing their manufacturing methods to meet higher volume run rates. Many custom optics manufacturers lack inhouse thin film coating capability. As a result, there are fewer well-rounded competitors in the custom optics arena, but they are equipped with modern facilities and progressive manufacturing methods. The Company has judiciously deployed capital towards modernizing its facility, and has staffed the manufacturing group with individuals with comprehensive experience in manufacturing management, manufacturing engineering, advanced finishing processes, thin-film coating processes, and capacity expansion. The Company competes on the basis of providing consistently high quality products, establishing strong customer relations, and continuously improving its labor productivity, cost structure, and product cycle times.

Competition for the Company's systems is limited, but competitors' products are generally lower priced. The Company's systems are considered to be high end and generally offer a combination of features not available elsewhere. Because of our in-house crystal growth capability, our staff is knowledgeable about matching appropriate crystals to given applications.

For the crystal product area, quality, delivery, and customer service are market drivers. Many of the Company's competitors are overseas and can offer significantly reduced pricing for some crystal species. The Company has been able to retain and grow its customer base by providing the quality and customer service needed by OEM customers. Oftentimes the quality of the crystal component drives the ultimate performance of the component or instrument into which it is installed. Thus quality and technical support are considered to be valuable attributes for a crystal supplier by many, but not all, OEM customers.

Although price is the principal factor in certain product categories, the principal means of competition in most product categories are not only price, but also include product design, product performance, quality, delivery, and customer service. Based on its performance to date, the Company believes that it can continue to compete successfully, although no assurances can be given in this regard.

As of December 31, 2002, the Company had 50 full time employees and no part time employees. As of December 31, 2001, the Company had 57 full time employees and 1 part time employee. As of December 31, 2000, the Company had 74 full-time employees and 9 part-time employees. The Company provides health, dental, disability and life insurance, a 401(k) plan, as well as sick leave, paid holidays and vacations to its full-time employees and has an incentive pay program covering all

employees. None of its employees are covered by a collective bargaining agreement. The Company believes that its relations with its employees are good.

The Company relies on its manufacturing and technological expertise, rather than on patents, to maintain its competitive position in the industry. The Company takes precautionary and protective measures to safeguard its design, technical and manufacturing data and relies on nondisclosure agreements with its employees to protect its proprietary information.

In 2002 the Company was awarded two patents for two crystal material inventions resulting from its research programs in the field of UV filter crystals.

Additionally, the Company holds United States patents for: a thermal conductivity meter (t-Master), a chemical process involving the use of zeolites for regioselective photochlorination; a composite membrane for the photochemical degradation of organic contaminants in ground water; a chemical process for selective fictionalization of fullerenes; a unique chemical reactor; and zeolite membranes able to effect separations at high temperatures. In 2000, the Company sold its technology applicable to tunable mid-IR lasers, including a patent, to an instrument systems company

Foreign sales of certain of the Company's products may require export licenses from the United States Department of Commerce or Department of State. Such licenses are generally available to all but a limited number of countries and are obtained when necessary.

There are no federal regulations nor any unusual state regulations which directly affect the sale of the Company's products other than those environmental compliance regulations which generally affect companies engaged in manufacturing operations in New Jersey.

Significant economic downturns or recessions in the United States or Europe could adversely affect our business, by causing a temporary or longer term decline in demand for our goods and services. Additionally, our revenues and earnings may be affected by general economic factors, such as excessive inflation, currency fluctuations and employment levels.

Our business is significantly dependent on the demand our customers experience for their products. Many of their end users are in industries that historically have experienced a cyclical demand for their products, including but not limited to semiconductor manufacturing, defense electro-optics systems manufacturing, and telecommunications infrastructure expansion. Therefore, as a result, demand for our products and our financial results of operations are subject to cyclical fluctuations.

We may encounter substantial competition from other companies positioned to serve the same market sectors that we serve. Some competitors may have financial, technical, marketing or other resources more extensive than ours, or may be able to respond more quickly than we can to new or emerging technologies and other competitive pressures. We may not be successful in winning orders

against our present or future competitors, which may adversely affect our business, our growth objectives, our financial condition, and our operating results.

(d) Our manufacturing processes require products from limited sources of supply.

We utilize many relatively uncommon materials and compounds to manufacture our products. Examples include optical grade quartz, specialty optical glasses, scarce natural and manmade crystals, and high purity chemical compounds. Failure of our suppliers to deliver sufficient quantities of these necessary materials on a timely basis, or to deliver contaminated or inferior quality materials, or to markedly increase their prices could have an adverse effect on our business, despite our efforts to secure long term commitments from our suppliers. Adverse results might include reducing our ability to meet commitments to our customers, compromising our relationship with our customers, adversely affecting our ability to meet expanding demand for our products, or causing our financial results to deteriorate.

(e) Our business success depends on our being able to recruit and retain key personnel.

Our existing business and our expansion plans depend on the expertise, experience, and continuing services of certain scientists, engineers, production and management personnel, and on our ability to recruit additional personnel. There is competition for the services of these personnel, and there is no assurance that we will be able to retain or attract the personnel necessary for our success, despite our effort to do so. The loss of the services of our key personnel could have a material adverse affect on our business, on our results of operations, or on our financial results.

(f) We depend on, but may not succeed in, developing and acquiring new products and processes.

In order to meet our strategic objectives, we must continue to develop, manufacture and market new products, and to develop new processes and to improve existing processes. As a result, we expect to continue to make significant investments in research and development and to continue to consider from time to time the strategic acquisition of businesses, products, or technologies complementary to our business. There can be no assurance that we will be able to develop and introduce new products or enhancements to our existing products and processes in a way that achieves market acceptance or other pertinent targeted results. Nor can we be sure that we will be successful in acquiring complementary businesses, products, or technologies. Failure to do so could have a material adverse affect on our ability to grow our business

We do not currently hold any material patents applicable to our most important products or manufacturing processes and instead rely on a combination of trade secret, and employee non-competition and nondisclosure agreements to protect our intellectual property rights. There can be no assurance that the steps we take will be adequate to prevent misappropriation of our technology. Also, there can be no assurance that, in the future, third parties will not assert infringement claims against us. Asserting our rights or defending against third-party claims could involve substantial expense, thus materially and adversely affecting our business, results of operations or financial condition.

(h) We may not succeed in our strategy of acquiring complementary businesses or in integrating acquired businesses.

Our business strategy includes expanding our production capacities, our product lines and our market reach through both internal growth and acquisition of complementary businesses. We may not succeed in finding or completing acquisitions of such businesses, nor can we be assured that we will be

able to raise the financial capital needed for the acquisition. Acquisitions may result in per share financial dilution of our common stock from the issuance of equity securities. They may also result in the taking on of debt and contingent liabilities, and amortization expenses related to intangible assets acquired, any of which could have a material adverse affect on our business, financial condition or results of operations. Also, acquired businesses may be experiencing operating losses. Any acquisition will involve numerous risks, including difficulties in the assimilation of the acquired company's people, operations and products, uncertainties associated with operating in new markets and working with new customers, and the potential loss of the acquired company's key employees. To date, we have had little experience in acquiring or integrating businesses.

(i) Our operations may be adversely affected if we fail to keep pace with industry developments.

We serve industries and market sectors which will be affected by future technological developments. The introduction of products or processes utilizing new developments could render our existing products or processes obsolete or unmarketable. Our continued success will depend upon our ability to develop and introduce on a timely and cost-effective basis new products, processes, and manufacturing capabilities that keep pace with developments and address increasingly sophisticated customer requirements. There can be no assurance that we will be successful.

(j) Product yield problems and product defects that are not detected until in service could increase our costs and/or reduce our revenues.

Changes in our own or in our suppliers' manufacturing processes, or the use of defective or contaminated materials by us, could result in an adverse effect on our ability to achieve acceptable manufacturing yields, delivery performance, and product reliability. To the extent that we do not achieve such yields, delivery performance or product reliability, our business, operating results, financial condition and customer relationships could be adversely affected. Additionally, our customers may discover defects in our products after the products have been put into service in their systems. In addition, some of our products are combined by our customers with products from other vendors, which may contain defects, making it difficult and costly to ascertain whose product carries liability. Any of the foregoing developments could result in increased costs and warranty expenses, loss of customers, diversion of technical resources, legal action by our customers, or damage to the Company's reputation.

Many factors, including, future announcements concerning us, our competitors or customers, as well as quarterly variations in operating results, announcements of technological innovations, seasonal or other variations in anticipated or actual results of operations, changes in earnings estimates by analysts or reports regarding our industries in the financial press or investment advisory publications, could cause the market price of our stock to fluctuate substantially. In addition, our stock price may fluctuate widely for reasons which may be unrelated to operating results. These fluctuations, as well as general economic, political and market conditions such as recessions, military conflicts, or market or market-sector declines, may materially and adversely affect the market price of our common stock. In addition, any information concerning us, including projections of future operating results, appearing in investment advisory publications or on-line bulletin boards or otherwise emanating from a source other than us could in the future contribute to volatility in the market price of our common stock.

Sales to customers in countries other than the United States accounted for approximately 19%, 31% and 38% of revenues during the years ended December 31, 2002, 2001, and 2000, respectively. We anticipate that international sales will continue to account for a significant portion of our revenues for

the foreseeable future. In particular, although our international sales are denominated in U.S. dollars, currency exchange fluctuations in countries where we do business could have a material adverse effect on our business, financial condition or results of operations, by making us less price-competitive than foreign manufacturers

The Company occupies approximately 31,000 square feet of space located at 181 Legrand Avenue, Northvale, New Jersey pursuant to a net lease expiring on October 31, 2006. The Company has an option to renew the lease for an additional term of five years, and to lease 11,000 square feet of additional adjoining space in the same building commencing in 2003. The 2002 annual rent was approximately $224,000. The Company also paid real estate taxes and insurance premiums that total to approximately $41,000 during 2002. The Company also leases approximately 950 square feet of space at 148 Veterans Drive, Northvale, New Jersey pursuant to a gross lease renewable on a month-to-month basis.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

The Company's common stock, par value $.01 per share, is traded in the OTC Bulletin Board under the symbol INRD.

The following table sets forth the range of closing prices for the Common Stock in each fiscal quarter from the quarter ended March 31, 2001 through the quarter ended December 31, 2002 as reported by the National Association of Securities Dealers NASDAQ System. Such Over the Counter quotations reflect inter-dealer prices, without retail markup, markdown or commissions and may not necessarily reflect actual transactions.

	Price
	High	Low
Quarter ended December 31, 2002	.570	.300
Quarter ended September 30, 2002	.820	.250
Quarter ended June 30, 2002	1.100	.700
Quarter ended March 31, 2002	1.850	.910
Quarter ended December 31, 2001	1.320	.750
Quarter ended September 30, 2001	4.000	1.320
Quarter ended June 30, 2001	4.750	2.750
Quarter ended March 31, 2001	7.750	3.668

As of February 24, 2003, there were approximately 650 record owners of the Common Stock. The number of record owners of common stock was approximated based upon the number of Proxy Statements requested by the Company's Transfer Agent for the Annual shareholders' Meeting held August 7, 2002.

The Company did not pay any cash dividends on its Common Stock during the years ended December 31, 2002, 2001 or 2000. The Company paid a common stock dividend of 134,000 shares of common stock on its Series A and Series B convertible preferred stock in 2002, valued at $121,000. The Company paid a common stock dividend of 92,000 shares of common stock on its Series A and Series B convertible preferred stock in 2001, valued at $155,000. Payment of cash dividends will be at the discretion of the Company's Board of Directors and will depend, among other factors, upon the earnings, capital requirements, operations and financial condition of the Company. The Company does not anticipate paying cash dividends in the immediate future.

In 2002 the Company issued a Subordinated Convertible Promissory Note for proceeds of $1,000,000. The Holder of the Note is a related party to a major Shareholder of the Company. The note bears interest at the rate of 6% per annum and has a maturity date of January 31, 2006. The note is convertible into common shares of the Company at a conversion price that shall be (a) the price at which common stock is first issued for cash after the date of the Note to an unrelated third party investor or (b) the price mutually agreed upon by the Issuer and Holder at its then fair market value if no such issuance has occurred within 12 months of the date of the Note, December 31, 2002.

The following data is qualified in its entirety by the financial statements presented elsewhere in this Annual Report on Form 10-K.

Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition

Our significant accounting polices are described in Note 1 of the consolidated financial statements, that were prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements we made estimates and judgments that affect the results of our operations and the value of assets and liabilities we report. Our actual results may differ from these estimates.

We believe that the following summarizes critical accounting polices that require significant judgments and estimates in our preparation of our consolidated financial statements.

The Company records revenue, other than on Contract R&D revenues, when product is shipped. Revenue on Contract R&D is accounted for using the percentage-of-completion method, whereby revenue and profits are recognized through out the performance of the contracts. Percentage-of-completion is determined by relating the actual cost of work performed to date to the estimated total cost for each contract. Losses on contracts are recorded when identified.

The Company records an allowance for doubtful accounts receivable as a charge against earnings for revenue for items that have been reviewed and carry a risk of non-collection in the future. The Company has not experienced a non-collection of accounts receivable materially affecting the results of operations.

The Company records slow moving inventory reserve as a charge against earnings for all products on hand that have not been sold to customers in the past twelve months. An additional reserve is recorded for product on hand that may not be sold to customers within the upcoming twelve months.

From time to time, estimated accruals are recorded as a charge against earnings based on known circumstances where it is probable that a liability has been incurred or is expected to be incurred and the amount can be reasonably estimated.

The following table summarizes the Company's product sales by product categories, and contract research and development sales during the past three years:

The next table sets forth, for the past three years, the percentage relationship to total revenues from product sales and contract research and development of certain items included in the Company's consolidated statement of operations. 9 Year ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- % % % Revenues: Net product sales 91.5 80.0 83.3 Contract research and development 8.5 20.0 16.7 ----- ----- ----- 100.0 100.0 100.0 Interest and other income 0.3 0.3 0.2 ----- ----- ----- 100.3 100.3 100.2 ============================================================================== Costs and expenses: Cost of goods sold* 74.8 83.7 82.6 Plant consolidation costs -- 1.7 -- Contract research and development* 102.5 97.7 97.0 Selling, general and administrative expenses 21.7 19.0 18.2 Internal research and development*

		Year ended December 31,
		2002 %		2001 %		2000 %
Revenues:
	Product Sales	98.4		97.7		86.8
	Contract Research and Development	1.6		2.3		13.2

		100.0		100.0		100.0
Costs and Expenses:
	Cost of Goods Sold*	83.9		63.6		54.7
	Contract Research and Development*	72.2		33.6		113.7

	Product Gross Profit Margin	16.1		36.4		45.3
	Selling, General and Administrative Expenses	40.9		31.0		27.8
	Internal Research and Development**	2.4		2.6		5.4
	Process Re-Engineering Expenses	—		3.7		—

(Loss) Income From Operations		(27.0	)	(.01	)	5.1
Net (Loss) Profit		(30.1	)	.5		8.9

Total revenues decreased 31% to $5,569,118 in 2002. Total revenues increased 2% to $8,075,205 in 2001 from $7,909,967 in 2000, a new record for the Company.

Product sales were ~~$5,241,075, $4,347,429,~~$5,481,721, $7,886,037, and ~~$4,993,716~~$6,864,956, in ~~1996, 1995~~2002, 2001 and ~~1994,~~2000 respectively. Product sales in ~~1996 were 20% greater than the prior year due to a~~2002 reflected 98.4% of total sales and ~~marketing program that began early~~were 30% lower than in ~~1996.~~2001. Product sales in ~~1995~~2001 were 14.9% higher than in 2000, reflecting 97.7% of total revenues.

New bookings of product orders in 2002 were $5,190,000, 14% lower than ~~the prior year due to a significantly lower opening backlog and insufficient short term~~in 2001. New bookings of product orders in ~~1995. International sales, as a percentage of total product sales,~~2001 were 16 %, 19%, and 24% for 1996, 1995, and 1994, respectively. The dollar value of international sales increased in 1996 compared to 1995, and decreased in 1995 compared to 1994. Bookings of new orders, particularly for laser systems and instruments, were higher in 1996$5,979,000, approximately 22% lower than in ~~1995,~~2000.

The product book to bill ratio was 0.96, .76, and ~~resulted~~1.29 in ~~higher shipments in 1996 compared to the prior year.~~2002, 2001, and 2000, respectively.

The Company's backlog of product orders as of December 31, ~~1996~~2002 was approximately ~~$1,672,000,~~$1,300,000, compared to approximately ~~$1,470,000~~$1,541,000 as of December 31, 2001 and $3,448,000 at December 31, ~~1995. 10~~ 2000.

The decline in revenues in 2002 was sharpest in the Custom Optics area, off by $1,075,000 from the prior year. Continuing excess inventories and lack of demand from customers in the Semiconductor Process Control and Inspection sector and Telecommunications Instrument sector characterized 2002. Additionally, sales of Systems and Instruments were off $695,000 in 2002 from the record high of $1,851,000 in 2001. System and Instrument sales declines reflected decreased demand from the R&D sector partially in light of federal budget funding uncertainties for R&D in the aftermath of 9/11. This was in contrast to System and Instrument sales in 2001, when demand for these laser accessory products was strong from customers in the Laser OEM and University and National Lab (i.e. R&D) industry sectors.

Sales of Custom Optics in 2001 had been up 2% compared to the prior year at $3,211,793, following a 31% increase the prior year, but were disappointing when compared to expectations only a year earlier. The precipitous and unprecedented rapid drop in demand from OEM's in the Telecommunications and Semiconductor Inspection and Process Control sectors slowed order intake significantly in 2001; this slowness continued throughout 2002. Several OEM customers in these sectors required delivery "push-outs" into 2002. Nevertheless, revenues for Custom Optics in 2001 were at a historic high, helped by a strong backlog at the beginning of the year, a contract from a major new OEM, and continuing new orders from customers engaged in new product development.

Sales of Crystals and Components in 2002 were up 3% from the prior year, following a 25% decline the year before. This relatively good result for 2002, in a year when demand overall was weak, resulted from a strong increase in demand from Defense Electro-Optics sector customers for crystal components.

Sales to Laser Systems manufacturers in 2002 decreased 35% to $1,699,000, or 31% of product sales, as compared with $2,602,000 or 33% of product sales in 2001. OEM customers reported increasing inventories as demand slackened.

Sales to Semiconductor sector equipment manufacturers in 2002 declined 25% to $1,535,000, or 28% of product sales, as compared with $2,050,000 or 26% of product sales in 2001. Sales to semiconductor sector equipment manufacturers in 2001 increased 61% to $2,069,000, or 26% of product sales, as compared with $1,285,000 or 19% of product sales in 2000.

Sales to Telecommunications sector equipment manufacturers in 2002 declined 71% to $274,000, or 5% of product sales, as compared with $983,000 or 12% of product sales in 2001. Sales to the telecommunications sector in 2001 decreased 27% to $983,000, or 12% of product sales, as compared with $1,353,00 or 20% of product sales in 2000.

Sales to Government and Defense sector customers in 2002 increased 14% to $987,000, or 18% of product sales, as compared with $856,000 in 2001. Sales to Government and Defense industry customers in 2001 decreased 25% to $856,000, or 11% of product sales, as compared with $1,150,000 or 17% of product sales in 1999.

Sales to researchers in Universities and National Laboratories declined by 52% to $493,000, or 9% of product sales, as compared with $1,002,000 or 13% in 2001. Sales to researchers in Universities and National Laboratories in 2001 increased 15% to $1,002,000, or 13% of product sales, as compared with $687,000 or 10% in 2000.

International product sales, as a percentage of total product sales, were 19.0%, 34.1%, and 38.6%, for 2002, 2001, and 2000, respectively.

As a percentage of ~~net~~ product sales, cost of goods sold was ~~74.8%~~83.9%, ~~83.7%~~63.6% and ~~82.6%~~54.5% for the years ended December 31, ~~1996, 1995~~2002, 2001 and ~~1994,~~2000, respectively. Gross profit margin as a percentage of product sales was 16.1%, 36.4%, and 45.5% for 2002, 2001, and 2000, respectively.

In 2002 cost of goods sold percentage increased due to declining sales volumes and draw-down of inventories. Fixed costs are a major component of the total cost structure. Management and the Board of Directors decided to reduce such costs in 2002 only up to the point where further reductions would impede the Company's ability to perform for its current customers or to rebound in future when macroeconomic conditions improve. The ~~Company continued its efforts to monitor~~implementation of head-count reduction, reduced work-hours, and other cost saving measures decreased non-inventory expenses ~~in 1996.~~by approximately 15%. The ~~decrease in~~reduction of these expenses could not offset the impact of a sales volume decline of 30%. In 2001 the cost of goods sold percentage ~~from 1995 to 1996 is attributable~~increased due to increased ~~sales compared to relatively fixed~~manufacturing overhead costs ~~such as wages, depreciation~~for newly formed departments including production control and ~~rent. The increase~~manufacturing engineering and the absorption of additional overhead costs in production that resulted from ~~1994 to 1995 is attributable to lower than expected sales compared to relatively fixed costs. Prices for raw materials and~~decreased volumes in Contract R&D sales.

Costs of purchased components have been relatively stable in ~~1996~~2002, 2001 and ~~1995, while~~2000. Unit costs of raw materials such as crystal quartz and high grade optical glasses have increased in the last year.

Unit labor costs rose in ~~both~~all years. In 2000 labor costs increased as well due to payment of bonuses under the Company's incentive pay program, in which bonus income is earned by all employees when the Company meets or exceeds its operating profit and revenue targets. No bonus income was earned in 2002 or 2001.

Contract ~~research and development revenues were $489,930, $1,084,609, and $1,002,203 for the years ended December 31, 1996, 1995 and 1994, respectively. Related contract~~ R&D expenditures, including allocated indirect costs, were $502,367, $1,059,668, and $971,932. Revenues decreased from 1996 to 1995 based on the Company's policy to focus its funded research efforts on programs closely aligned with its core business. Revenues increased from 1994 to 1995 as a result of a greater emphasis by the Company's scientific and technical personnel on funded programs. The programs are typically fixed price contracts and provide for recovery of direct costs and an allocation of indirect manufacturing costs, and, depending on their terms, recovery of general and administrative costs. These programs are typically not profitable, but are pursued when the technology to be advanced is in line with the Company's future product plans.

Contract research and development revenues were $87,397, $189,168, and $1,045,011 for the years ended December 31, 2002, 2001 and 2000, respectively. Related contract R&D expenditures, including allocated indirect costs, were $63,098, $63,530, and $1,188,647. One new Contract R&D program, valued at $70,000, was booked in 2002. Revenue in 2002 came mainly from activities on that contract. The decline in Contract R&D revenues is part of a strategic re-focusing by the Company of its resources onto sales of products and non-R&D services, and the lack of availability of R&D funding for crystal materials research.

The Company ~~intends~~expects to continue ~~focusing~~to selectively seek new government-sponsored programs from time to time, as well as joint programs with certain of its ~~future funded research efforts on programs closely aligned with~~customers, in technical areas related to its core ~~business.~~ businesses.

Selling, general and administrative expenses in ~~1996 increased $211,530,~~2002 decreased $226,000 or ~~20.5%~~9.0% compared to ~~1995,~~2001.

The decrease in 2002 was attributable to overall reduction in personnel costs as well as cost savings implemented in other expense areas. The costs decreased despite the implementation of the Company's

plan to augment its sales force during the year. The Company will continue to seek ways to reduce costs during this current economic downturn.

There was a decrease in expenses in 2001 related to lower legal fees and costs relative to raising additional capital. However, significant increased costs were incurred in ~~1995 decreased $55,042 or 5.1% compared~~SG&A because of inclusion of administrative costs that had previously been allocated to ~~1994. In 1996, selling salaries and commissions increased, and the Company allocated a lower amount to contracts; these~~R&D contracts, because of increases in personnel dedicated to the implementation of new internal computer network and Enterprise Resource Planning System (ERP), because of costs ~~were partially offset~~associated with the Company's implementation of a proactive merger and acquisition program aimed at finding and evaluating complementary businesses and products, and by ~~lower professional fees~~increased business travel expenses.

In 2000, general and administration expenses increased due to increases in salaries, including, performance sharing incentive compensation, increases in personnel, including the inclusion of a ~~reduction~~full-time CEO/President and Director of Human Resources on the general management team, and increases in ~~rent cost. In 1995, selling commissions on international sales decreased~~recruiting expenses. Additionally, administrative costs also increased due to the legal expenses and other costs incurred as a result of the ~~Company allocated a higher portion~~private convertible preferred stock offering, application for NASDAQ registration, development of ~~G&A costs to contracts; these decreases were partially offset by higher sales salaries~~new and ~~advertising~~revised employee stock option programs, and marketing costs. Subject to availability of resources, the Company expects to increase certain selling costs in 1997, including additional sales staff and increased advertising and trade show participation. 11 other shareholder related activities.

Company-funded research expenditures during the years ended December 31, 2002, 2001, and ~~development expenses for 1996~~2000 were ~~$170,750 (3.3%~~$134,424 (2.5% of product sales) ~~compared with 1995 expenditures~~$201,603 (2.6% of ~~$305,626 (7.0%~~net product sales), and $369,643 (5.4% of ~~product sales). R&D expenses for 1994 were $365,856 (7.3% of~~net product sales). During ~~1996,~~2000 the Company ~~continued~~sold its tunable mid-IR laser technology to ~~decrease~~an instrument company as part of the Company's strategy to concentrate its ~~emphasis~~resources on its core business. The sale was responsible for curtailment of what had been a large portion of IR&D expenditures in the prior year and the first half of fiscal year 2000.

During 2002 and 2001, the Company narrowed its focus of internal research and development ofefforts onto new crystal products and ~~increased its short-term efforts on sales~~production methods, and ~~marketing of existing products.~~new optical component manufacturing technologies. As a result, internal R&D expenditures ~~decreased~~declined in ~~1996. This level is~~2002, and are expected to continue at this level in ~~1997.~~2003.

At the end of 2000, the Company announced a sweeping manufacturing process re-engineering program to modernize manufacturing methods, implement modern production machinery, incorporate a production control function for planning and scheduling, modernize and reconfigure its physical plant for efficient operational flow, increase labor productivity, improve operating margins, and lead ultimately to ISO certification of the Company. The special charges associated with this program were $299,763 ($.06 per share on a basic and diluted basis) for the year ended December 31, 2001. This effort continued throughout 2002, although at a greatly diminished rate.

Losses from operations in 2002 were $(1,504,400) compared to operating losses of $(6,104) in 2001 and operating income of $400,478 in 2000. Losses during 2002 were due to continued weak demand in major market sectors served by the Company and its products. Losses in 2001 were the result of special charges associated with the manufacturing reengineering program.

Interest expense increased over prior periods due to the increased borrowing needs experienced by the Company. During 2001, the company received $44,800 from the sale of 40,000 shares of an equity

derivative received as part of the compensation from the sale of its tunable mid-IR laser technology in 2000.

During 2002 dividends in common stock valued at $120,600 were issued to holders of the Company's Class B preferred stock (84,000 shares of common stock valued at $.90 per share) and the holder of the Company's Class A preferred stock (50,000 shares valued at $.90 per share). During 2001 dividends in common stock valued at $155,000 were issued to holders of the Company's Class B preferred stock (42,000 shares of common stock valued at $2.50 per share) and the holder of the Company's Class A preferred stock (50,000 shares of common stock at $1.00 per share). Net income used in earnings per share calculations included these charges in 2002 and 2001 in order to derive net income available to common shareholders in. In 2000, common stock dividends of $50,000 were issued to holders of the Company's Class A preferred stock (50,000 shares of common stock valued at $1.00 per share).

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and the tax ~~bases~~basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. At December 31, ~~1996,~~2002, the Company had a net deferred tax asset of ~~$2,304,000,~~approximately $2,826,000, the primary component of which was its significant net operating loss ~~carryforward.~~carry forward. The Company has established a valuation allowance to ~~fully~~ offset this deferred tax asset in the event that ~~operating losses continue and make it uncertain that~~ the tax asset will not be ~~realized.~~ realized in the future. In 2002, $100,000 of the deferred tax asset previously classified as an asset was eliminated due to the Company's recurring losses and uncertainty as to the Company's ability to generate taxable income in future years.

The Company's policy is to periodically review ~~its~~ pricing of ~~standard~~its products to keep pace with current ~~costs.~~costs, market demands, and competitive factors. As to special and long-term contracts, management endeavors to take potential inflation into account in pricing decisions. The impact of inflation on the Company's business has not been material to date.

During the ~~Company signed an agreement with Chase Manhattan Bank (successor to Chemical Bank) amending the terms~~second quarter of its credit facility. The new agreement requires monthly principal payments of $10,000 for January, 1997, and 7,500 from February 1997 until December 1997, monthly principal payments of $10,000 from January 1998 until December 1998, and monthly principal payments of 12,500 from January 1999 until August 1999. A final payment of $7,500 is due on September 1, 1999. Borrowings bear interest at prime (8.25% at December 31, 1996) + 2 1/4%. The agreement also amended the financial covenants contained in the original agreement. The Company continues to be required to maintain compliance with affirmative and negative covenants, including limitations on capital expenditures, dividends and new indebtedness, and compliance with a financial ratio tied to 12 accounts receivable. Chase Manhattan Bank also agreed to waive any defaults which existed under the previous facility. Borrowings are secured by accounts receivable and the personal guarantee of the Company's principal shareowner. In addition, in connection with the new Chase Manhattan Bank agreement, a shareowner and Subordinated Convertible Note holder agreed to maintain a certificate of deposit with Chase Manhattan Bank in the amount of $245,000 as collateral for the loan. Once the principal balance of the loan is reduced below $222,700, with each principal payment made by the Company, an amount may be withdrawn from the collateral deposit to maintain a 1.1 to 1 collateral to loan ratio. In April 1995,2002 the Company received ~~$225,000~~$1,000,000 from its bank collateralized by equipment. The loan is for a ~~shareowner~~3 year period with a 5 year amortization and ~~Subordinated Convertible Note holder~~bears an interest rate of 5.61%. Due to violation of certain bank covenants in 2003 the loan has been classified as a current liability.

At the end of the fourth quarter of 2002 the Company ~~through~~received $1,000,000 in proceeds from the issuance of ~~$125,000 of 8%~~a Subordinated Convertible Notes due December 15, 2000 (convertible at $1.00 per share) and 250,000 warrants at $0.40 per share. The warrants entitle the holder to purchase 250,000 shares of Common Stock at $0.6875 per share. The first six semiannual interest payments due under the Note are payable in the form of additional notes and do not require a cash outlay. On September 27, 1995, the Company raised an additional $100,000 from the same shareowner in the form of a 10% Unsecured Demand Convertible Promissory Note. The ~~Note~~note is ~~convertible into Common Stock~~due in January 2006 and bears an interest rate of 6%. Interest accrues yearly and along with principal may be converted to common stock at a conversion rate equal to the purchase price of stock issued for cash after the date of the note to an unrelated third party investor, or if no such issuance takes place within twelve months of the date of the note, at a price mutually agreed upon as fair value by issuer and holder. The holder of the note is a related party to a major shareholder of the Company.

The Company had available a $1,000,000 Line of Credit from its bank. The note bears interest at the ~~conversion price of $1.00; interest~~Bank's prime rate and is ~~also~~ payable ~~in Common Stock at the same conversion price.~~upon demand. The ~~proceeds from issuance of the Subordinated Notes, Warrants and Demand Note were used to reduce short-term liabilities, including trade debt. Although~~note is secured by its terms the Note is due on demand, it cannot be repaid until the Chase Manhattan Bank debt has been repaid in full. The Demand Note has been classified as noncurrent in the Company's December 31, 1996 balance sheet because the Note holder has agreed not to demand payment prior to January 1, 1998. In 1993, the Company raised $1,000,000 in new capital from a private investment group through the issuance of $746,215 of seven-year 10% subordinated convertible notes and 203,028 shares of common stock. The first six semi-annual interest payments due under the note were payable in the form of additional notes and did not require a cash outlay. Beginning in 1997 the Company will have to pay cash interest. During September 1993, the Company borrowed $100,000 in the form of two promissory notes from a shareownercertain assets of the Company. OnBorrowings against this note were approximately $750,000 as of December ~~16, 1993,~~31, 2002. The

borrowings under this line are currently limited to approximately $750,000 until covenant violations are remedied. The Company is currently working with the ~~shareowner exchanged~~bank to develop criteria that will allow for permanent reestablishment of the ~~existing promissory notes~~loans. Such criteria may include, but are not limited to, successful implementation of the Company's acquisition program, increased sales volumes and return to profitability. Interest and principal payments due on both loans are, and have always remained, current.

Capital expenditures, including internal labor and overhead charges, for ~~a new seven-year 10% subordinated convertible note~~the years ended December 31, 2002, 2001 and 2000 were approximately $554,000, $2,224,000, and $582,000, respectively. Capital expenditures in 2002 and 2001 were used for expansion and renovation of facilities and for the acquisition of equipment. The expenditures were financed in part from capital raised in the ~~amount~~2000 private offering of ~~$74,621~~series B convertible preferred stock and ~~20,303 shares~~in part by the asset loan secured in the second quarter of 2002. There are no major expenditures for capital equipment anticipated for FY 2003.

A summary of our contractual cash obligations at December 31, 2002 is as follows:

As shown in the accompanying financial statements, the Company reported a net loss of $(1,716,000) for 2002 and net income of approximately $44,000, and $708,000 for the years ended December 31, 2001, and 2000. During the past three years, the Company's working capital requirements were met by additional bank borrowings, issuance of subordinated notes and issuance of common ~~stock. The entire amount~~and preferred stock to shareowners.

EBITDA for 2002 was $(985,000) and net cash used in operations was $(807,000). Operating capital was augmented by borrowings of ~~all Subordinated Convertible Notes (issued both~~$1,000,000 from the Company's asset based credit facility. EBITDA for 2001 was approximately $351,000 and net cash used in ~~1993 and 1995) may be redeemed~~operations was approximately $(470,000). Operating capital was augmented by borrowings of $750,000 from the Company's revolving credit agreement.

In January of 2002 the Company ~~after December 15, 1998; they are subordinated to any outstanding indebtedness to Chase Manhattan Bank~~was successful in securing a $1,000,000 revolving credit line, and ~~other secured indebtedness of~~a $1,000,000 asset based term loan. Total additional borrowing against these credit facilities provided the ~~Company. At December 31, 1996 the~~working capital required in 2002. The Company ~~was~~is currently in violation of certain ~~terms of these notes; subsequent to year end,~~covenants provided for in the 13 ~~Company obtained waivers~~loan agreements.

In December 2002 the company received $1,000,000 in proceeds from the ~~holders~~issuance of a Subordinated Convertible Promissory Note. The Company is anticipating continued distressed market conditions during 2003 and will use the notes and modified the financial covenants in the debt agreements. In 1993, the principal shareowner and President of the Company exchanged an unsecured demand note for a new promissory note maturing on December 31, 1996 in the amount of $566,049 (including $154,049 of accrued interest) and 494,400 shares of common stock. The new note bears interest at 7% and is unsecured. Interest expense related to the shareowner loan was approximately $72,000, $72,000 and $74,000 in 1996, 1995 and 1994, respectively. This note has been classified as noncurrent in the Company's December 31, 1996 Balance Sheet becauseproceeds from the note ~~holder has agreed not~~ to demand payment prior to January 1, 1998. The Company's Secured Promissory Notes bear interest at 7%, are secured by certain of the Company's precious metals, and are convertible at any time into 200,000 shares of common stock. The Notes also contain acceleration clauses which would allow the holder, a shareowner of the Company, to accelerate the maturity date and demand payment if certain events occur. The maturity date of the Secured Notes is July 8, 1997. This note has been classified as noncurrentmeet its working capital needs in ~~the Company's December 31, 1996 Balance Sheet because the note holder has agreed not to demand payment prior to January 1, 1998.~~2003.

Where possible, the Company will continue to increase sales, and reduce expenses and cash requirements to improve future operating results and cash flows. Management expects that cash flow from operations and use of available cash reserves, will provide adequate liquidity for the Company's operations in ~~1996. If, however,~~2003.

The Company has an active program to align its expenses with present and projected revenues and with its commitments to its customers. During the ~~Company's cash flow~~recessionary year of 2001, employment was reduced in September from ~~operations is not maintained at satisfactory levels,~~83 to 69, a decline of 17%, through lay-off and attrition. Senior executives of the Company ~~may seek additional financing~~voluntarily accepted a 15% cut in pay, and Directors' fees were reduced 20%. In the first week of January 2002, employment was further reduced to ~~supplement~~58, a further decline of 16%, through lay-off and attrition. Reductions were again made in January 2003 to 50 employees, reflecting the continued business weakness. The Company believes that its current cash ~~flow. Because~~reserves coupled with its cost reduction and control program will allow the Company to maintain its fiscal viability throughout 2003.

The Company announced in 2002 that it is intent on implementing a plan to transform the Company into a portfolio of businesses serving the ~~circumstances described above relating~~Photonics industry. A merger and acquisitions advisory firm, The DAK Group, was employed in the fourth quarter of 2002 to assist management in this process. Capital needed to make the ~~Company's ability~~acquisitions or mergers will be through the issuance of equity-based instruments, necessary to ~~improve operating results~~achieve this plan.

No assurances can be given that we will be able to identify and ~~cash flows, there is substantial doubt about~~attract appropriate acquisition targets or raise the ~~Company's ability~~capital required.

Effect of interest rate fluctuations on interest sensitive financial instruments.

We are exposed to ~~continue as~~changes in interest rates from investments in certain money market accounts. We do not utilize derivative instruments or other market risk sensitive instruments to manage exposure to interest rate changes. We believe that a ~~going concern. Capital expenditures, including internal labor and overhead charges, for~~hypothetical 100 basis point adverse move in interest rates along the ~~years ended~~entire interest rate yield curve would not materially affect the fair value of our interest sensitive money market accounts at December 31, 1996, 1995 and 1994 were $238,000, $166,000, and $193,000, respectively. Until the Company is generating satisfactory amounts of cash flow from its operations, it is expected that future capital expenditures will be kept to a minimum. Management believes that in the short term, this limitation will not have a material effect on operations. Overview of Financial Condition As shown in the accompanying financial statements, the Company reported a net loss of approximately $374,000 for the year ended December 31, 1996, and also incurred losses in 1995 and 1994. During the past three years, the Company's working capital requirements were met in part on the basis of borrowings from, and issuance of common stock and warrants to, shareowners including the principal shareowner and the sale of certain non-operating assets. 14 These circumstances raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2 in the accompanying financial statements (see also Liquidity and Capital Resources under this Item 7). 2002.

The Company's consolidated financial statements are set forth on pages F-1 through ~~F-17. Page F-1 follows page 25.~~ F-19.

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial ~~Disclosure. On August 29, 1996, the Company filed Form 8-K reporting a change in its independent accountant. 15~~ Disclosure

Item 10. Directors and Executive Officers of the Registrant Directors The following table sets forth the names and ages of each of the members of the Company's Board of Directors, the other positions and offices presently held by each such person with the Company, the period during which each such person has served on the Company's Board of Directors, and the principal occupations and employment of each such person during the past five years. Director Positions; Business Name and Age Since Experience - ------------ ----- ---------- Warren Ruderman, 1973 Chairman of the Board of 77 Directors, President and Chief Executive Officer (1973 -

Name and Age	Since	Director Positions; Experience Business
Thomas Lenagh, 76	1998	Chairman of the Board of Directors (May 2000–Present). William B. Maxson, 1989 Consultant (1990 - Present); 66 Vice President (1984-1990), Air Force Programs Cypress International (marketing and business development firm); Officer, United States Air Force (1952 - 1984), retiring with rank of Major General in 1984. Donald H. Gately, 1995 Management Consultant 77 (1990 - 1994); Chief Operating Officer, Datamax Corporation (1994 - 1996) Aaron Dean 1996 Financial Analyst and Vice 35 President(1996 - Present) Prudential Securities (investment banking firm); Vice President (1995 - 1996) M.D. Sass Associates (investment banking firm); Vice President (1990 - 1995) Arnhold and S. Bleichroeder, Inc. (investment banking firm). Management Consultant (1990–Present) Past Chairman and CEO, Systems Planning Corporation Financial Vice President, the Aspen Institute Treasurer and Chief Investment Officer, The Ford Foundation Captain, US Navy Reserve (ret.)
Daniel Lehrfeld, 59	1999	Director President and Chief Executive Officer (2000–present), President and Chief Operating Officer(1999–2000), Vice President/General Manager (1995–1999) Raytheon/GM Hughes Electro-Optics Center, President (1989–1991) New England Research Center, (subsidiary) Deputy General Manager (1989–1995) & Director, Business Development, International Business, Operations, Cryogenic Products Magnavox Electronic Systems E. Coast Div., Deputy Sector Director & Program Director Philips Laboratories Briarcliff North American Philips, Group Leader/Project Leader Grumman Aerospace Corporation
Frank Wiedeman, 89	1998	Director Executive Director (1980–Present) American Capital Management Inc.
Jan Winston, 66	2000	Director Principal (1997–Present) Winston Consulting, Division Director/General Manager (1981–1997) IBM Corporation. Executive positions held in Development, Finance and Marketing.
John Rich, 65	2000	Director Vice President/General Manager (1999–2002) Power Electronics Division, C&D technologies President (1990–1999), Raytheon/GM Hughes Optical Systems Vice President (1983–1989), Perkin Elmer Microlithography, Electro-Optics, and Systems Colonel, Commander, Air Force Avionics Laboratory and Air Force Weapons Laboratory

The directors ~~serve one-year terms. Pursuant~~hold office for staggered terms ranging from one to agreements between the Company and Hoechst Celanese Corporation ("Hoechst"), Hoechst may designate a representative for nomination to the Company's Board of Directors; the Company has agreed to use its best efforts to have a designated representative elected to the 16 Board of Directors. At the present time Hoechst has not designated a representative to the Board. Pursuant to an agreement between INRAD and Clarex, Ltd. ("Clarex"), the Company has agreed to use its best efforts to have two individuals selected by Clarex elected to the Board of Directors as long as any of the subordinated convertible notes are outstanding. Aaron Dean has been selected by Clarex as one representative; a second representative has not been designated at the present time. three years.

The following table sets forth the name and age of each executive officer of the Company, the period during which each such person has served as an executive officer and the positions ~~and offices~~ with the Company held by each such person:

Name and Age	Since	Position With the Company
Daniel Lehrfeld, 59	1999	President and Chief Executive Officer
Maria Murray, 45	1993	Sr. Vice President—Business Development
William S. Miraglia, 53	1999	Chief Financial Officer and Secretary
Devaunshi Sampat, 49	1999	Vice President—Sales and Marketing
Thomas A. Caughey, 53	2000	Vice President—Product R&D and Customer Support
James J. Hoey, 58	2002	Vice President—Business Development Custom Optics

Daniel Lehrfeld has served as Chief Executive Officer ~~Positions~~ and ~~Offices Name and Age Since With~~President since May 2000. He joined the Company ~~- ------------ ----- ---------------- Warren Ruderman, 77 1973.........Chairman of Board of Directors~~in 1999 as President and Chief Executive Officer Maria Murray, 39 1995.........Vice President - Marketing and Sales Glenn Nosti, 41 1994.........Vice President - Manufacturing James Greco, 40 1996.........Controller and Secretary Warren Ruderman has served asOperating Officer. Prior to joining the Company, Mr. Lehrfeld held the position of Vice President and ~~Chairman~~General Manager of Electro-Optic Systems, a division successively of the ~~Board of Directors of the Company since he founded it in 1973. Prior to 1973, he founded~~Raytheon, GM/Hughes Electronics and ~~served as the President of Isomet Corporation, a manufacturer of acousto-optic devices for the laser industry,~~Magnavox Electronic Systems Corporations. He has also held executive positions with Philips Laboratories and ~~was a Teaching Fellow, Lecturer in Chemistry, Research Scientist~~Grumman Aerospace Corporation. Mr. Lehrfeld holds B.S. and Consultant at Columbia University. Dr. Ruderman was a founder and served as a director of the Melex Corporation (a life sciences company acquired by Revlon, Inc. in 1975). Dr. Ruderman holds a doctorate in Chemical PhysicsM.S. degrees from Columbia University School of Engineering and ~~is a Fellow~~Applied Science and an M.B.A. degree from the Columbia Graduate School of ~~the New York Academy of Sciences.~~Business.

Maria Murray joined the Company in January 1989, ~~as a Sales Engineer,~~ became Vice President of R&D Programs in 1993, and was appointed Sr. Vice President, ~~Marketing and Sales~~Business Development in ~~1995.~~1999. Prior to joining INRAD, ~~she~~Ms. Murray held positions in electronic design engineering in the laser and communication industries. She holds a ~~B.S.E.E.~~B.S. degree in Electrical Engineering from the University of Central Florida. Glenn Nosti joined the Company as a Senior Sales Engineer in July 1990. He was subsequently appointed Vice President, Manufacturing in 1994. Prior to joining INRAD, he held positions as Marketing Manager or National Sales Manager at companies within 17 ~~the laser optics industry. He received a B.S. in Business Administration from East Carolina University and an M.B.A. in Marketing from Fairleigh Dickinson University. James Greco~~

William S. Miraglia joined the Company as Secretary and ~~Controller~~Chief Financial Officer in ~~July 1996.~~June 1999. Previously, he held the position of Vice President of Finance for a division of UNC, Inc., a NYSE aviation company. Prior to ~~joining INRAD, he~~his last position, Mr. Miraglia has held management positions ~~as Controller of Divisions within National Cleaning Contractors from 1989-1996.~~in the aerospace industry and in public accounting. He ~~received~~holds a B.B.A. from Pace University, and an M.B.A from Long Island University and is a ~~certified public accountant. None~~Certified Public Accountant.

Devaunshi Sampat joined the Company in 1998. In 1999 she was appointed Vice President of Marketing and Sales. Prior to joining the Company, Ms. Sampat held sales management positions within the Photonics industry with Princeton Instruments and Oriel Instruments. Ms. Sampat holds a B.S. in Medical Technology from the University of Bridgeport.

Thomas A. Caughey joined the Company in 1978. He has focused on the development and improvement of the Company's crystal devices and systems, and on their application by the Company's numerous customers. In 2000, he was appointed Vice President of R&D and Customer Support. Prior to joining INRAD, Dr. Caughey was a Research Associate at Texas Tech University. He holds a Doctorate in Physical Chemistry from the University of Wisconsin—Madison, and a B.S. degree in Chemistry from the University of Michigan—Ann Arbor.

James J. Hoey joined the Company in 2002 as Vice President of Business Development for Custom Optics. Prior to joining INRAD, he was Manager for Business Development for Zygo Corporation for three years, and Business Unit Manager and Business Development Manager for Deposition Sciences for five years. Earlier, at Spectra Physics Lasers, Uniphase Corporation, and Melles Griot Corporation, he held marketing and sales management positions. He holds a bachelor's degree in aerospace engineering from Northrop Institute of Technology.

Each of the executive officers has been elected by the Board of Directors to serve as an officer of the Company ~~has an employment contract with~~until the ~~Company; each serves at~~next election of officers, as provided by the ~~pleasure of the Board of Directors.~~ Company's by-laws.

The following table sets forth, for the years ended December 31, ~~1996, 1995~~2002, 2001 and ~~1994,~~2000, the cash compensation paid by the Company and its subsidiaries, to oro with respect to the Company's ~~Chief Executive Officer, the only executive officer~~Officers, whose total annual salary and bonus exceeded $100,000, for services rendered in all capacities as an executive officer during such period:

~~(A)~~

Name and Position	Year	Salary		Bonus		Stock Options
Daniel Lehrfeld, President and Chief Executive Officer	2002 2001 2000	$ $ $	148,000 156,000 164,000		$ $	32,500* None 50,000	110,000 None 360,000
Maria Murray, Vice President, Business Development	2002 2001 2000	$ $ $	107,000 115,000 121,000			None None None	89,000 None 60,000
Devaunshi Sampat, Vice President, Sales and Marketing	2002 2001 2000	$ $ $	105,000 139,000 150,000		$	None None 17,600	59,500 None 31,000
William Miraglia Vice President, Chief Financial Officer	2002 2001 2000	$ $ $	101,000 105,000 110,000		$	None None 17,500	45,000 None 18,000
James Hoey	2002	$	100,000	**		None	60,000

The Company is party to an employment agreement with this officer that provides for a minimum annual salary.

Year Ending December 31,
2003	$	175,000
2004	$	175,000
2005	$	175,000
2006	$	175,000
Thereafter	$	175,000

Each non-employee director is paid ~~$500~~$400 for each board meeting they ~~attend. 18~~ attend, and $200 for each conference call meeting in which they participate.

Compensation Committee Interlock and Insider Participation in the compensation committee

The following table presents certain information with respect to the security ownership of the directors of the Company and the security ownership of ~~the only individuals~~each individual or ~~entities~~entity known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock as of March 1, ~~1997.~~2003. Percentages that include ownership of options or convertible securities are calculated assuming exercise or conversion by each individual or entity of the options, (including "out-of-the-money optons"), or convertible securities owned by each individual or entity separately without considering the dilutive effect of option exercises and security conversions by any other individual or entity. The Company has been advised that all individuals listed have the sole power to vote and dispose of the number of shares set opposite their names in the table. Percent of Name and Address Number of shares Common Stock - -------------------------------------------------------------------------------- Warren Ruderman(1) 1,106,400 52.5 c/o INRAD, Inc. 181 Legrand Avenue Northvale, NJ 07647 Clarex, Ltd. 1,919,889 (2) 50.9 c/o Bank of Nova Scotia Trust Company Bahamas Ltd. P.O. Box N1355 Nassau, Bahamas Hoechst Celanese Corp. 300,000 14.2 Routes 202-206 North Box 2500 Somerville, NJ 08876 William F. Nicklin 210,527 (3) 9.3 33 Grand Avenue Newburgh, NY 12550 William Maxson 3,162 (4) 0.1 c/o INRAD, Inc. Donald H. Gately 16,417 (5) 0.8 c/o INRAD, Inc. Aaron Dean 61,675 (6) 2.9 c/o INRAD, Inc. Directors and Executive 1,207,504 (7) 54.9 Officers as a group (7 persons)

Name and Address	Percent of Number of shares		Common Stock
Clarex, Ltd. Bay Street and Rawson Square P.O. Box N 3016 Nassau, Bahamas	3,266,914	(1)	52.9
Welland, Ltd. Bay Street and Rawson Square P.O. Box N 3016 Nassau, Bahamas	2,380,958	(2)	31.1
Warren Ruderman 45 Duane Lane Demarest, NJ 07627	1,467,046		27.8
Daniel Lehrfeld c/o INRAD, Inc.	413,400	(3)	7.4
Hoechst Celanese Corp. Routes 202-206 North Box 2500 Somerville, NJ 08876	300,000		5.7
Thomas Lenagh c/o INRAD, Inc.	86,900	(4)	1.6
Frank Wiedeman c/o INRAD, Inc.	78,400	(5)	1.5
John Rich c/o INRAD, Inc.	7,100	(6)	0.3
Jan Winston c/o INRAD, Inc.	8,000	(7)	0.2
Directors and Executive Officers as a group (8 persons)	819,235	(8)	13.9

The following table gives information about our Common Stock that may be issued upon the exercise of options, warrants and rights under our Key Employee Compensation Plan and our 2000 Equity Compensation Program, as of December 31, 2002. These plans were our only equity compensation plans in existence as of December 31, 2002.

Item 13. Certain ~~Relationships~~Relationship and Related Transactions In 1993, the principal shareowner and President of the Company exchanged an unsecured demand note for a new promissory note maturing on December 31, 1996 in the amount of $566,049 (including $154,049 of accrued interest) and 494,400 shares of common stock. The new note bears interest at 7% and is unsecured. Interest expense related to the shareowner loan was approximately $72,000, $72,000 and $74,000 in 1996, 1995 and 1994, respectively. Repayment of the shareowner loan has been subordinated to the prior repayment of the Company's indebtedness to Chase Manhattan Bank and to other secured indebtedness of the Company. The principal shareowner has guaranteed borrowings under the Company's existing credit facility with Chase Manhattan Bank. By mutual informal agreement, the Company has deferred certain interest payments to its principal shareholder. During the year ended December 31, 1996, the Company made three quarterly interest payments representing nine months of interest past due from 1995. Subject to adequate cash flow, the Company will continue to make interest payments to its principal shareholder. Although by its terms the indebtedness to the shareholder is due on December 31, 1996, it cannot be repaid until the Chase Manhattan Bank debt has been repaid in full. The shareholder loan has been classified as noncurrent in the accompanying balance sheet because the shareholder has agreed not to demand payment prior to January 1, 1998.

During the years ended December 31, ~~1996, 1995~~2002, 2001 and ~~1994~~2000 approximately 8%4%, 9%3%, and ~~12%~~6%, respectively of the ~~company's~~Company's net product sales were through a foreign agent, in which, ~~the~~Warren Ruderman a principal shareholder has an investment. 20 Terms of sales to this foreign agent were substantially the same as to unrelated foreign agents.

During 2002, Welland Ltd., a related party to Clarex, Ltd., received a 6% Subordinated Convertible Promissory Note due January 31, 2006, resulting in proceeds to the Company of $1,000,000.

During 2000, Clarex, Ltd., a shareowner and debt holder purchased 1000 shares of 10% convertible preferred stock for $1,000,000, converted a 10% convertible secured note and received 200,000 shares of the Company's common stock and exercised 345,000 of warrants and received 345,000 shares of the Company's common stock.

During 2000, the following directors and officers of the Company purchased 263 shares of 10% convertible preferred stock for $263,000:

Within the 90 days prior to the date of this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation's periodic SEC filings. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

The following exhibits are incorporated by reference to exhibits in the Company's Registration Statement or amendments thereto on Form S-18 (Registration No. 2-83689), initially filed with the Securities and Exchange Commission on May 11, 1983: Exhibit No. Present in Registration Exhibit Statement or No. Description of Exhibit or Amendments - --- ---------------------- ------------- 3.1 Restated Certificate of 3.1 of Amendment Incorporation, as amended. No. 1. 3.2 By-laws, as amended. 3.2 of Amendment No. 1. 10.4 License agreement, dated September 10.11 of Amendment 1981, between the Company and No. 1. Lambda Physik. 10.5 Key-Man Insurance Policy on the 10.12 of Amendment life of Warren Ruderman. No. 2.

The following exhibit is incorporated by reference to the Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 1985: ~~10.6~~

The following exhibit is incorporated by reference to the Company's proxy statement filed with the Securities and Exchange Commission related to the annual meeting held on June 20, ~~1996: 10.8 INRAD, Inc. Key Employee Compensation Plan. 21~~ 1991:

The following exhibit is incorporated by reference to the Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 1991: ~~10.9~~

The following exhibit is incorporated by reference to the Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, ~~1992: 10.10 Agreement with Chase Manhattan Bank Regarding Line of Credit.~~1993:

The following ~~exhibit is~~exhibits are incorporated by reference to the Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 1993: 10.11 Stock and Note Purchase Agreement with exhibits. The following exhibit is incorporated by reference to the Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended March 31, 1995: ~~10.12 Amended and Restated Chase Manhattan Bank Agreement.~~

The following exhibits are incorporated by reference to the Report to the Securities and Exchange Commission on Form 10-K for the ~~quarter~~fiscal year ended December 31, 1995: 10.13 Amendment and Waiver Agreement between INRAD and Chase Manhattan Bank dated August 31, 1995. 10.14 Subordinated Convertible Note dated April 9, 1995 between Clarex Limited and INRAD, Inc. 10.15 Unsecured Demand Convertible Promissory Note dated September 27, 1995 between Clarex Limited and INRAD, Inc.1996:

The following exhibits ~~form an attachment to this report: 10.16 Amendment and waiver between INRAD and Chase Manhattan Bank dated February 6, 1997. 22~~ ~~10.17 Addendum to lease dated October 4, 1991, between S&R Costa as lessor and the Company as leasee. 10.18 Amendment and waiver~~are incorporated by reference to the ~~stock~~Report to the Securities and ~~purchase agreement dated as of~~Exchange Commission on Form 10-K for the fiscal year ended December 15, 1993. 11.1 A statement regarding computation of per-share earnings is omitted because the computation can be clearly determined from the material contained herein. 22.1 Subsidiaries of the Company 23.1 Consent from Price Waterhouse LLP 23.2 Consent from Grant Thornton LLP 27.1 Financial Data Schedule 23 31, 1999:

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INRAD INC. By: /s/ Warren Ruderman ----------------------- Warren Ruderman, President and Chief Executive Officer Dated: March 27, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Warren Ruderman President, Chief March 27, 1997 - -------------------- Executive Officer Warren Ruderman

Signature	Title	Date

/s/ THOMAS LENAGH Thomas Lenagh	Chairman of the Board of Directors	April 2, 2003
/s/ DANIEL LEHRFELD Daniel Lehrfeld	President, Chief Executive Officer and Director	April 2, 2003
/s/ FRANK WIEDEMAN Frank Wiedeman	Director	April 2, 2003
/s/ JOHN RICH John Rich	Director	April 2, 2003
/s/ JAN WINSTON Jan Winston	Director	April 2, 2003
/s/ WILLIAM S. MIRAGLIA William S. Miraglia	Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)	April 2, 2003


/s/ DANIEL LEHRFELD Chief Executive Officer

I, William ~~B. Maxson Director March 27, 1997 - --------------------- William B. Maxson /s/ James L. Greco Controller~~S. Miraglia, certify that:


/s/ WILLIAM S. MIRAGLIA Chief Financial Officer

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE ~~COMPANY: State or Territory Company~~SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of ~~Incorporation ------- ----------------~~ INRAD, ~~Optical Systems,~~ Inc. ~~New Jersey 25~~ INRAD, INC. CONSOLIDATED FINANCIAL STATEMENTS INDEX Consolidated Financial Statements Page ---- Reports of Independent Accountants F-2 - F3 Consolidated Balance Sheets at December 31, 1996 and 1995 F-4 Consolidated Statements of Operationson Form 10-K for ~~each of~~ the ~~three years in the period~~year ended December 31, ~~1996 F-5 Consolidated Statements of Cash Flows for each~~2002 filed with the Securities and Exchange Commission (the "Report"), I, Daniel Lehrfeld, Chief Executive Officer of the ~~three years~~Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


		/s/ DANIEL LEHRFELD Daniel Lehrfeld Chief Executive Officer

This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and has not been filed as part of the Report or as a separate disclosure document.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of INRAD, Inc. on Form 10-K for the year ended December 31, ~~1996 F-6 Consolidated Statement of Shareowners' Equity for each~~2002 filed with the Securities and Exchange Commission (the "Report"), I, Daniel Lehrfeld, Chief Executive Officer of the ~~three years~~Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(3) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(4) The information contained in the period ended December 31, 1996 F-7 Notes to Consolidated Financial Statements F-8 to F-17 NOTE: All schedules are either not applicable or the information is includedReport fairly presents, in all material respects, the consolidated financial ~~statements~~condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented.


		/s/ WILLIAM S. MIRAGLIA William S. Miraglia Chief Financial Officer

This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and has not been filed as part of the Report or ~~notes thereto. F-1~~ as a separate disclosure document.

INRAD, INC. AND SUBSIDIARY

REPORT ON AUDITS OF ~~INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS~~ CONSOLIDATED FINANCIAL STATEMENTS

THREE YEARS ENDED DECEMBER 31, 2002

		Page
Report of Holtz Rubenstein & Co., LLP, Independent Certified Public Accountants		F-2
Consolidated balance sheets as of December 31, 2002 and 2001		F-3
Consolidated statements of operations for the three years ended December 31, 2002		F-4
Consolidated statements of shareowners' equity for the three years ended December 31, 2002		F-5
Consolidated statements of cash flows for the three years ended December 31, 2002		F-6
Notes to consolidated financial statements		F-7 - F-18

Board of Directors ~~INRAD,~~and Shareowners
Inrad, Inc. and Subsidiary
Northvale, New Jersey

We have audited the accompanying consolidated balance ~~sheet~~sheets of ~~INRAD,~~Inrad, Inc. ~~and subsidiaries~~and0 Subsidiary as of December 31, ~~1996,~~2002 and 2001, and the related consolidated statements of operations, shareowners' equity and cash flows for the ~~year then ended.~~three years ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our ~~audit.~~ audits.

We conducted our ~~audit~~audits in accordance with auditing standards generally accepted ~~auditing standards.~~in the United States of America. Those standards require that we plan and perform the ~~audit~~audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our ~~audit provides~~audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ~~INRAD,~~Inrad, Inc. and ~~subsidiaries~~Subsidiary as of December 31, ~~1996,~~2002 and the consolidated results of their operations and their consolidated cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the financial statements, the Company has had recurring losses and has substantial debt service obligations. These factors, among others, as discussed in Note 2 to the financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. GRANT THORNTON LLP Parsippany, New Jersey March 6, 1997 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareowners and Board of Directors of INRAD, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of INRAD, Inc. and its subsidiaries at December 31, 1995,2001 and the results of their operations and their cash flows for ~~each of~~ the ~~two~~three years ~~in the period~~then ended, ~~December 31, 1995,~~ in conformity with accounting principles generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As described in Note 2 to the financial statements, the Company has suffered recurring losses from operations and, for eachUnited States of the two years in the period ended December 31, 1995, cash outflows have been funded in part on the basis of borrowings from, and issuance of common stock and warrants to, shareowners including the principal shareowner. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Price WaterhouseAmerica.

INRAD, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS December 31, ------------ Assets 1996 1995 - ------ ---- ---- Current assets: Cash and cash equivalents $ 194,577 $ 37,981 Certificate of Deposit 70,000 70,000 Accounts receivable, net 735,160 804,834 Inventories 1,735,144 1,671,673 Unbilled contract costs 59,350 151,649 Assets held for sale -- 279,111 Other current assets 60,292 61,699 --------- --------- Total current assets 2,854,523 3,076,947 Plant and equipment, net 1,431,931 1,788,080 Precious metals 279,248 280,001 Other assets 149,503 151,016 --------- --------- Total assets $4,715,205 $5,296,044 ========= ========= Liabilities and Shareowners' Equity Current liabilities: Note payable - Bank 92,500 60,000 Current obligations under capital leases 73,399 190,754 Accounts payable and accrued liabilities 640,943 708,403 Advances from customers 73,244 116,205 Other current liabilities 48,865 53,084 --------- --------- Total current liabilities 928,951 1,128,446 Note payable - Bank 227,500 320,000 Obligations under capital leases 4,751 75,088 Secured Promissory Notes 250,000 250,000 Subordinated Convertible Notes 1,203,261 1,080,623 Unsecured Demand Convertible Note 100,000 100,000 Note payable - Shareowner 566,049 533,420 --------- --------- Total liabilities 3,280,512 3,487,577 --------- --------- Commitments Shareowners' equity: Common stock: $.01 par value; 2,121,571 shares issued 21,216 21,216 Capital in excess of par value 6,051,791 6,067,991 Accumulated deficit (4,586,514) (4,212,740) --------- --------- 1,486,493 1,876,467 Less - Common stock in treasury, at cost (12,300 shares at December 31, 1996; 15,000 shares at December 31, 1995) (51,800) (68,000) --------- --------- Total shareowners' equity 1,434,693 1,808,467 --------- --------- Total liabilities and shareowners' equity $4,715,205 $5,296,044 ========= =========

See ~~Notes~~notes to ~~Consolidated Financial Statements. F-4~~ consolidated financial statements

INRAD, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, ----------------------- 1996 1995 1994* ---- ---- ---- Revenues: Net product sales $5,241,075 $4,347,429 $4,993,716 Contract research and development 489,930 1,084,609 1,002,203 --------- --------- --------- 5,731,005 5,432,038 5,995,919 --------- --------- --------- Costs and expenses: Cost of goods sold 3,922,517 3,638,582 4,123,490 Plant consolidation costs - 94,228 - Contract research and development expenses 502,367 1,059,668 971,932 Selling, general and administrative expenses 1,245,077 1,033,547 1,088,589 Internal research and development expenses 170,750 305,626 365,856 --------- --------- --------- 5,840,711 6,131,651 6,549,867 --------- --------- --------- Operating Loss (109,706) (699,613) (553,948) Other income (expense): Interest expense (283,390) (285,646) (332,954) Interest and other income, net 19,322 16,381 13,508 --------- --------- --------- Net loss $(373,774) $(968,878) $(873,394) ========= ========= ========= Net loss per share $(0.18) $(0.46) $(0.41) ======= ====== ====== Weighted average shares outstanding 2,109,138 2,106,571 2,106,571 ========= ========= ========= * Prior year amounts have been reclassified

See notes to ~~conform to current year presentation (Note 1). See Notes to Consolidated Financial Statements. F-5~~ consolidated financial statements

INRAD, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net loss $ (373,774) $ (968,878) $ (873,394) ---------- ---------- ---------- Adjustments

See notes to to cash provided by (used in) operating activities: Depreciation and amortization Noncash interest Plant consolidation costs Gain on sale of equipment Changes in assets and liabilities: Accounts receivable Inventories Unbilled contract costs Other current assets Precious metals Other assets Accounts payable and accrued liabilities Advances from customers Other current liabilities Total adjustments Net cash provided by operating activities Cash flows from investing activities: Capital expenditures Purchase of Certificate of Deposit Proceeds from sale of equipment Net cash provided by (used in) investing activities Cash flows from financing activities: Repayments of note payable - Bank Proceeds from issuance of subordinated convertible notes Proceeds from issuance of unsecured demand convertible note Proceeds from sale of common stock warrants Principal payments of capital lease obligations Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year See Notes reconcile net loss 601,881 718,145 728,058 155,269 142,139 126,581 - 64,751 - (8,621) - - 69,674 (195,679) 294,194 (63,471) 226,099 195,517 92,299 5,068 61,265 1,405 (11,532) (8,205) 754 31,796 4,442 (17,467) (16,415) (6,176) (67,460) 82,951 (249,319) (42,961) (355) (5,759) (4,218) 912 25,986 ---------- ---------- ---------- 717,084 1,047,880 1,166,584 ---------- ---------- ---------- 343,310 79,002 293,190 ---------- ---------- ---------- (238,202) (166,450) (174,110) - - (70,000) 299,180 49,700 - ---------- ---------- ---------- 60,978 (116,750) (244,110) ---------- ---------- ---------- (60,000) (140,000) (230,000) 125,000 - 100,000 - 100,000 - (187,692) (228,989) (260,065) ---------- ---------- ---------- (247,692) (43,989) (490,065) ---------- ---------- ---------- 156,596 (81,737) (440,985) 37,981 119,718 560,703 ---------- ---------- ---------- $ 194,577 $ 37,981 $ 119,718 ========== ========== ========== to Consolidated Financial Statements. consolidated financial statements

INRAD, INC. ~~CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY~~
Common Stock Capital in Accumulated Treasury ------------ ---------- ----------- -------- Shares Amount excess of deficit stock ------ ------ --------- ------- ----- par value --------- Balance, December 31, 1993 2,121,571 $21,216 $5,967,991 $(2,370,468) $68,000 Net loss for the year - - - (873,394) - --------- ------- ---------- ------------ ------- Balance, December 31, 1994 2,121,571 21,216 5,967,991 (3,243,862) 68,000 Net loss for the year - - - (968,878) - Common stock warrants issued - - 100,000 - - --------- ------- ---------- ------------ ------- Balance, December 31, 1995 2,121,571 21,216 6,067,991 (4,212,740) 68,000 --------- ------- ---------- ------------ ------- Net loss for the year - - - (373,774) - Issuance of treasury stock - - (16,200) - (16,200) --------- ------- ---------- ------------ ------- Balance, December 31, 1996 2,121,571 $21,216 $6,051,791 $(4,586,514) $51,800 ========= ======= ========== ============ =======
~~See Notes to Consolidated Financial Statements. F-7~~ ~~INRAD, INC.~~ AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES:~~

THREE YEARS ENDED DECEMBER 31, 2002

1. Nature of ~~Operations: INRAD~~Business and Summary of Significant Accounting Policies

Inrad, Inc. and Subsidiary (the "Company") is a manufacturer of crystals, crystal devices, electro-optic and optical components, and sophisticated laser subsystems and instruments. ~~INRAD's~~The Company's principal customers include commercial instrumentation companies and OEM laser manufacturers, research laboratories, government agencies, and defense contractors. The Company's products are sold domestically using its own sales staff, and in major overseas markets, principally Europe and the Far East, using independent sales agents. ~~Basis~~

The accompanying consolidated financial statements include the accounts of ~~INRAD, Inc.~~the Company and its wholly-owned ~~subsidiaries. Intercompany~~subsidiary. Upon consolidation, all intercompany accounts and transactions ~~and balances have been~~are eliminated. ~~Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to~~

Management must 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~~uncollectability of accounts receivable. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the ~~reported amounts~~adequacy of ~~revenues~~the allowance for doubtful accounts.

Depreciation is computed using the ~~reporting periods. Actual results could differ~~straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is computed using the straight-line method over the estimated useful lives of the related assets or the remaining term of the lease, whichever is shorter. Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from ~~those estimates. Inventory Valuation:~~the accounts and gain or loss is included in operations.

Inventories, including certain precious metals consumed in the manufacturing process, are ~~valued~~stated at the lower of cost ~~(determined predominantly~~(first-in, first-out method) or market.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets, provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale, broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and

changes the timing of recognizing losses on such operations. The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not effect the Company's financial statements.

In accordance with SFAS No. 144, long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimate undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, and impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill and intangible assets not subject to amortization are tested annually for impairment and are tested for impairment more frequently if events and circumstances indicate that the assets might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value.

Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.

The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and accounts for stock issued for services provided by other than employees in accordance with and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB No. 25, compensation expense is based on the ~~first-in, first-out basis) or market. Precious Metals: Precious metals not consumed in the manufacturing process are valued at cost, cost being determined~~difference, if any, on the first-in, first-out basis. Plant and Equipment: Plant and equipment are stated at cost. Depreciation is computed under the straight-line method utilizing an estimated useful life of seven years. Leasehold improvements are amortized over the shorterdate of the ~~economic life or remaining term~~grant, between the fair value of the ~~lease. The~~Company's stock and the exercise price. During December 2002, the Company ~~constructs~~issued all stock options at fair market value. A new measurement date for purposes of determining compensation is established when there is a ~~portion~~substantive change to the terms of ~~its equipment. Internal labor~~an underlying option.

i. Contract research and ~~overhead charges capitalized in the construction of equipment amounted to approximately $110,000, $100,000, and $97,000 in 1996, 1995 and 1994, respectively. Contract Research and Development:~~development

Revenues from sponsored research and development are recorded using the percentage-of-completion method. Under this method, revenues are recognized based on direct labor and other direct costs incurred compared with total estimated direct costs. Contract R&D costs include allocations of plant overhead and general and administrative costs. ~~See Notes to Consolidated Financial Statements. F-8~~

Internal research and development costs are charged to expense as incurred. Prior to January 1, 1995, internal research and development costs included direct charges and allocations of plant overhead costs. Effective January 1, 1995, the Company modified its reporting to charge allocations of plant overhead costs directly to cost of goods sold. This reclassification has no effect on operating profit (loss) or net income (loss). Prior year amounts have been reclassified to conform to the current year presentation. Income taxes: The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognizedincurred

Precious metals not consumed in the ~~Company's~~manufacturing process are valued at cost, cost being determined on the first-in, first-out basis.

The preparation of financial statements ~~or tax returns. Deferred tax liabilities~~in conformity with generally accepted accounting principles requires management to make estimates and ~~assets are determined based on~~assumptions that affect the ~~difference between the financial statement carrying~~reported amounts ~~and the tax bases~~ of assets and liabilities ~~using enacted tax rates~~and disclosure of contingent assets and liabilities at the date of the financial statements

and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.

Advertising costs are charged to operations when the advertising first takes place. Included in ~~effect in~~selling, general and administrative expenses are advertising costs of $62,000, $45,000 and $43,000 for the years ~~in which~~ended December 31, 2002, 2001 and 2000.

For purposes of the ~~differences are expected to reverse. Cash Flow Information: The~~consolidated statement of cash flows, the Company considers all highly liquid ~~investments~~debt instruments purchased with ~~original~~a maturity ~~dates~~ of three months or less to be cash equivalents. The Company's Certificate of Deposit is not included in cash equivalents because the CD serves as collateral for a letter of credit. It is anticipated that the underlying contract will be completed in 1997 and the letter of credit canceled. Cash interest

Interest paid during the years ended December 31, ~~1996, 1995~~2002, 2001 and ~~1994~~2000 was ~~$109,497, $113,447,~~$135,001, $91,154 and ~~$200,195,~~$15,327, respectively.

In 2000, the Company converted $350,000 of notes payable into 280,000 shares of its common stock.

During 2000, the Company entered into capital lease obligations approximating $470,000 in connection with the acquisition of plant equipment.

The Company invests its excess cash in deposits and money market accounts with major financial institutions and in commercial paper of companies with strong credit ratings. Generally, the investments mature within ninety days, and therefore, are subject to little risk. The Company has not experienced losses related to these investments.

The concentration of credit risk in the Company's accounts receivable is mitigated by the Company's credit evaluation process, reasonably short collection terms and the geographical dispersion of revenue.

The Company utilizes many relatively uncommon materials and compounds to manufacture its products. Therefore, any failure by its suppliers to deliver materials of an adequate quality and quantity could have an adverse effect on the Company's ability to meet the commitments of its customers.

The basic net (loss) income per share is computed using weighted average number of common shares outstanding for the applicable period. The diluted (loss) income per share is computed using the weighted average number of common shares plus common equivalent shares outstanding, ~~during~~except if the ~~year. The weighted average number of shares used in computing net loss~~effect on the per share ~~was 2,109,138, 2,106,571,~~amounts, including equivalents, would be anti-dilutive.

Other comprehensive income refers to revenues, expenses, gains and ~~2,106,571 for the years ended December 31, 1996, 1995 and 1994, respectively. The effect of common stock equivalents has been~~losses that under generally accepted accounting principles are included in comprehensive income but are excluded from ~~the computation because their effect is antidilutive. Impairment~~net income as these amounts are recorded directly as an adjustment to stockholders' equity.

The company has included freight out as a component of ~~Long-Lived Assets: Statement of~~selling, general and administrative expenses that amounted to $30,242 in 2002, $42,675 in 2001 and $33,323 in 2000.

In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. ~~121,~~146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146 requires that a liability for cost that is associated with and exit or disposal activity be recognized when the ~~Impairment~~liability is incurred. It supersedes the guidance in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring". Under EITF 94-3, an entity recognized a liability for and exit cost on the date that the entity committed itself to an exit plan. Under SFAS 146, an entity's commitment to a plan does not, by itself, create a present obligation that meets the definition of ~~Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("~~a liability. SFAS ~~No. 121")~~146 also establishes ~~accounting standards~~that fair value is the objective for the ~~impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets. Under provisions~~initial measurement of the ~~Statement, impairment losses~~liability. SFAS 146 will be effective for exit or disposal activities that are ~~recognized when~~initiated after December 31, 2002. The adoption of SFAS 146 is not expected ~~future cash flows are less than~~to have a significant impact on the ~~assets' carrying value. Accordingly, when indicators~~Company.

In November 2002, the FASB issued Interpretation No. 45 (FIN), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of ~~impairment are present,~~Indebtedness of Others, and interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34". FIN 45 elaborates on the ~~Company will evaluate~~existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit and warranty obligations. It also clarifies that at the ~~carrying value of property, plant and equipment in relation to the operating performance and future undiscounted cash flows of the underlying business. SFAS No. 121 requires analysis of each item on~~time a company issues a guarantee, a company must recognize an ~~individual asset-by-asset basis, where applicable. The amount of the impairment loss is the excess of the carrying amount of the impaired asset over~~initial liability for the fair value of the ~~asset. Generally,~~obligations assumes under that guarantee and must disclose that information in its interim and annual financial statements. The provisions of FIN 45 relating to initial recognition and measurement must be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is not expected to have a significant impact on the Company.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123", which amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value ~~represents~~based method of accounting for stock-based employee compensation. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. In addition, SFAS No. 148 amends the ~~expected future cash flows from~~disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the ~~use~~method of accounting for stock-based employee compensation and the effect of the asset or group of assets, discounted at an interest rate commensurate with the risks involved. See Notes to Consolidated Financial Statements. F-9 ~~Advertising:~~method used on reported results. The Company ~~expenses advertising costs as incurred. NOTE 2 - LIQUIDITY AND FUNDING OF OPERATIONS: As shown~~will continue to account for stock-based compensation to employees under APB Opinion No. 25 and related interpretations. The adoption of SFAS No. 148 is not expected to have a significant impact on the ~~accompanying~~Company, as they have yet to issue stock-based employee compensation.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities". FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial ~~statements,~~interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is required to be applied to preexisting entities of the Company ~~reported a net loss~~as of ~~approximately $374,000 for~~ the ~~year ended December 31, 1996, and also incurred losses in 1995 and 1994. In addition,~~beginning of the first quarter after June 15, 2003. FIN 46 is required to be applied to all new entities with which the Company has substantial debt service obligations. During the past three years, the Company's working capital requirements were met by cash provided by operating activities, and by borrowings from, and issuancebecomes involved beginning February 1, 2003. The adoption of common stock and warrants to, shareowners including the principal shareowner. The Company continued to take steps in 1996 to reduce expenses, to reduce cash requirements through reduction in lease and bank payment schedules, and to raise cash through the sale of certain nonoperating assets. Management expects that cash flow from operations, will provide adequate liquidity for the Company's operations in 1997. If, however, the Company's cash flow from operationsFIN 46 is not ~~maintained at satisfactory levels,~~expected to have a significant impact on the Company may seek financing to supplement its cash flow. Due to the circumstances described above relating to Company's ability to improve operating results and cash flows, there is substantial doubt about the Company's ability to continue as a going concern. NOTE 3 - ACCOUNTS RECEIVABLE: Accounts receivable are comprised of the following: December 31, ------------ 1996 1995 ---- ---- Accounts receivable $740,160 $809,834 Allowance for doubtful accounts (5,000) (5,000) -------- -------- $735,160 $804,834 ======== ======== NOTE 4 - INVENTORIES:Company.

Inventories are comprised of the following: December 31, ------------ 1996 1995 ---- ---- Raw materials $ 184,116 $ 176,619 Work in process, including manufactured parts

	December 31,
	2002		2001
Raw materials	$	379,838	$	455,491
Work in process, including manufactured parts and components		1,510,890		1,767,016
Finished goods		192,204		134,377

	$	2,082,932	$	2,356,884

3. Property and components 1,430,086 1,343,021 Finished goods 120,942 152,033 ---------- ---------- $1,735,144 $1,671,673 ========== ========== Cost of sales for interim periods was computed using an estimated overall gross profit percentage which is adjusted at each December 31 based upon an annual inventory count. In 1996, 1995 and 1994, the fourth See Notes to Consolidated Financial Statements. F-10 ~~quarter operating results included an adjustment to decrease (increase) operating losses by approximately $164,000, (77,000) and (190,000), respectively. NOTE 5 - PLANT AND EQUIPMENT: Plant~~Equipment

Property and equipment isare comprised of the following: December 31, 1996 1995 ---- ---- Furniture and fixtures $ 361,501 $ 319,539 Machinery and equipment 6,913,950 6,633,292 Leasehold improvements 809,749 809,749 Construction in progress 0 84,617 --------- --------- 8,085,200 7,847,197 Less: Accumulated depreciation and amortization (6,653,269) (6,059,117) --------- --------- $1,431,931 $1,788,080 ========= ========= Depreciation expense (including amortization of capital leases) for the years ended December 31, 1996, 1995 and 1994 was $594,352, $715,892, and $724,289, respectively.

	December 31,
	2002		2001
Office and computer equipment	$	863,603	$	655,248
Machinery and equipment		7,106,236		6,803,855
Leasehold improvements		1,337,914		1,295,094

		9,307,753		8,754,197
Less accumulated depreciation and amortization		6,008,008		5,499,498

	$	3,299,745	$	3,254,699

In the fourth quarter of 1995, management implemented a program to sell certain nonoperating equipment to raise additional cash. At December 31, 1995, this equipment is carried at its net book value of $279,111, and was sold in 1996 for $299,180. NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities comprise the following: December 31, 1996 1995 ---- ---- Trade accounts payable and accrued purchases $376,825 $381,923 Payroll taxes payable 37,917 32,356 Accrued vacation 93,342 89,946 Accrued professional fees 43,576 142,020 Accrued liability - shareowners 60,863 40,964 Accrued liability - Other 28,420 21,194 ------- ------- $640,943 $708,403 ======= ======= See Notes to Consolidated Financial Statements F-11 NOTE 7 - DEBT: The Company's debt obligations as of December 31, 1996 and 1995 are as follows: December 31, 1996 1995 ---- ---- Note Payable - Bank $ 320,000 $ 380,000 Subordinated Convertible Notes 1,203,261 1,080,623 Unsecured Demand Convertible Note 100,000 100,000 Note Payable - Shareowner 566,049 533,420 Secured Promissory Notes 250,000 250,000 --------- --------- 2,439,310 $2,344,043 ========= ========= On February 6, 1997,January 2002 the Company ~~signed an~~repaid its obligation with its bank and entered into a new agreement with ~~Chase Manhattan Bank (successor to Chemical Bank) amending the terms~~another bank. This agreement provides for a $1,000,000 Line of its credit facility. The new agreement requires monthly principal payments of $10,000 for January 1997, and 7,500 from February 1997 until December 1997, monthly principal payments of $10,000 from January 1998 until December 1998, and monthly principal payments of 12,500 from January 1999 until August 1999. A final payment of $7,500 is due on September 1, 1999. Borrowings bear interest at prime (8.25% at December 31, 1996) + 2 1/4%. The agreement also amended the financial covenants contained in the original agreement . The Company continues to be required to maintain compliance with affirmative and negative covenants, including limitations on capital expenditures, dividends and new indebtedness, and compliance with a financial ratio tied to accounts receivable. Chase Manhattan Bank also agreed to waive any defaults which existed under the previous facility. Borrowings are secured by accounts receivable and the personal guarantee of the Company's principal shareowner. In connection with the new agreement, a shareowner and Subordinated Convertible Note holder agreed to maintain a certificate of deposit with Chase Manhattan Bank in the amount of $245,000 as collateral for the loan. Once the principal balance of the loan is reduced below $222,700, with each principal payment made by the Company, an amount may be withdrawn from the collateral deposit to maintain a 1.1 to 1 collateral to loan ratio. In April 1995, the Company received $225,000 from a shareowner and Subordinated Convertible Note holder of the Company through the issuance of $125,000 of 8% Subordinated Convertible Notes due December 15, 2000 (convertible at $1.00 per share) and 250,000 warrants at $0.40 per share. The warrants entitle the holder to purchase 250,000 shares of Common Stock at $0.6875 per share. Twenty-five percent of the Notes may be redeemed at any time if the Company consummates a public offering of its Common Stock. In connection with this transaction, the Company issued 50,000 warrants to purchase Common Stock at $1.00 per share. On September 27, 1995, the Company raised an additional $100,000 from the same shareowner in the form of a 10% Unsecured Demand Convertible Promissory Note. The Note is convertible into Common Stock of the CompanyCredit at the ~~conversion price of $1.00; interest is also payable in Common Stock~~bank's prime rate, and a $1,000,000 Asset Based Loan at the same conversion price. Although by its terms the Note is due on demand, it cannot be repaid until the Chase Manhattan Bank debt has been repaid in full. The Demand Note has been classified as noncurrent in the accompanying balance sheet because the Note holder has agreed not to demand payment prior to5.61%.

In January ~~1, 1998. See Notes to Consolidated Financial Statements F-12~~ In 1993, the Company raised $1,000,000 in cash from a private investment group through the issuance of $746,215 of 10% Subordinated Convertible Notes due December 15, 2000 (the "notes") and 203,028 shares of the Company's common stock at $1.25 per share. As part of this transaction, the Company issued warrants (expiring on December 15, 2000) which entitle the holders to purchase 171,675 shares of the Company's common stock at $1.50 per share. The warrants have been recorded at $68,670 resulting in a discount on the notes of $68,670. During September 1993, the Company borrowed $100,000 in the form of promissory notes from a shareowner of the Company. On December 16, 1993, these promissory notes were extinguished and $74,621 of the notes and 20,303 shares of the Company's common stock at $1.25 per share were issued. The notes are convertible at any time up to their maturity date into shares of the Company's common stock at $1.25 per share (to be adjusted for dividends, stock splits, etc.). Twenty-five percent of the notes may be redeemed by the Company after December 15, 1996, but before December 15, 1998, if the Company has a public offering of its shares of common stock. The entire amount of all Subordinated Convertible Notes (issued both in 1993 and 1995) may be redeemed by the Company after December 15, 1998; they are subordinated to any outstanding indebtedness to Chase Manhattan Bank and other secured indebtedness of the Company. These notes also contain certain covenants and restrictions, including financial ratios tied to accounts receivable and debt service (as defined). Interest is payable semiannually on these notes, and the first six interest payments are payable in the form of additional notes. At December 31, 1996 and 19952003 the Company was in violation of certain financial covenants required under the loan agreements. The Bank agreed to extend the loans through March 2003. The Company is in negotiations with the Bank to determine the criteria by which the Bank will extend the loans for Fiscal 2003. As a result of ~~these notes; subsequent~~the violations of the covenants all bank debt has been classified as a current liability. The Line of Credit that is secured primarily by accounts receivable and inventory has been limited to the ~~year ends,~~current borrowings of approximately $750,000. The Asset Based Loan that is secured by certain equipment owned by the Company ~~obtained waivers from~~currently has a balance of approximately $928,000. Interest and principal payments due on both loans are, and have always remained, current.

In 2002, the ~~holders~~Company issued a Subordinated Convertible Promissory Note for proceeds of $1,000,000. The Holder of the notes and modified the financial covenants in the debt agreements. In 1993, an unsecured demand note of $1,030,000 bearing interest at 10% per annum held by the President and principal shareowner was extinguished, andNote is a ~~promissory note maturing on December 31, 1996 in the amount of $566,049 (including $154,049 of accrued interest), and 494,400 shares~~related party to a major Shareholder of the ~~Company's common stock at $1.25 per share were issued.~~Company. The ~~promissory~~ note bears interest at ~~7%. However, a discount of $97,893 has been recorded on~~ the ~~promissory note to reflect the difference between the actual~~ rate of ~~interest on the~~6% per annum and has a maturity date of January 31, 2006. The note ~~and an estimated market rate. Repayment~~is convertible into common shares of the ~~promissory note has been subordinated to any outstanding indebtedness to Chase Manhattan Bank and other secured indebtedness~~Company at a conversion price that shall be (a) the price at which common stock is first issued for cash after the date of the ~~Company. By mutual informal agreement, beginning with~~Note to an unrelated third party investor or (b) the quarter ended June 30, 1995, the Company has deferred interest payments to its principal shareowner. The payments are expected to be resumed in 1997 and are expected to include both the scheduled quarterly payment and any deferred payments. The interest obligations have been accruedprice mutually agreed upon by the ~~Company~~Issuer and ~~are included in accounts~~Holder at its then fair market value if no such issuance has occurred within 12 months of December 31, 2002, the date of the Note.

Accounts payable and accrued ~~liabilities. Interest expense~~expenses are comprised of the following:

	December 31,
	2002		2001
Trade accounts payable and accrued purchases	$	131,903	$	528,729
Accrued vacation		79,017		69,260
Accrued payroll		100,267		90,000
Accrued expenses—other		57,150		41,405

	$	368,337	$	729,394

		December 31,
		2002		2001
	Capital leases, payable in aggregate monthly installments of $12,000, including interest at rates ranging from 11.0% to 11.6% expiring from June 2003 through October 2005, collateralized by equipment	$	287,169	$	374,191
	Less current portion		98,657		87,021

Long-term debt, excluding current portion		$	188,512	$	287,170

Year Ending December 31,
2003	$	140,579
2004		124,543
2005		95,477

Total minimum payments		360,599
Less amounts representing interest		73,430

Present value of minimum payments	$	287,169

Capital lease obligations are collateralized by property and equipment with cost and related ~~to the shareowner loan was approximately $72,000, $72,000,~~accumulated depreciation approximating $470,000 and ~~$74,000 in 1996, 1995 and 1994, respectively. Although by its terms the indebtedness to the shareowner is due on~~$121,000 respectively at December 31, 1996, it cannot be repaid until the Chase Manhattan Bank debt has been repaid in full. The shareowner loan has been classified as noncurrent in the accompanying balance sheet because the shareowner has agreed not to demand payment prior to January 1, 1998. The Company's Secured Promissory Notes bear interest at 7%, are secured by certain of the Company's precious metals, and are convertible at any time into 200,000 shares of common stock. The Notes also contain acceleration clauses which would allow the holder, a shareowner of the Company, to accelerate the maturity date and demand payment if certain events occur. The maturity date of the Secured Notes is July 8, 1997. The note has been classified as noncurrent in the accompanying balance sheet because the noteholder has agreed not to demand payment prior to January 1, 1998. Annual maturities of bank and other debt obligations, including noncash interest on subordinated notes, are as follows: 1997 $ 92,500 1998 1,036,049 1999 107,500 2000 1,254,346 --------- $2,490,395 --------- See Notes to Consolidated Financial Statements F-13 ~~NOTE 8 - INCOME TAXES:~~2002.

A reconciliation of the income tax (benefit) computed at the statutory ~~federal~~Federal income tax rate to the reported amount follows: Year ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Federal statutory rate 34% 34% 34% --- --- --- Tax (benefit) at federal statutory rates $(127,160) $(329,419) $(296,954) Loss in excess of available benefit 115,955 311,995 283,155 Other, net 11,205 17,424 13,799 -------- -------- -------- $ - $ - $ - ======== ======== ========

	Year Ended December 31,
	2002			2001			2000
Federal statutory rate		34	%		34	%		34	%

Tax provision (benefit) at Federal statutory rates	$	(549,233	)	$	14,836		$	239,550
Loss in excess of available benefit		549,233			—			—
Alternative minimum tax		—			—			16,000
Change in valuation allowance		100,000			(114,836	)		(255,550	)
State taxes		580			16,756			—

	$	100,580		$	(83,244	)	$	—

At December 31, ~~1996~~2002, the Company ~~had~~has Federal and State net operating loss carryforwards for ~~financial statement and~~ tax purposes of approximately ~~$5,660,000~~$7,027,000 and ~~5,599,176,~~$1,840,000, respectively. The tax loss ~~carryforward expires~~carryforwards expire at various dates through ~~2010.~~2022.

Internal Revenue Code Section 382 places a limitation on the utilization of Federal net operating loss and other credit carryforwards when an ownership change, as defined by the tax law, occurs. Generally, this occurs when a greater than 50 percentage point change in ownership occurs. Accordingly, the actual utilization of the net operating loss and ~~other carryforwards~~carryfowards for tax purposes may be limited annually to a percentage (approximately 7%6%) of the fair market value of the Company at the time of any such ownership change.

	Years Ended December 31,
	2002		2001			2000
Current:
State	$	580	$	16,756		$	—
Deferred:
Federal		100,000		(100,000	)		—
State		—		—			—

Total	$	100,580	$	(83,244	)	$	—

	December 31,
	2002			2001
Inventory reserves	$	50,000		$	48,000
Vacation liabilities		32,000			26,000
Other		83,000			41,000
Depreciation		(3,000	)		149,000
Loss carryforwards		2,500,000			1,932,000

Gross deferred tax assets		2,662,000			2,196,000
Valuation allowance		(2,662,000	)		(2,096,000	)

	$	—		$	100,000

During the years ended December 31, ~~December~~2002, 2001 and 2000 approximately 4%, 3%, and 6%, respectively of the Company's net product sales were through a foreign agent, in which, Warren Ruderman a principal shareholder has an investment.

During 2002, Welland Ltd., a related party to Clarex, Ltd., received a 6% Subordinated Convertible Promissory Note due January 31, 1996 1995 ---- ---- Deferred tax assets Inventory capitalization adjustment $ 11,000 $ 60,000 Inventory reserves 20,000 10,000 Vacation liabilities 30,000 62,000 Other 18,000 12,000 Loss carryforwards 2,240,000 2,279,000 ---------- ---------- Gross deferred tax assets 2,319,000 2,423,000 ---------- ---------- Deferred tax liabilities Depreciation (15,000) (242,000) ---------- ---------- Gross deferred tax liabilities (15,000) (242,000) ---------- ---------- 2,304,000 2,181,000 Valuation allowance (2,304,000) (2,181,000) ---------- ---------- Net deferred tax assets $ 0 $ 0 ========== ========== See Notes2006, resulting in proceeds to ~~Consolidated Financial Statements. F-14~~ ~~NOTE 9 - LEASE COMMITMENTS:~~the Company of $1,000,000.

During 2000, Clarex, Ltd., a shareowner and debt holder purchased 1,000 shares of 10% convertible preferred stock for $1,000,000, converted a 10% convertible secured note and received 200,000 shares of the Company's common stock and exercised 345,000 of warrants and received 345,000 shares of the Company's common stock.

During 2000, the following directors and officers of the Company purchased 253 shares of 10% convertible preferred stock for $253,000:

Daniel Lehrfeld, President and CEO	$	120,000
John Rich, Director	$	30,000
Jan Winston, Director	$	10,000
Maria Murray, VP business Development	$	50,000
Devaunshi Sampat, VP Sales & Marketing	$	20,000
William S. Miraglia, Chief financial Officer	$	23,000

The Company leases its office and manufacturing facility under an operating lease which expires in ~~2001.~~2006. The lease provides for additional rental payments based upon a pro rata share of real estate taxes and certain other expenses and has a renewal option for one five-year ~~period.~~period that was exercised during 2001. Rental expense was ~~$237,000, $298,000,~~approximately $224,000, $212,000 and ~~$309,000~~$206,000 in ~~1996, 1995~~2002, 2001 and ~~1994,~~2000, respectively, and real estate taxes were $41,000, $39,000 and $38,000 in 2002, 2001 and 2000, respectively. The Company subleased a portion of its premises in December 1995. The Company recorded a charge of approximately $95,000 in the fourth quarter of 1995 for the write-off of leasehold improvements and incremental costs incurred to move and consolidate the remaining leased space. The Company has entered into noncancellable lease agreements for certain equipment which are recorded as capital leases. These leases are secured by the related equipment and are for five year terms. During 1995, the Company has been able to formally modify its leases with certain lessors and has informally agreed with several others to modify the payment terms and, in most cases, extend the repayment period and thereby reduce the monthly payment requirements. The modifications did not result in a significant gain or loss. The following is a summary of assets under capital lease at: December 31, 1996 1995 ---- ---- Equipment under capital lease $ 790,532 $ 1,367,554 Less: Accumulated amortization (607,449) (916,644) ----------- ----------- $ 183,083 $ 450,910 =========== ===========

Future minimum ~~lease payments at December 31, 1996~~annual rentals are payable as follows: Capital Operating Leases Leases ------ ------ 1997 $78,009 $ 195,564 1998 4,825 195,564 1999 195,564 2000 195,564 2001 162,970 ------- ------- Total minimum lease payments 82,834 $ 945,226 ======= Less: Amount representing interest (4,684) ------- Present value of minimum capital lease payments (including $73,399 classified as current obligations under capital leases) $78,150 ======= See Notes to Consolidated Financial Statements. F-15 NOTE 10 - EXPORT SALES AND SALES TO MAJOR CUSTOMERS: Export sales, primarily to customers in Europe, Asia and Canada, amounted to 16%, 19% and 24% of net product sales in 1996, 1995, and 1994, respectively. Sales to one foreign customer was 12% of net product sales in 1994. No foreign customer accounted for more than 10% of net product sales in 1996 and 1995. Additionally, one U.S. customer accounted for more than 10% of net product sales in 1996, 1995 and 1994. One other U.S. customer accounted for over 10% of net product sales in 1996 and 1995. Additionally, one other U.S. customer accounted for over 10% of net product sales in 1995 and another accounted for over 10% in 1994. During the years ended December 31, 1996, 1995 and 1994 approximately 8%, 9% and 12% respectively of the company's net product sales were through a foreign agent, in which the principal shareholder has an investment. NOTE 11 - CAPITAL STOCK: The Company's authorized capital stock consists of 1,000,000 shares of preferred stock, without nominal or par value, and 6,000,000 shares of common stock, par value $.01 per share. The Company had 2,109,271 and 2,106,571 common shares outstanding at December 31, 1996 and 1995, respectively. There were no preferred shares issued or outstanding in either year. The Company has reserved 2,334,937 shares of common stock for issuance upon conversion of the Subordinated Convertible Notes, Secured Promissory Notes and Unsecured Demand Convertible Note (Note 7) and upon exercise of outstanding warrants and options (Notes 7 and 12). NOTE 12 - EMPLOYEE BENEFIT PLANS: During 1990 the Company adopted the Key Employee Compensation Program (the "Program"). In 1995 the maximum number of shares which may be awarded under the program was increased from 70,000 to 500,000. The number of shares issuable is subject to adjustment for stock dividends, stock splits, etc. The Company has reserved 500,000 shares of common stock for issuance under the plan. The Program provides for the granting of incentive stock options, compensatory stock options, stock appreciation rights and shares of common stock to certain full time employees of the Company under terms and at prices to be determined at the discretion of a committee appointed by the Board of Directors. Certain outside directors are eligible to receive compensatory stock options and stock appreciation rights. Subject to modification by the committee, options are generally exercisable in 25% installments beginning one year after the date of grant and continuing for each of the four years thereafter. The maximum term of the grant is ten years. All options were granted at the market value or above at the date of grant. To date, none of the options have been exercised. The following table summarizes the options granted under the plan for the three years ended December 31, 1996: Weighted Average Shares Price ------------------------------------------------------------------- Outstanding at December 31, 1993 43,000 $1.25 ------------------------------------------------------------------- Granted 34,000 $1.25 Expired/forfeited (16,000) $1.25 ------------------------------------------------------------------- Outstanding at December 31, 1994 61,000 $1.25 ------------------------------------------------------------------- Granted 77,000 $1.00 Expired/forfeited (11,000) $1.25 ------------------------------------------------------------------- Outstanding at December 31, 1995 127,000 $1.10 ------------------------------------------------------------------- See Notes to Consolidated Financial Statements. F-16 Granted 20,000 $1.00 Expired (9,000) 1.25 Forfeited (27,000) $1.00 ------------------------------------------------------------------- Outstanding at December 31, 1996 111,000 $1.09 ======= ===== ------------------------------------------------------------------- Exercisable at December 31, 1996 45,750 $1.18 ====== ===== ------------------------------------------------------------------- The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The Company accounts for its option plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations and, accordingly, no compensation cost has been recognized for the stock option plan. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net loss and loss per share would not have been impacted. These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1996 and 1995: expected volatility of 250%; weighted average risk-free rate of 6.008%; and weighted average expected life of 10 years. The weighted average grant date fair value of options granted during 1996 and 1995 was $0.38 and $0.28, respectively. The following table summarizes information about the stock options outstanding at December 31, 1996: Options outstanding Options exercisable ------------------------------------------------------------------ Number Weighted Weighted Number Weighted outstanding average average exercisable average Range of at December remaining exercise at December exercise exercise 31, 1996 contractual price 31, 1996 price prices life - -------------------------------------------------------------------------------- $1.00 - $1.25 111,000 8.01 years $1.09 45,750 $1.18

The Company maintains a 401(k) savings plan for all eligible employees (as defined in the plan) ~~employees.~~. The 401(k) plan allows employees to contribute from 1% to 15% of their compensation on a salary reduction, pre-tax basis. The 401(k) plan also provides that the Company, at the discretion of the Board of Directors, may match employee contributions. The Company ~~did not contribute~~contributed $11,870 in the form of 28,263 shares of the Company's common stock in 2002, distributed in March 2003 and $20,362 in the form of 14,037 shares of the Company's common stock in 2001, distributed in February 2002.

The Company is party to an employment agreement with an officer that provides for a minimum annual salary.

	Years Ended December 31,
	2002		2001		2000
Crystals and components	$	2,289,098	$	2,283,256	$	2,953,000
Custom optics		2,036,807		3,211,793		3,145,956
Systems and instruments		1,155,816		1,850,988		766,000

Total	$	5,481,721	$	7,886,037	$	6,864,956

Export sales, primarily to customers in Europe, Asia and Canada, amounted to 19%, 31% and 38% of net product sales in 2002, 2001 and 2000, respectively.

No foreign customer accounted for more than 10% of product sales in 2002. One foreign customer accounted for 10.7% of product sales in 2001 and for 13% of product sales in 2000. In 2002 one U.S. customer accounted for 13.4% of product sales. One U.S. customer accounted for 17.7% of product sales in 2001, one U.S. customer accounted for over 13% and another for 12.2% of product sales in 2000.

The Company has authorized 1,000,000 shares of preferred stock, no par value, which the Board of Directors has the authority to issue from time to time in a series. The Board of Directors also has the authority to fix, before the issuance of each series, the number of shares in each series and the designation, preferences, rights and limitations of each series.

In 2000, the Company sold 2,100 shares of Series B (the "Preferred Stock"), 10% convertible preferred stock at a price of $1,000 per share for proceeds of $2,100,000. Each share of Preferred Stock is convertible, at the option of the holder at any ~~amounts~~time, into common stock at the rate of $2.50 per share. Dividends on outstanding preferred stock are payable in common stock at the rate of $2.50 per share. The Preferred Stock has senior preference and priority as to the ~~401(k)~~dividend as well as distributions and payments upon the liquidation, dissolution, or winding up of affairs before any payment to other shareowners of the Company.

For the years ended December 31, 2002, 2001 and 2000, the Company paid a common stock dividend equal to $121,000, $105,000 and $50,000, respectively.

	Years Ended December 31,
	2002			2001				2000
Fixed Stock Options	Shares	Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding, beginning of year	698,600	$	2.20	729,500		$	1.96	358,500		$	1.02
Granted	475,200		0.94	289,700			4.97	514,000			2.40
Exercised	—		—	(29,250	)		1.05	(107,000	)		1.00
Expired	—		—	(15,500	)		1.25	—			—
Forfeited	—		—	(276,350	)		1.90	(36,000	)		1.13

Outstanding, end of year	1,173,800		1.69	698,600			2.20	729,500			1.96
Options exercisable, end of year	402,163		.98	242,650			1.70	175,625			1.32

Weighted-average fair values of options granted during year			.91				4.97				2.40

The following table summarizes information about stock options outstanding at December 31, 2002:

		Options Outstanding					Options Exercisable
Range of Exercise Price		Number Outstanding	Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Outstanding	Weighted Average Exercise Price
$	0.85—$2.00	1,003,650	7.93	yrs.	$	1.33	323,450	$	1.56
$	3.00—$5.00	169,600	7.61	yrs.	$	3.81	78,713	$	3.71

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following range of weighted-average assumptions were used for grants during the years ended December 31, 2002, 2001 and 2000:

	Years Ended December 31,
	2002		2001		2000
Dividend yield	0.00	%	0.00	%	0.00	%
Volatility	128.11	%	168.67	%	237.00	%
Risk-free interest rate	5.2	%	6.0	%	6.0	%
Expected life	10 years		10 years		10 years

At December 31, 2000, the Company had outstanding 26,675 common stock warrants exercisable at $1.50, and 25,000 exercisable at $.69. In 2001, the warrants were exercised resulting in net proceeds to the Company of $57,000.

e. Income per common share A reconciliation of income from continuing operations and basic to diluted share amounts is presented below.

		Years Ended December 31,
		2002				2001				2000
		Income			Average Shares	Income			Average Shares	Loss			Average Shares
(Loss) income before preferred dividends		$	(1,715,972	)		$	43,634			$	707,869
Less: preferred stock dividends			(120,600	)			(155,000	)			(50,000	)

Basic:
	Available to common shareholders		(1,836,572	)	5,210,322		(111,366	)	5,046,666		657,869		4,563,350
	Dilutive effect of convertible preferred stock and stock options		—		—		—		—		50,000		1,045,163

Diluted:
	Available to common shareowners and assumed conversions	$	(1,836,572	)	5,210,322	$	(111,366	)	5,046,666	$	707,869		5,608,513

The methods and assumptions used to estimate the fair value of the following classes of financial instruments were:

Current Assets and Current Liabilities: The carrying amount ~~at December 31, 1996~~of cash, current receivables and ~~1995 of the Company's~~payables and certain other short-term financial instruments ~~approximates~~approximate their fair ~~value because of the short maturity of those instruments.~~value.

Long-Term Debt: The fair value of the Company's long-term debt, ~~could~~including the current portion, was estimated using a discounted cash flow analysis, based on the Company's assumed incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of variable and fixed rate debt at December 31, 2002 approximates fair value.

Year 2002	First			Second		Third		Fourth
Net product sales	$	1,185,840		1,657,964		1,344,569		1,293,348
Contract R & D sales		34,625		28,000		—		24,772
Gross profit—product sales		62,253		432,237		239,877		147,852
Gross profit—contract R & D		(15,654	)	(6,562	)	(2,324	)	48,839
Net (loss)		(476,688	)	(322,209	)	(409,056	)	(628,619	)
Net income per share—Basic(a)		(0.09	)	(0.06	)	(0.07	)	(0.12	)
Net income per share—Diluted(a)		(0.09	)	(0.06	)	(0.07	)	(0.12	)

Year 2001	First			Second	Third	Fourth
Net product sales	$	2,351,720		2,323,713	1,583,298	1,627,756
Contract R & D sales		37,378		10,000	94,587	47,203
Gross profit—product sales		842,758		795,418	659,316	573,990
Gross profit—contract R & D		(19,425	)	6,391	80,477	58,225
Net income		251,278		20,834	25,156	(408,634	)
Net income per share—Basic(a)		0.05		0.01	0.01	(0.09	)
Net income per share—Diluted(a)		0.04		0.01	0.01	(0.09	)

At the end of 2000, the Company announced a process engineering redesign program to formalize production operations, and improve profitability through margin improvement. The special charges associated with this program were $299,763 ($.06 per share on a basic and diluted basis) for the year ended December 31, 2001.

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

New Jersey (State or other jurisdiction of incorporation or organization)		22-2003247 (I.R.S. Employer Identification No.)
181 Legrand Avenue, Northvale, NJ (Address of principal executive offices)		07647 (Zip Code)
(201) 767-1910 (Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:None

Plan Category	(a) Number Of Securities To Be Issued Upon Exercise Of Outstanding Options, Warrants and Rights	(b) Weighted-Average Exercise Price Of Outstanding Options, Warrants and Rights		(c) Number Of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected In Column (a)
Equity Compensation Plans Approved by Shareholders	1,173,800	$	1.69	660,200
Equity Compensation Plans Not Approved by Shareholders

TOTAL	1,173,800			660,200

Present Exhibit No.	Description of Exhibit	Exhibit No. in Registration Statement or or Amendments
3.1	Restated Certificate of Incorporation, as amended.	3.1 of Amendment No. 1.
3.2	By-laws, as amended.	3.2 of Amendment No. 1.
3.3	Certificate of Amendment of Certificate of Incorporation
3.4	Exhibit A—Series A 10% Convertible Preferred Stock
3.5	Exhibit B—Series B 10% Convertible Preferred Stock

			December 31,
			2002			2001
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	1,155,074		$	548,949
	Accounts receivable, net of allowance for uncollectible accounts of $40,000 and $54,000, in 2002 and 2001			1,041,262			1,295,394
	Unbilled contract costs			341,541			391,756
	Inventories			2,082,932			2,356,884
	Other current assets			80,675			140,366

		Total current assets		4,701,484			4,733,349

PROPERTY AND EQUIPMENT, net:
	Property and equipment at cost			9,307,753			8,754,197
	Less: accumulated depreciation and amortization			(6,008,008	)		(5,499,498	)

		Total property and equipment		3,299,745			3,254,699

PRECIOUS METALS				309,565			309,565
DEFERRED TAXES				—			100,000
OTHER ASSETS				198,131			201,459

		TOTAL ASSETS	$	8,508,925		$	8,599,072

LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
	Note payable—Bank		$	751,074		$	750,000
	Note payable—Other			124,917			—
	Current portion of long term debt			927,549			—
	Accounts payable and accrued expenses			368,337			729,392
	Current obligations under capital leases			98,657			87,021

		Total current liabilities		2,270,534			1,566,413
SUBORDINATED CONVERTIBLE PROMISSORY NOTE				1,000,000			—
CAPITAL LEASE OBLIGATIONS				188,512			287,170

		Total liabilities		3,459,046			1,853,583

COMMITMENTS SHAREOWNERS' EQUITY:
	10% Convertible preferred stock, Series A, no par value; 500 shares issued and outstanding, respectively			500,000			500,000
	10% Convertible preferred stock, Series B, no par value; 2,100 shares issued and outstanding, respectively			2,100,000			2,100,000
	Common stock, $.01 par value; authorized 15,000,000 shares; 5,283,640 and 5,135,603 issued and outstanding, respectively			52,836			51,356
	Capital in excess of par value			9,470,676			9,331,194
	Deficit			(7,058,683	)		(5,222,111	)

				5,064,829			6,760,439
		Treasury stock, at cost; 4,600 shares		(14,950	)		(14,950	)

		TOTAL SHAREOWNERS' EQUITY		5,049,879			6,745,489

TOTAL LIABILITIES AND SHAREOWNERS' EQUITY			$	8,508,925		$	8,599,072

Title of each class		Name of each exchange on which registered

		As of December 31, or For the Year Ended December 31,
		2002 $		2001 $		2000 $	1999 $	1998 $
Revenues		5,569,118		8,075,205		7,909,967	6,206,092	5,350,868
Net (Loss)Profit		(1,715,972	)	43,634		707,869	21,789	(631,768	)
Net (Loss)Profit applicable to common shareholders
	Basic	(.35	)	(.02	)	.14	.01	(0.30	)
	Diluted	(.35	)	(.02	)	.12	.01	(0.30	)
Weighted average shares
	Basic	5,210,322		5,046,666		4,563,350	4,096,078	2,119,609
	Diluted	5,210,322		5,046,666		5,608,513	4,096,078	2,119,609
Dividends Paid		120,600		155,000		50,000	None	None
Total Assets		8,508,925		8,599,072		7,829,755	4,113,227	3,538,157
Long-Term Obligations		1,188,512		287,170		326,059	350,000	350,000
Shareholders' Equity		5,049,879		6,745,489		6,388,780	2,995,161	2,473,372

Contractual Obligations	Total		2003		2004		2005		2006		2007		Thereafter
Note payable-bank	$	751,074	$	751,074	$	—	$	—	$	—	$	—	$	—
Note payable-other		124,917		124,917		—		—		—		—		—
Current portion of long-term debt		927,549		927,549		—		—		—		—		—
Operating leases		863,000		210,000		210,000		218,000		225,000		—		—
Capital leases including interest		360,599		140,579		124,543		95,477		—		—		—
Total contractual cash obligations	$	3,027,139	$	2,154,119	$	334,543	$	313,477	$	225,000	$	—	$	—

		INRAD INC.
		By:	/s/ DANIEL LEHRFELD Daniel Lehrfeld Chief Executive Officer
		Dated: April 2, 2003

				Preferred Stock (Series A)			Preferred Stock (Series B)
	Common Stock
	Common Stock									Capital in excess of par value					Subscription Receivable			Treasury Stock			Total Shareowners Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Capital in excess of par value		Deficit			Subscription Receivable			Treasury Stock			Total Shareowners Equity
Balance, January 1, 2000	4,100,678	$	41,007	500	$	500,000	—		—	$	8,237,718	$	(5,768,614	)	$			$	(14,950	)	$	2,995,161
Issuance of Preferred Stock	—		—	—		—	2,100		2,100,000		—		—			(220,000	)					1,880,000
Exercise of Options	107,000		1,070	—		—	—		—		68,430		—			—			—			69,500
Exercise of Warrants	420,000		4,200	—		—	—		—		382,050		—			—			—			386,250
Common Stock Issued on Conversion of Debt	280,000		2,800	—		—	—		—		347,200		—			—			—			350,000
Dividend on Preferred Stock	50,000		500	—		—	—		—		49,500		(50,000	)		—			—			—
Net income for the year	—		—	— .		—	—		—		—		707,869			—			—			707,869

Balance, December 31, 2000	4,957,678		49,577	500		500,000	2,100		2,100,000		9,084,898		(5,110,745	)		(220,000	)		(14,950	)		6,388,780
Exercise of Options	29,250		293	—		—	—		—		30,833					—			—			31,126
Exercise of Warrants	51,675		516	—		—	—		—		56,683					—			—			57,199
Dividend on Preferred Stock	92,000		920	—		—	—		—		154,080		(155,000	)		—			—
Subscription received	—		—	—		—	—		—		—					220,000			—			220,000
Contribution	5,000		50	—		—	—		—		4,700					—			—			4,750
Net income for the year	—		—	— .		—	—		—		—		43,634			—			—			43,634

Balance, December 31, 2001	5,135,603		51,356	500		500,000	2,100		2,100,000		9,331,194		(5,222,111	)		—			(14,950	)		6,745,489
401K contribution	14,037		140								20,222											20,362
Dividend on Preferred Stock	134,000		1,340								119,260		(120,600	)
													(1,715,972	)								(1,715,972	)

Balance, December 31, 2002	5,283,640	$	52,836	500	$	500,000	2,100	$	2,100,000	$	9,470,676	$	(7,058,683	)	$	—		$	(14,950	)	$	5,049,879

1991 Stock option plan		334,000
2000 Stock option plan		1,500,000
Convertible preferred stock		1,340,000