Inrad Optics, Inc. - Annual Report: 2002 (Form 10-K)

10-K
Securities and Exchange Commission
Washington, D.C. 20549

Commission file number 0-11668

INRAD, Inc.
(Exact name of registrant as specified in its charter)

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 Per Share
(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 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     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 15, 2003 was approximately $2,647,000

Common shares of stock outstanding as of March 15, 2003:
5,279,090 shares

Documents incorporated by reference: NONE

INRAD, INC.

INDEX

        Note: Page F-1 follows Page 26.

PART I

Forward Looking Statements

        This Annual Report contains forward-looking statements as that term is defined in the federal securities laws. The Company wishes to insure that any forward-looking statements are accompanied by meaningful cautionary statements in order to comply with the terms of the 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 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 "continue", and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to 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 us ultimately prove to be accurate. Readers are further cautioned that the Company's financial results can vary from quarter to quarter, and the financial results for any period may not necessarily be indicative of future results. The foregoing is not intended to be an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by the Company. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward looking statements, whether from new information, future events, or 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.

Item 1.    Business

        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

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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.

Products

        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:

Products Manufactured by the Company

Custom OEM Optics

        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

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

Optical Coatings

        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.

Crystals & Components

        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 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. 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.

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Research and Development

        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.

Markets

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

        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

4

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.

Long-Term Contracts

        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.

Marketing and Business Development

        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.

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Backlog

        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.

Competition

        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.

Employees

        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

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employees. 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 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

Regulation

        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.

Business Risk

(a)  As general economic conditions deteriorate, our financial results suffer.

        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.

(b)  Many of our customers industries are cyclical.

        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.

(c)  We face competition.

        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

7

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

(g)  We may not be able to fully protect our intellectual property.

        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

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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.

(k)  Our stock price may fluctuate.

        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.

(l)    International sales account for a significant portion revenues.

        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

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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

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, 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 3. Legal Proceedings

        There are no legal proceedings involving the Company as of the date hereof.

Item 4. Submission of Matters to a Vote of Security Holders

        Not Applicable.

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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 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.

(b)  Holders

        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.

(c)  Dividends

        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.

(d)  Recent Sales of Unregistered Securities

        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.

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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.

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

Critical Accounting Policies

        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.

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Results of Operations

        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.

*

calculated as a percentage of their respective revenues

**

calculated as a percentage of product sales

Total Revenues

        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

        Product sales were $5,481,721, $7,886,037, and $6,864,956, in 2002, 2001 and 2000 respectively. Product sales in 2002 reflected 98.4% of total sales and were 30% lower than in 2001. Product sales in 2001 were 14.9% higher than in 2000, reflecting 97.7% of total revenues.

13

        New bookings of product orders in 2002 were $5,190,000, 14% lower than in 2001. New bookings of product orders in 2001 were $5,979,000, approximately 22% lower than in 2000.

        The product book to bill ratio was 0.96, .76, and 1.29 in 2002, 2001, and 2000, respectively.

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

14

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

Cost of Goods Sold and Gross Profit Margin

        As a percentage of product sales, cost of goods sold was 83.9%, 63.6% and 54.5% for the years ended December 31, 2002, 2001 and 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 implementation of head-count reduction, reduced work-hours, and other cost saving measures decreased non-inventory expenses by approximately 15%. The reduction of these expenses could not offset the impact of a sales volume decline of 30%. In 2001 the cost of goods sold percentage increased due to increased manufacturing overhead costs for newly formed departments including production control and manufacturing engineering and the absorption of additional overhead costs in production that resulted from decreased volumes in Contract R&D sales.

        Costs of purchased components have been relatively stable in 2002, 2001 and 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 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

        Contract R&D 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 expects to continue to selectively seek new government-sponsored programs from time to time, as well as joint programs with certain of its customers, in technical areas related to its core businesses.

Selling, General and Administrative Expenses

        Selling, general and administrative expenses in 2002 decreased $226,000 or 9.0% compared to 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

15

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 SG&A because of inclusion of administrative costs that had previously been allocated to 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 associated with the Company's implementation of a proactive merger and acquisition program aimed at finding and evaluating complementary businesses and products, and by 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 full-time CEO/President and Director of Human Resources on the general management team, and increases in recruiting expenses. Additionally, administrative costs also increased due to the legal expenses and other costs incurred as a result of the private convertible preferred stock offering, application for NASDAQ registration, development of new and revised employee stock option programs, and other shareholder related activities.

Internal Research and Development Expenses

        Company-funded research expenditures during the years ended December 31, 2002, 2001, and 2000 were $134,424 (2.5% of product sales) $201,603 (2.6% of net product sales), and $369,643 (5.4% of net product sales). During 2000 the Company sold its tunable mid-IR laser technology to an instrument company as part of the Company's strategy to concentrate its 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 efforts onto new crystal products and production methods, and new optical component manufacturing technologies. As a result, internal R&D expenditures declined in 2002, and are expected to continue at this level in 2003.

Special Charges

        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.

Operating Income

        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.

Other Income and Expenses

        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

16

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

Preferred Stock Dividend

        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).

Income Taxes

        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 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, 2002, the Company had a net deferred tax asset of approximately $2,826,000, the primary component of which was its significant net operating loss carry forward. The Company has established a valuation allowance to offset this deferred tax asset in the event that the tax asset will not be 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.

Inflation

        The Company's policy is to periodically review pricing of its products to keep pace with current 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.

Liquidity and Capital Resources

        During the second quarter of 2002 the Company received $1,000,000 from its bank collateralized by equipment. The loan is for a 3 year period with a 5 year amortization and 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 received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note. The note is 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 Bank's prime rate and is payable upon demand. The note is secured by certain assets of the Company. Borrowings against this note were approximately $750,000 as of December 31, 2002. The

17

borrowings under this line are currently limited to approximately $750,000 until covenant violations are remedied. The Company is currently working with the bank to develop criteria that will allow for permanent reestablishment of the 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 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 2000 private offering of series B convertible preferred stock and 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:

Overview of Financial Condition

        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 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 $1,000,000 from the Company's asset based credit facility. EBITDA for 2001 was approximately $351,000 and net cash used in 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 was successful in securing a $1,000,000 revolving credit line, and a $1,000,000 asset based term loan. Total additional borrowing against these credit facilities provided the working capital required in 2002. The Company is currently in violation of certain covenants provided for in the loan agreements.

        In December 2002 the company received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note. The Company is anticipating continued distressed market conditions during 2003 and will use the proceeds from the note to meet its working capital needs in 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 2003.

18

        The Company has an active program to align its expenses with present and projected revenues and with its commitments to its customers. During the recessionary year of 2001, employment was reduced in September from 83 to 69, a decline of 17%, through lay-off and attrition. Senior executives of the Company 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 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 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 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.

Item 7A.    Discussion of Market Risk

        Effect of interest rate fluctuations on interest sensitive financial instruments.

        We are exposed to 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 hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive money market accounts at December 31, 2002.

Item 8.    Financial Statements and Supplementary Data

        The Company's consolidated financial statements are set forth on pages F-1 through F-19.

Item 9.    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

        None

19

PART III

Item 10.    Directors and Executive Officers of the Registrant

        The directors hold office for staggered terms ranging from one to three years.

20

Executive Officers of the Registrant

        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 with the Company held by each such person:

        Daniel Lehrfeld has served as Chief Executive Officer and President since May 2000. He joined the Company in 1999 as President and Chief Operating Officer. Prior to joining the Company, Mr. Lehrfeld held the position of Vice President and General Manager of Electro-Optic Systems, a division successively of the Raytheon, GM/Hughes Electronics and Magnavox Electronic Systems Corporations. He has also held executive positions with Philips Laboratories and Grumman Aerospace Corporation. Mr. Lehrfeld holds B.S. and M.S. degrees from Columbia University School of Engineering and Applied Science and an M.B.A. degree from the Columbia Graduate School of Business.

        Maria Murray joined the Company in January 1989, became Vice President of R&D Programs in 1993, and was appointed Sr. Vice President, Business Development in 1999. Prior to joining INRAD, Ms. Murray held positions in electronic design engineering in the laser and communication industries. She holds a B.S. degree in Electrical Engineering from the University of Central Florida.

        William S. Miraglia joined the Company as Secretary and Chief Financial Officer in June 1999. Previously, he held the position of Vice President of Finance for a division of UNC, Inc., a NYSE aviation company. Prior to his last position, Mr. Miraglia has held management positions in the aerospace industry and in public accounting. He holds a B.B.A. from Pace University, and an M.B.A from Long Island University and is a 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 until the next election of officers, as provided by the Company's by-laws.

21

Item 11. Executive Compensation

Summary of Cash and Certain Other Compensation

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

*

Reflects deferred payout of bonus granted in recognition of asset sale in 2000. Full proceeds invested in Company Series B Preferred stock.

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

        The aggregate minimum commitment under this agreement is as follows:

**

Reflects payroll paid since hire date, October 2002.

During the periods covered, no Officer received perquisites (i.e., personal benefits) in excess of the lesser of $50,000 or 10% of such individual's reported salary and bonus.

Compensation of Directors

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

        Compensation Committee Interlock and Insider Participation in the compensation committee

        Frank Wiedeman, Director

        Jan Winston, Director

        John Rich, Director

22

Item 12.    Security Ownership of Certain Beneficial Owners and Management

        The following table presents certain information with respect to the security ownership of the directors of the Company and the security ownership of each individual or entity known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock as of March 1, 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.

(1)

Including 900,000 shares subject to convertible preferred stock exercisable or convertible within 60 days.

(2)

Includes 2,380,952 shares subject to convertible promissory notes at a stated conversion of $0.42, the market value of the Company's common shares on the date of issuance of the Note.

(3)

Including 48,000 shares subject to convertible preferred stock and 258,200 shares subject to options exercisable within 60 days.

23

(4)

Including 61,900 shares subject to options exercisable within 60 days.

(5)

Including 28,400 shares subject to options exercisable within 60 days.

(6)

Including 12,000 shares subject to convertible preferred stock and 3,300 shares subject to options exercisable or convertible within 60 days.

(7)

Including 4,000 shares subject to convertible preferred stock exercisable or convertible within 60 days and 3,400 shares subject to options exercisable or convertible within 60 days.

(8)

Including 620,755 shares subject to convertible preferred stock, stock options, and warrants exercisable within 60 days.

24

Equity Compensation Plan Information

        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 Relationship and Related Transactions

        During the years ended December 31, 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. 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:

25

Item 14. Controls and Procedures

        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.

26

PART IV

Item 14B.    Form 8K Filed:

        Convertible Subordinated Promissory Note, filed January 16, 2003.

Item 14C.    Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)

Financial statements filed as part of this report:
See Index to Consolidated Financial Statements at F-1.

(b)

Exhibits filed as part of this report:

        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:

        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:

        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, 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:

        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, 1993:

        The following 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, 1995:

        The following 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, 1996:

26

        The following 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, 1999:

*

Management contracts and employment agreements

27

SIGNATURES

        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.

        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.

28

CERTIFICATION FOR 10-K

I, Daniel Lehrfeld, certify that:

1.

I have reviewed this annual report on Form 10-K of INRAD, Inc.;



2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;



b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and



c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):



a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and



b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 2, 2003

29

CERTIFICATION FOR 10-K

I, William S. Miraglia, certify that:

1.

I have reviewed this annual report on Form 10-K of INRAD, Inc.;



2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;



b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and



c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):



a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and



b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 2, 2003

30

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, 2002 filed with the Securities and Exchange Commission (the "Report"), I, Daniel Lehrfeld, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

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



(2)

The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented.

Dated: April 2, 2003

        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.

31

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, 2002 filed with the Securities and Exchange Commission (the "Report"), I, Daniel Lehrfeld, Chief Executive Officer of the 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 Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented.

Dated: April 2, 2003

        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.

32

INRAD, INC. AND SUBSIDIARY

REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS

THREE YEARS ENDED DECEMBER 31, 2002

CONTENTS

F-1

Independent Auditors' Report

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

We have audited the accompanying consolidated balance sheets of Inrad, Inc. and0 Subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareowners' equity and cash flows for the 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 audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the 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 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, Inc. and Subsidiary as of December 31, 2002 and 2001 and the results of their operations and their cash flows for the three years then ended, in conformity with accounting principles generally accepted in the United States of America.

HOLTZ RUBENSTEIN & CO., LLP

Melville, New York
February 14, 2003

F-2

INRAD, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements

F-3

INRAD, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements

F-4

INRAD, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY