FORM 10-K

                       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, 1995

                                       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

Commission file number     0-11668

                                   INRAD, Inc.
             (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 to Section 12(b) of the Act: None

     Title of each class                         Name of each exchange on
                                                      which registered

   --------------------------                  ----------------------------

   --------------------------                  ----------------------------

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

                     Common Stock, par value $0.01 Per Share
                                (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 __.

     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]

     Aggregate  market value of the  registrant's  Common Stock, par value $0.01
per share, held by non-affiliates as of March 8, 1996 was approximately $96,000.

             Common shares of stock outstanding as of March 8, 1996:

                                2,106,571 shares

<PAGE>

                                  INRAD, INC.

                                     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...................................................................23
                                                      
Note:  Page F-1 follows Page 23.


                                       i
<PAGE>

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 as stand-alone  subsystems or instruments for
general use with  lasers.  These  products  are sold under the INRAD  trademark,
which has been registered 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.  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  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
<PAGE>

<TABLE>
<CAPTION>

                                                 Year Ended December 31,
                                                 -----------------------
                                  1995                    1994                        1993
                           -----------------------------------------------------------------------
Category                        Sales       %            Sales         %             Sales       %
--------                        -----       -            -----         -             -----       -
                                  $                        $                           $

<S>                            <C>         <C>         <C>            <C>           <C>         <C>
Crystals                       986,194     18          1,265,642      21            990,958     16
Crystal Components           2,277,565     42          2,312,372      39          2,212,894     35
Systems &                                                                      
 Instruments                 1,083,670     20          1,415,702      24          1,876,846     30
Contract Research &                                                            
 Development                 1,084,609     20          1,002,203      16          1,164,076     19
                            ----------    ---         ----------     ---         ----------    ---
  TOTAL                     $5,432,038    100         $5,995,919     100         $6,244,774    100
                            ==========    ===         ==========     ===         ==========    ===
</TABLE>

     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  efforts are being  directed  to this  anticipated
change in demand.

Products Manufactured 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


                                       2
<PAGE>

generators  are also used to mix the output  frequency of one laser with that of
another  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.
The  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
<PAGE>

     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 13 scientists  and  engineers,  including 4 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,
1995, 1994, and 1993 were $305,626 (7.0% of net product sales), $365,856 (7.3%),
and $315,006 (6.2%), respectively.

     In 1990 the Company  established a Federal Research and Development Program
Group in order to augment its own funded R&D efforts.  This group actively seeks
government  support in technical  areas in which 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
five U.S.  patents,  has filed  several  patent  applications  and is  preparing
additional   applications.   The  Company  is  seeking  strategic   partners  to
commercialize the technologies developed from these programs.

     During  1995,  1994 and 1993,  the Company was awarded  funded R&D programs
totalling approximately  $316,000,  $573,000 and $1,871,000,  respectively.  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.

     Revenues from contract research and development were $1,084,609, $1,002,203
and  $1,164,076  during the years  ended  December  31,  1995,  1994,  and 1993,
respectively.   The  Company   expects  to   continue   to  actively   seek  new
government-sponsored  programs  as well as joint  programs  with  certain of its
customers in technical areas related to its core business.


                                       4
<PAGE>

Markets

     In 1995,  1994 and 1993 the Company's  domestic  product sales were made to
end users in the following market areas:

     Market                                  1995        1994        1993
     ------                                  ----        ----        ----
     Industrial                               67%         45%         42%
     Universities                              7%         10%         19%
     National Laboratories                     9%          7%         12%
     Government                               17%         38%         27%
                                             ---         ---         --- 
     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 1995.

     The Company does not have similar information about the end use of products
sold abroad. Foreign sales accounted for 19% of total product sales in 1995, 24%
in  1994,  and  26% in  1993.  Worldwide,  the  Company  has  approximately  250
customers,  one of which  accounted for 12% and 16% of net product sales in 1994
and 1993,  respectively.  No foreign customer accounted for more than 10% of net
product sales in 1995.  Additionally,  three U.S.  customers  each accounted for
more than 10% of net product sales in 1995, and two customers each accounted for
more than 10% of net product sales in 1994. No domestic  customer  accounted for
more than 10% of net product sales in 1993.

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, Europe and the Far East.

     The current  sales staff  consists of four  employees.  The Company  plans,
subject to  availability  of  resources,  to implement a  significant  sales and
marketing  program  in  1996,  including   additional  sales  staff,   increased
advertising and trade show  participation,  development of additional  marketing
materials, and greatly increased contact with existing and potential customers.

                                       5
<PAGE>

Backlog

     The Company's order backlog as of December 31, 1995 included  approximately
$1,470,000  of product  orders and  $413,000 of contract  R&D,  most of which is
scheduled to be completed in 1996.  On December 31, 1994,  the backlog  included
$1,116,000 of product orders and $1,223,000 of contract R&D.

Competition

     The Company  believes that there are relatively  few companies  which offer
the wide range of products  sold by the Company.  Within each product  category,
however,  there is competition.  Although price is a principal factor in certain
product  categories,   the  principal  means  of  competition  in  most  product
categories are product design, performance and quality. Based on its performance
to date,  the  Company  believes  that it can compete  successfully  in terms of
price, product design,  product performance and quality,  although no assurances
can be given in this regard.

Employees

     As of  December  31,  1995,  the Company had 52  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;  and a unique
chemical reactor. The Company is seeking strategic partners to commercialize the
technologies patented by INRAD.

     Although  the  Company  has  relied  in the past on its  manufacturing  and
technological expertise, rather than on any patents, to maintain its position in
the industry,  it is now additionally  seeking patent  protection for inventions
resulting  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.

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.

                                       6
<PAGE>

     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
manufacture 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,  1996.  The  Company  has an  option  to renew  the  lease  for two
additional  terms of five years each.  The 1995  annual  rent was  approximately
$298,000.  The Company also paid real estate taxes and insurance  premiums which
aggregated approximately $59,000 during 1995.

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
<PAGE>


                                    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, 1994,  through the
quarter  ended  December  31, 1995 as reported by the  National  Association  of
Securities Dealers NASDAQ System:

                                                                 Sales Price
                                                                 -----------
                                                                 High     Low
                                                                 ----     ---
         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
                                                               
         Quarter ended March 31, 1994 ........................  1 5/8    1 1/4
         Quarter ended June 30, 1994 .........................  1 1/2    1
         Quarter ended September 30, 1994 ....................  1         13/16
         Quarter ended December 31, 1994 .....................  1 1/4      1/2
                                                         
     (b) Holders.

     As of March 8, 1996, there were 188 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, 1995, 1994 or 1993. 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 does not anticipate paying cash dividends
in the immediate future.


                                       8
<PAGE>


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,
                    ------------------------------------------------------------
                    1995        1994        1993           1992         1991
                    ----        ----        ----           ----         ----
                      $           $           $              $            $

Revenues         5,432,038   5,995,919    6,244,774     5,684,259     6,178,651 
Net Income      
  (Loss)          (968,878)   (873,394)  (1,807,106)   (1,534,151)     (569,442)
Net Income      
  (Loss) Per    
  Share              (0.46)      (0.41)       (1.27)        (1.10)        (0.41)
Dividends       
  Paid                None        None         None          None          None
Total           
  Assets         5,296,044   6,083,264    7,535,448     7,909,697     8,154,329
Long-Term       
  Obligations    2,359,131     934,420    1,689,965       662,265       593,921
Shareholders'   
  Equity         1,808,467   2,677,345    3,550,739     4,299,888     5,834,039

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

     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.

Overview of Financial Condition

     As shown in the accompanying  financial statements,  the Company reported a
net loss of  approximately  $969,000 for the year ended  December 31, 1995,  and
also  incurred  losses  in 1994 and  1993.  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.

     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


                                       9
<PAGE>

described in Note 2 in the accompanying financial statements (see also Liquidity
and Capital Resources under this Item 7).

Results of Operations

     The following  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.

                                                    Year ended December 31,
                                                    -----------------------
                                                  1995       1994       1993
                                                  ----       ----       ----
                                                    %          %          %
Revenues:
   Net product sales                              80.0       83.3       81.4
   Contract research and development              20.0       16.7       18.6
                                                 -----      -----      -----
                                                 100.0      100.0      100.0

   Interest and other income                       0.3        0.2        0.1
                                                 -----      -----      -----
                                                 100.3      100.2      100.1
================================================================================

Costs and expenses:
   Cost of goods sold*                            83.7       82.6       88.6
   Write off of discontinued inventory*            --         --        11.8
   Plant consolidation costs                       1.7        --         --
   Contract research and
     development*                                 97.7       97.0       99.2
   Selling, general and
     administrative expenses                      19.0       18.2       18.6
   Internal research and
      development**                                7.0        7.3        6.2
   Interest expense                                5.3        5.6        5.1
================================================================================
Net income (loss)                                (17.8)     (14.6)     (28.9)

 *   calculated as a percentage of their respective revenues

**   calculated as a percentage of net product sales

     Net Product Sales

     Net product sales were $4,347,429,  $4,993,716 and $5,080,698 in 1995, 1994
and 1993, respectively. Product sales in 1995 were lower than the prior year due
to a significantly  lower opening backlog and insufficient  short term orders in
1995. Product sales in 1994 were comparable with 1993 levels.

     International  sales, as a percentage of total product sales, were 19%, 24%
and 26% for 1995, 1994, and 1993, respectively.  The dollar value and percentage
of international sales decreased in 1995 compared to 1994, and decreased in 1994
compared to 1993.  Bookings of new orders,  particularly  for laser  systems and

                                       10
<PAGE>

instruments, were lower in 1995 than in 1994, and resulted in lower shipments in
1995 compared to the prior year. In the first quarter of 1993,  the Company made
a shipment  totalling  $375,000  to one  customer.  This  nonrecurring  shipment
accounts for the dollar and percentage decrease in 1994 compared to 1993.

     The  Company's  backlog  of  product  orders as of  December  31,  1995 was
approximately  $1,470,000,  compared to approximately $1,116,000 at December 31,
1994.

     Cost of Goods Sold

     As a percentage of net product sales,  cost of goods sold was 83.7%,  82.6%
and 88.6% for the years ended  December 31, 1995,  1994 and 1993,  respectively.
The  Company  continued  its  efforts  to  reduce  expenses  in  1995.  The most
significant  cost  reductions  have  continued  to be in the form of  labor  and
related items such as payroll  taxes and  benefits.  The increase in the cost of
goods sold  percentage  from 1994 to 1995 is attributable to lower than expected
sales compared to relatively  fixed  overhead costs such as wages,  depreciation
and rent.  The decrease  from 1993 to 1994 is  attributable  to cost  reductions
achieved as a result of closing the Company's Inrad Optical  Systems  subsidiary
and management's program to reduce expenses.

     Prices for raw  materials  and purchased  components  have been  relatively
stable in 1995 and 1994, while labor costs rose in both years.

     Write Off of Discontinued Inventory

     During the fourth quarter of 1993 the Company  recorded an inventory  write
off of approximately  $600,000 in connection with the  discontinuance of certain
products  and product  lines  within  certain  market  segments.  The Company is
focusing its future efforts in industrial,  medical and scientific markets which
it believes  offer greater  growth  potential and improved  profit  margin.  The
Company  recorded a writedown  in 1993 for  products  not  consistent  with this
direction.

     Contract Research and Development

     Contract research and development revenues were $1,084,609,  $1,002,203 and
$1,164,076 for the years ended December 31, 1995,  1994 and 1993,  respectively.
Related contract R&D  expenditures,  including  allocated  indirect costs,  were
$1,059,668,  $971,932 and $1,155,204.  Revenues increased from 1994 to 1995 as a
result of a greater emphasis by the Company's scientific and technical personnel
on funded programs.  Revenues  decreased from 1993 to 1994 primarily  because of
lower  bookings in 1994 and  increased  effort by the Company's  scientific  and
technical  personnel  on internal  R&D and  manufacturing  projects  rather than
sponsored programs. The programs are typically fixed price contracts and provide


                                       11
<PAGE>

for recovery of direct costs and an allocation of indirect  manufacturing  costs
and, depending on their terms, recovery of general and administrative costs.

     The Company intends to focus its future funded research efforts on programs
closely  aligned  with its core  business.  This is  likely  to  result in lower
bookings of funded research programs and lower contract revenues and expenses in
1996.

     Selling, General and Administrative Expenses

     Selling,  general and administrative  expenses in 1995 decreased $55,042 or
5.1% compared to 1994, and in 1994  decreased  $75,673 or 6.5% compared to 1993.
In 1995,  selling  commissions on international  sales decreased and the Company
allocated  a higher  portion of G&A costs to  contracts;  these  decreases  were
partially  offset by higher sales salaries and advertising and marketing  costs.
Subject to  availability of resources,  the Company expects to increase  certain
selling  costs  in  1996,   including   additional  sales  staff  and  increased
advertising  and trade show  participation.  The decrease in SG&A  expenses from
1993  to  1994   occurred   primarily   because  of  decreases  in  selling  and
administrative  salaries,  advertising and trade shows, offset by higher selling
commissions on international sales and certain other administrative expenses.

     Internal Research and Development Expenses

     Research and  development  expenses for 1995 were $305,626 (7.0% of product
sales) compared with 1994 expenditures of $365,856 (7.3% of product sales).  R&D
expenses for 1993 were $315,006 (6.2% of product sales).

     During  1995,  the Company  decreased  its emphasis on  development  of new
products and increased its short-term efforts on sales and marketing of existing
products.  As a  result,  R&D  expenditures  decreased  in 1995.  This  trend is
expected to continue in 1996. In 1994, the Company's R&D expenses increased over
1993 because the Company's  scientific and technical  personnel  spent a greater
portion of their time on product development projects in line with the Company's
goal at that time of bringing more new products to market.

     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 bases of assets and  liabilities  using enacted tax rates in
effect  in the  years in which the  differences  are  expected  to  reverse.  At
December 31, 1995, the Company had a net deferred tax asset of  $2,181,000,  the
primary component of which was its significant net operating loss  carryforward.


                                       12
<PAGE>

The Company has established a valuation  allowance to fully offset this deferred
tax asset  because its history of operating  losses makes it uncertain  that the
tax asset will be realized.

     Inflation

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

     On August 31, 1995,  the Company  signed an agreement  with  Chemical  Bank
amending the terms of its credit  facility.  The new agreement  requires monthly
principal  payments of $5,000  from  September  1995 until  December  1996,  and
monthly  principal  payments of $10,000  thereafter  until  March 1998.  A final
payment of $170,000 is due on April 1, 1998.  Borrowings  bear interest at prime
(8.5% at December 31, 1995) + 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  financial  ratios  tied to accounts  receivable  and debt
service (as  defined).  Chemical  Bank also agreed to waive any  defaults  which
existed  under  the  previous  facility.  Borrowings  are  secured  by  accounts
receivable,  plant  and  equipment  not  previously  liened,  and  the  personal
guarantee of the Company's principal shareowner.

     In  connection  with the new Chemical  Bank  agreement,  a  shareowner  and
Subordinated Convertible Note holder agreed to maintain a certificate of deposit
with Chemical Bank in the amount of $245,000 as  collateral  for the loan.  Once
the principal balance of the loan is reduced below $245,000, with each principal
payment made by the Company,  a like amount may be withdrawn from the collateral
deposit.

     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. 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 is
convertible  into Common Stock of the Company at the conversion  price of $1.00;
interest  is also  payable in Common  Stock at the same  conversion  price.  The
proceeds from issuance of the Subordinated Notes,  Warrants and Demand Note were


                                       13
<PAGE>

used to reduce  short-term  liabilities,  including trade debt.  Although by its
terms the Note is due on demand,  it cannot be repaid  until the  Chemical  Bank
debt has been repaid in full. The Demand Note has been  classified as noncurrent
in the  Company's  December 31, 1995 balance  sheet  because the Note holder has
agreed not to demand payment prior to December 31, 1996.

     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 are payable in the form of additional notes
and do not require a cash outlay.

     During  September  1993, the Company  borrowed  $100,000 in the form of two
promissory  notes from a shareowner  of the Company.  On December 16, 1993,  the
shareowner  exchanged the existing  promissory  notes for a new  seven-year  10%
subordinated  convertible  note in the  amount of $74,621  and 20,303  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 Chemical Bank and other secured
indebtedness  of the Company.  At December 31, 1995 the Company was in violation
of certain terms of these notes;  subsequent  to year end, the Company  obtained
waivers from the holders of 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 in the amount of  $1,030,000  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.  By mutual  informal
agreement,  beginning  with the  quarter  ended June 30,  1995,  the Company has
deferred  interest  payments  to its  principal  shareowner.  The  payments  are
expected to be resumed in 1996 and are  expected to include  both the  scheduled
quarterly  payment  and  any  deferred  payments.  Although  by  its  terms  the
indebtedness  to the shareowner is due on December 31, 1996, it cannot be repaid
until the Chemical Bank debt has been repaid in full.  The  shareowner  loan has
been  classified as noncurrent in the Company's  December 31, 1995 balance sheet
because the  shareowner  has agreed not to demand  payment prior to December 31,
1996.

     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.

     As a result of the new  Chemical  Bank  agreement,  the  Company's  monthly
principal  requirement  was reduced by $10,000.  Renegotiation  of the equipment
leases in 1995 resulted in a reduction of the total  monthly  lease  payments by


                                       14
<PAGE>

approximately  $8,000.  Certain  leases by their  original terms mature in 1996,
whch will also reduce the Company's cash  requirements  in 1996. The Company has
also  identified  certain  non-operating  assets  which  it  intends  to sell to
generate  additional cash flows.  Where  possible,  the Company will continue to
reduce expenses and cash  requirements to improve future  operating  results and
cash flows.  Management  expects that cash flow from operations,  in addition to
cash generated from asset sales in 1996, will provide adequate liquidity for the
Company's  operations  in 1996.  If,  however,  the  Company's  cash  flow  from
operations  is not  maintained  at  satisfactory  levels,  the  Company may seek
additional financing to supplement the cash flow.

     Because of the  circumstances  described  above  relating to the  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.

     Capital  expenditures,  including internal labor and overhead charges,  for
the years ended  December 31, 1995,  1994 and 1993 were  $166,000,  $193,000 and
$379,000,  respectively.  During 1993, the Company completed lease financing for
the  purchase  of new  equipment  totalling  approximately  $110,000.  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.

Item 8.  Financial Statements and Supplementary Data.

     The Company's  consolidated financial statements are set forth on pages F-1
through F-17. Page F-1 follows page 23.

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

     Not applicable.


                                       15
<PAGE>

                                    PART III

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 Directors,
  76                                      President and Chief Executive Officer
                                          (1973 - Present).



Stanley A. Kitzinger,      1984         Financial Consultant (1986 - Present);
  79                                      Senior Vice President (1980-1986) of
                                          International Investors, Inc. (mutual
                                          funds investment); Senior Vice
                                          President (1980-1986) of Van Eck
                                          Management Corp. (investment
                                          management); Director (1989-1991) of
                                          Mutual Series Fund, Inc. (mutual funds
                                          investment).


William B. Maxson,         1989         Consultant (1990 - Present); Vice
  65                                      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 (1990 - Present);
  76                                      Chief Operating Officer, Datamax
                                          Corporation (1994 - 1996)

     The directors  serve  one-year  terms.  Pursuant 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


                                       16
<PAGE>

to the 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.  A representative  has not been designated by
Clarex at the present time.

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  and offices with the Company held by each
such person:

                          Officer       Positions and Offices
Name and Age               Since        With the Company
------------               -----        ----------------
Warren Ruderman, 76        1973 ......  Chairman of Board of Directors
                                        President and
                                        Chief Executive Officer

Maria Murray, 38           1995 ......  Vice President - Marketing
                                        and Sales

Glenn Nosti, 40            1994 ......  Vice President - Manufacturing

Ronald Tassello, 38        1989 ......  Vice President - Finance
                                        and Secretary

     Warren  Ruderman  has  served as  President  and  Chairman  of the Board of
Directors of the Company since he founded it in 1973.  Prior to 1973, he founded
and  served  as  the  President  of  Isomet   Corporation,   a  manufacturer  of
acousto-optic  devices  for  the  laser  industry,  and was a  Teaching  Fellow,
Lecturer in Chemistry, research scientist 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 Physics from Columbia  University,  and is a Fellow of the
New York Academy of Sciences.

     Maria  Murray  joined the Company in January  1989 as Manager,  Federal R&D
Programs,  and was appointed Vice President,  Marketing and Sales in 1995. Prior
to joining  INRAD,  she held positions in electrical  design  engineering in the
laser and communication  industries.  She holds a B.S.E.E.  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 the laser optics  industry.  He received a B.S. in Business


                                       17
<PAGE>

Administration  from East Carolina  University  and an M.B.A.  in Marketing from
Fairleigh Dickinson University.

     Ronald  Tassello joined the Company as Secretary and Controller in October,
1989 and was appointed Vice President,  Finance in 1990. Prior to joining INRAD,
he was employed as Senior Manager in the Hackensack  office of Price  Waterhouse
LLP, an accounting  and  consulting  firm. He held various  positions with Price
Waterhouse LLP from 1983 to 1989. He received a B.B.A.  from Pace University and
is a certified public accountant.

     None of the  officers of the Company has an  employment  contract  with the
Company; each serves at the pleasure of the Board of Directors.

Item 11.  Executive Compensation

Summary of Cash and Certain Other Compensation

     The following table sets forth, for the years ended December 31, 1995, 1994
and 1993, the cash compensation paid by the Company and its subsidiaries,  to or
with  respect to the  Company's  Chief  Executive  Officer,  the only  executive
officer  whose total annual  salary and bonus  exceeded  $100,000,  for services
rendered in all capacities as an executive officer during such period:

<TABLE>
<CAPTION>
                                                                Long-Term
                                   Annual Compensation(A)       Compensation
Name and Current                   ----------------------       ------------      All Other
Principal Position         Year     Salary        Bonus         Options Granted   Compensation ($)
------------------         ----     ------        -----         ---------------   ----------------

<S>                        <C>      <C>            <C>            <C>                 <C>
Warren Ruderman,           1995     $130,000       none           none                none
President and Chief
Executive Officer
                           1994     $130,000       none           none                none

                           1993     $130,500       none           none                none
</TABLE>

(A)  During the periods  covered,  no  Executive  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.

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
the only individuals or entities known by the Company to be the beneficial owner
of more than 5% of the Company's  Common Stock as of March 1, 1996.  The Company


                                       18
<PAGE>

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)                              1,081,400              51.3
c/o INRAD, Inc.
181 Legrand Avenue
Northvale, NJ  07647

Clarex, Ltd.                                    1,845,513(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                                203,089(3)            9.3
33 Grand Avenue
Newburgh, NY  12550

Stanley A. Kitzinger                                4,800(4)            0.2
c/o INRAD, Inc.

William Maxson                                      3,162(4)            0.1
c/o INRAD, Inc.

Donald H. Gately                                   16,417(5)            0.8
c/o INRAD, Inc.

Directors and Executive                         1,115,404(6)           52.2
  Officers as a group
  (7 persons)


     (1)  By virtue of his shareholdings,  Warren Ruderman may be deemed to be a
          "parent"  of the  Company  as that  term is  defined  in the Rules and
          Regulations of the Securities Act of 1933, as amended.

     (2)  Including 1,522,485 shares subject to options, warrants or convertible
          notes exercisable or convertible within 60 days.

     (3)  Including  72,562  shares  subject to  convertible  notes  convertible
          within 60 days.

     (4)  Including 1,500 shares subject to options exercisable within 60 days.

     (5)  Including 16,417 shares subject to warrants within 60 days.

     (6)  Including 29,042 shares subject to options or warrants within 60 days.

                                       19
<PAGE>

Item 13.  Certain Relationships 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,
$74,000 and $106,000 in 1995, 1994 and 1993, respectively.

     Repayment  of the  shareowner  loan  has  been  subordinated  to the  prior
repayment of the  Company's  indebtedness  to Chemical Bank and to other secured
indebtedness of the Company. The principal shareowner has guaranteed  borrowings
under the Company's  existing  credit  facility  with  Chemical  Bank. By mutual
informal agreement,  beginning with the quarter ended June 30, 1995, the Company
has deferred  interest  payments to its principal  shareowner.  The payments are
expected to be resumed in 1996 and are  expected to include  both the  scheduled
quarterly  payment  and  any  deferred  payments.  Although  by  its  terms  the
indebtedness  to the shareowner is due on December 31, 1996, it cannot be repaid
until the Chemical Bank debt has been repaid in full.  The  shareowner  loan has
been  classified as noncurrent in the Company's  December 31, 1995 balance sheet
because the  shareowner  has agreed not to demand  payment prior to December 31,
1996.

                                       20
<PAGE>

                                    PART IV

Item 14.  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:



                                                            Exhibit No.
Present                                                     in Registration
Exhibit                                                     Statement or
No.          Description of Exhibit                         or Amendments
-------      ----------------------                         ----------------
            
3.1          Restated Certificate of Incorpor-              3.1 of Amendment
             ation, 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         Common Stock Purchase and Option Agreements, dated
             10/14/85 and 11/17/85, between the Company and Celanese
             Corporation (now Hoechst Celanese Corporation).


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, 1990:


10.8         INRAD, Inc. Key Employee Compensation Plan.


                                       21
<PAGE>



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         Lease dated October 4, 1991 between S&R Costa 
             as lessor and the Company as lessee.


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 Chemical Bank Regarding Line of Credit.


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:


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,
1994:


10.12        Amended and Restated Chemical Bank Agreement.


The following exhibits form an attachment to this Report:


10.13        Amendment and Waiver Agreement between INRAD and Chemical
             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.


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


                                       22
<PAGE>

                                   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.

                                           INRAD INC.

                                           By: /s/  Warren Ruderman
                                              ------------------------------
                                           Warren Ruderman, President
                                           and Chief Executive Officer

                                           Dated: March 26, 1996


     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 26, 1996
------------------------      Executive Officer
Warren Ruderman               and Director (Principal
                              Executive Officer)


/s/ Stanley A. Kitzinger      Director                      March 26, 1996
------------------------
Stanley A. Kitzinger



/s/ Donald H. Gately          Director                      March 26, 1996
------------------------
Donald H. Gately



/s/ William B. Maxson         Director                      March 26, 1996
------------------------
William B. Maxson



/s/ Ronald Tassello           Vice President,               March 26, 1996
------------------------      Finance and Secretary
Ronald Tassello               (Principal Financial and
                              Accounting Officer)



                                       23
<PAGE>
                                  INRAD, INC.

                       CONSOLIDATED FINANCIAL STATEMENTS

                                     INDEX


Consolidated Financial Statements                                          Page

Report of Independent Accountants                                           F-2

Consolidated Balance Sheet at December 31, 1995 and 1994                    F-3

Consolidated Statement of Operations for each of the three years
  in the period ended December 31, 1995                                     F-4

Consolidated Statement of Cash Flows for each of the three years
  in the period ended December 31, 1995                                     F-5

Consolidated Statement of Shareowners' Equity for each
  of the three years in the period ended December 31, 1995                  F-6

Notes to Consolidated Financial Statements                          F-7 to F-16

Financial Statement Schedules

Schedule II - Valuation and qualifying accounts and Reserves               F-17



NOTE: All other  schedules  are  either  not  applicable  or the  information is
      included in the consolidated financial statements or notes thereto.


                                      F-1
<PAGE>

                       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 and 1994,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1995,  in  conformity  with  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
each of the three 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 Waterhouse  LLP
Morristown, New Jersey
March 15, 1996

                                      F-2
<PAGE>

                                  INRAD, INC.

                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>

                                                                         December 31,
                                                                         ------------
Assets                                                                1995          1994
                                                                     ------        ------
<S>                                                             <C>            <C>        
Current assets:
  Cash and cash equivalents                                     $    37,981    $   119,718
  Certificate of Deposit                                             70,000         70,000
  Accounts receivable, net                                          804,834        609,155
  Inventories                                                     1,671,673      1,897,772
  Unbilled contract costs                                           151,649        156,717
  Assets held for sale                                              279,111          --
  Other current assets                                               61,699         50,167
                                                                -----------    -----------
        Total current assets                                      3,076,947      2,903,529
Plant and equipment, net                                          1,788,080      2,742,531
Precious metals                                                     280,001        311,797
Other assets                                                        151,016        125,407
                                                                -----------    -----------
        Total assets                                            $ 5,296,044    $ 6,083,264
                                                                ===========    ===========
Liabilities and Shareowners' Equity
Current liabilities:
  Note payable - Bank                                                60,000    $   520,000
  Current obligations under capital leases                          190,754        311,199
  Subordinated Convertible Notes                                       --          846,116
  Accounts payable and accrued liabilities                          708,403        625,452
  Advances from customers 116,205 116,560        
  Other current liabilities                                          53,084         52,172
                                                                -----------    -----------
        Total current liabilities                                 1,128,446      2,471,499
Note payable - Bank                                                 320,000           --
Obligations under capital leases                                     75,088        183,632
Secured Promissory Notes                                            250,000        250,000
Subordinated Convertible Notes                                    1,080,623           --
Unsecured Demand Convertible Note                                   100,000           --
Note payable - Shareowner                                           533,420        500,788
                                                                -----------    -----------
        Total liabilities                                         3,487,577      3,405,919
                                                                -----------    -----------
Commitments (Note 10)
Shareowners' equity:
  Common stock: $.01 par value;      
      2,121,571 shares issued                                        21,216         21,216
  Capital in excess of par value                                  6,067,991      5,967,991
  Accumulated deficit                                            (4,212,740)    (3,243,862)
                                                                -----------    -----------
                                                                  1,876,467      2,745,345
  Less - Common stock in treasury,
   at cost (15,000 shares)                                          (68,000)       (68,000)
                                                                -----------    -----------
        Total shareowners' equity                                 1,808,467      2,677,345
                                                                -----------    -----------
        Total liabilities and shareowners' equity               $ 5,296,044    $ 6,083,264
                                                                ===========    ===========
</TABLE>


                See Notes to Consolidated Financial Statements.

                                      F-3
<PAGE>

                                  INRAD, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>

                                                    Year ended December 31,
                                                    -----------------------
                                               1995          1994*          1993*
                                             ----          ----           ----
<S>                                       <C>            <C>            <C>        
Revenues:
    Net product sales                     $ 4,347,429    $ 4,993,716    $ 5,080,698
    Contract research and development       1,084,609      1,002,203      1,164,076
                                          -----------    -----------    -----------
                                            5,432,038      5,995,919      6,244,774
                                          -----------    -----------    -----------
Costs and expenses:
    Cost of goods sold                      3,638,582      4,123,490      4,502,928
    Write off of discontinued inventory          --             --          600,000
    Plant consolidation costs                  94,228           --             --
    Contract research and development
      expenses                              1,059,668        971,932      1,155,204
    Selling, general and administrative
      expenses                              1,033,547      1,088,589      1,164,262
    Internal research and development
      expenses                                305,626        365,856        315,006
                                          -----------    -----------    -----------
                                            6,131,651      6,549,867      7,737,400
                                          -----------    -----------    -----------
       Operating profit (loss)               (699,613)      (553,948)    (1,492,626)
Other income (expense):
    Interest expense                         (285,646)      (332,954)      (319,974)
    Interest and other income, net             16,381         13,508          5,494
                                          -----------    -----------    -----------
Net income (loss)                         $  (968,878)   $  (873,394)   $(1,807,106)
                                          ===========    ===========    =========== 

Net income (loss) per share                    $(0.46)        $(0.41)        $(1.27)
                                               ------         ------         ------ 

</TABLE>

* Prior  year  amounts  have  been  reclassified  to  conform  to  current  year
presentation (Note 1).


                See Notes to Consolidated Financial Statements.

                                      F-4
<PAGE>



                                  INRAD, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                  Year ended December 31,
                                                                  -----------------------
                                                          1995            1994          1993
                                                          ----            ----          ----
<S>                                                   <C>            <C>             <C>         
Cash flows from operating activities:
        Net income (loss)                             $  (968,878)   $  (873,394)    $(1,807,106)
                                                      -----------    -----------     -----------
Adjustments to reconcile net income
  (loss) to cash provided by (used in)
  operating activities:
    Depreciation and amortization                         718,145        728,058         733,198
    Noncash interest                                      142,139        126,581            --   
    Plant consolidation costs                              64,751           --              --
    Changes in assets and liabilities:
      Accounts receivable                                (195,679)       294,194
      Inventories                                         226,099        195,517         818,300
      Unbilled contract costs                               5,068         61,265         (43,060)
      Other current assets                                (11,532)        (8,205)        (25,340)
      Precious metals                                      31,796          4,442           4,354
      Other assets                                        (16,415)        (6,176)         (5,673)
      Accounts payable and accrued liabilities             82,951       (249,319)        (63,477)
      Advances from customers                                (355)        (5,759)       (183,449)
      Other current liabilities                               912         25,986            (550)
                                                      -----------    -----------     -----------
        Total adjustments                               1,047,880      1,166,584       1,047,730
                                                      -----------    -----------     -----------
        Net cash provided by (used in)
          operating activities                             79,002        293,190        (759,376)
                                                      -----------    -----------     -----------
Cash flows from investing activities:
    Capital expenditures                                 (166,450)      (174,110)       (262,970)
    Purchase of Certificate of Deposit                       --          (70,000)           --
    Proceeds from sale of equipment                        49,700           --              --
                                                      -----------    -----------     -----------
        Net cash used in investing activities            (116,750)      (244,110)       (262,970)
                                                      -----------    -----------     -----------
Cash flows from financing activities:
    Repayments of note payable - Bank                    (140,000)      (230,000)           --
    Borrowings of note payable - Other                       --             --           350,000
    Net borrowings of note payable - Shareowner              --             --           484,049
    Proceeds from issuance of subordinated
      convertible notes                                   125,000           --           746,215
    Net proceeds from issuance of common stock               --             --           248,016
    Proceeds from issuance of unsecured
      demand convertible note                             100,000           --              --
    Proceeds from sale of common stock warrants           100,000           --              --
    Principal payments of capital lease obligations      (228,989)      (260,065)       (257,947)
                                                      -----------    -----------     -----------
        Net cash (used in) provided by
          financing activities                            (43,989)      (490,065)      1,570,333
                                                      -----------    -----------     -----------
Net (decrease) increase in cash
  and cash equivalents                                    (81,737)      (440,985)        547,987
Cash and cash equivalents at beginning of year            119,718        560,703          12,716
                                                      -----------    -----------     -----------
Cash and cash equivalents at end of year              $    37,981    $   119,718     $   560,703
                                                      ===========    ===========     ===========
</TABLE>
  
                See Notes to Consolidated Financial Statements.


                                      F-5
<PAGE>

                                  INRAD, INC.

                 CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY

<TABLE>
<CAPTION>

                                       Common Stock         Capital in    Accumulated     Treasury
                                  Shares       Amount        excess of     deficit          stock
                                  ------       ------        par value     -------          -----
                                                             --------- 
<S>                              <C>         <C>           <C>           <C>            <C>        
Balance, December 31, 1992       1,403,840   $    14,039   $ 4,917,211   $  (563,362)   $    68,000
Common stock issued                717,731         7,177     1,050,780          --             --
Net loss for the year                 --            --            --      (1,807,106)          --
                               -----------   -----------   -----------   -----------    -----------
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
                                 =========   ===========   ===========   ===========    ===========

</TABLE>

                See Notes to Consolidated Financial Statements.


                                       F-6
<PAGE>

                                  INRAD, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES:

Nature of Operations:

INRAD is a manufacturer of crystals, crystal devices,  electro-optic and optical
components,   and  sophisticated  laser  subsystems  and  instruments.   INRAD'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 of Presentation:

The consolidated  financial  statements  include the accounts of INRAD, Inc. and
its wholly-owned subsidiaries.  Intercompany transactions and balances have been
eliminated.

Use of Estimates:

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues and expenses  during the  reporting  periods.
Actual results could differ from those estimates.

Inventory Valuation:

Inventories,  including  certain  precious metals consumed in the  manufacturing
process,  are  valued  at the  lower of cost  (determined  predominantly  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 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 remaining term of the lease.

The Company  constructs a portion of its equipment.  Internal labor and overhead
charges  capitalized in the construction of equipment  amounted to approximately
$100,000, $97,000 and $147,000 in 1995, 1994 and 1993, respectively.

Contract Research and 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.


                                      F-7
<PAGE>

Internal Research and Development Costs:

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  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 of assets and  liabilities  using enacted tax rates in
effect in the years in which the differences are expected to reverse.

Cash Flow Information:

The Company considers all highly liquid investments with original 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 1996 and the letter of credit canceled.

Capital lease  obligations of  approximately  $110,000 at December 31, 1993 were
incurred when the Company entered into leases for new equipment.

Cash interest paid during the years ended  December 31, 1995,  1994 and 1993 was
$113,447, $200,195 and $206,859, respectively.

Net Loss Per Share:

Net loss per share is  computed  using  the  weighted  average  number of common
shares  outstanding  during the year. The weighted average number of shares used
in computing net loss per share was  2,106,571,  2,106,571 and 1,420,302 for the
years ended December 31, 1995, 1994 and 1993, respectively.

The effect of common stock  equivalents  has been excluded from the  computation
because their effect is antidilutive.

NOTE 2 - LIQUIDITY AND FUNDING OF OPERATIONS:

As shown on the accompanying  financial  statements,  the Company reported a net
loss of  approximately  $969,000 for the year ended  December 31, 1995, and also
incurred  losses in 1994 and 1993.  During the past three years,  the  Company's
working capital requirements were met by cash provided by operating  activities,
and  by  borrowings  from,  and  issuance  of  common  stock  and  warrants  to,
shareowners including the principal shareowner.

The Company  continued to take steps in 1995 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.  Where  possible,  the
Company will continue to reduce expenses and cash requirements to improve future
operating results.

                                      F-8
<PAGE>

Management expects that cash flow from operations, in addition to cash generated
from asset sales in 1996,  will provide  adequate  liquidity  for the  Company's
operations in 1996. If, however,  the Company's cash flow from operations is not
maintained at satisfactory  levels, 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 - DISCONTINUANCE OF CERTAIN PRODUCTS:

During the fourth quarter of 1993, the Company  recorded an inventory  write off
of  $600,000 in  connection  with the  discontinuance  of certain  products  and
product lines within certain market segments. The Company is focusing its future
efforts in industrial,  medical and  scientific  markets which it believes offer
greater  growth  potential and improved  profit margin.  The Company  recorded a
writedown in 1993 for products not consistent with this direction.

NOTE 4 - ACCOUNTS RECEIVABLE:

Accounts receivable are comprised of the following:

                                                       December 31,       
                                                       ------------
                                                  1995            1994
                                                  ----            ----
        Accounts receivable                     $809,834        $614,155
        Reserve for bad debts                     (5,000)         (5,000)
                                                --------        --------
                                                $804,834        $609,155
                                                ========        ========
                                              
NOTE 5 - INVENTORIES:                  

Inventories are comprised of the following:

                                                       December 31,       
                                                       ------------
                                                  1995            1994
                                                  ----            ----
        Raw materials                          $  176,619      $  181,422
        Work in process, including
           manufactured parts and components    1,343,021       1,461,543
        Finished goods                            152,033         254,807
                                                ---------       ---------
                                               $1,671,673      $1,897,772
                                               ==========      ==========
 
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 1995, 1994 and 1993, the fourth quarter  operating  results
included an adjustment to decrease  operating profits by approximately  $77,000,
$190,000  and  $1,160,000   (including  a  writedown  of  $600,000  for  certain
products), respectively.



                                      F-9
<PAGE>

NOTE 6 - PLANT AND EQUIPMENT:

Plant and equipment is comprised of the following:



                                                    December 31,
                                                    ------------
                                                 1995           1994
                                                 ----           ----   
        Furniture and fixtures              $   319,539    $   313,234
        Machinery and equipment               6,633,292      7,389,265
        Leasehold improvements                  809,749        902,789
        Construction in progress                 84,617         77,836
                                            -----------    -----------
                                              7,847,197      8,683,124
        Less:  Accumulated depreciation
                  and amortization           (6,059,117)    (5,940,593)
                                            -----------    -----------
                                            $ 1,788,080    $ 2,742,531
                                            ===========    ===========

Depreciation  expense  (including  amortization of capital leases) for the years
ended  December 31, 1995,  1994 and 1993 was  $715,892,  $724,289 and  $727,119,
respectively.

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,  which  management
estimates is realizable  value.  The equipment has been  classified as a current
asset because management expects the equipment to be sold within the next year.

NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:

Accounts payable and accrued liabilities comprise the following:



                                                    December 31,
                                                    ------------
                                                   1995       1994
                                                   ----       ----
Trade accounts payable and
  accrued purchases                              $381,923   $338,837
Payroll taxes payable                              32,356     42,321
Accrued vacation                                   89,946     90,524
Accrued professional fees                         142,020    109,146
Accrued liabilities - other                        62,158     44,624
                                                 --------   --------
                                                 $708,403   $625,452
                                                 ========   ========


                                      F-10
<PAGE>

NOTE 8 - DEBT:

The Company's debt obligations as of December 31, 1995 and 1994 are as follows:

                                           December 31,
                                           ------------
                                        1995         1994
                                        ----         ----
Note Payable - Bank                 $  380,000   $  520,000
Subordinated Convertible Notes       1,080,623      846,116
Unsecured Demand Convertible Note      100,000         --
Note Payable - Shareowner              533,420      500,788
Secured Promissory Notes               250,000      250,000
                                    ----------   ----------
                                    $2,344,043   $2,116,904
                                    ==========   ==========
                                    
On August 31, 1995,  the Company signed an agreement with Chemical Bank amending
the terms of its credit facility.  The new agreement  requires monthly principal
payments  of $5,000  from  September  1995  until  December  1996,  and  monthly
principal  payments of $10,000  thereafter  until March 1998. A final payment of
$170,000  is due on April 1, 1998.  Borrowings  bear  interest at prime (8.5% at
December 31, 1995) + 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 financial  ratios tied to accounts  receivable and debt service
(as  defined).  Chemical  Bank also agreed to waive any defaults  which  existed
under the previous facility.
Borrowings  are  secured  by  accounts  receivable,   plant  and  equipment  not
previously  liened,  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 Chemical Bank in
the amount of $245,000 as collateral for the loan. Once the principal balance of
the loan is reduced  below  $245,000,  with each  principal  payment made by the
Company, a like amount may be withdrawn from the collateral deposit.

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 Company at the conversion price
of $1.00; interest is also payable in Common Stock at the same conversion price.
Although by its terms the Note is due on demand,  it cannot be repaid  until the
Chemical 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 to December 31, 1996.

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


                                      F-11
<PAGE>

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 Chemical 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, 1995 the Company was in  violation  of certain  covenants of these
notes;  subsequent to year end, the Company obtained waivers from the holders 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,  and a
promissory  note  maturing  on  December  31,  1996 in the  amount  of  $566,049
(including  $154,049 of accrued  interest),  and 494,400 shares of the Company's
common stock at $1.25 per share were issued.  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 note and an
estimated market rate. Repayment of the promissory note has been subordinated to
any outstanding  indebtedness to Chemical Bank and other secured indebtedness of
the Company. By mutual informal agreement, beginning with the quarter ended June
30,  1995,  the  Company  has  deferred   interest  payments  to  its  principal
shareowner.  The payments are expected to be resumed in 1996 and are expected to
include both the  scheduled  quarterly  payment and any deferred  payments.  The
interest  obligations  have been  accrued by the  Company  and are  included  in
accounts  payable  and  accrued  liabilities.  Interest  expense  related to the
shareowner loan was  approximately  $72,000,  $74,000 and $106,000 in 1995, 1994
and 1993, respectively. Although by its terms the indebtedness to the shareowner
is due on December  31, 1996,  it cannot be repaid until the Chemical  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 December 31, 1996.

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.

Annual maturities of bank and other debt obligations, including noncash interest
on subordinated notes, are as follows:



        1996                            $    60,000
        1997                              1,036,049
        1998                                200,000
        1999                                     --
        2000                              1,254,346
                                          ---------
                                         $2,550,395
                                         ==========

                                      F-12
<PAGE>

NOTE 9 - INCOME TAXES:

A reconciliation  of the income tax (benefit)  computed at the statutory federal
income tax rate to the reported amount follows:

                                                   Year ended December 31,
                                                   -----------------------
                                             1995           1994         1993
                                             ----           ----         ----
Federal statutory rate                           34%           34%           34%
Tax (benefit) at federal statutory rates  $(329,419)    $(296,954)    $(614,416)
Loss in excess of available benefit         311,995       283,155       596,056
Other, net                                   17,424        13,799        18,360
                                          ---------     ---------     ---------
                                          $   --        $  --         $   --
                                          =========     =========     ========= 

At  December  31,  1995 the Company had net  operating  loss  carryforwards  for
financial statement and tax purposes of approximately  $5,319,000 and 5,697,000,
respectively. The tax loss carryforward expires at various dates through 2010.

Deferred tax assets (liabilities) comprise the following:

                                        December 31,   December 31,
                                            1995          1994
                                            ----          ----
 Deferred tax assets
    Inventory capitalization adjustment    60,000         73,000
    Inventory reserves                     10,000          4,000
    Vacation liabilities                   62,000         62,000
    Other                                  12,000           --
    Loss carryforwards                  2,279,000      2,046,000
                                      -----------    -----------
 Gross deferred tax assets              2,423,000      2,185,000
                                      -----------    -----------
 Deferred tax liabilities
    Depreciation                      $  (242,000)   $  (375,000)
                                      -----------    -----------
    Gross deferred tax liabilities    $  (242,000)   $  (375,000)
                                      -----------    -----------
                                        2,181,000      1,810,000
    Valuation allowance                (2,181,000)    (1,810,000)
                                      -----------    -----------
    Net deferred tax assets           $         0    $         0
                                      ===========    ===========

NOTE 10 - LEASE COMMITMENTS:

The Company  leases its office and  manufacturing  facility  under an  operating
lease which expires in 1996. The lease provides for additional  rental  payments
based upon a pro rata share of real estate taxes and certain other  expenses and
has renewal  options for two  five-year  periods.  The lease also  provides  for
inflationary  increases  based on changes in the consumer  price  index.  Rental
expense  was   $298,000,   $309,000  and  $342,000  in  1995,   1994  and  1993,
respectively.


                                      F-13
<PAGE>

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,
                                                    ------------
                                                 1995          1994
                                                 ----          ----
        Equipment under capital lease       $1,367,554      $1,367,554
        Less: Accumulated amortization        (916,644)       (717,200)
                                             ---------       --------- 
                                            $  450,910      $  650,354
                                            ==========      ==========

Future minimum lease payments at December 31, 1995 are payable as follows:

                                                 Capital      Operating    
                                                 Leases        Leases
                                                --------      --------          
1996                                            $198,111      $204,590
1997                                              87,174          --
1998                                               4,824          --
                                                --------      --------
Total minimum lease payments                     290,109      $204,590
                                                              ========
                                               
Less: Amount representing                      
  interest                                       (24,267)
                                               ---------         
                                                                 
Present value of minimum capital lease                           
 payments (including $190,754 classified
 as current obligations under
 capital leases)                               $ 265,842
                                               =========

The  operating  lease  payments  are  net  of  sublease  payments  to  INRAD  of
approximately $48,000.

NOTE 11 - EXPORT SALES AND SALES TO MAJOR CUSTOMERS:

Export  sales,  primarily to customers in Europe,  Asia and Canada,  amounted to
19%, 24% and 26% of net product sales in 1995, 1994, and 1993, respectively.

Sales to one foreign  customer were 12% and 16% of net product sales in 1994 and
1993,  respectively.  No  foreign  customer  accounted  for more than 10% of net
product sales in 1995.  Additionally,  three U.S.  customers  each accounted for
more  than  10% of net  product  sales  in 1995,  and two  U.S.  customers  each


                                      F-14
<PAGE>

accounted  for more  than 10% of net  product  sales in 1994.  No U.S.  customer
accounted for more than 10% of net product sales in 1993.

NOTE 12 - 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 2,106,571  common shares  outstanding  at
December 31, 1995 and 1994. There were no preferred shares issued or outstanding
in either year.  The Company has reserved  1,756,089  shares of common stock for
issurance  upon  conversion  of  the  Subordinated  Convertible  Notes,  Secured
Promissory  Notes  and  Unsecured  Demand  Convertible  Note  (Note  8) and upon
exercise of outstanding warrants and options (Notes 8 and 13).

NOTE 13 - EMPLOYEE BENEFIT PLANS:

During  1990 the Company  adopted the Key  Employee  Compensation  Program  (the
"Program").  In 1995, the Board of Directors,  subject to shareowner approval at
the next annual  shareowner's  meeting,  increased the maximum  number of shares
which may be awarded  under the program  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.  All options were
granted at the market value at the date of grant.  To date,  none of the options
have been exercised.  The following table  summarizes the activity for the three
years ended December 31, 1995:

                                                                     Option
                                                     Shares           Price
----------------------------------------------------------------------------
Balance at December 31, 1992                         50,500           $1.25
-----------------------------------------------------------------------------
Granted                                                --              --
Canceled                                             (7,500)          $1.25
-----------------------------------------------------------------------------
Balance at December 31, 1993                         43,000           $1.25
-----------------------------------------------------------------------------
Granted                                              34,000           $1.25
Canceled                                            (16,000)          $1.25
-----------------------------------------------------------------------------
Balance at December 31, 1994                         61,000           $1.25
-----------------------------------------------------------------------------
Granted                                              77,000           $1.00
Canceled                                            (11,000)          $1.25
-----------------------------------------------------------------------------
Balance at December 31, 1995                        127,000    $1.00--$1.25
=============================================================================

The Company  maintains a 401(k) savings plan for all eligible (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


                                      F-15
<PAGE>

match employee contributions.  The Company did not contribute any amounts to the
401(k) plan during 1995, 1994 or 1993.

In October  1995,  the FASB  issued SFAS No. 123,  "Accounting  for  Stock-Based
Compensation,"  which establishes  financial  accounting and reporting standards
for stock-based employee compensation plans. The statement defines a fair market
value based method of accounting  for employee  stock options and similar equity
instruments and encourages the use of that method of accounting for all employee
stock compensation plans.  However, SFAS No. 123 also permits the measurement of
compensation  costs  using  the  intrinsic  value  based  method  of  accounting
prescribed by Accounting  Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to  Employees."  If the Company  elects to account for its employee
stock  compensation  plans under the guidance  prescribed by APB Opinion No. 25,
the Company  will be required  to make pro forma  disclosures  of net income and
earnings  per share as if the fair value based method of  accounting  defined in
SFAS No. 123 had been applied. The accounting  requirements of this new standard
are  effective  for  transactions  entered into in fiscal years that begin after
December  15,  1995.  The Company has not made a decision as to which  method it
will utilize.

NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amount at December 31, 1995 of the Company's  short-term  financial
instruments  approximates  fair  value  because of the short  maturity  of those
instruments.  The fair  value of the  Company's  debt  could  not be  determined
without incurring excessive costs.


                                      F-16
<PAGE>

                                  INRAD, INC.

Schedule II - Valuation and qualifying accounts and Reserves

<TABLE>
<CAPTION>

                                 Balance at      -----------  Additions  ------------
                                beginning of    Charged to costs    Charged to                      Balance at
                                  period         and expenses     other accounts    Deductions    end of period
                                -------------------------------------------------------------------------------

Valuation Allowance on
Net Deferred Tax Assets:
<S>                             <C>                  <C>           <C>                  <C>         <C>      
        Year ended
        December 31, 1995       1,810,000            --            371,000 (1)         --           2,181,000

        Year ended 
        December 31, 1994       1,477,000            --            333,000 (1)         --           1,810,000

        Year ended
        December 31, 1993         661,000            --            816,000 (1)         --           1,477,000

</TABLE>




(1)  Change in net deferred tax assets.







                                      F-17