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

For the fiscal year ended      December 31, 1998
                          ------------------------------------
                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from..................to .............................

Commission file number              0-11668
                       -----------------------------------------------------

                                  INRAD, Inc.
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             (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
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(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 11, 1998 was approximately
$103,000.

        Common shares of stock outstanding as of March 11, 1999:

                               4,096,078 shares
                               ----------------

<PAGE>

                                INRAD, INC.

                                   INDEX
                                                              Page
                                                              ----

Part I

  Item 1.         Business......................................1

  Item 2.         Properties....................................6

  Item 3.         Legal Proceedings.............................6

  Item 4.         Submission of Matters to a Vote
                  of Security Holders...........................6

Part II

  Item 5.         Market for Registrant's Common Equity
                  and Related Stockholder Matters...............7

  Item 6.         Selected Financial Data.......................8

  Item 7.         Management's Discussion and Analysis
                  of Financial Condition and Results of
                  Operations....................................8

  Item 7A.        Quantitative and qualitative discussion
                  about market ................................14

  Item 8.         Financial Statements
                  and Supplementary Data.......................14

  Item 9.         Changes In and Disagreements
                  With Accountants On Accounting
                  and Financial Disclosure.....................14

Part III

  Item 10.        Directors and Executive Officers
                  of the Registrant............................15

  Item 11.        Executive Compensation.......................16

  Item 12.        Security Ownership of Certain
                  Beneficial Owners and Management.............16

  Item 13.        Certain Relationships
                  and Related Transactions.....................18

Part IV

  Item 14.        Exhibits, Financial Statement
                  Schedules, and Reports on Form 8-K...........19

Signatures.....................................................22

Note:  Page F-1 follows Page 22.


                                       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, measuring 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 drivers 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:

                                      Year Ended December 31,
                                      -----------------------

                               1998               1997               1996
                          ------------------------------------------------------
Category                       Sales    %         Sales    %         Sales    %
--------                       -----    -         -----    -         -----    -
                                 $                  $                  $

Crystals &
 Crystal Components       $3,372,802   63     $3,934,178  73     $3,563,983   62

Systems &
 Instruments               1,201,472   23      1,048,877  19      1,677,092   29

Contract Research &
 Development                 776,594   14        436,374   8        489,930    9
                             -------             -------            -------

TOTAL                     $5,350,868  100     $5,419,429 100     $5,731,005  100
                          ==========  ===     ========== ===     ==========  ===


                                       1
<PAGE>

      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
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 major laser manufacturers.

      In 1994, the Company introduced a new harmonic generator for use with
ultrafast lasers having pulsewidths in the femtosecond and picosecond ranges.
This product is sold on an OEM basis to the world's largest manufacturer of
ultrafast lasers.

      The Company has developed and produces a line of Autocorrelators which can
measure extremely short laser pulses. Accurate measurement of pulsewidth is
important in studies of chemical and biological reactions, as well as in the
development of high speed electronics, ultrafast lasers and laser diodes for


                                       2
<PAGE>

communications. The Model 5-14LD Autocorrelator is capable of measuring laser
pulsewidths from 50 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.

      The Company's coating facility produces a wide variety of sophisticated
coatings on many different substrates for use in its own products, as well as
for customers who purchase coated optics manufactured by the Company to their
specifications.

Research and Development

      The Company's research and development activities currently focus on
developing new proprietary products as well as new end uses for its existing
products. The Company is primarily engaged in research on crystal growth,
harmonic generation, and electro-optics. This combination allows the Company to
introduce new products based on crystals developed within the Company. A staff
of eleven scientists and engineers, including seven 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,
1998, 1997, and 1996 were $159,245 (3.4% of net product sales), $114,021 (2.2%
of net product sales), and $170,750 (3.3% of net product sales).

      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
which have promise for the development of new commercial products for 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
ten U.S. patents, and has filed additional applications. The Company is seeking
strategic partners to commercialize some of the technologies developed from
these programs.

      During 1998, 1997 and 1996, the Company was awarded funded R&D programs
totaling approximately $1,323,000, $945,000 and $152,000, respectively. The
programs range in duration from six to twenty-four months. All programs are


                                       3
<PAGE>

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 $776,594, $436,374
and $489,930 during the years ended December 31, 1998, 1997, and 1996,
respectively. The Company expects to continue seeking new government-sponsored
programs, as well as joint programs with certain of its customers, in technical
areas related to its core business.

Markets

      In 1998, 1997 and 1996 the Company's domestic product sales were made to
end users in the following market areas:

         Market                         1998            1997        1996
         ------                         ----            ----        ----

         Industrial                       79%            77%         66%
         Universities                     10%             9%         13%
         National Laboratories             3%             4%          8%
         Government                        8%            10%         13%
                                           --            ---         ---

         Total Domestic                  100%           100%        100%
                                         ====           ====        ====

      The Company does not have similar information about the end use of
products sold abroad. Export sales primarily to customers in Canada, Europe,
Near East and the Pacific Rim, amounted to 21% of total product sales in 1998,
16% in both 1997 and 1996. No foreign customer accounted for over 10% of net
product sales in 1998, 1997 or 1996. One U.S. customer accounted for 13%, 14%
and 12% of net product sales in 1998, 1997 and 1996, respectively. One other
U.S. customer accounted for 11% of net product sales in 1996.

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, Near East and the
Pacific Rim.

      The current sales staff consists of three degreed professionals plus
support personnel. The Company plans to increase its sales and marketing program
in 1999, which includes advertising, trade show participation, development of
additional marketing materials, and greatly increased contact with existing and
potential customers. In addition the Company intends to increase its sales
staff.

Backlog

      The Company's order backlog as of December 31, 1998 included approximately
$1,426,000 of product orders and $1,110,000 of contract R&D, most of which is
scheduled to be completed in 1999. On December 31, 1997, the backlog included
$1,862,000 of product orders and $573,000 of contract R&D.


                                       4
<PAGE>

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

Employees

      As of December 31, 1998, the Company had 57 full-time employees. The
Company provides health, dental, disability and life insurance, a 401(k) plan,
sick leave and paid holidays and vacations to its employees and has paid
year-end bonuses to employees in certain years. None of its employees are
covered by a collective bargaining agreement. The Company believes that its
relations with its employees are good.

Patents and Licenses

      The Company holds United States patents for: a chemical process involving
the use of zeolites for regioselective photochlorination; a composite membrane
for the photochemical degradation of organic contaminants in ground water; a
chemical process for selective functionalization of fullerenes; a unique
chemical reactor; and zeolite membranes able to effect separations at high
temperatures. The Company is seeking strategic partners to commercialize,
license or sell these patented technologies.

      The company was awarded a U.S. patent for a Thermal Conductivity Meter
(t-Master) that the company has begun to market, principally to the
semiconductor industry. The t-Master, which is useful for the measurement of the
thermal conductivity of thin films, was recognized by a 1997 R&D 100 award as
one of the year's 100 most technologically significant products and processes.

      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.

      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.


                                       5
<PAGE>

Item 2. Properties.

      The Company occupies approximately 31,000 square feet of space located at
181 Legrand Avenue, Northvale, New Jersey pursuant to a net lease expiring on
October 31, 2001. The Company has an option to renew the lease for one
additional term of five years. The 1998 annual rent was approximately $196,000.
The Company also paid real estate taxes and insurance premiums which aggregated
approximately $42,000 during 1998.

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.


                                       6
<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 Bid prices for the Common
Stock in each fiscal quarter from the quarter ended March 31, 1997, through the
quarter ended December 31, 1998 as reported by the National Association of
Securities Dealers NASDAQ System:

                                                                   Bid Price
                                                                   ---------
                                                              High         Low
                                                              ----         ---

      Quarter ended March 31, 1998............................7/16       13/32

      Quarter ended June 30, 1998..............................1/2         3/8

      Quarter ended September 30, 1998.........................3/8        5/16

      Quarter ended December 31, 1998.........................5/16        5/16

      Quarter ended March 31, 1997............................9/32        9/32

      Quarter ended June 30, 1997.............................9/32        9/32

      Quarter ended September 30, 1997........................9/32        9/32

      Quarter ended December 31, 1997........................17/32        9/32

Such Over the Counter quotations reflect inter-dealer prices, without retail
markup, markdown or commissions and may not necessarily reflect actual
transactions.

      (b) Holders.

      As of February 12, 1999, there were 193 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, 1998, 1997 or 1996. Payment of dividends will be at the
discretion of the Company's Board of Directors and will depend, among other
factors, upon the earnings, capital requirements, operations and financial
condition of the Company. The Company's loan agreement with its bank currently
prohibits it from paying dividends. The Company does not anticipate paying cash
dividends in the immediate future.

      (d) Recent Sales of Unregistered Securities.

      On December 1998, the Company issued a total of 1,979,107 unregistered
shares of its common stock as payment on certain notes totaling $1,800,000 and
accrued interest totaling $442,000 to its president and another shareowner note
holder. This transaction is exempt from registration as an exempt private
placement pursuant to section 4(2) of the Securities Act.

      In May 1998, the Company issued a total of 7,700 shares of its common
stock to its employees. This transaction is exempt from registration as either
not involving a sale or as an exempt private placement pursuant to section 4(2)
of the Securities Act.


                                       7
<PAGE>

      In January 1996, the Company issued a total of 2,700 shares of its common
stock to its employees. The issuance was exempt from registration as either not
involving a sale or as an exempt private placement pursuant to Section 4(2) of
the Securities Act.

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,

                    1998         1997         1996          1995         1994
                    ----         ----         ----          ----         ----
                      $            $            $             $            $

Revenues          5,350,868    5,419,429    5,731,005   5,432,038     5,995,919

Net Loss           (631,768)    (572,121)    (373,774)   (968,878)     (873,394)

Net Loss per
  Common Share     (0.30)       (0.27)       (0.18)       (0.46)       (0.41)

Dividends
  Paid              None         None         None         None         None

Total
  Assets          3,538,157    4,093,459    4,715,205   5,296,044     6,083,264

Long-Term
  Obligations       350,000    2,257,153    2,351,561   2,359,131       934,420

Shareholders'
  Equity          2,473,372      862,572    1,434,693   1,808,467     2,677,345

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

      The following information contains forward-looking statements, including,
statements with respect to the revenues to be realized from existing backlog
orders and ability to generate sufficient cash flow in the future. The Company
wishes to insure that any forward-looking statements are accompanied by
meaningful cautionary statements in order to comply with the terms of the safe
harbor provided by the Private Securities Reform Act of 1995. Actual results may
vary materially from these forward-looking statements due to the following
factors: inability to maintain customer relationships and/or add new customers;
failure to consummate the sale of $500,000 of preferred stock or arrange
alternative financing; unforeseen overhead expenses that may adversely affect
financial results or other inability's to operate with a positive cash flow.
Readers are further cautioned that the Company's financial results can vary from
quarter to quarter, and the financial results for any period may not necessarily
be indicative of future results. The foregoing is not intended to be an
exhaustive list of all factors which could cause actual results to differ
materially from those expressed in forward-looking statements made by the
Company.

      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.


                                       8
<PAGE>

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,
                                                     -----------------------
                                                1998         1997          1996
                                                ----         ----          ----
                                                  %           %            %

Revenues:
    Net product sales                           85.5         91.9          91.5
    Contract research and development           14.5          8.1           8.5
                                                ----         ----          ----
                                               100.0        100.0         100.0
    Interest and other income                    0.2          0.2           0.3
                                               -----        -----         -----
                                               100.2        100.2         100.3
===============================================================================
Costs and expenses:
    Cost of goods sold*                         74.3         77.6          74.8
    Plant consolidation costs                     --           --            --
    Contract research and
      development*                             106.7        100.3         102.5
    Selling, general and
      administrative expenses                   25.5         24.5          21.7
    Internal research and
       development**                             3.5          2.2           3.3
    Interest expense                             4.6          4.7           4.9
===============================================================================
Net loss                                       (11.8)       (10.6)         (6.5)

*     calculated as a percentage of their respective revenues
**    calculated as a percentage of net product sales

Net Product Sales

      Net product sales were $4,574,274, $4,983,055 and $5,241,075, in 1998,
1997 and 1996, respectively. Product sales in 1998 were 8% less than 1997 due to
bookings being less in 1998 as compared to the same period of 1997. Product
sales in 1997 were 5% less than 1996, also due to less bookings.

      International sales, as a percentage of total product sales, were 21%, 16%
and 16 for 1998, 1997, and 1996, respectively.

      The Company's backlog of product orders as of December 31, 1998 was
approximately $1,426,000, compared to approximately $1,862,000 at December 31,
1997.

Cost of Goods Sold

      As a percentage of net product sales, cost of goods sold was 74.3%, 77.6%
and 74.8% for the years ended December 31, 1998, 1997 and 1996, respectively. In
1998, the cost of goods sold percentage decreased from 1997 due to increased
allocations of overhead to contract research and research and development
expenses and due to lower depreciation expenses in 1998. The increase in the
cost of goods sold percentage from 1996 to 1997 is attributable to lower sales
compared to relatively fixed costs such as wages, depreciation and rent.


                                       9
<PAGE>

      Prices for raw materials and purchased components have been relatively
stable in 1998, 1997 and 1996, while labor costs rose in all years.

Contract Research and Development

      Contract research and development revenues were $776,594, $436,374 and
$489,930 for the years ended December 31, 1998, 1997 and 1996, respectively.
Related contract R&D expenditures, including allocated indirect costs, were
$828,850, $437,623 and $502,367. Revenues increased in 1998 over 1997 due to a
larger opening backlog and increased bookings in 1998. Revenues decreased from
1996 to 1997 based on the Company's policy to focus its funded research efforts
on programs closely aligned with its core business, and due to the low opening
backlog. The programs are typically fixed price contracts and provide for
recovery of direct costs and an allocation of indirect manufacturing costs and,
depending on their terms, recovery of general and administrative costs.

      The Company intends to continue focusing its future funded research
efforts on programs closely aligned with its core business.

Selling, General and Administrative Expenses

      Selling, general and administrative expenses in 1998 increased $33,436, or
2.5% compared to 1997, and in 1997 increased $83,844 or 6.7% compared to 1996.
In 1998, selling, general and administration expenses increased due to increases
in salaries and additional recruiting expenses. In 1997, selling salaries,
travel and advertising increased and the Company allocated a lower amount to
contracts; these increases in costs were partially offset by lower commissions.
Subject to availability of resources, the Company expects to increase certain
selling costs in 1999, including additional sales staff.

Internal Research and Development Expenses

      Company-funded research expenditures during the years ended December 31,
1998, 1997, and 1996 were $159,245 (3.5% of net product sales), $114,021 (2.2%
of net product sales), and $170,750 (3.3% of net product sales). During 1998,
the Company continued to focus its internal research and development efforts on
a few new products with short development cycles. As a result, R&D expenditures
increased slightly in 1998 and decreased in 1997. This level is expected to
continue in 1999.

Income taxes

      The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Deferred tax liabilities and
assets are determined based on the difference between the financial statement
carrying amounts and the tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
At December 31, 1998, the Company had a net deferred tax asset of $2,751,000,
the primary component of which was its significant net operating loss
carryforward. The Company has established a valuation allowance to fully offset
this deferred tax asset in the event that operating losses continue and make it
uncertain that the tax asset will be realized.

Year 2000 Issue

      The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any computer
programs and hardware as well as software products and certain equipment and
machinery that are date sensitive may recognize a date using "00" as the Year


                                       10
<PAGE>

1900 rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities for both the Company and its customers who rely on its
products.

      The Company has divided the Year 2000 issue into two main areas: internal
information technology ("IT") and non-IT systems, including embedded technology
such as microprocessors; and external agents including critical suppliers,
customers and other third parties the Company utilizes for various processing
functions.

      The Company is evaluating new IT software systems to replace its non Y2K
compliant system. In the event we do not find a system that meets our
requirements, an upgrade that is Y2K compliant is available for our current
system. To date, based upon reviewing hardware, it has been determined that a
small amount of older computer equipment must be replaced, but the type and
amount are not significant and will be replaced in the ordinary course as
systems are upgraded. Financing has been arranged with a leasing company for the
Company to lease hardware and software.

      The Company is in the process of assessing its Year 2000 exposure as it
pertains to non-IT systems, including manufacturing, research and development
and key relationships, such as vendors and customers. This includes the process
of identifying and prioritizing critical suppliers and customers and
communicating with them about their plans and progress in addressing the Year
2000 problem. The Company also utilizes third-party vendors for processing data
and payments, e.g. payroll services, 401 (k) plan administration, check
processing, medical benefits processing, etc. The Company has initiated
communications with these vendors to determine the status of their systems.
Should these vendors not be compliant in a timely manner, the Company may be
required to process transactions manually or delay processing until such time as
the vendors are Year 2000 compliant. The review of non-IT systems and key third
party relationships is expected to be completed by the end of the second quarter
of 1999. At this time the cost to be Y2K compliant cannot be estimated.

      The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.

      The future costs of the Company's Year 2000 efforts are expected to be
funded through future operating cash flows and the financing of hardware and
software. The requirements for the correction of Year 2000 issues and the date
on which the Company believes it will complete the Year 2000 modifications are
based on management's current best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources, third-party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
may cause such material differences include, but are not limited to, the
availability of personnel trained in this area, the ability to locate and
collect all relevant computer data and similar uncertainties.

      No contingency plans have been developed to date. Contingency plans will


                                       11
<PAGE>

be prepared so that the Company's critical business processes can be expected to
continue to function on January 1,2000 and beyond. The Company's contingency
plans will be structured to address both remediation of systems and their
components and overall business operating risk. These plans are intended to
mitigate both internal risks as well as potential risks in the supply chain of
the Company's suppliers and customers.

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 February 6, 1997, the Company signed an agreement with Chase Manhattan
Bank (successor to Chemical Bank) amending the terms of its credit facility. The
new agreement requires monthly principal payments of $10,000 for January 1997,
and $ 7,500 from February 1997 until December 1997, monthly principal payments
of $10,000 from January 1998 until December 1998, and monthly principal payments
of $ 12,500 from January 1999 until August 1999. A final payment of $7,500 is
due on September 1, 1999. Borrowings bear interest at prime (7.75% at December
31, 1998) + 2 1/4%. The agreement also amended the financial covenants contained
in the original agreement. The Company continues to be required to maintain
compliance with affirmative and negative covenants, including limitations on
capital expenditures, dividends and new indebtedness, and compliance with a
financial ratio tied to accounts receivable. Borrowings are secured by accounts
receivable and the personal guarantee of the Company's principal shareowner.

      In connection with the new agreement, a shareowner and Subordinated
Convertible Note holder agreed to maintain a certificate of deposit with Chase
Manhattan Bank in the amount of $245,000 as collateral for the loan. Once the
principal balance of the loan is reduced below $222,700, with each principal
payment made by the Company, an amount may be withdrawn from the collateral
deposit to maintain a 1.1 to 1 collateral to loan ratio. On December 31, 1998
the certificate of deposit was in the amount of $140,250.

      In December 1998, the Company entered into a number of transactions to
improve its balance sheet and in effect increase its shareowner equity. These
transactions converted $1,800,799 of notes payable and $441,789 of accrued
interest into 1,979,107 shares of its common stock. The notes converted into
equity are as follows:

      In April 1995, the Company received $225,000 from a shareowner and
      Subordinated Convertible Note holder of the Company through the issuance
      of a $125,000 8% Subordinated Convertible Note 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. In connection with this transaction, the Company
      issued 50,000 warrants to purchase Common Stock at $0.6875 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. Both of these notes along with their accrued interest
      were converted into a total of 299,194 shares of common stock at the note
      conversion price of $1.00 per share on December 31, 1998.

      In 1993, the Company raised $1,000,000 in cash from a private investment


                                       12
<PAGE>

      group through the issuance of a $746,215 10% Subordinated Convertible Note
      due December 15, 2000 (the "note") 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. On December 31, 1998 this note along with its
      accrued interest was converted into 960,000 shares of the Company's common
      stock.

      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. This
      note along with its accrued interest was converted into 684,921 shares of
      the Company's common stock on December 31, 1998. Interest expense related
      to the shareowner loan was approximately $57,000, $57,000 and $72,000 in
      1998, 1997 and 1996, respectively.

      As a result of the forgoing the Company expects interest expense for 1999
      to be significantly less then it was in 1998.

      During September 1993, the Company borrowed $100,000 in the form of a
promissory note from a shareowner of the Company. On December 16, 1993, this
promissory note was extinguished and a $74,621 10% subordinated convertible note
and 20,303 shares of the Company's common stock at $1.25 per share were issued.
The note is convertible at any time up to the maturity date into shares of the
Company's common stock at $1.25 per share (to be adjusted for dividends, stock
splits, etc.).

      The entire amount of the Subordinated Convertible Note may be redeemed by
the Company after December 15, 1998; they are subordinated to any outstanding
indebtedness to Chase Manhattan Bank and other secured indebtedness of the
Company. This note also contains certain covenants and restrictions, including
financial ratios tied to accounts receivable and debt service (as defined).
Interest is payable semiannually on this note, and the first six interest
payments are payable in the form of additional notes. At December 31, 1998 and
1997 the Company was not in violation of the covenants of this note. At December
31, 1996 the Company was in violation of certain covenants of this note;
subsequent to the year end, the Company obtained a waiver from the holder of the
note and modified the financial covenants in the debt agreements.

      The Company's Secured Promissory Note bears interest at 7%, is secured by
certain of the Company's precious metals, and is convertible at any time into
200,000 shares of common stock. The Note also contains 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 was July 8, 1997. However, the noteholder has agreed not to
demand payment prior to January 1, 2000, therefore the note has been classified
as noncurrent in the accompanying balance sheet.

      In March 1999, a shareowner and debtholder of the Company has agreed to
purchase 500 shares of 10% convertible preferred stock at the price of $1,000
per share. Two hundred shares will be purchased for $200,000 in March 1999 and
the remaining three hundred shares will be purchased in June 1999 for $300,000.
Dividends are payable in common stock at the rate of $1.00 per share.


                                       13
<PAGE>

      Because of the circumstances described below 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, 1998, 1997 and 1996 were $ 95,000, $86,000 and
$238,000, respectively. Until the Company is generating satisfactory amounts of
cash flow from its operations, it is expected that future capital expenditures
will be kept to a minimum. Management believes that in the short term, this
limitation will not have a material effect on operations.

Overview of Financial Condition

      As shown in the accompanying financial statements, the Company reported a
net loss of approximately $632,000 for the year ended December 31, 1998, and
also incurred losses in 1997 and 1996. During the past three years, the
Company's working capital requirements were met in part on the basis of issuance
of common stock to shareowners including the principal shareowner and the sale
of certain non-operating assets.

      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 and the sale of $500,000 of preferred
stock will provide adequate liquidity for the Company's operations in 1999. The
Company plans to hire additional manufacturing management and sales personnel,
and to purchase fixed assets, in order to improve operations; however a loss is
anticipated in 1999. 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.

      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
also described in Note 2 in the accompanying financial statements.

Item 7A. Quantitative and qualitative discussion about market risk.

      Not applicable

Item 8. Financial Statements and Supplementary Data.

      The Company's consolidated financial statements are set forth on pages F-1
through F-15. Page F-1 follows page 23.

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

      Not applicable.


                                       14
<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
  79                                         Directors, Chief Technology Officer
                                             1999, President and Chief
                                             Executive Officer (1973-1999)

Charles Lucy,               1998         President and Chief Executive Officer
  73                                         (1999), Management Consultant
                                             (1989 - 1996)
                                             Vice-President Telecommunications
                                             Group Corning, Inc.
                                             (1977 - 1988)

Thomas Lenagh,              1998         Management Consultant (1990 - Present);
  72

Frank Wiedeman,             1998         Executive Director (1980 - Present)
  84                                         American Capital Management Inc.

      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
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. Thomas Lenagh and Frank Wiedeman have been
selected by Clarex as their representatives.

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, 79             1973         Chairman of the Board of
                                             Directors, Chief Technology Officer
                                             1999, President and Chief


                                       15
<PAGE>

                                             Executive Officer (1973-1999)

Charles Lucy, 73            1999         President and Chief Executive Officer
                                             (1999), Management Consultant
                                             (1989 - 1996)
                                             Vice-President Telecommunications
                                             Group Corning, Inc.
                                             (1977 - 1988)

Maria Murray, 41            1995             Vice President - Marketing
                                             and Sales

James Greco, 42             1996             Chief Financial Officer and
                                             Secretary

Ilya Zwieback, 50           1998             Vice President - Crystal Growth

      Warren Ruderman has served as President and Chairman of the Board of
Directors of the Company since he founded it in 1973. In March of 1999 Dr.
Ruderman assumed the title of Chief Technology Officer and will continue to be
Chairman of the Board. 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.

      Charles Lucy joined the Company in March of 1999 as President and Chief
Executive Officer. Prior to joining the Company, Mr. Lucy was a management
consultant from 1989 to 1996. From 1952 to 1988 Mr. Lucy was employed by
Corning, Inc., and the last 9 years as Vice President and Director of
International Operations.

      Maria Murray joined the Company in January 1989 as a Sales Engineer,
became Vice President of R&D Programs in 1993, and was appointed Vice President,
Marketing and Sales in 1995. Prior to joining INRAD, she held positions in
electronic 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.

      James Greco joined the Company as Secretary and Controller in July 1996
and was appointed Chief Financial Officer in 1998. Prior to joining INRAD, he
held positions as Controller of Divisions within National Cleaning Contractors
from 1989-1996. He received a B.B.A. from Pace University and is a certified
public accountant.

      Ilya Zwieback joined the Company in 1992 as Senior Research Scientist and
left the Company in 1996 to join Lockheed Sanders as Senior Physicist. In 1997
Dr. Zwieback rejoined the Company as Manager of Crystal Growth and in 1998 was
appointed Vice President, Crystal Growth. Dr. Zwieback holds a Doctorate of
Physics in semiconductors from Moscow Institute of Steel and Alloys.

      Charles Lucy has an employment contract which calls for an annual salary
of $120,000, after six months of service the contract can be cancelled by either


                                       16
<PAGE>

party with 30 days notice. 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, 1998,
1997 and 1996, 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,        1998     $130,000          none                none               none
President and Chief                                                                
Executive Officer                                                                      
                        1997     $130,000          none                none               none
                                                                                       
                        1996     $130,000          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.

Compensation of Directors

Each non-employee director is paid $500 for each board meeting they attend, and
$250 for each conference call meeting in which they participate.

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, 1999. The Company
has been advised that all individuals listed have the sole power to vote and
dispose of the number of shares set opposite their names in the table.

                                                                   Percent of
Name and Address                      Number of shares            Common Stock
--------------------------------------------------------------------------------
Warren Ruderman                           1,791,946                     43.7
c/o INRAD, Inc.
181 Legrand Avenue
Northvale, NJ  07647

Clarex, Ltd.                              2,187,214 (1)                 46.9
c/o Bank of Nova Scotia
  Trust Company Bahamas Ltd.
PO Box N1355
Nassau, Bahamas


                                       17
<PAGE>

Hoechst Celanese Corp.                      300,000                      7.3
Routes 202-206 North
Box 2500
Somerville, NJ  08876

William F. Nicklin                          210,527 (2)                  5.0
33 Grand Avenue
Newburgh, NY  12550

Frank Wiedeman                               51,500 (3)                  1.2
c/o INRAD, Inc.

Directors and Executive                   1,883,146 (4)                 45.0
  Officers as a group
  (7 persons)

      (1)   Including 570,000 shares subject to options, warrants or convertible
            notes exercisable or convertible within 60 days.

      (2)   Including 80,000 shares subject to convertible notes convertible
            within 60 days.

      (3)   Including 50,000 shares subject to options exercisable within 60
            days.

      (4)   Including 89,250 shares subject to options or warrants within 60
            days.

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 $57,000,
$57,000 and $72,000 in 1998, 1997 and 1996, respectively. On December 31, 1998
this note along with its accrued interest was converted into 684,921 shares of
the Company's Common Stock.

      During the years ended December 31, 1998, 1997 and 1996 approximately 4%,
4%, and 8%, respectively of the Company's net product sales were through a
foreign agent, in which the principal shareholder has an investment. Terms of
sales to this foreign agent were substantially the same as to unrelated foreign
agents.

      On December 31, 1998, a shareowner and debtholder converted $1,234,730 of
notes and $322,917 of accrued interest into 1,294,186 shares of the Company's
Common Stock.


                                       18
<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:

7           The following exhibits are incorporated by reference to exhibits in
            the Company's Registration Statement or amendments thereto on Form
            S-18 (Registration No. 2-83689), initially filed with the Securities
            and Exchange Commission on May 11, 1983:

                                                         Exhibit No.
Present                                                  in Registration
Exhibit                                                  Statement or
No.            Description of Exhibit                    or Amendments
---            ----------------------                    -------------

3.1            Restated Certificate of                   3.1 of Amendment
               Incorporation, as amended.                No. 1.

3.2            By-laws, as amended.                      3.2 of Amendment
                                                         No. 1.

10.4           License agreement, dated September        10.11 of Amendment
               1981, between the Company and             No. 1.
               Lambda Physik.

10.5           Key-Man Insurance Policy on the           10.12 of Amendment
               life of Warren Ruderman.                  No. 2.

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

10.6           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 Company's proxy
statement filed with the Securities and Exchange Commission related to the
annual meeting held on June 20, 1996:

10.8           INRAD, Inc. Key Employee Compensation Plan.

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 Chase Manhattan Bank Regarding Line of
               Credit.

The following exhibit is incorporated by reference to the Report to the


                                       19
<PAGE>

Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1993:

10.11          Stock and Note Purchase Agreement with exhibits.

The following exhibit is incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-Q for the quarter ended March 31,
1995:

10.12          Amended and Restated Chase Manhattan Bank Agreement.

The following exhibits are incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1995:

10.13          Amendment and Waiver Agreement between INRAD and Chase Manhattan
               Bank dated August 31, 1995.

10.14          Subordinated Convertible Note dated April 9, 1995
               between Clarex Limited and INRAD, Inc.

10.15          Unsecured Demand Convertible Promissory Note dated
               September 27, 1995 between Clarex Limited and INRAD,
               Inc.

The following exhibits are incorporated by reference to the Report to the
Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1996:

10.16          Amendment and waiver between INRAD and Chase Manhattan Bank dated
               February 6, 1997.

10.17          Addendum to lease dated October 4, 1991, between S&R
               Costa as lessor and the Company as leasee.

10.18          Amendment and waiver to the stock and purchase agreement dated as
               of December 15, 1993.

11.1           A statement regarding computation of per-share earnings is
               omitted because the computation can be clearly determined from
               the material contained herein.

22.1           Subsidiaries of the Company

23.1           Consent from Price Waterhouse LLP

23.2           Consent from Grant Thornton LLP

27.1           Financial Data Schedule

The following exhibits are incorporated by reference to the report to the
Securities and Exchange Commission on form 10-K for the fiscal year ended
December 31, 1997:

22.1           Subsidiaries of the Company

23.1           Consent from Price Waterhouse LLP

23.2           Consent from Grant Thornton LLP

The following exhibits form an attachment to this report:

10.19          Agreement with Clarex to convert 1995 subordinated convertible
               note with accrued interest into common stock.

10.20          Agreement with Clarex to convert unsecured demand convertible
               note 


                                       20
<PAGE>

               with accrued interest into common stock.

10.21          Agreement with Clarex to convert 1993 subordinated convertible
               note with accrued interest into common stock.

10.22          Agreement with Ruderman to convert promissory note with accrued
               interest into common stock.

10.23          Agreement with Clarex to convert accrued interest on secured
               promissory note into common stock.

10.24          Employment contract with Charles Lucy.

22.1           Subsidiaries of the Company.

23.2           Consent from Grant Thornton LLP.

27.1           Financial data schedule.


                                       21
<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/ Charles Lucy
                                          -----------------------------------
                                          Charles Lucy, President
                                          and Chief Executive Officer

                                          Dated: March 19, 1999

      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/ Charles Lucy           President, Chief               March 19, 1999
----------------------     Executive Officer              
Charles Lucy               and Director (Principal        
                           Executive Officer)             
                                                          
                                                          
                                                          
/s/ Warren Ruderman        Chief Technology Officer       March 19, 1999
----------------------     and Chairman of the Board      
Warren Ruderman            of Directors                   
                                                          
                                                          
                                                          
/s/ Thomas Lenagh          Director                       March 19, 1999
----------------------                                    
Thomas Lenagh                                             
                                                          
                                                          
/s/ Frank Wiedeman         Director                       March 19, 1999
----------------------                                    
Frank Wiedeman                                            
                                                          
                                                          
/s/ James L. Greco         Chief Financial Officer        March 19, 1999
----------------------     and Secretary                  
James L. Greco             (Principal Financial and       
                           Accounting Officer)            
                                                        


                                       22
<PAGE>
                                   INRAD, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                                      INDEX

Consolidated Financial Statements                                         Page
                                                                          ----

Report of Independent Certified Public Accountants                         F-2

Consolidated Balance Sheets at December 31, 1998 and 1997                  F-3

Consolidated Statements of Operations for each of the three years
   in the period ended December 31, 1998                                   F-4

Consolidated Statement of Shareowners' Equity for each
   of the three years in the period ended December 31, 1998                F-5

Consolidated Statements of Cash Flows for each of the three years
   in the period ended December 31, 1998                                   F-6

Notes to Consolidated Financial Statements                         F-7 to F-15

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


                                      F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
INRAD, Inc.

We have audited the accompanying consolidated balance sheet of INRAD, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareowners' equity, and cash flows for each of the
three years in the period ended December 31, 1998. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of INRAD, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements, the
Company has had recurring losses. This factor, among others, as discussed in
Note 2 to the financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.


GRANT THORNTON LLP
New York, New York
March 5, 1999 (except for Note 14, as to which date is March 19, 1999)


                                      F-2
<PAGE>

                                   INRAD, INC.

                           CONSOLIDATED BALANCE SHEETS

                                                            December 31,
                                                            ------------
Assets                                                    1998        1997
------                                                    ----        ----
Current assets:
    Cash and cash equivalents                       $   208,028     $   209,142
    Certificate of deposit                                    0          70,000
    Accounts receivable, net                            639,604         654,827
    Inventories                                       1,433,081       1,546,541
    Unbilled contract costs                             125,096         102,363
    Other current assets                                 64,626          64,145
                                                    -----------     -----------
      Total current assets                            2,470,435       2,647,018

Plant and equipment:
    Plant and equipment at cost                       5,216,544       5,121,379
    Less: Accumulated depreciation
    and amortization                                 (4,585,761)     (4,124,715)
                                                    -----------     -----------
    Total plant and equipment                           630,783         996,664
Precious Metals                                         282,396         278,693
Other assets                                            154,543         171,084
                                                    -----------     -----------
      Total assets                                  $ 3,538,157     $ 4,093,459
                                                    ===========     ===========

Liabilities and Shareowners' Equity

Current liabilities:
    Note payable - bank                             $   107,500     $   120,000
    Current obligations under capital leases              8,007          12,262
    Accounts payable and accrued liabilities            527,991         720,214
    Advances from customers                              30,887          63,329
    Other current liabilities                            40,400          57,929
                                                    -----------     -----------
      Total current liabilities                         714,785         973,734

Note payable - bank                                           0         107,500
Obligations under capital leases                              0           8,683
Secured Convertible Promissory Note                     250,000         250,000
Subordinated Convertible Notes                          100,000       1,224,921
Unsecured Demand Convertible Note                             0         100,000
Note payable - Shareowner                                     0         566,049
                                                    -----------     -----------
      Total liabilities                               1,064,785       3,230,887
                                                    -----------     -----------

Shareowners' equity:
    Common stock: $.01 par value; 4,100,678 shares
       issued at December 31, 1998; 2,121,571
       shares at December 31, 1997                       41,007          21,216
    Capital in excess of par value                    8,237,718       6,051,791
    Accumulated deficit                              (5,790,403)     (5,158,635)
                                                    -----------     -----------
                                                      2,488,322         914,372
    Less common stock in treasury, at cost; 4,600                  
       shares issued December 31, 1998; 12,300                     
       shares issued December 31, 1997                  (14,950)        (51,800)
                                                    -----------     -----------
      Total shareowners' equity                       2,473,372         862,572
                                                    -----------     -----------
      Total liabilities and shareowners' equity     $ 3,538,157     $ 4,093,459
                                                    ===========     ===========
                                                                  
                      See Notes to Consolidated Statements


                                      F-3
<PAGE>

                                   INRAD, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                     Year ended December 31,
                                                     -----------------------
                                                1998           1997           1996
                                                ----           ----           ----
<S>                                          <C>            <C>            <C>        
Revenues:
    Net product sales                        $ 4,574,274    $ 4,983,055    $ 5,241,075
    Contract research and development            776,594        436,374        489,930
                                             -----------    -----------    -----------
                                               5,350,868      5,419,429      5,731,005
                                             -----------    -----------    -----------

Costs and expenses:
    Cost of goods sold                         3,396,603      3,864,506      3,922,517
    Contract research and development
     expenses                                    828,850        437,623        502,367
    Selling, general and administrative
     expenses                                  1,362,357      1,328,921      1,245,077
    Internal research and development
     expenses                                    159,245        114,021        170,750
                                             -----------    -----------    -----------
                                               5,747,055      5,745,071      5,840,711
                                             -----------    -----------    -----------

        Operating Loss                          (396,187)      (325,642)      (109,706)

Other income (expense):
    Interest expense                            (244,533)      (256,482)      (283,390)
    Interest and other income, net                 8,952         10,003         19,322
                                             -----------    -----------    -----------

Net loss                                     $  (631,768)   $  (572,121)   $  (373,774)
                                             ===========    ===========    ===========

Net loss per common share-basic
     and diluted                             $     (0.30)   $     (0.27)   $     (0.18)
                                             ===========    ===========    ===========

Weighted average common shares outstanding     2,119,609      2,109,271      2,109,138
                                             ===========    ===========    ===========
</TABLE>

                      See Notes to Consolidated Statements


                                      F-4
<PAGE>

                                   INRAD, INC.

                CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY

                                                         
<TABLE>
<CAPTION>
                                    Common Stock         Capital in                             
                               ---------------------      excess of    Accumulated     Treasury 
                               Shares         Amount      par value      deficit        stock
                               ------         ------      ---------      -------        -----
<S>                            <C>         <C>           <C>           <C>            <C>        
Balance, December 31, 1995     2,121,571   $    21,216   $ 6,067,991   $(4,212,740)   $    68,000

Net loss for the year                 --            --            --      (373,774)            --

Issuance of treasury stock            --            --        16,200            --        (16,200)
    to employees
                             -----------   -----------   -----------   -----------    -----------
Balance, December 31, 1996     2,121,571        21,216     6,051,791    (4,586,514)        51,800

Net loss for the year                 --            --            --      (572,121)            --

Balance, December 31, 1997     2,121,571        21,216     6,051,791    (5,158,635)        51,800
                             -----------   -----------   -----------   -----------    -----------


Issuance of treasury stock            --            --        36,850            --        (36,850)
    to employees

Common stock issued on         1,979,107        19,791     2,222,777
    conversion of debt

Net loss for the year                 --            --            --      (631,768)            --
                             -----------   -----------   -----------   -----------    -----------

Balance, December 31, 1998     4,100,678   $    41,007   $ 8,237,718   $(5,790,403)   $    14,950
                             ===========   ===========   ===========   ===========    ===========
</TABLE>

                      See Notes to Consolidated Statements


                                      F-5
<PAGE>

                                   INRAD, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                Year ended December 31,
                                                -----------------------
                                            1998           1997        1996
                                            ----           ----        ----
<S>                                        <C>          <C>          <C>       
Cash flows from operating activities:
     Net loss                              $(631,768)   $(572,121)   $(373,774)
                                           ---------    ---------    ---------
Adjustments to reconcile net loss
  to cash provided by operating
  activities:
    Depreciation and amortization            481,402      530,610      601,881
    Noncash interest                         206,244       21,660      155,269
    Gain on sale of equipment                 (3,500)      (3,800)      (8,621)
    Changes in assets and liabilities:
      Accounts receivable                     15,223       80,333       69,674
      Inventories                            113,460      188,603      (63,471)
      Unbilled contract costs                (22,733)     (43,012)      92,299
      Other current assets                      (481)      (3,853)       1,405
      Precious metals                         (3,703)         555          754
      Other assets                            (3,817)     (30,717)     (17,467)
      Accounts payable and accrued
        liabilities                           53,131      101,965      (67,460)
      Advances from customers                (32,442)      (9,915)     (42,961)
      Other liabilities                      (17,529)       9,064       (4,218)
                                           ---------    ---------    ---------
         Total adjustments                   785,255      841,493      717,084
                                           ---------    ---------    ---------
         Net cash provided by
          operating activities               153,487      269,372      343,310
                                           ---------    ---------    ---------
Cash flows from investing activities:
    Capital expenditures                     (95,163)     (86,208)    (238,202)
    Proceeds from sale of equipment            3,500        3,800      299,180
    Proceeds from redemption of
        certificate of deposit                70,000            0            0
                                           ---------    ---------    ---------
         Net cash (used in) provided by
            investing activities             (21,663)     (82,408)      60,978
                                           ---------    ---------    ---------
Cash flows from financing activities:
    Repayments of note payable - bank       (120,000)     (92,500)     (60,000)
    Principal payments of capital
        lease obligations                    (12,938)     (79,899)    (187,692)
                                           ---------    ---------    ---------
         Net cash used in
          financing activities              (132,938)    (172,399)    (247,692)
                                           ---------    ---------    ---------
Net increase (decrease) in cash
  and cash equivalents                        (1,114)      14,565      156,596
Cash and cash equivalents at
  beginning of year                          209,142      194,577       37,981
                                           ---------    ---------    ---------
Cash and cash equivalents at end of year   $ 208,028    $ 209,142    $ 194,577
                                           =========    =========    =========
</TABLE>

                      See Notes to Consolidated 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 shorter of the economic life or
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
$7,000, $15,000 and $110,000 in 1998, 1997 and 1996, 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.

Internal Research and Development Costs:

Internal research and development costs are charged to expense as incurred.

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 


                                      F-7
<PAGE>

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. A valuation allowance is established when deferred tax
assets are not likely to be realized.

Cash Flow Information:

The Company considers all highly liquid investments with original maturity dates
of three months or less to be cash equivalents.

Cash interest paid during the years ended December 31, 1998, 1997 and 1996 was
$51,673, $40,525 and $109,497, respectively.

In December 1998 the Company converted $1,800,779 of notes payable and $441,789
of accrued interest into 1,979,107 shares of its Common Stock.

Net Loss Per Common Share:

Net loss per common 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 2,119,609, 2,109,271 and 2,109,138 for
the years ended December 31, 1998, 1997 and 1996, respectively.

The effect of options and warrants outstanding during the year and convertible
notes have been excluded from the computation because their effect is
antidilutive. At December 31, 1998 the Company had outstanding 300,000 warrants
exercisable at $0.6875; 12,700 exercisable at $1.00; 175,392 exercisable at
$1.50. Also at December 31, 1998 the Company had outstanding 146,500 stock
options exercisable at $1.00, and 33,000 exercisable at $1.25.
See Note 7 for a description of the convertible notes.

Impairment of Long-Lived Assets:

Impairment losses are recognized when expected future cash flows are less than
the assets' carrying value. Accordingly, when indicators of impairment are
present, the Company will evaluate the carrying value of property, plant and
equipment and other long term assets in relation to the operating performance
and future undiscounted cash flows of the underlying business. The amount of the
impairment loss is the excess of the carrying amount of the impaired asset over
the fair value of the asset. Generally, fair value represents the expected
future cash flows from the use of the asset or group of assets, discounted at an
interest rate commensurate with the risks involved.

Advertising:

The Company expenses advertising costs as incurred.

NOTE 2 - LIQUIDITY AND FUNDING OF OPERATIONS:

As shown on the accompanying financial statements, the Company reported a net
loss of approximately $632,000 for the year ended December 31, 1998, and also
incurred losses in 1997 and 1996. During the past three years, the Company's
working capital requirements were met by cash provided by operating activities.

Management expects that cash flow from operations and the sale of $500,000 of
preferred stock, will provide adequate liquidity for the Company's operations in
1999. The Company plans to hire additional manufacturing and sales personnel,
and purchase additional fixed assets, in order to improve operations; however a
loss is anticipated in 1999. If the Company's cash flow from operations is not
maintained at satisfactory levels, however, 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.


                                      F-8
<PAGE>

NOTE 3 - ACCOUNTS RECEIVABLE:

Accounts receivable are comprised of the following:
                                                           December 31,
                                                           ------------
                                                        1998           1997
                                                        ----           ----

   Accounts receivable                              $ 646,604        $ 661,827
   Allowance for doubtful accounts                     (7,000)          (7,000)
                                                    ---------        ---------
                                                    $ 639,604        $ 654,827
                                                    =========        =========

NOTE 4 - INVENTORIES:

Inventories are comprised of the following:
                                                         December 31,
                                                         ------------
                                                      1998           1997
                                                      ----           ----

    Raw materials                                  $  157,360       $  168,976
    Work in process, including
       manufactured parts and components            1,171,023        1,285,157
    Finished goods                                    104,698           92,408
                                                   ----------       ----------
                                                   $1,433,081       $1,546,541
                                                   ==========       ==========

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 1998, 1997 and 1996, the fourth quarter operating results
included an adjustment for the annual inventory count that decreased (increased)
operating losses by approximately $34,000, $(33,000) and $164,000, respectively.

NOTE 5 - PLANT AND EQUIPMENT:

Plant and equipment are comprised of the following:

                                                          December 31,
                                                          ------------
                                                     1998             1997
                                                     ----             ----

    Furniture and fixtures                      $   188,446        $   171,515
    Machinery and equipment                       4,611,683          4,536,143
    Leasehold improvements                          416,415            413,721
                                                -----------        -----------
                                                  5,216,544          5,121,379
    Less accumulated depreciation
            and amortization                     (4,585,761)        (4,124,715)
                                                -----------        -----------
                                                $   630,783        $   996,664
                                                ===========        ===========

Depreciation expense (including amortization of capital leases) for the years
ended December 31, 1998, 1997 and 1996 was $461,044, $521,475 and $594,352,
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 was carried at its net book value of $279,111, and was sold in 1996
for $299,180.


                                      F-9
<PAGE>

NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:

Accounts payable and accrued liabilities comprise the following:

                                                             December 31,
                                                             ------------
                                                          1998         1997
                                                          ----         ----
    Trade accounts payable and
     accrued purchases                                 $288,682      $249,758
    Payroll taxes payable                                42,888        34,492
    Accrued vacation                                    121,693        98,289
    Accrued professional fees                            41,601        50,129
    Accrued liability - shareowners                           0        96,597
    Accrued interest                                        925       163,063
    Accrued liability - other                            32,202        27,886
                                                       --------      --------
                                                       $527,991      $720,214
                                                       ========      ========
    
NOTE 7 - DEBT:
    
The  Company's  debt  obligations  as of  December  31,  1998  and 1997 are as
follows:

                                                           December 31,
                                                           ------------
                                                        1998          1997
                                                        ----          ----

    Note Payable - Bank                             $  107,500     $  227,500
    Subordinated Convertible Notes                     100,000      1,224,921
    Unsecured Demand Convertible Note                        0        100,000
    Note Payable - Shareowner                                0        566,049
    Secured Promissory Notes                           250,000        250,000
                                                    ----------     ----------
                                                    $  457,500     $2,368,470
                                                    ==========     ==========

On February 6, 1997, the Company signed an agreement with Chase Manhattan Bank
(successor to Chemical Bank) amending the terms of its credit facility. The new
agreement requires monthly principal payments of $10,000 for January 1997, and $
7,500 from February 1997 until December 1997, monthly principal payments of
$10,000 from January 1998 until December 1998, and monthly principal payments of
$ 12,500 from January 1999 until August 1999. A final payment of $7,500 is due
on September 1, 1999. Borrowings bear interest at prime (7.75% at December 31,
1998) + 2 1/4%. The agreement also amended the financial covenants contained in
the original agreement . The Company continues to be required to maintain
compliance with affirmative and negative covenants, including limitations on
capital expenditures, dividends and new indebtedness, and compliance with a
financial ratio tied to accounts receivable. Borrowings are collateralized by
accounts receivable and the personal guarantee of the Company's principal
shareowner.

In connection with the new agreement, a shareowner and Subordinated Convertible
Note holder agreed to maintain a certificate of deposit with Chase Manhattan
Bank in the amount of $245,000 as collateral for the loan. Once the principal
balance of the loan is reduced below $222,700, with each principal payment made
by the Company, an amount may be withdrawn from the collateral deposit to
maintain a 1.1 to 1 collateral to loan ratio. On December 31, 1998, the
certificate of deposit was in the amount of $140,250.

In April 1995, the Company received $225,000 from a shareowner and Subordinated
Convertible Note holder of the Company through the issuance of a $125,000 8%
Subordinated Convertible Note 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. In 


                                      F-10
<PAGE>

connection with this transaction, the Company issued 50,000 warrants to purchase
Common Stock at $0.6875 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. Both of these notes, along with their
accrued interest, were converted into a total of 299,194 shares of common stock
at the note conversion price of $1.00 per share on December 31, 1998.

In 1993, the Company raised $1,000,000 in cash from a private investment group
through the issuance of a $746,215 10% Subordinated Convertible Note due
December 15, 2000 (the "note") 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. On
December 31, 1998, this note, along with its accrued interest, was converted
into 960,000 shares of the Company's common stock.

During September 1993, the Company borrowed $100,000 in the form of a promissory
note from a shareowner of the Company. On December 16, 1993, this promissory
note was extinguished and a $74,621 10% subordinated convertible note and 20,303
shares of the Company's common stock at $1.25 per share were issued. The note is
convertible at any time up to the maturity date into shares of the Company's
common stock at $1.25 per share (to be adjusted for dividends, stock splits,
etc.).

The entire amount of the Subordinated Convertible Note may be redeemed by the
Company after December 15, 1998; it is subordinated to any outstanding
indebtedness to Chase Manhattan Bank and other secured indebtedness of the
Company. This note also contains certain covenants and restrictions, including
financial ratios tied to accounts receivable and debt service (as defined).
Interest is payable semiannually on this note, and the first six interest
payments are payable in the form of additional notes. At December 31, 1998 and
1997, the Company was not in violation of the covenants of this note. At
December 31, 1996, the Company was in violation of certain covenants of this
note; subsequent to the year end, the Company obtained a waiver from the holder
of the note 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. This note along with its accrued interest was converted
into 684,921 shares of the Company's common stock on December 31, 1998. Interest
expense related to the shareowner loan was approximately $57,000, $57,000 and
$72,000 in 1998, 1997 and 1996, respectively.

The Company's Secured Convertible Promissory Note bears interest at 7%, is
collateralized by certain of the Company's precious metals, and is convertible
at any time into 200,000 shares of common stock. The Note also contains
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 Note was July 8, 1997. However, the noteholder has
agreed not to demand payment prior to January 1, 2000; therefore the note has
been classified as noncurrent in the accompanying balance sheet.

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

            1999                                 $ 107,500
            2000                                   350,000
                                                 ---------
                                                 $ 457,500
                                                 =========


                                      F-11
<PAGE>

NOTE 8 - INCOME TAXES:

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

<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                                      -----------------------
                                                    1998        1997        1996
                                                    ----        ----        ----
     <S>                                             <C>           <C>           <C>  
     Federal statutory rate                            34%           34%           34%
                                                ---------     ---------     ---------
     Tax (benefit) at Federal statutory rates   $(214,801)    $(194,480)    $(127,160)
     Loss in excess of available benefit          189,828       181,355       115,955
     Other, net                                    24,973        13,125        11,205
                                                ---------     ---------     ---------
                                                $      --     $      --     $      --
                                                =========     =========     =========
</TABLE>

At December 31, 1998, the Company had net operating loss carryforwards for tax
purposes of approximately $6,414,000. The tax loss carryforward expires at
various dates through 2018.

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

Deferred tax assets (liabilities) comprise the following:

                                                 December 31,    December 31,
                                                     1998            1997
                                                     ----            ----
     Deferred tax assets
         Inventory capitalization adjustment$            --    $     1,000
         Inventory reserves                          20,000         20,000
         Vacation liabilities                        44,000         33,000
         Other                                        3,000         67,000
         Depreciation                               119,000         48,000
         Loss carryforwards                       2,565,000      2,354,000
                                                -----------    -----------
         Gross deferred tax assets                2,751,000      2,523,000
         Valuation allowance                     (2,751,000)    (2,523,000)
                                                -----------    -----------
         Net deferred tax asset                 $        --    $        --
                                                ===========    ===========

NOTE 9 - LEASE COMMITMENTS:

The Company leases its office and manufacturing facility under an operating
lease which expires in 2001. The lease provides for additional rental payments
based upon a pro rata share of real estate taxes and certain other expenses and
has a renewal option for one five-year period. Rental expense was $196,000,
$196,000, and $237,000 in 1998, 1997 and 1996, respectively, and real estate
taxes were $42,000, $41,000 and $41,000 in 1998, 1997 and 1996, respectively.


                                      F-12
<PAGE>

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 three to five year terms.

                                                   December 31,
                                                1998         1997
                                                ----         ----

            Equipment under capital lease    $  22,690    $ 132,690
            Less: Accumulated amortization      (8,093)     (75,565)
                                             ---------    ---------
                                             $  14,597    $  57,125
                                             =========    =========

Future minimum lease payments at December 31, 1998 are payable as follows:

                                                Capital          Operating
                                                 Leases            Leases
                                                 ------            ------
      1999                                     $  8,602         $  195,564
      2000                                            0            195,564
      2001                                            0            162,970
                                               --------         ----------

      Total minimum lease payments             $  8,602         $  554,098
                                                                ==========

      Less amount representing interest            (595)
                                               --------
      Present value of minimum capital lease      8,007
                                               ========

NOTE  10 - PRODUCT  SALES,  EXPORT SALES AND SALES TO MAJOR CUSTOMERS:

The Company's sales for each major category of its product line are as follows:

                                  1998          1997          1996
                            ---------------------------------------
Crystals and
  Crystal Components        $3,372,802    $3,934,178     $3,563,983

Systems and Instruments      1,201,472     1,048,877      1,677,092
                            ----------    ----------     ----------

TOTAL                       $4,574,274    $4,983,055     $5,241,075
                            ==========    ==========     ==========

Export sales, primarily to customers in Europe, Asia and Canada, amounted to
21%, 16% and 16% of net product sales in 1998, 1997 and 1996, respectively.

No foreign customer accounted for more than 10% of net product sales in 1998,
1997 and 1996. One U.S. customer accounted for more than 13%, 14% and 12% of net
product sales in 1998, 1997 and 1996, respectively. One other U.S. customer
accounted for over 11% of net product sales in 1996. During the years ended
December 31, 1998, 1997 and 1996, approximately 4%, 4% and 8%, respectively, of
the Company's net product sales were through a foreign agent, in which the
principal shareholder has an investment.

NOTE 11 - CAPITAL STOCK:

The Company's authorized capital stock consists of 1,000,000 shares of preferred
stock, without nominal or par value, and 6,000,000 shares of common stock, par
value $.01 per share. The Company had 4,096,078 common shares outstanding at
December 31, 1998 and 2,109,271 common shares outstanding at December 31, 1997.
There were no preferred shares issued or outstanding in either year. The Company
has reserved 1,268,092 shares of common stock for issuance upon conversion of
the


                                      F-13
<PAGE>

Subordinated Convertible Notes, Secured Promissory Notes (Note 7) and upon
exercise of outstanding warrants and all options available under the plan (Notes
7 and 12).

NOTE 12 - EMPLOYEE BENEFIT PLANS:

During 1990, the Company adopted the Key Employee Compensation Program (the
"Program"). In 1995, the maximum number of shares which may be awarded under the
program was increased from 70,000 to 500,000. The number of shares issuable is
subject to adjustment for stock dividends, stock splits, etc. The Company has
reserved 500,000 shares of common stock for issuance under the plan.

The Program provides for the granting of incentive stock options, compensatory
stock options, stock appreciation rights and shares of common stock to certain
full time employees of the Company under terms and at prices to be determined at
the discretion of a committee appointed by the Board of Directors. Certain
outside directors are eligible to receive compensatory stock options and stock
appreciation rights. Subject to modification by the committee, options are
generally exercisable in 25% installments beginning one year after the date of
grant and continuing for each of the four years thereafter. The maximum term of
the grant is ten years. All options were granted at the market value or above at
the date of grant. To date, none of the options have been exercised. The
following table summarizes the options granted under the plan for the three
years ended December 31, 1998:
                                                                Weighted
                                                                 Average
                                                Shares             Price
      ------------------------------------------------------------------
      Outstanding at December 31, 1995         127,000             $1.10
      ------------------------------------------------------------------
      Granted                                   20,000             $1.00
      Expired                                   (9,000)            $1.25
      Forfeited                                (27,000)            $1.00
      ------------------------------------------------------------------
      Outstanding at December 31, 1996         111,000             $1.09
      ------------------------------------------------------------------
      Granted                                  123,000             $1.00
      Expired                                   (9,500)            $1.09
      Forfeited                                (22,000)            $1.04
      ------------------------------------------------------------------
      Outstanding at December 31, 1997         202,500             $1.04
      ------------------------------------------------------------------
      Granted                                    9,500             $1.00
      Expired                                   (1,250)            $1.00
      Forfeited                                (21,750)            $1.00
      ------------------------------------------------------------------
      Outstanding at December 31, 1998         189,000             $1.05
                                               =======             =====
      ------------------------------------------------------------------
      Exercisable at December 31, 1998          87,000             $1.10
                                                ======             =====
      ------------------------------------------------------------------

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The
Company accounts for its option plan under APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations and, accordingly, no
compensation cost has been recognized for the stock option plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant date for awards in 1998, 1997 and 1996 consistent
with the provisions of SFAS No. 123, the Company's net loss and loss per share
would not have been impacted.

These pro forma amounts may not be representative of future disclosures because
they do not take into account pro forma compensation expense related to grants
made before 1995. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for grants in 1998 was expected volatility of 250%;
weighted average risk-free rate of 5.71% and weighted average expected life of
10 years; in 1997 expected volatility of 250%; weighted average risk-free rate
of 6.24%; and weighted average expected life of 10 years; and in 1996 expected
volatility of 250%; weighted average risk-free rate of 6.008%; and weighted


                                      F-14
<PAGE>

average expected life of 10 years.

The weighted average grant date fair value of options granted during 1998, 1997
and 1996 was $0.41, $0.32 and $0.38, respectively.

                        Options outstanding              Options exercisable
              ------------------------------------------------------------------
                             Weighted
                 Number      average      Weighted       Number      Weighted
Range of      outstanding   remaining      average    exercisable    average
exercise      at December  contractual    exercise    at December    exercise
prices          31, 1998       life         price       31, 1998      price
--------------------------------------------------------------------------------
$1.00 - $1.25   189,000     7.60 years      $1.05        87,000       $1.10

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
match employee contributions. The Company did not contribute any amounts to the
401(k) plan during 1998, 1997 or 1996.

NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amount at December 31, 1998 and 1997 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, at December 31, 1998
and 1997 (see Note 7) could not be determined without incurring excessive costs.

NOTE 14 - SUBSEQUENT EVENT:

In March 1999, a shareowner and debtholder of the Company has agreed to purchase
500 shares of 10% convertible preferred stock at a price of $1,000 per share.
Two hundred shares will be purchased in March 1999 for $200,000 and the three
hundred shares will be purchased in June 1999 for $300,000. Dividends are
payable in common stock at the rate of $1.00 per share.


                                      F-15