---

---

10-K
Securities and Exchange CommissionWashington, D.C. 20549

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

Commission file number 0-11668

---

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

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

|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)

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

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

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

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

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

Documents incorporated by reference: NONE

---

---

---

INRAD, INC.

INDEX

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

Note:
Page F-1 follows Page 26.

---



PART I

Forward Looking Statements

This Annual Report contains forward-looking statements as that term is defined in the federal securities laws. The Company wishes to insure that any
forward-looking statements are accompanied by meaningful cautionary statements in order to comply with the terms of the safe harbor provided by the Private Securities Litigation Reform Act of 1995.
The events described in the forward-looking statements contained in this Annual Report may not occur. Generally these statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of our plans or strategies, projected or anticipated benefits of acquisitions to be made by us, projections involving anticipated revenues, earnings, or other aspects of
our operating results. The words "may", "will", "expect", "believe", "anticipate", "project", "plan", "intend", "estimate", and "continue", and their opposites and similar expressions are intended to
identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks, and other influences,
many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Factors which may affect our results include, but are
not limited to, the risks and uncertainties discussed in Items 1, 7 and 7A. Any one or more of these uncertainties, risks, and other influences could materially affect our results of operations and
whether forward-looking statements made by us ultimately prove to be accurate. Readers are further cautioned that the Company's financial results can vary from quarter to quarter, and the financial
results for any period may not necessarily be indicative of future results. The foregoing is not intended to be an exhaustive list of all factors that could cause actual results to differ materially
from those expressed in forward-looking statements made by the Company. Our actual results, performance and achievements could differ materially from those expressed or implied in these
forward-looking statements. We undertake no obligation to publicly update or revise any forward looking statements, whether from new information, future events, or otherwise.

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

Item 1.    Business

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

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

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

1

---

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

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

Products

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

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

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

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

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

Year Ended December 31,Category

2002
Sales

%

2001
Sales

%

2000
Sales

%Crystals and Components

$
2,289,098

40

$
2,823,256

35

$
2,953,000

37Custom Optics


2,036,807

38


3,211,793

40


3,145,956

40Systems & Instruments


1,155,816

21


1,850,988

23


766,000

10Subtotal


5,481,721

99


7,886,037

98


6,864,956

87Contract Research & Development


87,397

1


189,168

2


1,045,011

13TOTAL

$
5,569,118

100

$
8,075,205

100

$
7,909,967

100


Products Manufactured by the Company



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

2

---

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



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

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



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



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

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

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

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

3

---

Research and Development

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

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

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

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

Markets

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

Market

2002

2001

2000Laser Systems


35
%

33
%

31
%Semiconductor


28
%

26
%

19
%Telecomm


5
%

12
%

20
%Other


5
%

5
%

3
%Total Industrial


73
%

76
%

73
%Government/Defense


18
%

11
%

17
%Universities & National Laboratories


9
%

13
%

10
%Total (%)


100
%

100
%

100
%Total ($)

$
5,482,000

$
7,886,000

$
6,864,000


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

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

4

---

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

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

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

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

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

Long-Term Contracts

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

Marketing and Business Development

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

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

5

---

Backlog

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

Competition

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

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

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

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

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

Employees

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

6

---

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

Patents and Licenses

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

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

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

Regulation

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

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

Business Risk

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

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

(b)  Many of our customers industries are cyclical.

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

(c)  We face competition.

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

7

---

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

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

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

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

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

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

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

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

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

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

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

8

---

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

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

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

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

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

(k)  Our stock price may fluctuate.

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

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

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

9

---

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

Item 2. Properties

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

Item 3. Legal Proceedings

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

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

Not
Applicable.

10

---



PART II

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

(a)  Market Information

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

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

PriceHigh

LowQuarter ended December 31, 2002

.570

.300Quarter ended September 30, 2002

.820

.250Quarter ended June 30, 2002

1.100

.700Quarter ended March 31, 2002

1.850

.910Quarter ended December 31, 2001

1.320

.750Quarter ended September 30, 2001

4.000

1.320Quarter ended June 30, 2001

4.750

2.750Quarter ended March 31, 2001

7.750

3.668


(b)  Holders

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

(c)  Dividends

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

(d)  Recent Sales of Unregistered Securities

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

11

---

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, |           |           |          
|-------------------------------------------------- | ------- | ----------------------------------------------------- | --------- | --------- | ---------
|
|Revenues                                           |         | 5,569,118                                             |           | 8,075,205 |          
|Net (Loss)Profit                                   |         | (1,715,972                                            | )         | 43,634    |          
|Net (Loss)Profit applicable to common shareholders |         |                                                       |           |           |          
|                                                   | Basic   |                                                       | (.35      | )         | (.02     
|                                                   | Diluted |                                                       | (.35      | )         | (.02     
|Weighted average shares                            |         |                                                       |           |           |          
|                                                   | Basic   |                                                       | 5,210,322 |           | 5,046,666
|                                                   | Diluted |                                                       | 5,210,322 |           | 5,046,666
|Dividends Paid                                     |         | 120,600                                               |           | 155,000   |          
|Total Assets                                       |         | 8,508,925                                             |           | 8,599,072 |          
|Long-Term Obligations                              |         | 1,188,512                                             |           | 287,170   |          
|Shareholders' Equity                               |         | 5,049,879                                             |           | 6,745,489 |          

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

Critical Accounting Policies

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

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

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

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

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

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

12

---

Results of Operations

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

|                                |  | Year Ended December 31,
|------------------------------- |  | -----------------------
|
|Crystals and Components         |  | $                      
|Custom Optics                   |  |                        
|Systems & Instruments           |  |                        
|                                |  |                        
|Subtotal                        |  |                        
|Contract Research & Development |  |                        
|                                |  |                        
|TOTAL                           |  | $                      
|                                |  |                        

The
next table sets forth, for the past three years, the percentage relationship to total revenues from product sales and contract research and development of certain items included in
the Company's consolidated statement of operations.

Year ended December 31,2002
%

2001
%

2000
%Revenues:Product Sales

98.4

97.7

86.8Contract Research and Development

1.6

2.3

13.2100.0

100.0

100.0Costs and Expenses:Cost of Goods Sold*

83.9

63.6

54.7Contract Research and Development*

72.2

33.6

113.7Product Gross Profit Margin

16.1

36.4

45.3Selling, General and Administrative Expenses

40.9

31.0

27.8Internal Research and Development**

2.4

2.6

5.4Process Re-Engineering Expenses



3.7

(Loss) Income From Operations

(27.0
)
(.01
)
5.1Net (Loss) Profit

(30.1
)
.5

8.9


---

Total Revenues

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

Product Sales

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

13

---

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

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

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

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

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

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

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

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

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

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

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

14

---

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

Cost of Goods Sold and Gross Profit Margin

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

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

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

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

Contract Research and Development

Contract R&D programs are typically fixed price contracts and provide for recovery of direct costs and an allocation of indirect manufacturing costs, and,
depending on their terms, recovery of general and administrative costs. These programs are typically not profitable, but are pursued when the technology to be advanced is in line with the Company's
future product plans.

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

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

Selling, General and Administrative Expenses

Selling, general and administrative expenses in 2002 decreased $226,000 or 9.0% compared to 2001.

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

15

---

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

There
was a decrease in expenses in 2001 related to lower legal fees and costs relative to raising additional capital. However, significant increased costs were incurred in SG&A because
of inclusion of administrative costs that had previously been allocated to R&D contracts, because of increases in personnel dedicated to the implementation of new internal computer network and
Enterprise Resource Planning System (ERP), because of costs associated with the Company's implementation of a proactive merger and acquisition program aimed at finding and evaluating complementary
businesses and products, and by increased business travel expenses.

In
2000, general and administration expenses increased due to increases in salaries, including, performance sharing incentive compensation, increases in personnel, including the
inclusion of a full-time CEO/President and Director of Human Resources on the general management team, and increases in recruiting expenses. Additionally, administrative costs also
increased due to the legal expenses and other costs incurred as a result of the private convertible preferred stock offering, application for NASDAQ registration, development of new and revised
employee stock option programs, and other shareholder related activities.

Internal Research and Development Expenses

Company-funded research expenditures during the years ended December 31, 2002, 2001, and 2000 were $134,424 (2.5% of product sales) $201,603 (2.6% of net
product sales), and $369,643 (5.4% of net product sales). During 2000 the Company sold its tunable mid-IR laser technology to an instrument company as part of the Company's strategy to
concentrate its resources on its core business. The sale
was responsible for curtailment of what had been a large portion of IR&D expenditures in the prior year and the first half of fiscal year 2000.

During
2002 and 2001, the Company narrowed its focus of internal research and development efforts onto new crystal products and production methods, and new optical component
manufacturing technologies. As a result, internal R&D expenditures declined in 2002, and are expected to continue at this level in 2003.

Special Charges

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

Operating Income

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

Other Income and Expenses

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

16

---

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

Preferred Stock Dividend

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

Income Taxes

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

Inflation

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

Liquidity and Capital Resources

During the second quarter of 2002 the Company received $1,000,000 from its bank collateralized by equipment. The loan is for a 3 year period with a
5 year amortization and bears an interest rate of 5.61%. Due to violation of certain bank covenants in 2003 the loan has been classified as a current liability.

At
the end of the fourth quarter of 2002 the Company received $1,000,000 in proceeds from the issuance of a Subordinated Convertible Promissory Note. The note is due in
January 2006 and bears an interest rate of 6%. Interest accrues yearly and along with principal may be converted to common stock at a conversion rate equal to the purchase price of stock issued
for cash after the date of the note to an unrelated third party investor, or if no such issuance takes place within twelve months of the date of the note, at a price mutually agreed upon as fair value
by issuer and holder. The holder of the note is a related party to a major shareholder of the Company.

The
Company had available a $1,000,000 Line of Credit from its bank. The note bears interest at the Bank's prime rate and is payable upon demand. The note is secured by certain assets of
the Company. Borrowings against this note were approximately $750,000 as of December 31, 2002. The

17

---

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

Capital
expenditures, including internal labor and overhead charges, for the years ended December 31, 2002, 2001 and 2000 were approximately $554,000, $2,224,000, and $582,000,
respectively. Capital expenditures in 2002 and 2001 were used for expansion and renovation of facilities and for the acquisition of equipment. The expenditures were financed in part from capital
raised in the 2000 private offering of series B convertible preferred stock and in part by the asset loan secured in the second quarter of 2002. There are no major expenditures for capital
equipment anticipated for FY 2003.

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

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

Overview of Financial Condition

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

EBITDA
for 2002 was $(985,000) and net cash used in operations was $(807,000). Operating capital was augmented by borrowings of $1,000,000 from the Company's asset based credit facility.
EBITDA for 2001 was approximately $351,000 and net cash used in operations was approximately $(470,000). Operating capital was augmented by borrowings of $750,000 from the Company's revolving credit
agreement.

In
January of 2002 the Company was successful in securing a $1,000,000 revolving credit line, and a $1,000,000 asset based term loan. Total additional borrowing against these credit
facilities provided the working capital required in 2002. The Company is currently in violation of certain covenants provided for in the loan agreements.

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

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

18

---

The
Company has an active program to align its expenses with present and projected revenues and with its commitments to its customers. During the recessionary year of 2001, employment
was reduced in September from 83 to 69, a decline of 17%, through lay-off and attrition. Senior executives of the Company voluntarily accepted a 15% cut in pay, and Directors' fees were
reduced 20%. In the first week of January 2002, employment was further reduced to 58, a further decline of 16%, through lay-off and attrition. Reductions were again made in
January 2003 to 50 employees, reflecting the continued business weakness. The Company believes that its current cash reserves coupled with its cost reduction and control program will allow the
Company to maintain its fiscal viability throughout 2003.

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

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

Item 7A.    Discussion of Market Risk

Effect of interest rate fluctuations on interest sensitive financial instruments.

We
are exposed to changes in interest rates from investments in certain money market accounts. We do not utilize derivative instruments or other market risk sensitive instruments to
manage exposure to interest rate changes. We believe that a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair
value of our interest sensitive money market accounts at December 31, 2002.

Item 8.    Financial Statements and Supplementary Data

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

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

None

19

---



PART III

Item 10.    Directors and Executive Officers of the Registrant

|Name and Age        |  | Since |  | Director Positions; Experience Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------------- |  | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Thomas Lenagh, 76   |  | 1998  |  | Chairman of the Board of Directors (May 2000Present). Management Consultant (1990Present) Past Chairman and CEO, Systems Planning Corporation Financial Vice President, the Aspen Institute Treasurer and Chief Investment Officer, The Ford
Foundation Captain, US Navy Reserve (ret.)                                                                                                                                                                                                                                                                                                               
|Daniel Lehrfeld, 59 |  | 1999  |  | Director President and Chief Executive Officer (2000present), President and Chief Operating Officer(19992000), Vice President/General Manager (19951999) Raytheon/GM Hughes Electro-Optics Center, President (19891991) New
England Research Center, (subsidiary) Deputy General Manager (19891995) & Director, Business Development, International Business, Operations, Cryogenic Products Magnavox Electronic Systems E. Coast Div., Deputy Sector Director & Program
Director Philips Laboratories Briarcliff North American Philips, Group Leader/Project Leader Grumman Aerospace Corporation
|Frank Wiedeman, 89  |  | 1998  |  | Director Executive Director (1980Present) American Capital Management Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Jan Winston, 66     |  | 2000  |  | Director Principal (1997Present) Winston Consulting, Division Director/General Manager (19811997) IBM Corporation. Executive positions held in Development, Finance and Marketing.                                                                                                                                                                                                                                                                                                                                                                                                                    
|John Rich, 65       |  | 2000  |  | Director Vice President/General Manager (19992002) Power Electronics Division, C&D technologies President (19901999), Raytheon/GM Hughes Optical Systems Vice President (19831989), Perkin Elmer Microlithography, Electro-Optics,
and Systems Colonel, Commander, Air Force Avionics Laboratory and Air Force Weapons Laboratory                                                                                                                                                                                                                                                                    

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

20

---

Executive Officers of the Registrant

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

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

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

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

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

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

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

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

Each
of the executive officers has been elected by the Board of Directors to serve as an officer of the Company until the next election of officers, as provided by the Company's
by-laws.

21

---

Item 11. Executive Compensation

Summary of Cash and Certain Other Compensation

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

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

---

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

The
aggregate minimum commitment under this agreement is as follows:

Year Ending December 31,2003

$
175,0002004

$
175,0002005

$
175,0002006

$
175,000Thereafter

$
175,000




Compensation of Directors

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

Compensation
Committee Interlock and Insider Participation in the compensation committee

Frank
Wiedeman, Director

Jan
Winston, Director

John
Rich, Director

22

---

Item 12.    Security Ownership of Certain Beneficial Owners and Management

The following table presents certain information with respect to the security ownership of the directors of the Company and the security ownership of each
individual or entity known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock as of March 1, 2003. Percentages that include ownership of options or
convertible securities are calculated assuming exercise or conversion by each individual or entity of the options, (including "out-of-the-money optons"), or convertible securities owned by each
individual or entity separately without considering the dilutive effect of option exercises and security conversions by any other individual or entity. The Company has been advised that all
individuals listed have the sole power to vote and dispose of the number of shares set opposite their names in the table.

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

---

23

---

24

---

Equity Compensation Plan Information

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

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

Item 13. Certain Relationship and Related Transactions

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

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

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

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

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

25

---

Item 14. Controls and Procedures

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

26

---



PART IV

Item 14B.    Form 8K Filed:

Convertible Subordinated Promissory Note, filed January 16, 2003.

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

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:

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

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:

|10.1 |  | 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, 1991:

|10.2* |  | 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:

|10.3 |  | 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,
1993:

|10.5 |  | Stock and Note Purchase Agreement with exhibits.
|---- |  | ------------------------------------------------

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:

|10.6 |  | Subordinated Convertible Note dated April 9, 1995 between Clarex Limited and INRAD, Inc.
|---- |  | ----------------------------------------------------------------------------------------

|10.7 |  | 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:

|10.8 |  | Addendum to lease dated October 4, 1991, between S&R Costa as lessor and the Company as lessee.
|---- |  | -----------------------------------------------------------------------------------------------

|10.9 |  | Amendment and waiver to the stock and purchase agreement dated as of December 15, 1993.
|---- |  | ---------------------------------------------------------------------------------------

26

---

The
following exhibits are incorporated by reference to the Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31,
1999:

|10.10* |  | Employment contract with Devaunshi Sampat.
|------ |  | ------------------------------------------

|10.11* |  | Employment contract with Daniel Lehrfeld.
|------ |  | -----------------------------------------

|10.12* |  | INRAD, Inc. 2000 Equity Compensation Program.
|------ |  | ---------------------------------------------

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

|23.2 |  | Consent from Holtz Rubenstein & Co, LLP.
|---- |  | ----------------------------------------

---

27

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

| |  | INRAD INC.          
| |  | --------------------
| |  | By:                 
| |  | Dated: April 2, 2003

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/THOMAS LENAGHThomas Lenagh             |  | Chairman of the Board
of Directors                                                 |  | April 2, 2003
|/s/DANIEL LEHRFELDDaniel Lehrfeld         |  | President, Chief
Executive Officer
and Director                                    |  | April 2, 2003
|/s/FRANK WIEDEMANFrank Wiedeman           |  | Director                                                                           |  | April 2, 2003
|/s/JOHN RICHJohn Rich                     |  | Director                                                                           |  | April 2, 2003
|/s/JAN WINSTONJan Winston                 |  | Director                                                                           |  | April 2, 2003
|/s/WILLIAM S. MIRAGLIAWilliam S. Miraglia |  | Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer) |  | April 2, 2003

28

---



CERTIFICATION FOR 10-K

I,
Daniel Lehrfeld, certify that:



Date:
April 2, 2003

|                                          |  | 
|----------------------------------------- |  | 
|/s/DANIEL LEHRFELDChief Executive Officer |  | 

29

---

CERTIFICATION FOR 10-K

I,
William S. Miraglia, certify that:



Date:
April 2, 2003

|                                              |  | 
|--------------------------------------------- |  | 
|/s/WILLIAM S. MIRAGLIAChief Financial Officer |  | 

30

---



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

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



Dated:
April 2, 2003

| |  |                                                          
| |  | ---------------------------------------------------------
| |  | /s/DANIEL LEHRFELDDaniel Lehrfeld
Chief Executive Officer

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

31

---



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

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

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

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

Dated:
April 2, 2003

| |  |                                                                  
| |  | -----------------------------------------------------------------
| |  | /s/WILLIAM S. MIRAGLIAWilliam S. Miraglia
Chief Financial Officer

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

32

---



INRAD, INC. AND SUBSIDIARY    REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS    THREE YEARS ENDED DECEMBER 31, 2002

CONTENTS

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

F-1

---



Independent Auditors' Report

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

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

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Inrad, Inc. and Subsidiary as of
December 31, 2002 and 2001 and the results of their operations and their cash flows for the three years then ended, in conformity with accounting principles generally accepted in the United
States of America.

HOLTZ
RUBENSTEIN & CO., LLP

Melville,
New York
February 14, 2003

F-2

---



INRAD, INC. AND SUBSIDIARY        CONSOLIDATED BALANCE SHEETS

|                                          |                                                                                                                          | December 31,                          |          
|----------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ------------------------------------- | ---------
|
|ASSETS                                    |                                                                                                                          |                                       |          
|CURRENT ASSETS:                           |                                                                                                                          |                                       |          
|                                          | Cash and cash equivalents                                                                                                |                                       | $        
|                                          | Accounts receivable, net of allowance for uncollectible accounts of $40,000 and $54,000, in 2002 and 2001                |                                       |          
|                                          | Unbilled contract costs                                                                                                  |                                       |          
|                                          | Inventories                                                                                                              |                                       |          
|                                          | Other current assets                                                                                                     |                                       |          
|                                          |                                                                                                                          |                                       |          
|                                          |                                                                                                                          | Total current assets                  |          
|                                          |                                                                                                                          |                                       |          
|PROPERTY AND EQUIPMENT, net:              |                                                                                                                          |                                       |          
|                                          | Property and equipment at cost                                                                                           |                                       |          
|                                          | Less: accumulated depreciation and amortization                                                                          |                                       |          
|                                          |                                                                                                                          |                                       |          
|                                          |                                                                                                                          | Total property and equipment          |          
|                                          |                                                                                                                          |                                       |          
|PRECIOUS METALS                           |                                                                                                                          |                                       | 309,565  
|DEFERRED TAXES                            |                                                                                                                          |                                       |         
|OTHER ASSETS                              |                                                                                                                          |                                       | 198,131  
|                                          |                                                                                                                          |                                       |          
|                                          |                                                                                                                          | TOTAL ASSETS                          |          
|                                          |                                                                                                                          |                                       |          
|LIABILITIES AND SHAREOWNERS' EQUITY       |                                                                                                                          |                                       |          
|CURRENT LIABILITIES:                      |                                                                                                                          |                                       |          
|                                          | Note payableBank                                                                                                        |                                       | $        
|                                          | Note payableOther                                                                                                       |                                       |          
|                                          | Current portion of long term debt                                                                                        |                                       |          
|                                          | Accounts payable and accrued expenses                                                                                    |                                       |          
|                                          | Current obligations under capital leases                                                                                 |                                       |          
|                                          |                                                                                                                          |                                       |          
|                                          |                                                                                                                          | Total current liabilities             |          
|SUBORDINATED CONVERTIBLE PROMISSORY NOTE  |                                                                                                                          |                                       | 1,000,000
|CAPITAL LEASE OBLIGATIONS                 |                                                                                                                          |                                       | 188,512  
|                                          |                                                                                                                          |                                       |          
|                                          |                                                                                                                          | Total liabilities                     |          
|                                          |                                                                                                                          |                                       |          
|COMMITMENTS SHAREOWNERS' EQUITY:          |                                                                                                                          |                                       |          
|                                          | 10% Convertible preferred stock, Series A, no par value; 500 shares issued and outstanding, respectively                 |                                       |          
|                                          | 10% Convertible preferred stock, Series B, no par value; 2,100 shares issued and outstanding, respectively               |                                       |          
|                                          | Common stock, $.01 par value; authorized 15,000,000 shares; 5,283,640 and 5,135,603 issued and outstanding, respectively |                                       |          
|                                          | Capital in excess of par value                                                                                           |                                       |          
|                                          | Deficit                                                                                                                  |                                       |          
|                                          |                                                                                                                          |                                       |          
|                                          |                                                                                                                          |                                       | 5,064,829
|                                          |                                                                                                                          | Treasury stock, at cost; 4,600 shares |          
|                                          |                                                                                                                          |                                       |          
|                                          |                                                                                                                          | TOTAL SHAREOWNERS' EQUITY             |          
|                                          |                                                                                                                          |                                       |          
|TOTAL LIABILITIES AND SHAREOWNERS' EQUITY |                                                                                                                          | $                                     | 8,508,925
|                                          |                                                                                                                          |                                       |          

See notes to consolidated financial statements

F-3

---



INRAD, INC. AND SUBSIDIARY        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                  |                                              | Years Ended December 31, |           
|--------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------ | ----------
|
|REVENUES:                                                                         |                                              |                          |           
|                                                                                  | Net product sales                            |                          | $         
|                                                                                  | Contract research and development            |                          |           
|                                                                                  |                                              |                          |           
|                                                                                  |                                              |                          | 5,569,118 
|                                                                                  |                                              |                          |           
|COST AND EXPENSES:                                                                |                                              |                          |           
|                                                                                  | Cost of goods sold                           |                          |           
|                                                                                  | Contract research and development expenses   |                          |           
|                                                                                  | Selling, general and administrative expenses |                          |           
|                                                                                  | Internal research and development expenses   |                          |           
|                                                                                  | Special charges                              |                          |           
|                                                                                  |                                              |                          |           
|                                                                                  |                                              |                          | 7,073,518 
|                                                                                  |                                              |                          |           
|OPERATING (LOSS) INCOME                                                           |                                              |                          | (1,504,400
|                                                                                  |                                              |                          |           
|OTHER INCOME (EXPENSE):                                                           |                                              |                          |           
|                                                                                  | Gain on sale of technology                   |                          |           
|                                                                                  | Interest expense                             |                          |           
|                                                                                  | Interest income                              |                          |           
|                                                                                  | Other                                        |                          |           
|                                                                                  |                                              |                          |           
|                                                                                  |                                              |                          | (110,992  
|                                                                                  |                                              |                          |           
|(LOSS) INCOME BEFORE INCOME TAX (PROVISION) BENEFIT AND PREFERRED STOCK DIVIDENDS |                                              |                          | (1,615,392
|INCOME (PROVISION) TAX BENEFIT (NET)                                              |                                              |                          | 100,580   
|                                                                                  |                                              |                          |           
|NET (LOSS) INCOME                                                                 |                                              |                          | (1,715,972
|PREFERRED STOCK DIVIDENDS                                                         |                                              |                          | (120,600  
|                                                                                  |                                              |                          |           
|NET (LOSS) INCOME APPLICABLE TO COMMON SHAREOWNERS                                |                                              | $                        | (1,836,572
|                                                                                  |                                              |                          |           
|NET (LOSS) INCOME PER COMMON SHARE                                                |                                              |                          |           
|                                                                                  | Basic                                        |                          | $         
|                                                                                  |                                              |                          |           
|                                                                                  | Diluted                                      |                          | $         
|                                                                                  |                                              |                          |           

See
notes to consolidated financial statements

F-4

---



INRAD, INC. AND SUBSIDIARY  CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY

|                                          |  |           |  |   |        | Preferred Stock
(Series A) |     | Preferred Stock
(Series B) |   |         |  |       |  |   |           |  |   |           | 
|----------------------------------------- |  | --------- |  | - | ------ | -------------------------- | --- | -------------------------- | - | ------- |  | ----- |  | - | --------- |  | - | --------- | 
|
|
|
|Balance, January 1, 2000                  |  | 4,100,678 |  | $ | 41,007 |                            | 500 |                            | $ | 500,000 |  |      |  |   |          |  | $ | 8,237,718 | 
|Issuance of Preferred Stock               |  |          |  |   |       |                            |    |                            |   |        |  | 2,100 |  |   | 2,100,000 |  |   |          | 
|Exercise of Options                       |  | 107,000   |  |   | 1,070  |                            |    |                            |   |        |  |      |  |   |          |  |   | 68,430    | 
|Exercise of Warrants                      |  | 420,000   |  |   | 4,200  |                            |    |                            |   |        |  |      |  |   |          |  |   | 382,050   | 
|Common Stock Issued on Conversion of Debt |  | 280,000   |  |   | 2,800  |                            |    |                            |   |        |  |      |  |   |          |  |   | 347,200   | 
|Dividend on Preferred Stock               |  | 50,000    |  |   | 500    |                            |    |                            |   |        |  |      |  |   |          |  |   | 49,500    | 
|Net income for the year                   |  |          |  |   |       |                            |  . |                            |   |        |  |      |  |   |          |  |   |          | 
|                                          |  |           |  |   |        |                            |     |                            |   |         |  |       |  |   |           |  |   |           | 
|Balance, December 31, 2000                |  | 4,957,678 |  |   | 49,577 |                            | 500 |                            |   | 500,000 |  | 2,100 |  |   | 2,100,000 |  |   | 9,084,898 | 
|Exercise of Options                       |  | 29,250    |  |   | 293    |                            |    |                            |   |        |  |      |  |   |          |  |   | 30,833    | 
|Exercise of Warrants                      |  | 51,675    |  |   | 516    |                            |    |                            |   |        |  |      |  |   |          |  |   | 56,683    | 
|Dividend on Preferred Stock               |  | 92,000    |  |   | 920    |                            |    |                            |   |        |  |      |  |   |          |  |   | 154,080   | 
|Subscription received                     |  |          |  |   |       |                            |    |                            |   |        |  |      |  |   |          |  |   |          | 
|Contribution                              |  | 5,000     |  |   | 50     |                            |    |                            |   |        |  |      |  |   |          |  |   | 4,700     | 
|Net income for the year                   |  |          |  |   |       |                            |  . |                            |   |        |  |      |  |   |          |  |   |          | 
|                                          |  |           |  |   |        |                            |     |                            |   |         |  |       |  |   |           |  |   |           | 
|Balance, December 31, 2001                |  | 5,135,603 |  |   | 51,356 |                            | 500 |                            |   | 500,000 |  | 2,100 |  |   | 2,100,000 |  |   | 9,331,194 | 
|401K contribution                         |  | 14,037    |  |   | 140    |                            |     |                            |   |         |  |       |  |   |           |  |   | 20,222    | 
|Dividend on Preferred Stock               |  | 134,000   |  |   | 1,340  |                            |     |                            |   |         |  |       |  |   |           |  |   | 119,260   | 
|                                          |  |           |  |   |        |                            |     |                            |   |         |  |       |  |   |           |  |   |           | 
|                                          |  |           |  |   |        |                            |     |                            |   |         |  |       |  |   |           |  |   |           | 
|Balance, December 31, 2002                |  | 5,283,640 |  | $ | 52,836 |                            | 500 |                            | $ | 500,000 |  | 2,100 |  | $ | 2,100,000 |  | $ | 9,470,676 | 
|                                          |  |           |  |   |        |                            |     |                            |   |         |  |       |  |   |           |  |   |           | 

See notes to consolidated financial statements

F-5

---



INRAD, INC. AND SUBSIDIARY        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                                | Years Ended December 31,                            |                                    
|---------------------------------------------------- | ---------------------------------------------------------------------------------------------- | --------------------------------------------------- | -----------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                                |                                                     |                                    
|                                                     | Net (loss) income                                                                              |                                                     | $                                  
|                                                     |                                                                                                |                                                     |                                    
|                                                     | Adjustments to reconcile (loss) income to net cash (used in) provided by operating activities: |                                                     |                                    
|                                                     |                                                                                                | Depreciation and amortization                       |                                    
|                                                     |                                                                                                | Deferred tax asset                                  |                                    
|                                                     |                                                                                                | Allowance for uncollectible accounts                |                                    
|                                                     |                                                                                                | Increase in inventory reserve                       |                                    
|                                                     |                                                                                                | Contribution of stock                               |                                    
|                                                     |                                                                                                | Changes in operating assets and liabilities:        |                                    
|                                                     |                                                                                                |                                                     | (Increase) decrease in assets:     
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                |                                                     | Increase (decrease) in liabilities:
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                | Total adjustments                                   |                                    
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                | Net cash (used in) provided by operating activities |                                    
|                                                     |                                                                                                |                                                     |                                    
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                                |                                                     |                                    
|                                                     | Capital expenditures                                                                           |                                                     |                                    
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                | Net cash used in investing activities               |                                    
|                                                     |                                                                                                |                                                     |                                    
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                                |                                                     |                                    
|                                                     | Proceeds from issuance of preferred stock                                                      |                                                     |                                    
|                                                     | Increase in notes payable                                                                      |                                                     |                                    
|                                                     | Principal payments of capital lease obligations                                                |                                                     |                                    
|                                                     | Principal payments on long- term debt                                                          |                                                     |                                    
|                                                     | Proceeds from long- term debt                                                                  |                                                     |                                    
|                                                     | Proceeds from convertible promissory note                                                      |                                                     |                                    
|                                                     | Proceeds from exercise of warrants and options                                                 |                                                     |                                    
|                                                     |                                                                                                |                                                     |                                    
|                                                     |                                                                                                | Net cash provided by financing activities           |                                    
|                                                     |                                                                                                |                                                     |                                    
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                                |                                                     | 606,125                            
|CASH AND CASH EQUIVALENTS, beginning of year         |                                                                                                |                                                     | 548,949                            
|                                                     |                                                                                                |                                                     |                                    
|CASH AND CASH EQUIVALENTS, end of year               |                                                                                                | $                                                   | 1,155,074                          
|                                                     |                                                                                                |                                                     |                                    

See
notes to consolidated financial statements

F-6

---

INRAD, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2002

1.    Nature of Business and Summary of Significant Accounting Policies

a.Nature of Operations

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

b.Principles of consolidation

The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Upon consolidation, all intercompany accounts and transactions are
eliminated.

c.Allowance for doubtful accounts

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

d.Depreciation and amortization

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

e.Inventories

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

f.Income taxes

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

g.Impairment of long-lived assets

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

F-7

---

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

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

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

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

h.Stock-based compensation

The
Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and accounts for stock issued for services provided by other than employees in accordance with and complies with the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the Company's stock and the exercise
price. During December 2002, the Company issued all stock options at fair market value. A new measurement date for purposes of determining compensation is established when there is a
substantive change to the terms of an underlying option.

i.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.

j.Internal research and development costs

Internal
research and development costs are charged to expense as incurred

k.Precious metals

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

l.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

F-8

---

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

m.Advertising costs

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

n.Statement of cash flows

For
purposes of the consolidated statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash
equivalents.

Interest
paid during the years ended December 31, 2002, 2001 and 2000 was $135,001, $91,154 and $15,327, respectively.

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

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

Income
taxes paid were $580 in 2002, $16,756 in 2001 and none in 2000.

o.Concentration of risk

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

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

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

p.Net (loss) income per common share

The
basic net (loss) income per share is computed using weighted average number of common shares outstanding for the applicable period. The diluted (loss) income per share is computed
using the weighted average number of common shares plus common equivalent shares outstanding, except if the effect on the per share amounts, including equivalents, would be anti-dilutive.

q.Comprehensive income (loss)

Other
comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from
net income as these amounts are recorded directly as an adjustment to stockholders' equity.

r.Shipping and handling costs

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

F-9

---

s.Recently issued accounting pronouncements

In
July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS 146
requires that a liability for cost that is associated with and exit or disposal activity be recognized when the liability is incurred. It supersedes the guidance in EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring". Under EITF
94-3, an entity recognized a liability for and exit cost on the date that the entity committed itself to an exit plan. Under SFAS 146, an entity's commitment to a plan does not, by
itself, create a present obligation that meets the definition of a liability. SFAS 146 also establishes that fair value is the objective for the initial measurement of the liability.
SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a significant impact on the
Company.

In
November 2002, the FASB issued Interpretation No. 45 (FIN), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, and interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34". FIN 45 elaborates on the existing disclosure requirements
for most guarantees, including loan guarantees such as standby letters of credit and warranty obligations. It also clarifies that at the time a company issues a guarantee, a company must recognize an
initial liability for the fair value of the obligations assumes under that guarantee and must disclose that information in its interim and annual financial statements. The provisions of FIN 45
relating to initial recognition and measurement must be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is not expected to have a
significant impact on the Company.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of FASB Statement
No. 123", which amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on reported results. The Company will continue to account for stock-based compensation to employees under APB Opinion
No. 25 and related interpretations. The adoption of SFAS No. 148 is not expected to have a significant impact on the Company, as they have yet to issue stock-based employee compensation.

In
January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities". FIN 46 requires certain variable interest entities to
be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is required to be applied to preexisting entities of the Company as of the
beginning of the first quarter after June 15, 2003. FIN 46 is required to be applied to all new entities with which the Company becomes involved beginning February 1, 2003. The adoption
of FIN 46 is not expected to have a significant impact on the Company.

F-10

---

2.    Inventories

Inventories are comprised of the following:

December 31,2002

2001Raw materials

$
379,838

$
455,491Work in process, including manufactured parts and components


1,510,890


1,767,016Finished goods


192,204


134,377$
2,082,932

$
2,356,884


3.    Property and Equipment

Property and equipment are comprised of the following:

December 31,2002

2001Office and computer equipment

$
863,603

$
655,248Machinery and equipment


7,106,236


6,803,855Leasehold improvements


1,337,914


1,295,0949,307,753


8,754,197Less accumulated depreciation and amortization


6,008,008


5,499,498$
3,299,745

$
3,254,699


4.    Bank Loans

In January 2002 the Company repaid its obligation with its bank and entered into a new agreement with another bank. This agreement provides for a
$1,000,000 Line of Credit at the bank's prime rate, and a $1,000,000 Asset Based Loan at 5.61%.

In
January 2003 the Company was in violation of certain financial covenants required under the loan agreements. The Bank agreed to extend the loans through March 2003. The
Company is in negotiations with the Bank to determine the criteria by which the Bank will extend the loans for Fiscal 2003. As a result of the violations of the covenants all bank debt has been
classified as a current liability.    The Line of Credit that is secured primarily by accounts receivable and inventory has been limited to the current borrowings of approximately
$750,000. The Asset Based Loan that is secured by certain equipment owned by the Company currently has a balance of approximately $928,000. Interest and principal payments due on both loans are, and
have always remained, current.

F-11

---

5.    Subordinated Convertible Promissory Note

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

6.    Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses are comprised of the following:

December 31,2002

2001Trade accounts payable and accrued purchases

$
131,903

$
528,729Accrued vacation


79,017


69,260Accrued payroll


100,267


90,000Accrued expensesother


57,150


41,405$
368,337

$
729,394


7.    Capital Leases

Capital leases consist of the following:

December 31,2002

2001Capital leases, payable in aggregate monthly installments of $12,000, including interest at rates ranging from 11.0% to 11.6% expiring from June 2003 through October 2005, collateralized by equipment

$
287,169

$
374,191Less current portion


98,657


87,021Long-term debt, excluding current portion

$
188,512

$
287,170


Maturities
of capital leases are as follows:

Year Ending December 31,2003

$
140,5792004


124,5432005


95,477Total minimum payments


360,599Less amounts representing interest


73,430Present value of minimum payments

$
287,169


Capital
lease obligations are collateralized by property and equipment with cost and related accumulated depreciation approximating $470,000 and $121,000 respectively at
December 31, 2002.

F-12

---

8.    Income Taxes

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

Year Ended December 31,2002

2001

2000Federal statutory rate


34
%

34
%

34
%Tax provision (benefit) at Federal statutory rates

$
(549,233
)
$
14,836

$
239,550Loss in excess of available benefit


549,233





Alternative minimum tax








16,000Change in valuation allowance


100,000


(114,836
)

(255,550
)State taxes


580


16,756


$
100,580

$
(83,244
)
$



At
December 31, 2002, the Company has Federal and State net operating loss carryforwards for tax purposes of approximately $7,027,000 and $1,840,000, respectively. The tax loss
carryforwards expire at various dates through 2022.

Internal
Revenue Code Section 382 places a limitation on the utilization of Federal net operating loss and other credit carryforwards when an ownership change, as defined by the
tax law, occurs. Generally, this occurs when a greater than 50 percentage point change in ownership occurs. Accordingly, the actual utilization of the net operating loss and carryfowards 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.

The
provision (benefit) for income taxes consists of the following:

Years Ended December 31,2002

2001

2000Current:State

$
580

$
16,756

$
Deferred:Federal


100,000


(100,000
)

State








Total

$
100,580

$
(83,244
)
$



Deferred
tax assets (liabilities) comprise the following:

December 31,2002

2001Inventory reserves

$
50,000

$
48,000Vacation liabilities


32,000


26,000Other


83,000


41,000Depreciation


(3,000
)

149,000Loss carryforwards


2,500,000


1,932,000Gross deferred tax assets


2,662,000


2,196,000Valuation allowance


(2,662,000
)

(2,096,000
)$


$
100,000


F-13

---

9.    Related Party Transactions

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

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

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

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

Daniel Lehrfeld, President and CEO

$
120,000John Rich, Director

$
30,000Jan Winston, Director

$
10,000Maria Murray, VP business Development

$
50,000Devaunshi Sampat, VP Sales & Marketing

$
20,000William S. Miraglia, Chief financial Officer

$
23,000


10.  Commitments

a.Lease commitment

The
Company leases its office and manufacturing facility under an operating lease which expires in 2006. The lease provides for additional rental payments based upon a pro rata share of
real estate taxes and certain other expenses and has a renewal option for one five-year period that was exercised during 2001. Rental expense was approximately $224,000, $212,000 and
$206,000 in 2002, 2001 and 2000, respectively, and real estate taxes were $41,000, $39,000 and $38,000 in 2002, 2001 and 2000, respectively.

Future
minimum annual rentals are payable as follows:

Year Ending December 31,2003

$
210,0002004

$
210,0002005

$
218,0002006

$
225,000


b.Retirement plans

The
Company maintains a 401(k) savings plan for all eligible employees (as defined in the plan). 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 contributed
$11,870 in the form of 28,263 shares of the Company's common stock in 2002, distributed in March 2003 and $20,362 in the form of 14,037 shares of the Company's common stock in 2001, distributed
in February 2002.

c.Employment agreements

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

F-14

---

The
aggregate minimum commitment under this agreement is as follows:

Year Ending December 31,2003

$
175,0002004

$
175,0002005

$
175,0002006

$
175,000Thereafter

$
175,000


11.  Product Sales, Foreign Sales and Sales to Major Customers

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

Years Ended December 31,2002

2001

2000Crystals and components

$
2,289,098

$
2,283,256

$
2,953,000Custom optics


2,036,807


3,211,793


3,145,956Systems and instruments


1,155,816


1,850,988


766,000Total

$
5,481,721

$
7,886,037

$
6,864,956


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

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

12.  Shareowners' Equity

a.Common shares reserved

Common
shares reserved at December 31, 2001, are as follows:

1991 Stock option plan

334,0002000 Stock option plan

1,500,000Convertible preferred stock

1,340,000


b.Preferred stock

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

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

F-15

---

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

c.Stock options



Years Ended December 31,2002

2001

2000Fixed Stock Options

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
PriceOutstanding, beginning of year

698,600

$
2.20

729,500

$
1.96

358,500

$
1.02Granted

475,200


0.94

289,700


4.97

514,000


2.40Exercised






(29,250
)

1.05

(107,000
)

1.00Expired






(15,500
)

1.25




Forfeited






(276,350
)

1.90

(36,000
)

1.13Outstanding, end of year

1,173,800


1.69

698,600


2.20

729,500


1.96Options exercisable, end of year

402,163


.98

242,650


1.70

175,625


1.32Weighted-average fair values of options granted during year




.91




4.97




2.40


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

Options Outstanding

Options ExercisableRange of
Exercise Price

Number
Outstanding

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

Number
Outstanding

Weighted
Average
Exercise
Price$
0.85$2.00

1,003,650

7.93
yrs.
$
1.33

323,450

$
1.56$
3.00$5.00

169,600

7.61
yrs.
$
3.81

78,713

$
3.71




F-16

---



|                   |                          | Years Ended December 31,
|------------------ | ------------------------ | ------------------------
|
|Net (loss) income: |                          |                         
|                   | As reported              |                         
|                   | Pro forma                |                         
|                   | Income (loss) per share: |                         
|                   |                          | Basic:                  
|                   |                          |                         
|                   |                          |                         
|                   |                          | Diluted:                
|                   |                          |                         
|                   |                          |                         

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

Years Ended December 31,2002

2001

2000Dividend yield

0.00
%
0.00
%
0.00
%Volatility

128.11
%
168.67
%
237.00
%Risk-free interest rate

5.2
%
6.0
%
6.0
%Expected life

10 years

10 years

10 years


d.Warrants

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

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

Years Ended December 31,2002

2001

2000Income

Average
Shares

Income

Average
Shares

Loss

Average
Shares(Loss) income before preferred dividends

$
(1,715,972
)


$
43,634



$
707,869Less: preferred stock dividends


(120,600
)



(155,000
)



(50,000
)Basic:Available to common shareholders


(1,836,572
)
5,210,322


(111,366
)
5,046,666


657,869

4,563,350Dilutive effect of convertible preferred stock and stock options












50,000

1,045,163Diluted:Available to common shareowners and assumed conversions

$
(1,836,572
)
5,210,322

$
(111,366
)
5,046,666

$
707,869

5,608,513


F-17

---

13.  Fair Value of Financial Instruments

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

Current Assets and Current Liabilities:The carrying amount of cash, current receivables and payables and certain other
short-term financial instruments approximate their fair value.

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

14.  Quarterly Data (Unaudited)

Summary
quarterly results were as follows:

Year 2002

First

Second

Third

FourthNet product sales

$
1,185,840

1,657,964

1,344,569

1,293,348Contract R & D sales


34,625

28,000



24,772Gross profitproduct sales


62,253

432,237

239,877

147,852Gross profitcontract R & D


(15,654
)
(6,562
)
(2,324
)
48,839Net (loss)


(476,688
)
(322,209
)
(409,056
)
(628,619
)Net income per shareBasic(a)


(0.09
)
(0.06
)
(0.07
)
(0.12
)Net income per shareDiluted(a)


(0.09
)
(0.06
)
(0.07
)
(0.12
)


Year 2001

First

Second

Third

FourthNet product sales

$
2,351,720

2,323,713

1,583,298

1,627,756Contract R & D sales


37,378

10,000

94,587

47,203Gross profitproduct sales


842,758

795,418

659,316

573,990Gross profitcontract R & D


(19,425
)
6,391

80,477

58,225Net income


251,278

20,834

25,156

(408,634
)Net income per shareBasic(a)


0.05

0.01

0.01

(0.09
)Net income per shareDiluted(a)


0.04

0.01

0.01

(0.09
)


---

15.  Special Charges

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

F-18

---

QuickLinks