**Exhibit 10.5**

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**THIS CONVERTIBLE PROMISSORY NOTE HAS BEEN,AND ANY SHARES ISSUED UPON CONVERSION PURSUANT TO THE TERMS HEREOF WILL BE,ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR SALE IN CONNECTION WITH,ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, ASAMENDED (THE “ACT”).  THIS CONVERTIBLEPROMISSORY NOTE, AND ANY SECURITIES ISSUED UPON CONVERSION PURSUANT TO THISNOTE, HAVE NOT BEEN REGISTERED UNDER THE ACT OR ANY STATE SECURITIES LAW, ANDMAY BE OFFERED AND SOLD ONLY IF REGISTERED PURSUANT TO THE PROVISIONS OF THEACT OR THOSE LAWS OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE.**

 

**SUBORDINATED CONVERTIBLE PROMISSORY NOTE**

 
| Principal Amount:  $1,000,000 |   | December 31, 2002 |
|-----------------------------------------|--------|-------------------|

 

FOR VALUE RECEIVED, INRAD, INC., a New Jersey corporation (hereinaftercalled “Issuer”), hereby promises to pay to the order of WELLAND, LTD. and itssuccessors and assigns (hereinafter called the “Holder”), at such address asthe Holder may designate in writing to Issuer, the principal sum of ONE MILLIONDOLLARS ($1,000,000) plus all accrued interest owing hereunder in lawful moneyof the United States of America on or before the Maturity Date (as definedbelow), unless this Convertible Promissory Note (the “Note”) is converted bythe Holder as set forth herein.  Forpurposes of this Note, “Maturity Date” shall mean January 31, 2006.

 

# *Interest*.  Interest shall accrue on the unpaidprincipal amount of this Note at the rate of six percent (6%) per annum andshall be due and payable on the Maturity Date. Interest shall be computed on the basis of a 360 day year for the actualnumber of days elapsed.

 

# *OptionalPrepayment; Order of Payments.* Issuer may prepay this Note at any time, in whole or in part,without premium or penalty; provided, however, Issuer shall provide to theHolder written notice at least ten (10) business days prior to suchprepayment.  All payments made onaccount of this Note shall be applied first to the payment of any costs ofenforcement then due hereunder, second to the payment of accrued and unpaidinterest then due hereunder, and the remainder, if any, shall be applied to theunpaid principal balance of this Note.

 

# *Eventof Default Defined; Acceleration of Maturity*.  If one or more of the following events(“Events of Default”) shall have occurred:

 

## a default in thepayment of all or any part of the principal or interest due under this Note asand when the same shall become due and payable, at maturity, by declaration aspermitted hereunder, upon acceleration or otherwise;

 

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## Issuer shall merge or consolidate with or into anyother person or entity, sell, transfer, lease or otherwise dispose of all orany substantial portion of its assets or adopt a plan of liquidation ordissolution; *provided*, *however*, that Issuer shall have the rightto merge with any other entity so long as Issuer shall be the surviving entityin any such merger;

 

## Issuer shall have applied for or consented to theappointment of a custodian, receiver, trustee or liquidator, or othercourt-appointed fiduciary of all or a substantial part of its properties; or acustodian, receiver, trustee or liquidator or other court appointed fiduciaryshall have been appointed with the consent of Issuer; or Issuer is generallynot paying its debts as they become due or is insolvent, or has made a generalassignment for the benefits of its creditors; or Issuer files a voluntarypetition in bankruptcy, or a petition or an answer seeking reorganization or anarrangement with its creditors or seeking to take advantage of any insolvencylaw, or an answer admitting the material allegations of a petition in anybankruptcy, reorganization or insolvency proceeding or has taken action for thepurpose of effecting any of the foregoing; or if, within sixty (60) days afterthe commencement of any proceeding against Issuer seeking any reorganization,rehabilitation, arrangement, composition, readjustment, liquidation,dissolution or similar relief under the Federal bankruptcy code or similarorder under future similar legislation, the appointment of any trustee,receiver, custodian, liquidator, or other court-appointed fiduciary of Issueror of all or any substantial part of its properties, such order or appointmentshall not have been vacated or stayed on appeal or if, within sixty (60) days afterthe expiration of any such stay, such order or appointment shall not have beenvacated (all such events, collectively “Insolvency Events”);

 

Then Holder, by notice in writing to Issuer (the “AccelerationNotice”), may declare the principal amount of this Note and all accrued butunpaid interest to be due and payable immediately, and upon any suchdeclaration the same shall become immediately due and payable; provided that ifan Insolvency Event occurs, the principal amount of this Note and all accrued butunpaid interest shall become and be immediately due and payable without anydeclaration or other act on the part of the Holder.

 

# *Conversion*.  The Holder may, at any time prior to theearlier of the Maturity Date or the prepayment of this Note by Issuer, convertall or a portion of the principal and accrued interest then outstanding underthis Note into fully paid and non-assessable shares of Issuer’s Common Stock(the “Common Stock”), at the Conversion Price (as defined below) per share.  Such conversion shall be effected by theHolder by sending a written notice of conversion and this Note to Issuer forcancellation and issuance of the number of shares of Common Stock into whichthis Note is being converted.  In theevent this Note is being converted in part, a replacement Note representing theunconverted portion of this Note shall be delivered to the Holder.  Upon conversion of this Note, only wholeshares of Common Stock shall be issued. Any remainder due hereunder which is insufficient to purchase a wholeshare of Common Stock shall be paid by Issuer in cash.  The Conversion Price shall be (a) the priceat which common stock is first issued for cash after the date of this Note toan unrelated third party investor or (b) the price mutually agreed to by theIssuer and the Holder as its then fair market value if no such issuance hasoccurred within 12 months of the date hereof (the “Conversion Price”).  To

 

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# supplement clause (a), if after the date hereof butbefore any third party purchase of Common Stock for cash, the Company issuesany security convertible into Common Stock to an unrelated third party investorfor cash, the Conversion Price of this Note shall be the same as the conversionprice of that convertible security. Once fixed, the Conversion Price and the amount and kind of securitiesissuable upon conversion of this Note shall be subject to adjustment from timeto time in accordance with the provisions of this Section 4.

 

**4.1*          Subdivision or Combination of CommonStock*.  In case Issuer shall atany time subdivide (by any stock split, stock dividend or otherwise) itsoutstanding shares of Common Stock into a greater number of shares, theConversion Price in effect immediately prior to such subdivision shall beproportionately reduced, and, conversely, in case the outstanding shares ofCommon Stock shall be combined into a smaller number of shares, the ConversionPrice in effect immediately prior to such combination shall be proportionatelyincreased.**

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**4.2          *Reorganizationor Reclassification*.  If anycapital reorganization or reclassification of the capital stock of Issuer(other than in connection with a merger or other reorganization in which Issueris not the surviving entity) shall be effected in such a way that holders ofCommon Stock shall be entitled to receive stock, securities or assets withrespect to or in exchange for Common Stock, then, as a condition of suchreorganization or reclassification, lawful and adequate provisions shall bemade whereby the Holder shall thereupon have the right to receive upon theconversion of this Note, upon the terms and conditions specified herein and inlieu of the shares of Common Stock immediately theretofore receivable upon theconversion of this Note, such shares of stock, securities or assets as may beissued or payable with respect to or in exchange for the shares of Common Stockimmediately theretofore receivable upon such conversion had such reorganizationor reclassification not taken place, and in any such case appropriateprovisions shall be made with respect to the rights and interests of the Holderto the end that the provisions hereof shall thereafter be applicable, as nearlyas may be, in relation to any shares of stock, securities or assets thereafterdeliverable upon the exercise of such conversion rights.**

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4.3           *Notice of Adjustment*.  Upon any adjustment of the Conversion Price,then and in each such case Issuer shall give written notice thereof, bydelivery in person, certified or registered mail, return receipt requested,telecopier or telex, addressed to the Holder at the address of the Holder, asprovided to Issuer, which notice shall state the Conversion Price resultingfrom such adjustment, setting forth in reasonable detail the method upon whichsuch calculation is based.

 

**4.4          *Due Issuanceof Shares Upon Conversion*. Issuer covenants and agrees that all shares of Common Stock or any suchother securities which may be issued upon any whole or partial conversion ofthis Note will, upon issuance, be validly issued, fully paid and non-assessableand free from all taxes, liens and charges with respect to the issue thereof.**

 

**4.5          *Stock to beReserved*.  Issuer will at alltimes reserve and keep**

 

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**availableout of its authorized Common Stock, solely for the purpose of issuance upon theconversion of this Note as herein provided, such number of shares of CommonStock as shall then be issuable upon the conversion hereof.  Issuer will not take any action whichresults in any adjustment of the Conversion Price if the total number of sharesof Common Stock issued and issuable after such action upon conversion of thisNote would, when added to the number of shares of Common Stock then reservedfor issuance, exceed the total number of shares of Common Stock then authorizedby Issuer’s Certificate of Incorporation.**

 

5.             *Subordination*.  The Issuer hereby agrees, and the Holder of this Note by itsacceptance agrees, that the payment of the principal of and interest on theNote is hereby expressly made subordinate and junior in right of payment, tothe extent set forth in the following paragraphs (a), (b) and (c), to the priorpayment in full of all Senior Debt of the Issuer, whether such Senior Debt,except as provided in Section 5 below, is incurred prior to, on or after thedate hereof:

 

(a)           In the event of insolvencyor bankruptcy proceedings, or any receivership, liquidation, reorganization orother similar proceedings relative to the Issuer or to any of the property ofthe Issuer, or in the event or any proceedings for voluntary liquidation,dissolution, or other winding-up of the Issuer, whether or not involvinginsolvency or bankruptcy, then the holders of Senior Debt shall be entitled toreceive payment in full of all principal of and interest on all Senior Debtbefore the Holder of this Note shall be entitled to receive any payment onaccount of principal or interest on this Note, and to that end the holders ofSenior Debt shall be entitled to receive for application in payment thereof anypayment or distribution of any kind or character, whether in cash or propertyor securities, which may be payable or deliverable in any such proceedings inrespect of this Note.

 

(b)           Inthe event that this Note is declared due and payable prior to its statedmaturity, by reason of the occurrence of an Event of Default hereunder (undercircumstances when the provisions of the foregoing paragraph (a) shall not beapplicable), then all principal of and interest on all Senior Debt outstandingat the time of such declaration shall first be paid in full, before any paymenton account of principal or interest is made upon this Note.

 

(c)           TheIssuer may make payments and, subject to Section 1 of this Note, prepayments ofthe principal of and interest of this Note if, at the time of the payment andimmediately after giving effect thereto, (i) there exists no default in anypayment with respect to any Senior Debt and (ii) there shall not have occurredan event of default (other than a default in the payment of amounts duethereon) with respect to any Senior Debt, as defined in the instrument underwhich the same is outstanding, permitting the holders thereof to accelerate thematurity thereof, other than an event of default which shall have been cured orwaived or shall have ceased to exist.  Shouldthe Holder of this Note, while there exists a default or an event of default asprovided in the immediately preceding sentence, and after being notified by theholder of the Senior Debt of the default, receive any such payment, or shouldthe Holder of this Note receive any distribution in bankruptcy, dissolution, orsimilar insolvency proceedings in regard to the Issuer, the Holder of the Notewill hold such payment or distribution in trust for

 

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the holder of the Senior Debtand will pay over such amounts to such holder to apply to the Senior Debt untilthe same is paid in full.

 

The provisions of this Section 5 are for the purpose of defining therelative rights of the holders of Senior Debt and the Holder of the Noteagainst the Issuer and its property. Nothing herein shall impair, as between the Issuer and the Holder ofthis Note, the obligation of the Issuer, which is unconditional and absolute,to pay to the Holder the principal and interest in accordance with the termsand the provisions hereof; nor shall anything herein prevent the Holder of thisNote from exercising all remedies otherwise permitted by applicable law orhereunder upon default under this Note, subject to the rights, if any, underthis Section 5 of holders of Senior Debt to receive cash, property, stock orobligation otherwise payable or deliverable to the Holder of this Note.  The Issuer acknowledges and agrees that therights of the Holder of this Note with respect to the Issuer’s cash, property,rights and other assets of any kind are senior and prior to the rights of anyholder of capital stock of the Issuer arising from such capital stock.

 

(d)         Definition.  “***Senior Debt***” shall mean the principal of, interest onand, if applicable, any premium on (i) the debt of the Issuer outstandingas of the date hereof, (ii) additional indebtedness incurred by the Issuerafter date hereof for money borrowed from a bank, savings and loan associationtrust Issuer, insurance Issuer or similar financial institution,(iii) purchase money secured debt, (iv) obligations of the Issuer aslessee under leases of real or personal property which are treated as capitallease obligations under generally accepted accounting principals, and (v) anydeferrals, renewals, refinancings or extensions of any of the foregoing.

 

6.             Miscellaneous.

 

6.1           *Binding Effect; Assignability.*  This Note shall be binding upon Issuer, itssuccessors and its assigns, and shall inure to the benefit of Holder, itssuccessors and its assigns.  This Noteis transferable or assignable by the Holder or any transferee of the Holderonly to an Affiliate or a partner, or an heir, administrator, executor orsuccessor of the Holder; provided that such transfer or assignment is made incompliance with the Act and any applicable state and foreign securities laws.

 

6.2           *Governing Law; Jurisdiction; Venue*.  This Note has been executed in and shall begoverned by the laws of the State of New Jersey.  Issuer irrevocably submits to the exclusive jurisdiction of thecourts of the State of New Jersey which will be the exclusive jurisdiction fordisputes arising under the Note and the United States District Court for theDistrict of New Jersey for the purpose of any suit, action, proceeding orjudgment relating to or arising out of this Note.

 

IN WITNESSWHEREOF, Issuer has caused this Note to be signed in its name by its dulyauthorized officer and its corporate seal to be affixed hereto.

 

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|   | INRAD, INC.                    |
|--------|--------------------------------|
|   |                           |
|   | By:                            | /s/ William S. Miraglia |   |
|   |                           |
|   | William S. Miraglia, Secretary |

 

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