UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C.  20549
                                      FORM 10-Q


(Mark One)
[X]            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)15(D)
                   OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended  JUNESEPTEMBER 30, 1997
                                ------------------------------------------------------------
                                          OR
[   ]TRANSITION]             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)15(D)
                        OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                               _________ to_____________to
                               ----------------------------       -------------
Commission file number                              0-11668
                               ------------------------------------------------------------------------------------
                                       INRAD, INC. 
--------------------------------------------------------------- -------------------------------------------------------------------------------
                (Exact name of registrant as specified in its charter)

              NEW JERSEY               22-2003247                    
- ------------------------                         -------------------------------------------------------------------------- ----------------------------------
(State or other jurisdiction of incorporation       (I.R.S. Employer
           or organization)                      Identification Number)

                INRAD, INC.  181 LEGRAND AVENUE, NORTHVALE, NJ  07647 
--------------------------------------------------------------------- -------------------------------------------------------------------------------
                       (Address of principal executive offices)
                                      (Zip Code)

                                   (201) 767-1910 
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             (Registrant's telephone number, including area code)
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            (Former name, former address and formal fiscal year,
                        if changed since last report)


   Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.

Yes    X      No
      -------      -----------       ----

       Common shares of stock outstanding as of July 30,October 28, 1997:

                            2,109,271 SHARES



                                INRAD, Inc.
                                  INDEX
                                                                    PAGE NUMBER

Part I.  FINANCIAL INFORMATION................................................1PART I.FINANCIAL INFORMATION........................................   1

    Item 1. Financial Statements:
            Consolidated Balance SheetsSheet as of JuneSeptember 30,
            1997 (unaudited)and December 31, 1996...............................11996...................   1

            Consolidated StatementsStatement of Operations for the Three
            and SixNine Months Ended JuneSeptember 30, 1997 and 1996
            (unaudited).................2.............................................    2

            Consolidated Statement of Cash Flows for the SixNine
            Months Ended JuneSeptember 30, 1997 and 1996 (unaudited)..............................3....    3

            Notes to Consolidated Financial Statements......................4Statements..............    4

     Item 2.   Management's Discussion and Analysis of Financial
               Condition and Results of Operations...........................................6

Part II. OTHER INFORMATION....................................................9Operations..................    6

PART II.OTHER INFORMATION...........................................    9

    Item 6. Exhibits and Reports on Form 8-K................................9

SIGNATURES  ..................................................................108-K........................    9


SIGNATURES..........................................................   10



                 PART I.     FINANCIAL INFORMATION
         ITEM 1.     FINANCIAL STATEMENTS

                               INRAD, INC.
                       CONSOLIDATED BALANCE SHEETS
                                        
                                             (UNAUDITED)          
                                            JUNESEPTEMBER 30,           DECEMBER 31,
                                               1997                   1996
                                                 ----              ----
ASSETS
CURRENT ASSETS:
    Cash and cash equivalents                $    104,401172,447         $    194,577
    Certificate of Deposit                         70,000               70,000
    Accounts receivable, net                      674,475751,132              735,160
    Inventories                                 1,828,0671,656,964            1,735,144
    Unbilled contract costs                        92,43491,996               59,350
    Other current assets                           61,52223,794               60,292
                                             -----------------------          ------------
       TOTAL CURRENT ASSETS                     2,830,8992,766,333            2,854,523
PLANT AND EQUIPMENT, NET                        1,225,6321,115,451            1,431,931

PRECIOUS METALS                                   279,247              279,248
OTHER ASSETS                                      167,060165,014              149,503
                                             -----------------------          ------------
       TOTAL ASSETS                          $  4,502,8384,326,045          $  4,715,205
                                             -----------        ------------          -----------------------
                                             ------------          ------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:CURRENT LIABILITIES:
    Note payable - Bank                      $    105,000112,500          $    92,500
    Current obligations under capital leases      37,82020, 611               73,399
    Accounts payable and accrued liabilities      858,056825,574              640,943
    Advances from customers                        131,73085,627               73,244
    Other current liabilities                      19,65414,107               48,865
                                             -----------------------          ------------
       TOTAL CURRENT LIABILITIES                1,152,2601,058,419              928,951

Note payableNOTE PAYABLE - Bank                              167,500BANK                               137,500              227,500
Obligations under capital leases                  12,576OBLIGATIONS UNDER CAPITAL LEASES                   10,670                4,751
Secured Promissory NotesSECURED PROMISSORY NOTES                          250,000              250,000
Subordinated Convertible NotesSUBORDINATED CONVERTIBLE NOTES                  1,203,261            1,203,261
Unsecured Demand Convertible NoteUNSECURED DEMAND CONVERTIBLE NOTE                 100,000              100,000
Note payableNOTE PAYABLE - ShareownerSHAREOWNER                         566,049              566,049
                                             -----------------------          ------------
       TOTAL LIABILITIES                        3,451,6463,325,899            3,280,512
                                             -----------        ------------          Commitments        

Shareholders' equity:------------
COMMITMENTS        
SHAREHOLDERS' EQUITY:
    Common stock: $.01 par value; 2,121,571
    shares issued                                  21,216               21,216
    Capital in excess of par value              6,051,791             6,051,791
    Accumulated deficit                        (4,970,015)(5,021,061)           (4,586,514)
                                             -----------        ------------          1,102,992------------
                                                1,051,946             1,486,493
    Less - Common stock in treasury,
    at cost (12,300 shares at
    JuneSeptember 30, 1997 and at 
    December 31, 1996)                           (51,800)               (51,800)
                                             -----------------------          ------------
         TOTAL SHAREHOLDERS' EQUITY            1,051,1921,000,146              1,434,693
                                             -----------------------          ------------
              
         TOTAL LIABILITIES AND SHAREHOLDERS'
          EQUITY                              $  4,502,838        $  4,715,205
                                             -----------$4,326,045             $4,715,205
                                             ------------          -----------------------
                                             ------------          ------------

                 See Notes to Consolidated Financial Statements.
                                        
                                        1



                                 
INRAD, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNESEPTEMBER 30, SIXNINE MONTHS ENDED JUNESEPTEMBER 30, --------------------------- ------------------------- 1997 1996 1997 1996 ---- ---- ---- --------------- ----------- ------------ ------------ REVENUES: Net product sales $ 1,254,0631,412,167 $ 1,415,0701,307,043 $ 2,302,2353,714,402 $ 2,564,2993,871,342 Contract research and development 99,920 196,835 205,046 327,643 --------- --------- --------- --------- 1,353,983 1,611,905 2,507,281 2,891,942 --------- --------- --------- ---------109,925 122,973 314,971 450,616 ----------- ----------- ------------ ------------ 1522,092 1,430,016 4,029,373 4,321,958 COSTS AND EXPENSES: Cost of goods sold 999,942 1,063,891 1,796,553 2,025,7961,059,631 995,181 2,856,184 3,020,977 Contract research and development expenses 97,006 194,127 203,473 326,797106,632 124,406 310,105 451,203 Selling, general and administrative expenses 342,227 344,357 701,815 640,039323,078 275,616 1,024,893 915,655 Internal research and development expenses 34,811 42,182 62,685 67,875 --------- --------- --------- --------- 1,473,986 1,644,557 2,764,526 3,060,507 --------- --------- --------- ---------25,001 61,877 87,686 129,752 ----------- ----------- ------------ ------------ 1,514,342 1,457,080 4,278,868 4,517,587 ----------- ----------- ------------ ------------ OPERATING PROFIT (LOSS) (120,003) (32,652) (257,245) (168,565) Other income (expense)7,750 (27,064) (249,495) (195,629) OTHER INCOME (EXPENSE): Interest expense (64,620) (69,767) (129,824) (144,568)(63,895) (70,439) (193,719) (215,007) Interest and other income, net 1,417 2,815 3,568 13,639 --------- --------- --------- ---------5,098 2,733 8,666 16,372 ----------- ----------- ------------ ------------ NET INCOME (LOSS) (183,206) (99,604) (383,501) (299,494)(51,047) (94,770) (434,548) (394,264) ACCUMULATED DEFICIT, BEGINNING OF PERIOD (4,786,809) (4,412,630) (4,586,514)(4,970,015) (4,512,234) (4,586,513) (4,212,740) --------- --------- --------- -------------------- ----------- ------------ ------------ ACCUMULATED DEFICIT, END OF PERIOD $(4,970,015) $(4,512,234) $(4,970,015) $(4,512,234) --------- --------- --------- --------- --------- --------- --------- ---------$(5,021,062) $(4,607,004) $ (5,021,061) $(4,607,004) ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------ NET INCOME (LOSS) PER SHARE $(0.09)$(0.03) $(0.05) $(0.18) $(0.14) --------- --------- --------- --------- --------- --------- --------- ---------$(0.21) $(0.19) ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------ WEIGHTED AVERAGE SHARES OUTSTANDING 2,109,271 2,109,271 2,109,271 2,109,004 --------- --------- --------- --------- --------- --------- --------- ---------2,109,093 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------
See Notes to Consolidated Financial Statements. 2 INRAD, INC. CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS (UNAUDITED) SIXNINE MONTHS ENDED JUNESEPTEMBER 30, ------------------------- 1997 1996 ---- --------- ----- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (383,501) $(299,494)$(434,548) $(394,264) --------- --------- ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization 264,552 279,064398,028 418,596 Noncash interest - 81,384123,269 Gain on sale of equipment -(3,800) (8,621) CHANGES IN ASSETS AND LIABILITIES: Accounts receivable 60,685 (21,830)(15,971) 147,782 Inventories (92,923) 102,81278,180 154,854 Unbilled contract costs (33,084) 83,418(32,645) 76,130 Other current assets (1,230) 10,15436,498 33,307 Precious metals - -0 754 Other assets (22,247) (14,893)(22,818) (16,093) Accounts payable and accrued liabilities 239,802 42,532207,321 (56,973) Advances from customers 58,486 (32,580)12,383 (47,770) Other current liabilities (29,210) (29,585)(34,757) (35,128) --------- --------- Total adjustments 444,831 491,855622,419 790,107 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 61,330 192,361187,871 395,843 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (53,561) (131,645)(74,239) (178,577) Proceeds from sale of equipment -3,800 299,180 --------- --------- NET CASH (USED IN) PROVIDED BY (USED IN) INVESTING ACTIVITIES (53,561) 167,535(70,439) 120,603 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments of note payable - Bank (47,500) (30,000)(70,000) (45,000) Principal payments of capital lease obligations (50,445) (131,450) Advance from shareowner - - --------- ---------(69,562) (156,448) NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (97,945) (161,450)(139,562) (201,448) --------- --------- NET (DECREASE) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (90,176) 198,446(22,130) 314,998 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 194,577 37,981 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 104,401172,447 $ 236,427352,979 --------- --------- --------- --------- See Notes to Consolidated Financial Statements. 3 INRAD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - SUMMARY OF ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements of INRAD, Inc. (the "Company") reflect all adjustments, which are of a normal recurring nature, and disclosures which, in the opinion of management, are necessary for a fair statement of results for the interim periods. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements as of December 31, 1996 and 1995 and for the years then ended and notes thereto included in the Registrant's Annual Report on Form 10-K, filed with the Securities and Exchange Commission. INVENTORY VALUATION Interim inventories as well as cost of goods sold are computed by using the gross profit method of interim inventory valuation and applying an estimated gross profit percentage based on the actual values for the preceding fiscal year, unless the companyCompany believes that a different gross profit percentage may more accurately reflect its current year's cost of goods sold and gross profit. INCOME TAXES The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the weighted average number of common shares outstanding. The effect of common stock equivalents has been excluded from the computation because their effect is antidilutive. In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share." This Statement establishes standards for computing and presenting earnings per share ("EPS") and applies to all entities with publicly held common stock or potential common stock. This Statement replaces the presentation of primary EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects the potential dilution of securities that could share in the earnings. This Statement is not expected to have a material effect on INRAD's reported EPS amounts. This Statement is effective for INRAD's financial statements for the year ended December 31, 1997. 4 NOTE 2 -INVENTORIES- INVENTORIES AND COST OF GOODS SOLD For the sixnine month period ended JuneSeptember 30, 1997, the Company used 78%76.9% as its estimated cost of goods sold percentage. For the previous year, 1996, the actual cost of goods sold percentage was 74.8%. The Company believes 78%76.9% better approximates the expected 1997 annual cost of goods sold percentage based on estimated profitability of actual sales through JuneSeptember 30, 1997 and the anticipated annual level of product shipments and related costs. For the sixnine month period ended JuneSeptember 30, 1996, the Company used 79%78% as its estimated cost of goods sold percentage. NOTE 3 -DEBT- DEBT NOTE PAYABLE - SHAREOWNER By mutual informal agreement, the Company has deferred certain interest payments to its principal shareowner. During the sixnine month period ended JuneSeptember 30, 1997, the Company did not make any interest payments. Subject to adequate cash flow, the Company expectsThe Company's ability to make the remaining quarterly interest paymentspayment in 1997.1997 is subject to adequate cash flow. Although by its terms the indebtedness to the shareowner is due on December 31, 1996, it cannot be repaid until the Chase Manhattan Bank debt has been repaid in full.full, which is expected to be on September 1, 1999. The shareowner loan has been classified as noncurrent in the accompanying balance sheet because the shareowner has agreed not to demand payment prior to JulyOctober 1, 1998. UNSECURED DEMAND CONVERTIBLE NOTE Although by its terms the Note is due on demand, it cannot be repaid until the Chase Manhattan Bank debt has been repaid in full. The Demand Note has been classified as noncurrent in the accompanying balance sheet because the Note holder has agreed not to demand payment prior to JulyOctober 1, 1998. SECURED PROMISSORY NOTE Although by its terms the Note is due on July 8, 1997, it cannot be repaid until the Chase Manhattan Bank debt has been repaid in full. The Promissory note has been classified as noncurrent in the accompanying balance sheet because the Note holder has agreed not to demand payment prior to JulyOctober 1, 1998. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information contains forward-looking statements, including statements with respect to the revenues to be realized from existing backlog orders and ability to generate sufficient cash flow in the future. The Company wishes to insure that any forward-looking statements are accompanied by meaningful cautionary statements in order to comply with the terms of the safe harbor provided by the Private Securities Reform Act of 1995. Actual results may vary from these forward-looking statements due to the following factors: inability to maintain customer relationships and/or add new customers; unforeseen overhead expenses that may adversely affect financial results or other inabilitiesinability's to operate with a positive cash flow. Readers are further cautioned that the Company's financial results can vary from quarter to quarter, and the financial results reported for the secondthird quarter may not necessarily be indicative of future results. The foregoing is not intended to be an exhaustive list of all factors which could cause actual results to differ materially from those expressed in forward-looking statements made by the Company. For more information about the Company, please review the Company's most recent Form 10-K filed with the Securities & Exchange Commission. RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's unaudited consolidated financial statements presented elsewhere herein. The discussion of results should not be construed to imply any conclusion that such results will necessarily continue in the future. NET PRODUCT SALES Net sales for the secondthird quarter of 1997 decreased $161,000,increased $105,000, or 11%8%, from the comparable quarter in 1996, and net sales for the sixnine months ended JuneSeptember 30, 1997 decreased $262,000,$157,000, or 10%4%, from the comparable 1996 period. International shipments in the first sixnine months of 1997 were $404,000 (18%$512,000 (14% of total shipments) compared to $477,000 (19%$664,000 (17%) for the first sixnine months of 1996. Product sales during the sixnine months ended JuneSeptember 30, 1997 were less than the prior year because bookings were down, particularly bookings shippable on a short term basis. During the secondthird quarter of 1997, shipments were lessmore than in the comparable quarter in 1996, while bookings increased during that same period.were more than in 1996 for both the second and third quarters. Most of the increased bookings were not shippable during the quarter, but will be shippable in the future. The backlog of unfilled product orders was $2,147,000$2,250,000 at JuneSeptember 30, 1997, compared with $1,672,000 at December 31, 1996 and $2,000,000$2,004,000 at JuneSeptember 30, 1996. COST OF GOODS SOLD For the sixnine month period ended JuneSeptember 30, 1997, the Company used 78%76.9% as its estimated cost of goods sold percentage. For the previous year, 1996, the actual cost of goods sold percentage was 74.8%. The Company believes 78%76.9% better approximates the expected 1997 annual cost of goods sold percentage based on estimated profitability of actual sales through JuneSeptember 30, 1997 and the anticipated annual level of product shipments and related costs. For the sixnine month period ended JuneSeptember 30, 1996, the Company used 79%78% as its estimated cost of goods sold percentage. 6 CONTRACT RESEARCH AND DEVELOPMENT Contract research and development revenues for the second quarter of 1997 decreased $97,000, or 49%, from the comparable quarter in 1996, and revenues for the six months ended June 30, 1997 and 1996 were $205,000 and $328,000, respectively. Related contract research and development expenditures, including allocated indirect costs, for the quarter ended June 30, 1997 were $97,000 compared to $194,000 for the comparable 1996 quarter; expenses for the six month period ended June 30, 1997 and 1996 were $203,000 and $327,000, respectively. Revenues decreased from 1996 to 1997 due to a lower opening backlog of contracts. The Company expects to continue to focus its future efforts on funded programs closely aligned with its core business. The Company's backlog of contract R&D was $629,000 at June 30, 1997, compared with $75,000 at December 31, 1996 and $162,000 at June 30, 1996. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased $62,000$109,000 for the first sixnine months of 1997. The increase is due primarily to higher selling expenses, including sales salaries, due to the addition of a sales person, increased advertising and travel, and a lower allocation of general and administrative expenses to contract research and development. During the secondthird quarter of 1997, Selling, General and Administrative Expenses decreased $2,000increased $47,000 as compared to 1996. This decreaseincrease was due to less commissions on international sales offset by additional selling expenses for salaries, advertising and travel, and a lower allocation of general and administrative expenses to contract research and development.travel. INTERNAL RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses for the quarter ended JuneSeptember 30, 1997 were $35,000$25,000 compared to $42,000$62,000 for the quarter ended JuneSeptember 30, 1996. Expenses for the sixnine months ended JuneSeptember 30, 1997 were $63,000$88,000 compared to $68,000$130,000 for the comparable 1996 period. The Company is focusing its internal research and development efforts in 1997 on a few new products with short development cycles. INTEREST EXPENSE Interest expense was $65,000$64,000 for the quarter ended JuneSeptember 30, 1997 compared to $70,000 for the quarter ended JuneSeptember 30, 1996, and $130,000$194,000 and $145,000$215,000 for the sixnine months ended JuneSeptember 30, 1997 and 1996, respectively. 7 LIQUIDITY AND CAPITAL RESOURCES During the quarter ended March 31, 1997, the Company signed an agreement with Chase Manhattan Bank (successor to Chemical Bank) amending the terms of its credit facility. The new agreement requires monthly principal payments of $10,000 for January, 1997, and 7,500 from February 1997 until December 1997, monthly principal payments of $10,000 from January 1998 until December 1998, and monthly principal payments $12,500 from January 1999 until August 1999. A final payment of $7,500 is due on September 1, 1999. The Company's cash flow requirements will increase in 1997 because the Company must begin making cash interest payments ($110,000 annually) on its Subordinated Convertible Notes issued in 1993. The first payment was due on June 15, 1997, and was not made. Capital expenditures, including internal labor and overhead charges, for the sixnine months ended JuneSeptember 30, 1997 and 1996 were $54,000$74,000 and $132,000,$178,000, respectively. Until the Company is generating satisfactory amounts of cash flow from its operations, it is expected that future capital expenditures will be kept to a minimum. Management believes that in the short term, this limitation will not have a material effect on operations. During the sixnine month period ended JuneSeptember 30, 1997 and for each of the three years in the period ended December 31, 1996, the Company hadhas suffered recurring losses from operations. Cash outflows during these periods have been funded on the basis of borrowings from, and issuance of common stock and warrants to shareownersshareholders, including the principal shareowner,shareholder, as further described in the Company's Annual Report on Form 10-K. Thethe Company's liquidity is dependent on its ability to generate sufficient cash flow from operations. This will substantially depend, however, on the Company's ability to improve operating results and thereby generate adequate cash flow from operations. Because of the uncertainty relating to the Company's ability to improve operating results and cash flows, there is substantial doubt about the Company's ability to continue as a going concern. 8 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits: 11. An exhibit showing the computation of per-share earnings is omitted because the computation can be clearly determined from the material contained in this Quarterly Report on Form 10-Q. 27. Financial Data Schedule. (B) Reports on Form 8-K: None.None 9 SIGNATURES Pursuant to the requirements 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.INC. By: /s/ Warren Ruderman ------------------------ Warren Ruderman President and Chief Executive Officer/S/ WARREN RUDERMAN ------------------------------------- WARREN RUDERMAN PRESIDENT AND CHIEF EXECUTIVE OFFICER By: /s/ James/S/ JAMES L. Greco ------------------------ JamesGRECO ------------------------------------- JAMES L. Greco ControllerGRECO CONTROLLER (Chief Accounting Officer) Date: AugustNovember 12, 1997 10