NORTHVALE, NJ, July 8 - INRAD, Inc. (OTC Bulletin Board: INRD) today released the Letter to Shareholders from its 2001 Annual Report.

To Our Shareholders
2001 was a year of challenges for our company, as it was for most of the Photonics industry. While our revenues were up somewhat, the unprecedented rapid and steep decline in the semiconductor and telecommunications markets interrupted INRAD’s upward trajectory as a manufacturing company re-focused on growth. Positive trends in other sectors helped to mitigate, but not overcome, the negative impact from this downturn. New orders were down, and end of year backlog dropped $2 million from the end of 2000.

During the year we worked to strike the right balance between navigating the difficult near term – 2001 and 2002 – while continuing to build INRAD for success in the long term. As our volume of shipment requirements declined in the second half, we reduced our cost base in stages to address these near-term realities. We cut back on discretionary spending, implemented pay cuts and workforce reductions, and took many other actions to lower spending and conserve cash. This year’s annual report, which is shorter and contains fewer graphic elements than last year’s, is just one way we’re spending less.

But we continued our initiatives aimed at positioning INRAD for long-term success. We made progress in our operational initiatives, in implementation of a proactive merger and acquisition process, and in the transformation of our company culture.

In this letter I’ll review our results, describe some of these accomplishments and touch on our priorities for 2002.

2001: Making 2002 A Difficult Year
Revenues in 2001 were up – 15% increase in product sales and 2% increase in total sales year over year to a new record for INRAD of $8.0 million – and net income was positive. But revenues were well below the $9.5 million we had targeted back in 2000. We saw demand from our customers in the semiconductor and telecommunications market sectors, which represented 38% of our revenues, drop precipitously in the sharpest and deepest industry downturn in two decades.
Serving a diversity of sectors helps, and we experienced growth in both shipments to, and new orders from, customers in the laser systems and research/university sectors, while orders from defense electro-optical systems customers began to recover in the last quarter.
Nevertheless, product bookings overall declined steadily beginning in the second quarter, finishing at 32% less than in 2000, and year end backlog dropped $2 million from the end of 2000.
The pain from the slowdown in new orders in 2001 is being felt in 2002. Revenues in the first three quarters of 2002 will be below those in the same periods in 2001, and we do not expect to return to profitability until 2003.
As our volume of shipment requirements declined in the second half, we reduced our cost base in stages. Executive management led the way with a 15% pay cut. We reduced employment by 30% in two steps to 57. For 2002, we implemented a plan to eliminate 80 paid work hours in each fiscal quarter until this measure is no longer required.

Investments For Growth

Most importantly, we continued to invest in initiatives aimed at positioning INRAD for long-term success. We made substantial progress during 2001 on our operational initiatives, including our plant and equipment modernization program, our manufacturing systems deployment program, and our process re-engineering program. These efforts are already succeeding; we are now producing the same and similar products as before in more productive ways, we have expanded our plant capacity, improved labor productivity and manufacturing cycle times, and will enjoy improved gross margins as we grow.

We implemented a proactive merger and acquisition process, aimed at expanding our Photonic Products and Custom Optics businesses. We are beginning to see progress from that program as we enter serious discussions with complementary businesses interested in joining forces with INRAD. Anticipating the former, we committed to increase the size and reach of our sales team and are implementing that commitment in 2002.

Additionally, we negotiated and put into place a comprehensive three-part lending arrangement to cover our working capital, capital expenditure, and complementary business acquisition financing needs through 2002.

Making INRAD a High Performance Company

This year we continued our work to transform INRAD’s culture. We’re building on the best of our heritage while instilling the values and behaviors – especially team orientation, decisiveness, commitment to customers, flexibility, accountability – we need for long-term success.
We worked to implement the pay cuts and workforce reductions in ways that were consistent with our commitment to treating our people fairly and with dignity.

Priorities For 2002

A top priority for 2002 is to continue the operational initiatives that began to bear fruit in 2001. This year we will focus on the major manufacturing management systems implementation that we began in 2001, as well as continuing improvements in manufacturing and on-time delivery. Another priority is to complete our first acquisition and integration of a complementary business into INRAD, signifying our move into phase 2 of our multi-year transformation and growth plan for the company. Another is the start-up and launch of our new Thin Film Services product area. Yet another priority is to expand our domestic sales force and their reach. Lastly, a key priority is to minimize our losses during this difficult and unprofitable year, and prepare for a return to profitability in 2003.

The most important decisions we make during difficult economic times are the ones that get the company ready for when conditions improve. We are positioned to emerge from the downturn as a more efficient and competitive company with a wider breadth of products and services to offer our customers. We continue to anticipate an exciting future.

Daniel Lehrfeld
President and CEO

INRAD, Inc. develops, manufactures, and supplies products for key Photonics Industry sectors via its four related product areas: Crystals and Crystal Components, Custom Optics, Systems and Instruments, and Thin Film Services. Its customers include leading corporations in the Laser Systems, Semiconductor Inspection Equipment, Telecommunications and Defense industries, as well as the U.S. Government. Its products are also used extensively by researchers at National Laboratories and Universities world-wide.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this press release that are not purely historical are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These statements may be identified by their use of forward-looking terminology such as "believes", "expects", "will", "plan", or similar words. Such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. Risks and uncertainties that could cause actual results to differ materially from such forward looking statements are, but are not limited to, uncertainties in market demand for the company's products or the products of its customers, future actions by competitors, inability to implement its growth strategy, inability to raise capital, and other factors discussed from time to time in the Company's filings with the Securities and Exchange Commission. The forward looking statements made in this news release are made as of the date hereof and INRAD does not assume any obligation to update publicly any forward looking statement.

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