CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)(Unaudited)

See Notes to Consolidated Financial Statements (Unaudited)

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SFAS No. 123(R) and certain SEC rules and regulations and provides interpretations with respect to the valuation of share-based payments for public companies.

Prior to January 1, 2006, the Company accounted for similar transactions in accordance with APB No. 25 which employed the intrinsic value method of measuring compensation cost. Accordingly, compensation expense was not

recognized for fixed stock options if the exercise price of the option equaled or exceeded the fair value of the underlying stock at the grant date.

While FAS No. 123 encouraged recognition of the fair value of all stock-based awards on the date of grant as expense over the vesting period, companies were permitted to continue to apply the intrinsic value-based method of accounting prescribed by APB No. 25 and disclose certain pro-forma amounts as if the fair value approach of SFAS No. 123 had been applied.  In December 2002, FAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS No. 123, was issued, which, in addition to providing alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation, required more prominent pro-forma disclosures in both the annual and interim financial statements.  The Company complied with these disclosure requirements for all applicable periods prior to January 1, 2006.

In adopting FAS 123(R), the Company applied the modified prospective approach to transition. Under the modified prospective approach, the provisions of FAS 123 (R) are to be applied to new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the required effective date shall be recognized as the requisite service is rendered on or after the required effective date. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated for either recognition or pro-forma disclosures under FAS 123.

As a result of the adoption of FAS 123 (R), the Company’s results for

During the three month periodmonths ended March 31,September 30, 2007 includeand 2006 the Company recognized share-based compensation expense totaling $9,105.$11,915 and $19,697, respectively. Such amounts have been included in the Consolidated Statements of Operations within cost of goods sold ($2,442),were $1,179 and $3,955, respectively, and $10,736 and $15,742 as selling, general and administrative expenses ($6,663), as appropriate.  expense, respectively.

For threethe nine months ended March 31,September 30, 2007 share-based compensation expense was $30,125 and included amounts recorded in the Consolidated Statements of Operations within cost of goods sold of $6,063 and $24,062 within selling, general and administrative expense. For the nine months ended September 30, 2006, share-based compensation expense was $30,204$62,348 including $4,398$11,861 within cost of goods sold and $25,806$50,487 within selling, general and administrative expense, as appropriate.expense. No income tax benefit has been recognized in the income statement for share-based compensation arrangements due to the Company’s history of operating losses.

Stock option compensation expense in 2007 and 2006 is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period.

The weighted average estimated fair value of stock options granted in the threenine months ended March 31,September 30, 2007 and 2006 was $1.47 and $1.43,$1.46, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. During 2007, the Company took into consideration guidance under SFAS 123R and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating assumptions. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon the contractual term of the options. The Company’s uses the available rate on zero-coupon government obligations with a remaining term equal to the expected life of the options as the basis for its risk-free interest rate.

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The assumptions made in calculating the fair values of options are as follows:

The CompanyThere were no options granted 29,039 options under the Plan during the three months ended March 31,September 30, 2007 at an exercise price of $1.50 per share.  Inand 2006. For the threenine months ended March 31, 2006, 67,200September 30, 2007 there were 29,039 options were granted at an exercise price of $1.50 per share.as compared with 77,200 options granted at an average exercise price of $1.53 for the nine months ended September 30, 2006. Stock grants are issued at a price that is equal to the closing market price on the date of each grant.

The following table represents our stock options granted, exercised, and forfeited during the first threenine months of 2007.

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The following table represents non-vested stock options granted, vested, and forfeited during the threenine months ended March 31,September 30, 2007.

As of March 31,September 30, 2007, there was $89,896$69,126 of unrecognized compensation costs, net of estimated forfeitures, related to non-vested stock options, which is expected to be recognized over a weighted average period of approximately 2.82.5 years. The total fair value of shares vested during the threenine months ended March 31,September 30, 2007 and 2006, was $65,000$70,911 and $152,000,$63,766, respectively.

f.New Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN 48 effective January 1, 2007 and the adoption did not have a material impact on our consolidated financial statements or effective tax rate and did not result in any unrecognized tax benefit.

Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectively, in our consolidated financial statements. For the nine months ended September 30, 2007 and 2006, the Company did not recognize any interest or penalty expense related to income taxes.

As of September 30, 2007, all of the Company’s deferred tax assets are fully reserved by a valuation allowance equal to 100% of the net deferred tax assets   In addition, the Company has significant net operating loss carryovers which are subject to a valuation allowance due to the uncertain nature of the realization of the losses. The Company has determined that it is not reasonably possible for the amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“Statement No. 157”). The standard provides enhanced guidance for using fair value to measure assets and liabilities and also responds to investors’ requests for expanded information about the extent to which companies’ measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. While the standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, it does not expand the use of fair value in any new circumstances. Statement No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management of the Company is evaluating the impact of this

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standard, but does not anticipate that it will have a significant impact on its financial statements.

Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“Statement 159”), was issued in February 2007. Statement 159 allows entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Statement 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Statement 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. Statement 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair Value of Financial Instruments. Statement 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of FAS 159 on its financial position or results of operations.

NOTE 2 — CONVERSION OF CONVERTIBLE PREFERRED SHARES

On April 16, 2007, the Company called for the redemption of its Series A 10% Convertible Preferred Stock (the “Series A”).  On April 30, 2007, the Company received notice that Clarex Limited, the holder of all the shares of the Series A, elected to convert the 500 Preferred shares into 500,000 shares of the Company’s common stock, in accordance with the Series A Agreement.

NOTE 3 —- IMPACT OF UNAUTHORIZED PERSONAL TRANSACTIONS BY FORMER CFO

As previously reported, over a period of approximately six years, from the second quarter of 2000 through the second quarter of 2006, the Company’s former Chief Financial Officer, William Miraglia, had engaged in unauthorized and personal transactions totaling approximately $860,000.

These transactions were entered by the former CFO into the Company’s accounts as Selling, General and Administrative expenses. Although the transactions were unauthorized and personal in nature, based upon a review of the accounting treatment of individual transactions, the Company concluded that all material charges have been reflected as part of the reported expenses, reported net income, earnings per share and cash flows in the appropriate periods. A total of $47,000 was recorded in Selling, General and Administrative expenses in the first quarter of 2006 and an additional $10,000 was recorded in Selling, General and Administrative expenses in the second quarter of 2006. There were no charges to the accounts of the Company in the third quarter ended September 30, 2006 or subsequently, from that date.

A claim to recover a portion of these losses under the Company’s employee dishonesty insurance policy was settled in the third quarter of 2006 in the amount of $300,000, the policy limit, and has been reflected in the Company’s financial results for the three months and nine months ended September 30, 2006.

As a result of the foregoing discoveries, Mr. Miraglia was terminated for cause from his employment with the Company on June 14, 2006. Upon termination of his employment, Mr. Miraglia signed an agreement to make restitution to the Company. To date, he has repaid $5,000. In light of a number of factors, the Company does not believe that any significant recoveries from Mr. Miraglia are likely in the near term, but the Company is keeping all of its options open.

The U.S. Attorney’s Office launched an investigation into these matters in 2006. On September 25, 2007, Mr. Miraglia pleaded guilty to all four counts of a criminal information, after waiving indictment, before the Honorable Joseph A. Greenaway, Jr., United States District Court Judge for the District of New Jersey, and admitted to the embezzlement of the Company’s funds. Throughout this period, the Company has been cooperatingcooperated fully with the U.S. Attorney’s office in its ongoing investigation intohandling of this matter.

Disclosure: Forward Looking Statements

This Quarterly 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 Quarterly 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”, “target”, “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. Actual results may vary from these forward-looking statements for many reasons, including the following factors:

·•                  adverse changes in economic or industry conditions in general or in the markets served by the Company and its customers

·•                  actions by competitors

·•                  inability to add new customers and/or maintain customer relationships

·•                  inability to retain key employees.

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. Investors are encouraged to review the risk factors set forth in the Company’s most recent Form 10-K as filed with the Securities and Exchange Commission on March 30, 2007. 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. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. Except as required by law, we undertake no

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obligation to publicly update or revise any forward looking statements, whether from new information, future events, or otherwise.

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 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.

Critical Accounting Policies

Our significant accounting polices are described in Note 1 of the Consolidated Financial Statements. 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 under different assumptions or conditions.

For additional information regarding our critical accounting policies and estimates, see the section entitled “Managements Discussion and Analysis of Financial Condition and Results of Operations” in our annual report filed with the Securities and Exchange Commission on Form 10-K for the year ended December 31, 2006.

Results of Operations

PPGI’s business units’ products continue to fall into two product categories: optical components (including standard and custom optical components and assemblies, crystals, and crystal components), and laser accessories (including wavelength conversion instruments that employ nonlinear or electro-optical crystals to perform the function of wavelength conversion, or optical switching, and optical Q-switches.Q-switches). Currently, its optical components product lines and services are brought to market via three PPGI business units: INRAD, Laser Optics, and MRC Optics. Laser accessories are brought to market by INRAD.

Revenues

Total sales for the three months ended March 31,September 30, 2007 were $3,541,000$3,838,000 as compared with total sales of $3,663,000$3,049,000 for the same three months in 2006; up 25.9%. Total sales for the nine months ended September 30, 2007 were $11,057,000 as compared with $10,244,000 for the same period last year; up 7.9%.

Third quarter sales of optical components rose by 31.0% compared with the third quarter of last year and was mainly attributable to increased revenues at Laser Optics. Comparative optical component sales for the same periods decreased slightly at INRAD and were flat at MRC Optics.

Overall, sales of optical components for the nine months ended September 30, 2007 were up 7.4% compared to the nine months ended September 30, 2006, a decrease of 3.3%.  again lead by increased revenues at Laser Optics.

Sales of custom optical componentsINRAD laser accessories during the first nine months were up 13.4% year over year although sales in thisthe third quarter decreased by approximately 4.3%13.3% from the same period in the prior year, with a reduction in demand for UV filter crystals from a defense industry OEM customer.  This was offset somewhat by an approximately 1% increase inthird quarter last year.

Company sales of laser accessories.  Sales of optical components remained strongwere mainly to customers within the aerospace/aerospace, defense, and process control and metrology industry sectors.  Shipments

Major customer sales, defined as 10% of period revenues, are summarized as follows:

Sales to two aerospace/one defense industry customers in the first quarter represented 15.3% and 18.8%customer were 12.1% of total sales in the period, respectively.  During fiscal yearquarter just ended and 13.9% of sales for the first nine months. In 2006, sales to two aerospace customersthe same customer represented 13.0% and 13.6%17.3% of total revenuessales in the third quarter and 14.4% of sales for nine months. Sales to a second defense industry customer represented 18.4% of sales in the quarter just ended and 19.0% fo sales for the first quarter.nine months of 2007. By comparison, this same customer represented 17.3% for both the three months and nine months ending September 30, 2006.

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Sales to a new customer in the process control and metrology industry represented 17.3% of sales in the third quarter of 2007. In 2006, a third defense industry customer represented 12.9% of sales in the comparable third quarter period.

Product bookings for the first nine months ended September 30, 2007 were $13,525,000, up $2,950,000, a 27.9% increase, from $10,575,000 in the comparable nine months of 2006. Product bookings for the quarter ended March 31,September 30, 2007 were $4,960,000 as compared with $2,271,000 for$5,199,000, equaling the same periodrecord $5,155,000 booked in the third quarter of last year, an increaseand up 54.3% from product bookings in the second quarter of 118%.  In this year’s first2007.

Third quarter order intakebookings for optical components was especially strongimproved from the second quarter for both INRAD and Laser Optics, whilereplenishing and increasing backlog levels in both. Product bookings at MRC Optics were significantly higher than third quarter shipments, resulting in an increased order intake at INRAD andbacklog.

One MRC for optical components was moderate.  Major OEM customer orders do not usually follow a strict seasonal trend, and major production releases from aerospace/defense industry customers usually occur once or twice per year at irregular intervals.  In this year’s first quarter, orders from four major OEM customers accounted for 67% of new orders.  Of these, one large order for high precision crystal optical components was from a major defense industry OEMOptics customer in the infra-red imaging systems sector, another was for precision X-ray monochrometers fromdefense industry placed a major multinational manufacturerrepeat order which represented 19.6% of X-ray analyticaltotal third quarter bookings. At Laser Optics, one new process control and metrology equipment,industry customer’s order represented 13.2% of its total new orders for the quarter, while another was for UV filter crystal components fromLaser Optics defense industry customer booked a follow-on order representing 16.6% of total new bookings. In INRAD, a defense industry manufacturercustomer’s repeat order represented 20.9% of aircraft missile warning sensors and self-protection systems, while the fourth was for laser accessories and specialty laser frequency doubling crystals from a major manufacturer of commercial laser systems.  In last year’s first quarter, orders from three INRAD and MRC Optics OEM customers accounted in the aggregate for 56% of total new orders.  One order was from a major defense industry OEM customer, on a new program, which represented 30% of total bookings for the quarter.  Another order, representing 17% of new orders was from another defense industry OEM who issued a follow-on production release for proprietary INRAD filter crystal components used in their anti-aircraft missile warning systems, while the third was from an industrial factory automation sector customer.

Product backlog at March 31,on September 30, 2007 was $8,450,000 which compares withapproximately $9,413,000, up 20.0% from a backlog of $6,484,000$7,843,000 at the same point in 2006 and aup $1,381,000 or 17.2% from the backlog ofon June 30, 2007. By comparison, product backlog was $6,969,000 on December 31, 2006.

Based upon

The increase in backlog experienced during the backlog at the end of the firstthird quarter and related delivery schedules, management expects revenuesis expected to trend moderately higher in the second quarter.have a positive impact on fourth quarter revenues.

Cost of Goods Sold

For the three-month period ended March 31,September 30, 2007, the cost of goods sold as a percentage of product revenues was 61.0% as52.7% compared with 67.6%to 71.0% for the same

period last year.  For the full year 2006, the actual cost of goods sold percentage was 67.4%.

Gross margin was 39.0% in the first quarter, compared with 32.4% in the first quarter of last year.  Gross margin in 2006 was 32.6% for the full year. In dollar terms, firstthird quarter cost of goods sold was $2,159,000$2,022,000 compared with $2,475,000 in the same period$2,166,000 in 2006, down 12.8%6.6%, while revenues increased 25.9%. A partThis large reduction in the cost of this decrease is attributablegoods sold percentage for the period was primarily a reflection of substantially lower material costs as a percentage of revenues, increased labor productivity and lower non-labor manufacturing costs as a percentage of revenues, on substantially higher sales volume.

Material costs as a percentage of revenues decreased by approximately 21% in comparison to the 3.3% decreaseprior year period, caused principally by an increase in revenues.  However, this reductionshipments in the third quarter with customer furnished materials which carry no related material costs in cost-of-goods sold. Total labor costs for the comparable third quarters in 2007 and 2006, respectively, were essentially unchanged. Output when related to direct labor costs, in terms of both the dollar value of goods shipped and increased levels of work-in-process inventory, rose approximately 14%. Non-labor manufacturing costs as a percentage of revenues decreased by 10% on higher shipment dollar volumes.

Gross margin in the third quarter was $1,816,000 or 47.3%, compared with a gross margin of $883,000 or 29.0% in the comparable period of 2006, reflecting the positive factors discussed above.

For the nine month period ended September 30, 2007, the cost of goods sold was primarily58.5% of sales or $6,467,000 compared to 68.8% of sales and $7,052,000 for nine months in 2006. This improvement reflected substantially lower material costs as a resultpercentage of improved operationalrevenues, increased labor productivity, and relatedlower non-labor manufacturing costs, as a percentage of revenues. Year-to-date material cost reduction,reductions resulted principally from the increase in thisthird quarter 2007 product shipments which included customer furnished materials in the third quarter, as discussed above. Correspondingly, gross margin for the nine months ended September 30, 2007 improved to $4,590,000 or 41.5% of sales as compared to the previous period.  Work-in-process inventory levels increased$3,192,000 or 31.2% in the comparable period as production backlogs for the second quarter rose to record levels, positively affecting the cost of goods sold and gross margin.2006.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A” expenses) in the third quarter of 2007 were $857,000,$908,000 representing 23.7% of sales compared to $907,000, or 24.2%29.8% of sales in the third quarter of 2006. Total SG&A costs were only slightly higher despite the period revenue increase of 25.9%. SG&A expenses for the first nine months of 2007 decreased by $96,000 to $2,667,000, or 24.1% of sales, compared with $2,763,000, or 27.0% of sales in the first nine months of 2006, on a nine month revenue increase of 7.9% compared to the nine months ended September 30, 2006.