ITEM 2.                             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION

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 and

·                  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 in April 2005.on March 31, 2006 and Amendment No. 1 of Form 10-K/A filed on September 29, 2006.  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.  We undertake no 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, that were prepared in accordance with accounting principles generally accepted in the United States of America.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 on Form 10-K for the year ended December 31, 2005.

Results Ofof Operations

PPGI’s business units’ products continue at present 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, and optical Q-switches that employ nonlinear or electro-optical crystals to perform the function of wavelength conversion, or optical switching.  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 JuneSeptember 30, 2006 were $3,531,000$3,049,000 as compared with total sales of $3,107,000$3,581,000 for the same three months in 2005; up 13.6%down 14.9%.  Total sales for the sixnine months ended JuneSeptember 30, 2006 were $7,194,000$10,244,000 as compared with $6,344,000$9,906,000 for the same period last year; up 13.4%3.4%.

Sales of crystal components by INRAD, for the quarter, were strong and essentially unchanged from the third quarter of last year, while sales for the first nine months were up 4.0% from the same period in 2005.  Sales of INRAD laser accessories increased 73% on a quarterly comparison to last year, but were down 35% on a year to year comparison through the first nine months.  The decline resulted from the termination of a product distribution agreement, in January 2006, for the sale of laser pulse measurement instruments (auto-correllators) into the U.S. market, as previously reported.

Third quarter sales of custom optical components declined from second quarter levels due to a combination of delays in the awarding of certain follow-on production contracts from several customers and the completion of other production contracts that did not have a follow-on phase.  Sales of custom optical components from INRAD,by Laser Optics anddeclined 12.8% compared to the third quarter of last year, but were up 11.5% over last year for nine months.  Shipment of MRC Optics branded product linesproducts dipped in the secondthird quarter to a low for this year and were updown 31.6% from the same period in the prior year.  SalesThis dip in sales was due to a decrease in shippable backlog from a delay in the awarding of follow-on production contracts in the first half.  A delay in the delivery of customer supplied materials also factored into lower third quarter shipments.  Despite these productsfactors, MRC Optics sales for the first nine months were especially strongup 11.8% year-over-year.

Company sales were mainly to customers within the aerospace, defense, and process control and metrology industry sectors.  Sales to onetwo defense industry customercustomers represented 20%14.2% and 13.7% of total revenues in this quarterquarter.  Sales to three defense industry customers represented 17.4%, 11.7%, and 16%10.0% of total revenues for the first six months.  Sales to another defense sector customer represented 12.8% of total revenues for this quarter and 13.2% of total revenues for the first sixnine months.  In 2005, sales to one aerospacedefense industry customer represented 16%10% of total revenues in the secondthird quarter and 15% fortwo defense industry customers represented 12.4% and 10.8% of total revenues in the first half of that year.nine months.

However sales of INRAD laser accessories declined 13% on a quarterly comparison to last year and were down 47% on a year to date comparison with last year through the second half.  The decline was due to cessation of sales of laser pulse measurement instruments (auto-correlators) into the US market in January of this year with the end of a product distribution agreement as previously reported, and to decreasing sales of wavelength conversion accessories and q-switches, a mature line of products.

Product bookings for the quarter ended JuneSeptember 30, 2006 were $3,149,000 as compared with $2,620,000down 16.1% to $5,155,000 from $6,142,000 for the same period last year but were up 20.2%.63.8% from product bookings in the previous quarter.  Product bookings for the first halfnine months were $5,420,000,$10,575,000, as compared with $5,668,000$11,874,000 in the first halfnine months of 2005, down 4.4%10.9%.

In this year’s secondthe third quarter of 2006, order intake for optical components was stronger than in the firstsecond quarter for both INRAD and Laser Optics, while order intake at MRCreplenishing their backlogs.  One Laser Optics was lower than in the first quarter.  Three large defense industry contract opportunitiescustomer revised its prior estimate upwards significantly for MRC Optics, including twofollow-on business in this year’s second half and into the next year.  Its order accounted for 22.2% of total new awards and one follow-on award, were anticipated for award in the second quarter.  These have slipped and are now not expected to be in-hand until late in the third or fourth quarter of this year.orders.  A follow-on order from one INRAD defense industry customer, for proprietary INRAD filter crystal components used in their anti-aircraft missile protection system, accounted for 21.8%23.5% of total bookings in the third quarter.  Order intake at MRC Optics was up sharply in comparison to bookings in the second quarter.  AnOne order, from one Laser Optics process control and metrology industry customeran anticipated follow-on production award that had been delayed earlier in the year, accounted for 18.3%11.4% of total new orders in this quarter.  Orders from three OEM customers, including the preceding two and another Laser Optics defense industry customer, accounted in the aggregate for 49.5% of total new orders in this year’s second quarter.orders.

One major Laser Optics OEM customer advised the Company that its follow-on production awards over the coming year will be significantly smaller than in the past year.  One INRAD defense industry customer advised the Company that its follow-on OEM order will not call for higher production rates and will thus be significantly smaller than projected when awarded later in the second half.

Product backlog on JuneSeptember 30, 2006 was $6,104,000, up 5.3%approximately $7,843,000, down 5.4% from a backlog of $5,797,000$8,311,000 at the same point in 2005, but downrose approximately 5.9%28.5% from a backlog of $6,484,000$6,104,000 on March 31,June 30, 2006.  ProductBy comparison, product backlog was $7,876,000 on December 31, 2005.2005,

The declineincrease in backlog overexperienced during the first half, in additionthird quarter is expected to delays in the award of new and follow-on production contracts, will have a negativepositive impact on Companyfourth quarter revenues in the second half of 2006.and results.

Cost of Goods Sold

Decreased sales volumes in the third quarter, as anticipated, put pressure on the Company’s gross margins.  In the third quarter, management implemented cost reductions through cut-backs in labor and other variable manufacturing cost elements to compensate for lower volumes, where practical and appropriate.  For the three-month period ended JuneSeptember 30, 2006, the cost of goods sold as a percentage of productsales revenues improvedincreased to 68.2% as compared with 76.0% for71.0% from 69.1% in 2005, reflecting the same periodimpact of lower sales and backlog levels, this quarter.  In dollar terms, third quarter cost of goods sold of $2,166,000 was down 12.5%, from last year.  years’ third quarter total of $2,476,000, while sales revenues fell by 14.9%

For the sixnine month period ended JuneSeptember 30, 2006 the cost of goods sold percentage was 67.9%68.8% compared to 78.3%75.2% in the comparable period.  In dollar terms, second quarter cost of goods sold was $2,410,000 compared with $2,362,000 in the same period in 2005, up 2.0% on a year-over-year revenue increase of 13.6%.  For the first six months, cost of goods sold was $4,885,000 compared with $4,969,000 for the same period in 2005, down 1.7% on revenue increase of 13.4% for the comparable period.2005.  For the full year 2005, the actual cost of goods sold percentage was 72.2%.  For nine months, cost of goods sold was $7,052,000 or $397,000 lower as compared to $7,449,000 for the same period in 2005.  Overall, the nine month cost of goods sold dropped 5.4% despite a revenue increase of 3.4% for the comparable period, reflecting these higher sales in addition to improved operational productivity and efficiencies.

Gross margin was 31.8%slackened to 29.0% in the secondthird quarter, compared with 24.0%31.0% in the secondthird quarter of last year, and 32.4% in the first quarter of this year.down due to lower sales.  For the first half,nine months, the gross margin was 32.1%31.2% in 2006, up significantly from 21.7%24.8% in 2005, influenced by interrelated factors of higher sales and improved production efficiencies.2005.

Second quarter sales were 3.7%, or $131,000 lower than first quarter sales, while second quarter cost of goods sold was only down $65,000.  Although this resulted in a gross profit margin decrease of 0.6% compared to the first quarter, overall gross margin continued the positive strengthening trend that began in the second quarter of 2005.  In the first half, the Company achieved the level of gross profit margin targeted for this period in 2006.

As discussed above, decreased sales volumes in the second half are anticipated which will put pressure on gross margins over the balance of the year.  Management expects to implement cost reductions in the third quarter, through decreases in labor and other variable manufacturing cost elements, to compensate where practical.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $993,000, or 28.1% of sales,$907,000 in the secondthird quarter of 2006 and $898,000, or 28.9% of sales$788,000 in the secondthird quarter of 2005 on a period over period revenue increasedecrease of 13.6%14.9%.  S,G&ASelling, general and administrative expenses for the first halfnine months of 2006 were $1,856,000,$2,763,000, up $218,000 or 25.8% of sales, which8.6% when compared with $1,769,000 or 27.9%$2,545,000 in the first halfnine months of 2005, on a revenue increase of 13.4%3.4%.  S,G&A expenses in the first quarter

On average, quarterly selling, general and administrative expense is running at a rate of 2006 were $863,000,$921,000 or 23.8%27.0% of sales over nine months compared to nine months last year of $848,000 or 25.7% of sales.

The increase in S,G&AOver nine months ended September 30, 2006, selling, general and administrative expenses in the second quarter over the prior year’s comparable period and first quarter levels was attributableincreased due to a number of factors.  Severalreasons.  In 2006, the Company began expensing certain stock-based compensation (stock options) under FASB 123(R).  For the first nine months of 2006, the SG&A portion of this category of expense is approximately $51,000, while it was -$ 0- in 2005.  Additionally, the Company incurred higher expenses this year for IT (information technology) support in connection with the implementation, licensing fees and technical support for a new server and operating software, along with enhancements to its computer network, spam filtering software, back-up and security functionality.  Additional expenses were also incurred for recruitment fees in connection with the Company’s successful search for its new CFO.  Legal and accounting expenses related to administrative corporate matters were also up over the comparable nine month period from last year.  Additionally, significant non-recurring expenses were incurred in connection with the Company’s investigation into the misappropriation of Company funds for personal use by its former CFO, as we reported in our Form 8-K filed on June 26, 2006.2006, our second quarter 10Q, and our amended 2005 Form 10-K/A.  These included additional costs for legal advice, forensic accounting consulting services and temporary accounting assistance, andassistance.  Director fees were up also resulting from special meetings of the Audit Committee of the Board of Directors.  Increased expenses also resulted from recruitment costs incurred in connection withDirectors necessitated by the Company’s successful search for its new CFO, and higher legal and accountingevents surrounding Mr. Miraglia. The total of extra non-recurring expenses related to day-to-day corporate matters.the Miraglia investigation were approximately $140,000 for nine months of which approximately $59,000 were expensed in the third quarter of 2006.

Internal Research and Development Expenses

There were no research and development expenses for the quarter ended JuneSeptember 30, 2006 or for the full first halfnine months of 2006.  This compares with $20,000$39,000 for the first halfnine months of 2005.  Technical resources continued to be assigned to support of manufacturing and production process improvements, initiatives aimed at improving gross profit margins, and investment into research and development remains at a historically low level.documentation of Company processes in preparation for certification under ISO 9001:2000.

Operating Profit (Loss)

The Company realized a profitloss from operations of $129,000,$(24,000), or 3.7%0.7% of revenuesales in the quarter just ended and $453,000, or 6.3% of revenue for the first six months of 2006.third quarter.  This compares with an operating lossprofit of $(172,000)$279,000 or (5.5)%7.8% of sales for the secondthird quarter of 2005 and2005.  As discussed above, third quarter operating profit was negatively impacted by non-recurring S,G&A expenses related to the events surrounding the investigation of its former CFO in the amount of approximately $59,000, in addition to lower sales levels in the quarter.

For the nine months ended September 30, 2006, operating profit was $428,000 or 4.2%, up significantly from a loss of $(414,000)$(129,000) or (6.5)(1.3)% of sales for the first halfnine months of 2005.2005, including approximately $140,000 of non-recurring selling, general and administrative expenses related to the investigation discussed above.  The year over year improvement in operating profit over nine months was the result ofattributable to both higher sales significantly higher gross margins, and higher operational efficiencies, all inter-related factors.

Second quarteran improved operating profit margin dropped from that in the first quarter as a result of $131,000 in lower sales compared with $65,000 of lower cost of goods sold, and the non-recurring S,G&A expenses discussed above.structure.

Anticipating that second half total sales will be lower than sales in the first half, managements’ focus at all operations is on reductions in labor and other variable expenses to the extent practical, and on business development.

Other Income and ExpensesExpense

Net interestInterest expense-net for the quarter was $102,000, down slightly from $108,000 last year.  Interest expense was $109,000 in the second quarter and $231,000net of $333,000 for the first sixnine months of 2006.  This compares with higher net2006 fell by $27,000 from $360,000 in 2005.  The reduction in interest expenses of $115,000 and $243,000 for the same periods in 2005 reflectingexpense-net reflects both the positive impact of interest income realized on this yearsyear’s higher cash balances.balances and an approximately $399,000 reduction in long term notes and capital lease obligations balances due to scheduled amortization payments, over the nine months of 2006.

In the third quarter of 2006, the Company received notification of a settlement for $300,000, the policy limit, from a claim under its employee dishonesty insurance policy and the Company reported the recovery as other income (expense) for the period.  By comparison, in the third quarter of 2005, the Company realized a gain of $136,000 on the sale of excess precious metals.

The Company also incurred costs of $13,000 during the nine months ended September 30, 2006 to liquidate liabilities for property tax and unemployment and disability tax that surfaced late and were incurred as part of its acquisition in December 2003 of the assets and certain liabilities of the former Laser Optics, Inc.

Net Profit (Loss)

The Company had a net profit of $7,000$173,000 for the secondthird quarter of 2006, up fromas compared with a lossnet profit of $(286,000)$308,000 for the secondthird quarter of last year.  For the sixnine months ended JuneSeptember 30, 2006, net profit was $208,000$381,000, comparing favorably with a net loss of $(659,000)$(349,000) in the same period last year.

Net Profit (Loss) Applicable to Common Shareholders and Earnings Per Common Share

The Company distributes a stock dividend equivalent to 134,000 common shares in the second quarter of each year, to the holders of its Series A and B preferred stock.  The expense of this dividend is set by the market price of the common shares on the date of its distribution, and is added to the net income or loss to determine the net income applicable to the common shareholders.  Preferred stock dividends in 2006 were valued at $234,500,based on our April 30, 2006 stock price of $1.75.  This compares to dividends of $134,000 or $1.00 per share in the second quarter of 2005.

Net lossprofit applicable to common shareholders for the three months ended JuneSeptember 30, 2006 was $(228,000)$173,000 or $(0.03) a share and $(26,000) or $(0.00)$0.02 per share, for the first six months, an improvement from comparable period losses of $(420,000)basic and diluted and $308,000 or $(0.06)$0.04 per share-basic and $0.03 per share and $(793,000)-diluted for 2005.  For nine month ended September 30, 2006 net profit applicable to common shareholders was $147,000 or $(0.11)$0.02 net profit per share — basic and diluted, after reflecting a preferred stock dividend of 134,000 common shares valued at $234,000 versus a net loss of $483,000 or $(0.07) per share — basic and diluted, for nine months ended September 30, 2005, respectively.after a preferred stock dividend of 134,000 common shares valued at $134,000.  The year over year increase in the amount of the preferred stock dividend resulted from an increase in market value of the Company shares on the date of the stock dividend.

Liquidity and Capital Resources

Net cash flow fromprovided by operating activities was $985,000$1,063,000 for the first halfnine months of 2006, upshowing a significant improvement from a negative net cash flow from operationsprovided by operating activities of $(821,000)$(647,000) in the first halfnine months of 2005.

Last year’s negative operating cash flow for the first half resulted in large measure from working capital requirements that included increases in accounts receivable, decreases in accounts payable and customer advances.  These factors along with lower sales, process re-engineering activities and inefficiencies at the Company’s new MRC Optics subsidiary.  Changes in payables and receivables during that period combined to result in an unusually large working capital requirement for the first six months of 2005.  This year’s positive cash flow from operations resulted fromover nine months was due to a number of factors including increased profitability due toon higher sales and improved margins, as well as a reduction in accounts receivable balances comparedof $568,000.  This was offset by a reduction in both accounts payable and customer advances in the amount of $266,000 and $272,000, respectively.  In addition, other current assets rose by $359,000 including $300,000 for insurance proceeds receivable on a claim under our employee dishonesty policy related to our former CFO.  Last year, operating cash flow for the first sixnine months was negatively affected by an increase in working capital requirements.  Accounts receivable balances rose by $484,000 over the first nine months of 2005 when the Company experienced an overall increasecorresponding with a drop in accounts receivablepayable balances of $495,000.$216,000 and a reduction in customer advances of $223,000.  These factors along with lower sales, process re-engineering activities and supply chain and operational inefficiencies, which have since been resolved, at the Company’s new MRC Optics subsidiary, resulted in a net use of cash in operations of $647,000.

DuringFor the sixnine month period ended JuneSeptember 30, 2006, working capital requirements were funded from cash generated by operations.  During the sixnine month period ended JuneSeptember 30, 2005, cash outflows were funded from cash reserves resulting from positive cash flow in 2004, and from capital raised from equity and debt placements during 2004.2004, and from the sale of non-productive and excess precious metal owned by the Company.

Capital expenditures for fixed assets, including purchasesthe nine months ended September 30, 2006 were $967,000, and were in part financed by proceeds from a portionpromissory note of applicable internal labor and overhead charges, were $(904,000) in the first half of 2006 vs. $(131,000) in the first half of 2005.  Capital expenditures for all of 2005 were $(454,000).

This years’ capital expenditures principally represents equipment purchases required in the performance of certain specific contracts and additionally gives the Company increased capability and a stronger competitive position in the manufacture of certain types of spherical and aspherical lenses.  The fiscal year 2005 amount represents mainly expenditures for replacement of capital equipment at the end of its useful life.

The majority of cash used to finance this year’s capital expenditures was obtained through the issuance of a seven year note  in the first quarter of this year,$700,000 from a major shareholder and debt holder who agreed to provideThe terms of the Company with $700,000 in debt financing to fund the acquisition of certain capital assets required for expanded capabilities.  The note was executed and the funds received in February 2006.  Its terms call for its repayment in equal monthly installments of interest and principal, commencing in March, 2006.  The note bears an annual interest rate of 6.75%.  During the first nine months of 2005, capital expenditures totaled $191,000.

During

This years’ capital expenditures includes significant expenditures for equipment required in the second quarter 25,000performance of certain specific contracts, and which additionally provides the Company with increased capability and a stronger competitive position in the manufacture of certain types of spherical and aspherical lenses.  The capital expenditures in 2005 represent mainly expenditures for replacement of capital equipment at the end of its useful life.

In the first nine months of 2006, 115,000 stock options were exercised at a weighted average exercise price of $1.00$0.85 each and converted to 25,000115,000 shares of common stock.  No options were exercised or common shares issued in 2005.

For the first six monthsAs of September 30, 2006, cash and cash equivalents increased by $554,000$495,000 over nine months to $1,710,000.  By comparison, in the first half of 2005, the Company had$1,651,000.  This compares to a decrease in cash and cash equivalents of $1,175,000 and an ending$884,000 over nine months last year to a balance of $219,000.$509,000 as of September 30, 2005.

ManagementThe Company’s management expects that cash flow from operations and use of its existing cash reserves will provide adequate liquidity for the Company’s operations inover the balance of 2006.

Management may from time to time continue to attempt to raise investment capital and to identify and to make investments in capital acquisitions, both in equipment and acquisition of complementary businesses, to pursue its objective of growth in shareholder value and to maintain a competitive edge in the markets that it serves.  However, there can be no assurance that the Company will continue to pursue such acquisitions or the raising of acquisition capital as it examines all of its strategic options.

ITEM 3.                             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company believes that it has limited exposure to changes in interest rates from investments in certain money market accounts.  The Company does not utilize derivative instruments or other market risk sensitive instruments to manage exposure to interest rate changes.  The Company believes 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 the Company’s interest sensitive money market accounts at JuneSeptember 30, 2006.  Interest on notes and leases are at fixed rates for the term of the debt.