**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549






**FORM
      10-Q**







QUARTERLY
      REPORT UNDER SECTION 13 OR 15 (d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





**For
      The Quarterly Period Ended September 30, 2006**





Commission
      File No. 1-3920









**NORTH
      AMERICAN GALVANIZING & COATINGS, INC.**


(Exact
      name of the registrant as specified in its charter)






**Delaware**


(State
      of
      Incorporation)





**7** **1-0268502**


(I.R.S.
      Employer Identification No.)





**5314
      S. Yale Avenue, Suite 1000, Tulsa, Oklahoma 74135**


(Address
      of principal executive offices)





Former
      address of registrant: 2250 East 73 rd Street,
      Tulsa, Oklahoma 74136






**(918)
      494-0964**


(Registrant's
      telephone number)










Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 and 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
o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer, as defined in Rule 12b-2 of
      the
      Exchange Act (Check one):


Large
                  accelerated filer o
              Accelerated
                  filer o
              Non-accelerated
                  filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the exchange Act). Yes
o No x





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of September 30, 2006:




Common
      Stock $ .10 Par Value . . . . . 7,852,871














**NORTH
      AMERICAN GALVANIZING & COATINGS, INC.**


**AND
      SUBSIDIARY**





**Index
      to Quarterly Report on Form 10-Q**









**Part
                  I.**
              **Financial
                Information**
              
              **Page**Forward
                Looking Statements or Information
              
              2Item
                1.
              Financial
                  StatementsReport
                  of Independent Registered Public Accounting Firm
              
              3Condensed
                  Consolidated Balance Sheets as of September 30, 2006 (unaudited),
                  and
                  December 31, 2005
              
              4Condensed
                  Consolidated Statements of Income for the three- and nine-month
                  periods
                  ended September 30, 2006 and 2005 (unaudited)
              
              5Condensed
                  Consolidated Statements of Cash Flows for the nine months ended
                  September
                  30, 2006 and 2005 (unaudited)
              
              6Condensed
                  Consolidated Statement of Stockholders’ Equity for the nine months ended
                  September 30, 2006 (unaudited)
              
              7Notes
                  to Condensed Consolidated Interim Financial Statements for the
                  three- and
                  nine-month periods ended September 30, 2006 and 2005
                  (unaudited)
              
              8-14Item
                2.
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              15-22Item 3.
              Quantitative
                  and Qualitative Disclosure About Market Risks
              
              22Item 4.
              Controls
                  and Procedures
              
              23**Part
                  II.**
              **Other
                Information**
              
              23-24**Signatures
                and Certifications**
              
              25-64












1











**Forward
      Looking Statements or Information**





Certain
      statements in this Form 10-Q, including information set forth under the caption
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations”, constitute “Forward-Looking Statements” within the meaning of
      Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
      Securities Exchange Act of 1934, as amended. Such statements are typically
      punctuated by words or phrases such as “anticipates,” “estimate,” “should,”
“may,” “management believes,” and words or phrases of similar import. The
      Company cautions investors that such forward-looking statements included in
      this
      Form 10-Q, or hereafter included in other publicly available documents filed
      with the Securities and Exchange Commission, reports to the Company’s
      stockholders and other publicly available statements issued or released by
      the
      Company involve significant risks, uncertainties, and other factors which could
      cause the Company’s actual results, performance (financial or operating) or
      achievements to differ materially from the future results, performance
      (financial or operating) or achievements expressed or implied by such
      forward-looking statements. Factors that could cause or contribute to such
      differences could include, but are not limited to, market substitution of other
      corrosion protection alternatives, such as paint, changes in demand, prices,
      the
      raw materials cost of zinc and the cost of natural gas; changes in economic
      conditions of the various markets the Company serves, as well as the other
      risks
      detailed herein and in the Company’s reports filed with the Securities and
      Exchange Commission. The Company believes that the important factors set forth
      in the Company’s cautionary statements at Exhibit 99 to this Form 10-Q could
      cause such a material difference to occur and investors are referred to Exhibit
      99 for such cautionary statements.





















































2




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








**To
      the Board of Directors and Stockholders of**


**North
      American Galvanizing & Coatings, Inc.**





We
      have
      reviewed the accompanying condensed consolidated balance sheet of North American
      Galvanizing & Coatings, Inc. and subsidiary (the “Company”) as of September
      30, 2006, and the related condensed consolidated statements of income for the
      three- and nine-month periods ended September 30, 2006 and 2005, stockholders’
equity for the nine-month period ended September 30, 2006, and of cash flows
      for
      the nine-month periods ended September 30, 2006 and 2005. These interim
      financial statements are the responsibility of the Company’s
      management.





We
      conducted our reviews in accordance with standards of the Public Company
      Accounting Oversight Board (United States). A review of interim financial
      information consists principally of applying analytical procedures and making
      inquiries of persons responsible for financial and accounting matters. It is
      substantially less in scope than an audit conducted in accordance with standards
      of the Public Company Accounting Oversight Board (United States), the objective
      of which is the expression of an opinion regarding the financial statements
      taken as a whole. Accordingly, we do not express such an opinion.





Based
      on
      our reviews, we are not aware of any material modifications that should be
      made
      to such condensed consolidated interim financial statements for them to be
      in
      conformity with accounting principles generally accepted in the United States
      of
      America.





We
      have
      previously audited, in accordance with standards of the Public Company
      Accounting Oversight Board (United States), the consolidated balance sheet
      of
      North American Galvanizing & Coatings, Inc. and subsidiary as of December
      31, 2005, and the related consolidated statements of operations and
      comprehensive income, stockholders’ equity and cash flows for the year then
      ended (not presented herein); and in our report dated February 10, 2006, we
      expressed an unqualified opinion on those consolidated financial statements.
      In
      our opinion, the information set forth in the accompanying condensed
      consolidated balance sheet as of December 31, 2005 is fairly stated, in all
      material respects, in relation to the consolidated balance sheet from which
      it
      has been derived.








/s/ 
      Deloitte & Touche LLP





Tulsa,
      Oklahoma


October
      31, 2006


























3




**NORTH
                AMERICAN GALVANIZING & COATINGS, INC.****CONDENSED
                CONSOLIDATED BALANCE SHEETS****(In
                thousands, except per share amounts)****Unaudited****September
                30,**
            
            **December
                31,****ASSETS**
            
            **2006**
            
            **2005**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            131
            
            $
            1,367Investments
            
            
            1,008
            
            
            —Trade
                receivables—less allowances of $239 for 2006 and $124 for
                2005
            
            
            11,838
            
            
            6,808Inventories
            
            
            6,569
            
            
            6,077Prepaid
                expenses and other assets
            
            
            451
            
            
            966Deferred
                tax asset—net
            
            
            802
            
            
            243Total
                current assets
            
            
            20,799
            
            
            15,461PROPERTY,
                PLANT AND EQUIPMENT—AT COST:Land
            
            
            2,167
            
            
            2,167Galvanizing
                plants and equipment
            
            
            36,567
            
            
            35,33038,734
            
            
            37,497Less—allowance
                for depreciation
            
            
            (18,054
            )
            
            (15,954
            )Construction
                in progress
            
            
            424
            
            
            325Total
                property, plant and equipment—net
            
            
            21,104
            
            
            21,868GOODWILL—Net
            
            
            3,448
            
            
            3,448OTHER
                ASSETS
            
            
            252
            
            
            278TOTAL
                ASSETS
            
            $
            45,603
            
            $
            41,055**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIES:Current
                maturities of long-term obligations
            
            $
            758
            
            $
            715Current
                portion of bonds payable
            
            
            760
            
            
            731Subordinated
                notes payable
            
            
            —
            
            
            1,000Trade
                accounts payable
            
            
            4,414
            
            
            1,838Accrued
                payroll and employee benefits
            
            
            1,190
            
            
            1,222Accrued
                taxes
            
            
            2,229
            
            
            591Other
                accrued liabilities
            
            
            2,916
            
            
            2,338Total
                current liabilities
            
            
            12,267
            
            
            8,435DEFERRED
                TAX LIABILITY—Net
            
            
            907
            
            
            1,047LONG-TERM
                OBLIGATIONS
            
            
            3,414
            
            
            7,072BONDS
                PAYABLE
            
            
            4,630
            
            
            5,203Total
                liabilities
            
            
            21,218
            
            
            21,757COMMITMENTS
                AND CONTINGENCIES (NOTES 6 AND 7)STOCKHOLDERS’
                EQUITY:Common
                stock—$.10 par value:Issued—8,209,925
                shares in 2006 and 2005
            
            
            821
            
            
            821Additional
                paid-in capital
            
            
            14,922
            
            
            17,391Retained
                earnings
            
            
            10,072
            
            
            6,543Common
                shares in treasury at cost— 357,054 in 2006 and 1,362,977 in
                2005
            
            
            (1,430
            )
            
            (5,457
            )Total
                stockholders’ equity
            
            
            24,385
            
            
            19,298TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            45,603
            
            $
            41,055See
                notes to condensed consolidated interim financial
                statements.






4




**NORTH
                AMERICAN GALVANIZING & COATINGS, INC.****CONDENSED
                CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)****(In
                thousands, except per share amounts)****For
                the Three Months Ended**
            
            **For
                the Nine Months Ended****September
                30**
            
            **September
                30****2006**
            
            **2005**
            
            **2006**
            
            **2005**SALES
            
            $
            20,155
            
            $
            12,687
            
            $
            53,793
            
            $
            34,768COSTS
                AND EXPENSES:Cost
                of sales
            
            
            15,109
            
            
            9,721
            
            
            38,811
            
            
            26,254Selling,
                general and administrative expenses
            
            
            2,119
            
            
            1,778
            
            
            6,206
            
            
            5,209Depreciation
                and amortization
            
            
            842
            
            
            600
            
            
            2,134
            
            
            1,865Total
                costs and expenses
            
            
            18,070
            
            
            12,099
            
            
            47,151
            
            
            33,328OPERATING
                INCOME
            
            
            2,085
            
            
            588
            
            
            6,642
            
            
            1,440INTEREST
                EXPENSE
            
            
            172
            
            
            285
            
            
            651
            
            
            788INCOME
                BEFORE INCOME TAXES
            
            
            1,913
            
            
            303
            
            
            5,991
            
            
            652INCOME
                TAX EXPENSE
            
            
            809
            
            
            124
            
            
            2,462
            
            
            262NET
                INCOME
            
            $
            1,104
            
            $
            179
            
            $
            3,529
            
            $
            390NET
                INCOME PER COMMON SHARE:Net
                incomeBasic
            
            $
            0.14
            
            $
            0.03
            
            $
            0.48
            
            $
            0.06Diluted
            
            $
            0.14
            
            $
            0.02
            
            $
            0.46
            
            $
            0.05See
                notes to condensed consolidated interim financial
                statements.























5




**NORTH
                AMERICAN GALVANIZING & COATINGS, INC.****CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)****NINE
                MONTHS ENDED SEPTEMBER 30, 2006 AND 2005****(In
                thousands, except per share amounts)****2006**
            
            **2005**OPERATING
                ACTIVITIES:Net
                income
            
            $
            3,529
            
            $
            390Loss
                on disposal of assets
            
            
            19
            
            
            51Depreciation
            
            
            2,134
            
            
            1,865Non-cash
                directors’ fees
            
            
            352
            
            
            175Deferred
                income taxes
            
            
            (699
            )
            
            456Non-cash
                share-based compensation
            
            
            61
            
            
            —Changes
                in operating assets and liabilities, net of purchase of assets from
                Gregory Industries, Inc. (Note 2):Accounts
                receivable—net
            
            
            (5,030
            )
            
            (1,643
            )Inventories
                and other assets
            
            
            49
            
            
            108Accounts
                payable, accrued liabilities and other
            
            
            4,559
            
            
            2,828Cash
                provided by operating activities
            
            
            4,974
            
            
            4,230INVESTING
                ACTIVITIES:Capital
                expenditures
            
            
            (944
            )
            
            (606
            )Purchase
                of investment
            
            
            (1,008
            )
            
            —Payment
                for purchase of Gregory Industries' galvanizing operation
            
            
            —
            
            
            (4,188
            )Cash
                used in investing activities
            
            
            (1,952
            )
            
            (4,794
            )FINANCING
                ACTIVITIES:Payments
                on long-term obligations
            
            
            (19,948
            )
            
            (16,017
            )Proceeds
                from long-term obligations
            
            
            16,089
            
            
            17,469Payment
                of subordinated notes payable
            
            
            (1,000
            )
            
            —Proceeds
                from exercise of stock options
            
            
            771
            
            
            —Payment
                on bonds
            
            
            (544
            )
            
            (516
            )Tax
                benefit realized from stock options exercised
            
            
            320
            
            
            —Proceeds
                from exercise of stock warrants
            
            
            57
            
            
            —Purchase
                of common stock for the treasury
            
            
            (3
            )
            
            —Proceeds
                from sale of treasury stock
            
            
            —
            
            
            100Cash
                provided by/(used in) financing activities
            
            
            (4,258
            )
            
            1,036INCREASE/(DECREASE)
                IN CASH AND CASH EQUIVALENTS
            
            
            (1,236
            )
            
            472CASH
                AND CASH EQUIVALENTS:Beginning
                of period
            
            
            1,367
            
            
            634End
                of period
            
            $
            131
            
            $
            1,106CASH
                PAID DURING THE PERIOD FOR:Income
                taxes (net of refunds of $432 in 2005)
            
            $
            1,419
            
            $
            (376
            )Interest
            
            $
            750
            
            $
            733NON-CASH
                INVESTING AND FINANCING ACTIVITIES:Acquisitions
                of fixed assets under capital lease obligations
            
            $
            244
            
            $
            —See
                notes to condensed consolidated interim financial
                statements.







6




**NORTH
                AMERICAN GALVANIZING & COATINGS, INC.****CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS’ EQUITY****FOR
                THE NINE MONTHS ENDED SEPTEMBER 30, 2006****(In
                thousands, except per share amounts)**






**Common
                Stock**
            
            **Additional****$.10
                Par Value**
            
            **Paid-in**
            
            **Retained**
            
            **Treasury
                Stock****Shares**
            
            **Amount**
            
            **Capital**
            
            **Earnings**
            
            **Shares**
            
            **Amount**
            
            **Total**BALANCE—January
                1, 2006
            
            
            8,209,925
            
            $
            821
            
            $
            17,391
            
            $
            6,543
            
            
            1,362,977
            
            $
            (5,457
            )
            $
            19,298Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            3,529
            
            
            —
            
            
            —
            
            
            3,529Stock
                units for Director Stock Unit Program
            
            
            —
            
            
            —
            
            
            352
            
            
            —
            
            
            —
            
            
            —
            
            
            352Incentive
                Stock Plan Compensation
            
            
            —
            
            
            —
            
            
            61
            
            
            —
            
            
            —
            
            
            —
            
            
            61Purchase
                of common stock for the treasury
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            535
            
            
            (3
            )
            
            (3
            )Issuance
                  of treasury shares for stock optiontransactions, net of shares
                  tendered for payment and including tax benefit
            
            
            —
            
            
            —
            
            
            (558
            )
            
            —
            
            
            (411,823
            )
            
            1,649
            
            
            1,091Issuance
                  of treasury shares for warranttransactions, net of shares tendered
                  for payment
            
            
            —
            
            
            —
            
            
            (2,324
            )
            
            —
            
            
            (594,635
            )
            
            2,381
            
            
            57BALANCE—September
                30, 2006
            
            
            8,209,925
            
            $
            821
            
            $
            14,922
            
            $
            10,072
            
            
            357,054
            
            $
            (1,430
            )
            $
            24,385






See
        notes
        to consolidated financial statements.







7


**NORTH
      AMERICAN GALVANIZING & COATINGS, INC.AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**


**FOR
      THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2006 and
      2005**


**UNAUDITED**





**Note
      1.**  **Basis
      of Presentation**


The
      condensed consolidated interim financial statements included in this report
      have
      been prepared by North American Galvanizing & Coatings, Inc. (the “Company”)
      pursuant to its understanding of the rules and regulations of the Securities
      and
      Exchange Commission for interim reporting and include all normal and recurring
      adjustments which are, in the opinion of management, necessary for a fair
      presentation. The condensed consolidated interim financial statements include
      the accounts of the Company and its subsidiary.





Certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with accounting principles generally accepted in the
      United States of America have been condensed or omitted pursuant to such rules
      and regulations for interim reporting. The Company believes that the disclosures
      are adequate to make the information presented not misleading. However, these
      interim financial statements should be read in conjunction with the financial
      statements and notes thereto included in the Company's Annual Report on Form


10-K
      for
      the year ended December 31, 2005. The financial data for the interim periods
      presented may not necessarily reflect the results to be anticipated for the
      complete year.





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the balance
      sheet dates and the reported amounts of revenues and expenses for each of the
      periods. Actual results will be determined based on the outcome of future events
      and could differ from the estimates. The Company’s sole business is hot dip
      galvanizing and coatings which is conducted through its wholly owned subsidiary,
      North American Galvanizing Company (“NAG”).





**Note
      2.       Business Expansion - Purchase of
      Assets**


On
      February 28, 2005, NAGalv-Ohio, Inc., a subsidiary of North American Galvanizing
      Company, purchased certain galvanizing assets of Gregory Industries, Inc.,
      located in Canton, Ohio, for a cash purchase price of $3.7 million plus
      approximately $0.5 million in purchase related expenses. The purchase expands
      the service area of North American Galvanizing into the northeast region of
      the
      United States. The results of the operations of NAGalv-Ohio, Inc. have been
      included in the consolidated financial statements since February 28, 2005.
      Goodwill of less than $0.1 million was recognized in the purchase. The net
      purchase price was allocated as follows:




Current
                  assets
              $1.8
                  millionNet
                  property, plant & equipment
              2.3Goodwill
              0.1Purchase
                  price
              $4.2million




Pro-forma
      unaudited results of operations of the Company for the nine-month period ended
      September 30, 2005, prepared as if the purchase had taken place on January
      1,
      2005 would have been as follows:




Nine
                    Months
                  Ended
                    September 30*Dollars
                    in Thousands, Except per Share Amounts*
                
                2005Sales
                
                $
                35,872Net
                    Income
                
                
                270Earnings
                    per share:Basic
                
                $
                .04Diluted
                
                $
                .04






8


**Note
      3.**  **Stock
      Options**





On
      September 30, 2006 the Company has two share-based compensation plans, which
      are
      shareholder-approved, the 2004 Incentive Stock Plan and the Director Stock
      Unit
      Plan (Note 8). The Company’s 2004 Incentive Stock (the Plan) permits the grant
      of share options and shares to its employees and directors for up to 1,250,000
      shares of common stock. The Company believes that such awards better align
      the
      interests of its employees and directors with those of its shareholders. Option
      awards are granted with an exercise price equal to the market price of the
      Company’s stock at the date of grant; those option awards vest based on 4 years
      of continuous service and have 10-year contractual terms.





The
      Company adopted Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment” (“SFAS No. 123(R)”) under the modified prospective method
      on January 1, 2006. Under the “modified prospective” method, compensation cost
      is recognized in the financial statements beginning with the effective date,
      based on the requirements of SFAS No. 123(R) for all share-based payments
      granted after that date, and based on the requirements of Statement of Financial
      Accounting Standards No.123, “Accounting for Stock Based Compensation” (“SFAS
      No. 123”) for all unvested awards granted prior to the effective date of SFAS
      No. 123(R).





SFAS
      No.
      123(R) eliminates the intrinsic value measurement method of accounting in APB
      Opinion 25 and generally requires measuring the cost of the employee services
      received in exchange for an award of equity instruments based on the fair value
      of the award on the date of the grant. The standard requires grant date fair
      value to be estimated using either an option-pricing model which is consistent
      with the terms of the award or a market observed price, if such a price exists.
      Such costs must be recognized over the period during which an employee is
      required to provide service in exchange for the award. The standard also
      requires estimating the number of instruments that will ultimately be issued,
      rather than accounting for forfeitures as they occur.





The
      compensation cost for the Plan was $32,000 for the three-months ended September
      30, 2006 and $61,000 for the first nine-months of 2006. No tax benefit was
      recognized for the incentive stock plan compensation cost. There was no
      share-based compensation cost capitalized during the first nine months of 2006.





In
      2005,
      the Company accounted for its stock option plans in accordance with Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”,
      under which no compensation cost was recognized for stock option awards. Had
      compensation cost for the Company’s stock option plans been determined according
      to the methodology of SFAS No. 123, the Company’s pro forma net earnings and
      basic and diluted earnings per share for the three- and nine-month periods
      ended
      September 30, 2005 would have been as follows:




Three
                  Months Ended
              
              Nine
                  Months Ended*(Dollars
                in Thousands, Except per Share Amounts)*
              
              September
                  30, 2005
              
              September
                  30, 2005Net
                  Income, as reported
              
              $
              179
              
              $
              390Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based methods, net of tax
              
              $
              (24
              )
              $
              (39
              )Pro
                  forma net income
              
              $
              155
              
              $
              351Earnings
                  per share:Basic
                  and Diluted - as reported
              
              $
              .03
              
              $
              .06Basic
                  and Diluted - pro forma
              
              $
              .02
              
              $
              .05






9




The
      fair
      value of options granted under the Company’s stock option plans was estimated
      using the Black-Scholes option-pricing model with the following assumptions
      used:




Three
                  Months Ended September 30
              
              Nine
                  Months Ended September 30*Dollars
                in Thousands, Except per Share Amounts*
              
              
              **2006**
              
              
              2005
              
              
              **2006**
              
              
              2005Volatility
              
              
              —
              
              
              47
              %
              
              **54**
              **%**
              
              47
              %Discount
                  Rate
              
              
              —
              
              
              4.2
              %
              
              **4.7**
              **%**
              
              4.2
              %Dividend
                  Yield
              
              
              —
              
              
              —
              
              
              —
              
              
              —Fair
                  Value
              
              
              —
              
              $
              1.25
              
              **$**
              **1.50**
              
              $
              1.48





In
      the
      first nine months of 2006, the Company issued stock options for 167,500 shares
      at $2.14 per share, and issued stock options for 140,000 shares at $2.33 per
      share in the first nine months of 2005. The fair value of options which became
      fully vested during the first nine months of 2006 was $32,550. The intrinsic
      value of options exercised during the first nine months of 2006 was
      $1,479,000.




**Number of**
              **Shares**
            
            **Weighted Average**
              **Exercise Price**Outstanding,
                December 31, 2005 (518,333 exercisable)
            
            
            713,333
            
            $
            2.11Granted
            
            
            167,500
            
            
            2.14Exercised
            
            
            (413,750
            )
            
            2.19Surrendered/expired/cancelled
            
            
            (40,000
            )
            
            2.42Outstanding,
                September 30, 2006 ( 178,083 exercisable)
            
            
            427,083
            
            $
            2.02







Information
      about stock options as of September 30, 2006:




**Options
                Outstanding**
            
            **Options
                Exercisable****Weighted-**
            
            
            
            
            
            **Weighted-****Weighted-**
            
            **Average**
            
            
            
            **Weighted-**
            
            **Average****Average**
            
            **Remaining**
            
            
            
            **Average**
            
            **Remaining****Range
                of**
            
            **Number
                of**
            
            **Exercise**
            
            **Contractual**
            
            **Number
                of**
            
            **Exercise**
            
            **Contractual****Exercise
                Prices**
            
            **Shares**
            
            **Price**
            
            **Life
                (Years)**
            
            **Shares**
            
            **Price**
            
            **Life
                (Years)**$1.00
                to $1.50
            
            
            95,833
            
            $
            1.28
            
            
            5.1
            
            
            88,333
            
            $
            1.26
            
            
            5.5$1.70
                to $2.10
            
            
            230,000
            
            
            2.05
            
            
            8.5
            
            
            70,000
            
            
            1.97
            
            
            7.6$2.41
                to $2.85
            
            
            81,250
            
            
            2.51
            
            
            8.5
            
            
            —
            
            
            —
            
            
            —$3.06
                to $3.50
            
            
            20,000
            
            
            3.16
            
            
            1.2
            
            
            20,000
            
            
            3.16
            
            
            1.2427,083
            
            $
            2.02
            
            
            7.4
            
            
            178,083
            
            $
            1.75
            
            
            5.9




As
      of
      September 30, 2006, the total compensation cost related to nonvested awards
      not
      yet recognized was $306,890, which is expected to be recognized over a weighted
      average period of 1.6 years. The aggregate intrinsic value of options
      outstanding and options exercisable was $1,842,468 and $816,018, respectively,
      at September 30, 2006.




**Note
      4.       Income Per Common
      Share**





Basic
      earnings per common share for the periods presented are computed based upon
      the
      weighted average number of shares outstanding, adjusted for stock unit grants.
      Diluted earnings per common share for the periods presented are based on the
      weighted average shares outstanding, adjusted for stock unit grants and for
      the
      assumed exercise of stock options and warrants using the treasury stock method.





10




Three
                  Months Ended September 30Number
                  of Shares2006
              
              2005Basic
              
              
              7,804,952
              
              
              6,909,360Diluted
              
              
              8,091,372
              
              
              7,626,642






Nine
                  Months Ended September 30Number
                  of Shares2006
              
              2005Basic
              
              
              7,360,852
              
              
              6,857,820Diluted
              
              
              7,594,776
              
              
              7,584,103





The
      options excluded from the calculation of diluted earnings per share, due to
      the
      option price being higher than the share market value is 295,000 at September
      30, 2005. There were no options priced higher than the share market value at
      September 30, 2006.





**Note
      5.**  **Long-Term
      Obligations**


September
                  30
              
              December
                  31(Dollars
                in Thousands)
              
              2006
              
              2005Revolving
                  line of credit
              
              $
              —
              
              $
              3,304Term
                  loan
              
              
              3,930
              
              
              4,465Capital
                  lease obligations
              
              
              225
              
              
              —9.5%
                  note due 2015
              
              
              17
              
              
              18$
              4,172
              
              $
              7,787Less
                  current portion
              
              
              (758
              )
              
              (715
              )$
              3,414
              
              $
              7,072






In
      February 2005, the Company amended a three-year bank credit agreement that
      was
      scheduled to expire in December 2007 and extended its maturity to February
      28,
      2008. Subject to borrowing base limitations, the amended agreement provides
      (i)
      an $8,000,000 maximum revolving credit facility for working capital and general
      corporate purposes and (ii) a $5,001,000 term loan that combined the outstanding
      principal balance of the existing term loan with additional financing for the
      purchase of assets of a galvanizing facility (Note 2).





Term
      loan
      payments are based on a seven-year amortization schedule with equal monthly
      payments of principal and interest, and a final balloon payment in February
      2008. The term loan may be prepaid without penalty. The revolving line of credit
      may be paid down without penalty, or additional funds may be borrowed up to
      the
      maximum line of credit. At September 30, 2006, the Company had unused borrowing
      capacity of $7.4 million under the $8.0 million line of credit, based on the
      underlying borrowing base of accounts receivable and inventory. At September
      30,
      2006, there were no borrowings outstanding under the bank credit agreement,
      and
      $.6 million was reserved for outstanding irrevocable letters of credit to secure
      payment of current and future workers’ compensation claims.





Substantially
      all of the Company’s accounts receivable, inventories, fixed assets and the
      common stock of its subsidiary are pledged as collateral under the agreement,
      and the credit agreement is secured by a full and unconditional guaranty from
      NAG. Amounts borrowed under the agreement bear interest at the prime rate of
      JPMorgan Chase Bank or the LIBOR rate, at the option of the Company, subject
      to
      a rate margin adjustment determined by the Company’s consolidated debt service
      coverage ratio. The interest rate on these borrowings was 8.50% at September
      30,
      2006. In the event the Company fails to maintain a consolidated debt service
      coverage




11




ratio
      for
      any fiscal quarter of at least 1.25 to 1.00, the Applicable LIBOR Rate Margin
      will be increased from 3.0% to 5.75% and the Applicable Prime Rate Margin will
      be increased from .25% to 3.00%. Thereafter, the increased rate margin will
      remain in effect until such time as the Company has maintained a consolidated
      debt service coverage ratio greater than or equal to 1.25 to 1.00 for a
      subsequent fiscal quarter.





In
      the
      event the Company fails to maintain a consolidated EBITDA to capital
      expenditures plus current maturity of long-term debt ratio for any fiscal
      quarter of not less than 1.00 to 1.00, the increase in the Applicable LIBOR
      Rate
      Margin ranges from 3.75% to 5.75%, and the increase in the Applicable Prime
      Rate
      Margin ranges from 1.00% to 3.00%.





The
      credit agreement requires the Company to maintain compliance with covenant
      limits for current ratio, debt to tangible net worth ratio, debt service
      coverage ratio and a capital expenditures ratio. At September 30, 2006, the
      Company was in compliance with the covenants. The actual financial ratios
      compared to the required ratios, were as follows: Current Ratio - actual 1.70
      versus minimum required of 1.10; Debt to Tangible Net Worth Ratio - actual
      1.01
      vs. maximum permitted of 2.50; Debt Service Coverage Ratio - actual 3.94 versus
      minimum permitted of 1.25; Capital Expenditures Coverage Ratio - actual 1.98
      versus minimum required of 1.0.





**Note
      6.**  **Subordinated
      Debt**





On
      August
      31, 2006, North American Galvanizing & Coatings, Inc. prepaid the $1 million
      subordinated promissory notes due to mature in February of 2007. In February
      2006, the Company offered the noteholders of its $1 million subordinated
      promissory notes the opportunity to extend the maturity date one year to
      February 17, 2007. The extension, which was offered on a voluntary basis, was
      100% subscribed. The notes were issued with warrants to purchase 666,666 shares
      of common stock of the Company. All of the warrants were exercised by the
      holders during the third quarter of 2006, at the exercise price of $.856 per
      share.





**Note
      7.**  **Commitments
      and Contingencies**


The
      Company has commitments with domestic and foreign zinc producers and brokers
      to
      purchase zinc used in its hot dip galvanizing operations. Commitments for the
      future delivery of zinc reflect rates then quoted on the London Metals Exchange
      and are not subject to price adjustment or are based on such quoted prices
      at
      the time of delivery. At September 30, 2006 the aggregate commitments for the
      procurement of zinc at fixed prices was approximately $1.0 million. The Company
      reviews these fixed price contracts for losses using the same methodology
      employed to estimate the market value of its zinc inventory. The Company had
      unpriced commitments for the purchase of 3.0 million pounds of zinc at September
      30, 2006.





The
      Company’s financial strategy includes evaluating the selective use of derivative
      financial instruments to manage zinc and interest costs. As part of its
      inventory management strategy, the Company expects to continue evaluating
      hedging instruments to minimize the impact of zinc price fluctuations. The
      Company had no derivative instruments required to be reported at fair value
      at
      September 30, 2006 or December 31, 2005, and did not utilize derivatives in
      the
      nine-month period ended September 30, 2006 or the year ended December 31, 2005,
      except for the forward purchase agreements described above, which are accounted
      for as normal purchases.





The
      Company’s total off-balance sheet contractual obligations at September 30, 2006,
      consist of approximately $1.8 million for long-term operating leases for
      vehicles, office space, office equipment, galvanizing facilities and galvanizing
      equipment and approximately $1.0 million for zinc purchase commitments. The
      various leases for galvanizing facilities, including option renewals, expire
      from 2006 to 2017. A lease for galvanizing equipment expires in 2007.





On
      August
      30, 2004, the Company was informed by counsel for the Metropolitan Water
      Reclamation District of Greater Chicago (the “Water District”) that the Water
      District had, on August 25, 2004 filed a Second Amended Complaint in the United
      States District Court, Northern District of Illinois, Eastern Division, naming
      North American Galvanizing & Coatings, Inc. (formerly known as Kinark
      Corporation) as an added defendant. Counsel for the Water District also gave
      the
      Company notice of the Water District’s intent to file (or amend the
      Complaint






12




to
      include) a Citizens Suit under the Resource Compensation and Recovery Act
      (“RCRA”) against North American Galvanizing & Coatings, Inc., pursuant to
      Section 7002 of RCRA, 42 U.S.C. Section 6972. This Second Amended Complaint
      seeks enforcement of an August 12, 2004 default judgment in the amount of
      $1,810,463.34 against Lake River Corporation and Lake River Holding Company,
      Inc. in connection with the operation of a storage terminal by Lake River
      Corporation in violation of environmental laws. Lake River Corporation conducted
      business as a subsidiary of the Company until September 30, 2000, at which
      time
      Lake River Corporation was sold to Lake River Holding Company, Inc. and ceased
      to be a subsidiary of the Company. The Second Amended Complaint asserts that
      prior to the sale of Lake River Corporation, the Company directly operated
      the
      Lake River facility and, accordingly, seeks to have the Court pierce the
      corporate veil of Lake River Corporation and enforce the default judgment order
      of August 12, 2004 against the Company. The Company denies the assertions set
      forth in the Water District’s Complaint and on November 13, 2004 filed a partial
      motion for dismissal of the Second Amended Complaint.





In
      December 2004, the Water District filed a Third Amended complaint in the
      litigation, adding two claims: (1) a common law claim for nuisance; and (2)
      a
      claim under the federal Resource Conservation and Recovery Act, in which the
      Water District argues that the Company is responsible for conditions on the
      plaintiff’s property that present an “imminent and substantial endangerment to
      human health and the environment.” In January 2005, the Company filed a partial
      motion to dismiss the Third Amended Complaint. On April 12, 2005, the Court
      issued an order denying in part and granting in part the Company’s partial
      motion to dismiss plaintiff’s third amended complaint. The Company has filed an
      appeal with the Seventh Circuit Court of Appeals requesting dismissal of the
      sole CERCLA claim contained in the Third Amended Complaint that was not
      dismissed by the United States District Court’s April 12, 2005 order. The Water
      District has also appealed those rulings contained in the April 12, 2005
      order that are adverse to the Water District. Meanwhile, litigation in the
      United States District Court continues.




The
      Company has denied any liability with respect to this claim and intends to
      vigorously defend this case. At this time, the Company has not determined the
      amount of any liability that may result from this matter


or
      whether such liability, if any, would have a material adverse effect on the
      Company’s financial condition, results of operations, or liquidity.





The
      Internal Revenue Service is reviewing the Harris County Industrial Development
      Corporation Adjustable Rate Industrial Development Bonds and compliance with
      the
      Internal Revenue Code section (IRC) 144(a)(4)(ii)’s dollar limitation on capital
      expenditures within a relevant period. The IRS review concerns whether two
      operating leases commencing in January 2001 are conditional sales contracts,
      not
      true leases, according to Revenue Ruling 55-540. Should the Company be
      completely unsuccessful in its position that the bonds meet the tax-exempt
      financing requirements, the bonds could lose their tax exempt status, the
      Company could be required to redeem the bonds, which had a principal balance
      of
      $5,390,000 at September 30, 2006, and the Company could be required to pay
      up to
      $145,000 in additional income tax on the interest payments made to the
      bondholders. Management of the Company, based upon their analysis of known
      facts
      and circumstances and advice from legal counsel, does not believe that this
      matter will have a material adverse effect on the results of operations,
      financial conditions or cash flows of the Company and continues to classify
      $4,630,000 of the bond liability as long-term according to the original terms
      of
      the bond agreement. In addition, management believes the Company has sufficient
      long-term borrowing capacity to repay the bonds in the unlikely event it is
      required.





NAG
      was
      notified in 1997 by the Illinois Environmental Protection
      Agency (“IEPA”) that it was one of approximately 60 potentially responsible
      parties (“PRPs”) under the Comprehensive Environmental Response, Compensation,
      and Liability Information System (“CERCLIS”) in connection with cleanup of an
      abandoned site formerly owned by Sandoval Zinc Co. A number of the PRPs have
      agreed to work together and with IEPA on a voluntary basis. The Company has
      been
      and continues to participate in this volunteer group. The group has retained
      consultants and legal representatives familiar with IEPA regulations. This
      volunteer group, with its consultants, has cooperated with IEPA in attempting
      to
      better define the environmental issues associated with the Sandoval
      Zinc site. To that extent, this voluntary group prepared and submitted to IEPA
      in August 2000 a work plan. The purpose of this work plan is to attempt to
      define the extent of environmental remediation that might be required, assess
      risks, and review alternatives to addressing potential remediation. The IEPA
      has
      yet to respond to






13


this
      proposed work plan or suggest any other course of action, and there has been
      no
      activity in regards to this issue during 2006. Therefore, the Company has no
      basis for determining potential exposure and estimated remediation costs at
      this
      time.





The
      Company is committed to complying with all federal, state and local
      environmental laws and regulations and using its best management practices
      to
      anticipate and satisfy future requirements. As is typical in the galvanizing
      business, the Company will have additional environmental compliance costs
      associated with past, present and future operations. Management is committed
      to
      discovering and eliminating environmental issues as they arise. Because of
      frequent changes in environmental technology, laws and regulations management
      cannot reasonably quantify the Company’s potential future costs in this area.





North
      American Galvanizing & Coatings, Inc. and its subsidiary are parties to a
      number of other lawsuits and environmental matters which are not discussed
      herein. Management of the Company, based upon their analysis of known facts
      and
      circumstances and reports from legal counsel, does not believe that any other
      such matter will have a material adverse effect on the results of operations,
      financial conditions or cash flows of the Company.





**Note
      8.       Director Stock Unit
      Program**


On
      January 1, 2005, the Company implemented the Director Stock Unit Program
      (approved by the stockholders at the Annual Meeting held July 21, 2004) under
      which a Director is required to defer 50% of his or her board fee and may elect
      to defer up to 100% of his or her board fee, plus a matching contribution by
      the
      Company that varies from 25% to 75% depending on the level of deferral. Such
      deferrals are converted into a stock unit grant, payable to the Director five
      years following the year of deferral. For 2005 and 2006, all of the Company’s
      Outside Directors elected to defer 100% of the annual board fee and the
      Company’s chief executive officer and Inside Director has elected to defer a
      corresponding amount of his salary. Outside Directors currently receive an
      annual fee of $35,000, which includes attendance at board meetings and service
      on committees of the board.





Information
      related to fees and salary deferred by the Directors for the three- and
      nine-month periods ended September 30, 2006 and 2005, are
      following:




Three
                  Months Ended September 30
              
              Nine
                  Months Ended September 30**2006**
              
              2006
              
              **2006**
              
              2005Deferred
                  director stock units
              
              
              **23,716**
              
              
              35,712
              
              
              **125,588**
              
              
              79,632Average
                  value per stock unit
              
              **$**
              **4.52**
              
              $
              1.96
              
              **$**
              **2.80**
              
              $
              2.20







The
      value
      of a stock unit grant is the average of the closing prices for a share of the
      Company’s stock for the 10 trading days before the date the director fees
      otherwise would have been payable in cash.





**Note
      9.       Certain Relationships and Related
      Transactions**


A
      subsidiary of North American Galvanizing Company (NAGalv-Ohio, Inc.) purchased
      the after-fabrication hot dip galvanizing assets of Gregory Industries, Inc.
      located in Canton, Ohio on February 28, 2005. Gregory Industries, Inc. is a
      manufacturer of products for the highway industry. T. Stephen Gregory, appointed
      a director of North American Galvanizing & Coatings, Inc. on June 22, 2005
      is the chairman of the board and a shareholder of Gregory Industries, Inc.
      Total
      sales to Gregory Industries, Inc. for the three-month periods ended September
      30, 2006 and 2005 were approximately $645,000 and $465,000, respectively. Total
      sales to Gregory Industries, Inc. for the nine-month periods ended September
      30,
      2006 and 2005 were approximately $1,389,000 and $1,018,000, respectively. The
      amount due from Gregory Industries, Inc. included in trade receivables at
      September 30, 2006 and December 31, 2005 was $411,000 and $254,000,
      respectively.





**Note
      10.     Change in Depreciation Method for Plant and
      Equipment**


Effective
        in 2001, the Company adopted the units of production method of depreciation
        for certain equipment at new galvanizing plants and for significant expansions
        of existing plants. The units of production method of depreciation was based
        on
        projected total tonnage to be processed over the estimated lives of the
        respective plant equipment.




14


The
      straight-line method of depreciation was continued for all other plant and
      equipment. In recognition of subsequent experience that indicated the
      equipment being depreciated under the units of production method was affected
      to
      a greater extent by age than by the level of production activity taking place
      within the plants, effective July 1, 2006, the Company changed its depreciation
      method for these assets, with an aggregate cost basis of $5.9 million, from
      the
      units of production method to the straight-line method. This change in
      accounting estimate effected by a change in accounting principle is preferable
      because the straight-line method better allocates the cost of these assets
      to
      accounting periods in a systematic and rational manner more closely related
      to
      the assets’ pattern of consumption.


The
        impact on the current period earnings from this change, which was applied
        prospectively beginning July 1, 2006, was a decrease in operating income
        of
        $174,000, a decrease in net income of $108,000 and a reduction in basic and
        diluted earnings per share of $.01 for the three and nine months ended September
        30, 2006.


**Note
      11.     Investments**


The
      Company has classified its investments as available-for-sale and records the
      unrealized holding gains (losses) on these investments as a separate component
      of Stockholder’s Equity as other comprehensive income. If the Company believes
      that a decline in the fair value of a security is other than temporary, the
      cost
      basis of such security is written down and the loss is reflected as a charge
      to
      income. Investment income is recognized on the accrual method. Cost is
      determined on the specific identification basis in computing realized gains
      and
      losses on sales of investments. The Company’s investments consist of debt
      securities. There is no difference in amortized cost and fair value of the
      Company’s available-for-sale debt securities at September 30, 2006.


**







































































15


**North
      American Galvanizing & Coatings, Inc. and Subsidiary**





**Item
      2.       Management’s Discussion and Analysis of
      Financial Condition and Results of Operations**





**GENERAL**





North
      American Galvanizing is a leading provider of corrosion protection for iron
      and
      steel components fabricated by its customers. Hot dip galvanizing is the process
      of applying a zinc coating to fabricated iron or steel material by immersing
      the
      material in a bath consisting primarily of molten zinc.


Effective
        in 2001, the Company adopted the units of production method of
        depreciation, for certain equipment at new galvanizing plants and for
        significant expansions of existing plants. The units of production method
        of
        depreciation was based on projected total tonnage to be processed over the
        estimated lives of the respective plant equipment. The straight-line method
        of
        depreciation was continued for all other plant and equipment. In recognition
        of
        subsequent experience that indicated the equipment being depreciated under
        the units of production method was affected to a greater extent by age than
        by
        the level of production activity taking place within the plants, effective
        July
        1, 2006, the Company changed its depreciation method for these assets, with
        an
        aggregate cost basis of $5.9 million, from the units of production method
        to the
        straight-line method. This change in accounting estimate effected by a change
        in
        accounting principle is preferable because the straight-line method better
        allocates the cost of these assets to accounting periods in a systematic
        and
        rational manner more closely related to the assets’ pattern of
        consumption.
  The
          impact on the current period earnings from this change, which was applied
          prospectively beginning July 1, 2006, was a decrease in operating income
          of
          $174,000, a decrease in net income of $108,000 and a reduction in basic
          and
          diluted earnings per share of $.01 for the three and nine months ended
          September
          30, 2006.


The
      Company has classified its investments as available-for-sale and records the
      unrealized holding gains (losses) on these investments as a separate component
      of Stockholder’s Equity as other comprehensive income. If the Company believes
      that a decline in the fair value of a security is other than temporary, the
      cost
      basis of such security is written down and the loss is reflected as a charge
      to
      income. Investment income is recognized on the accrual method. Cost is
      determined on the specific identification basis in computing realized gains
      and
      losses on sales of investments. The Company’s investments consist of debt
      securities. There is no difference in amortized cost and fair value of the
      Company’s available-for-sale debt securities at September 30, 2006.





There
      have been no other changes in critical accounting policies previously disclosed
      in Form 10-K for the year ended December 31, 2005.





On
      February 28, 2005, NAGalv-Ohio, Inc., a subsidiary North American Galvanizing
      Company, purchased the hot-dip galvanizing assets of a galvanizing facility
      located in Canton, Ohio. The transaction was structured as an asset purchase,
      pursuant to an Asset Purchase Agreement dated February 28, 2005 by and between
      NAGalv-Ohio, Inc., and the privately owned Gregory Industries, Inc. for all
      of
      the plant, property and equipment of Gregory Industries’ after-fabrication hot
      dip galvanizing operation. Operating results of the purchased galvanizing
      business are included in the Company’s financial statements commencing from the
      date of the purchase on February 28, 2005.





The
      Company’s galvanizing plants offer a broad line of services including centrifuge
      galvanizing for small threaded products, sandblasting, chromate quenching,
      polymeric coatings, and proprietary INFRASHIELD SM Coating
      Application Systems for polyurethane protective linings and coatings over
      galvanized surfaces. The Company’s mechanical and chemical engineers provide
      customized assistance with initial fabrication design, project estimates and
      steel chemistry selection.





The
      Company’s galvanizing and coating operations are composed of eleven facilities
      located in Colorado, Kentucky, Missouri, Ohio, Oklahoma, Tennessee and Texas.
      These facilities operate galvanizing kettles ranging in length from 16 feet
      to
      62 feet, and have lifting capacities ranging from 12,000 pounds to 40,000
      pounds.








16





The
      Company maintains a sales and service network coupled with its galvanizing
      plants, supplemented by national account business development at the corporate
      level. In a typical year, the Company will galvanize in excess of 365,000,000
      pounds of steel products for approximately 2,000 customers
      nationwide.





All
      of
      the Company’s sales are generated for customers whose end markets are
      principally in the United States. The Company markets its galvanizing and
      coating services directly to its customers and does not utilize agents or
      distributors. Although hot dip galvanizing is considered a mature service
      industry, the Company is actively engaged in developing new markets through
      participation in industry trade shows, metals trade associations and
      presentation of technical seminars by its national marketing service
      team.





Hot
      dip
      galvanizing provides metals corrosion protection for many product applications
      used in commercial, construction and industrial markets. The Company’s
      galvanizing can be found in almost every major application and industry that
      requires corrosion protection where iron or steel is used, including the
      following end user markets:




·
            highway
                and transportation,


·
            power
                transmission and distribution,


·
            wireless
                and telecommunications,


·
            utilities,


·
            petrochemical
                processing,


·
            industrial
                grating,


·
            infrastructure
                including buildings, airports, bridges and power
                generation;


·
            wastewater
                treatment,


·
            fresh
                water storage and transportation;


·
            pulp
                and paper,


·
            pipe
                and tube,


·
            food
                processing,


·
            agricultural
                (irrigation systems),


·
            recreation
                (boat trailers, marine docks, stadium
                scaffolds),


·
            bridge
                and pedestrian handrail,


·
            commercial
                and residential lighting poles, and


·
            original
                equipment manufactured products, including general
                fabrication.





As
      a
      value-added service provider, the Company’s revenues are directly influenced by
      the level of economic activity in the various end markets that it serves.
      Economic activity in those markets that results in the expansion and/or
      upgrading of physical facilities (i.e., construction) may involve a time-lag
      factor of several months before translating into a demand for galvanizing
      fabricated components. Despite the inherent seasonality associated with large
      project construction work, the Company maintains a relatively stable revenue
      stream throughout the year by offering fabricators, large and small, reliable
      and rapid turn-around service.





The
      Company records revenues when the galvanizing and coating processes are
      completed. The Company generates all of its operating cash from such revenues,
      and utilizes a line of credit secured by the underlying accounts receivable
      and
      zinc inventory to facilitate working capital needs.





Each
      of
      the Company’s galvanizing plants operate in a highly competitive environment
      underscored by pricing pressures, primarily from other public and
      privately-owned galvanizers and alternative forms of corrosion protection,
      such
      as paint. The Company’s long-term response to these challenges has been a
      sustained strategy focusing on providing a reliable quality of galvanizing
      to
      standard industry technical specifications and rapid turn-around time on every
      project, large and small. Key to the success of this strategy is the Company’s
      continuing commitment and long-term record of reinvesting earnings to upgrade
      its galvanizing facilities and provide technical






17




innovations
      to improve production efficiencies; and to construct new facilities when market
      conditions present opportunities for growth. The Company is addressing long-term
      opportunities to expand its galvanizing and coatings business through programs
      to increase industry awareness of the proven, unique benefits of galvanizing
      for
      metals corrosion protection. Each of the Company’s galvanizing plants is linked
      to a centralized system involving sales order entry, facility maintenance and
      operating procedures, quality assurance, purchasing and credit and accounting
      that enable the plant to focus on providing galvanizing and coating services
      in
      the most cost-effective manner.





The
      principal raw materials essential to the Company’s galvanizing and coating
      operations are zinc and various chemicals which are normally available for
      purchase in the open market.





**Key
      Indicators**





Key
      industries which historically have provided the Company some indication of
      the
      potential demand for galvanizing in the near-term, (i.e., primarily within
      a
      year) include highway and transportation, power transmission and distribution,
      telecommunications and the level of quoting activity for regional metal
      fabricators. In general, growth in the commercial/industrial sectors of the
      economy generates new construction and capital spending which ultimately impacts
      the demand for galvanizing.




Key
      operating measures utilized by the Company include new orders, zinc inventory,
      tons of steel galvanized, revenue, pounds and labor costs per hour, zinc usage
      related to tonnage galvanized, and lost-time safety performance. These measures
      are reported and analyzed on various cycles, including daily, weekly and
      monthly.





The
      Company utilizes a number of key financial measures to evaluate the operations
      at each of its galvanizing plants, to identify trends and variables impacting
      operating productivity and current and future business results, which include:
      return on capital employed, sales, gross profit, fixed and variable costs,
      selling and general administrative expenses, operating cash flows, capital
      expenditures, interest expense, and a number of ratios such as profit from
      operations and accounts receivable turnover. These measures are reviewed by
      the
      Company’s operating and executive management each month, or more frequently, and
      compared to prior periods, the current business plan and to standard performance
      criteria, as applicable.





**Key
      Developments**





During
      the period of January, 2003 through February 2005, the Company reported a number
      of developments supporting its strategic program to reposition its galvanizing
      business in the national market.




On
      February 28, 2005, NAGalv-Ohio, Inc., a subsidiary of North American Galvanizing
      Company, purchased the hot-dip galvanizing assets of a galvanizing facility
      located in Canton, Ohio. The transaction was structured as an asset purchase,
      pursuant to an Asset Purchase Agreement dated February 28, 2005 by and between
      NAGalv-Ohio, Inc., and the privately owned Gregory Industries, Inc. for all
      of
      the plant, property, and equipment of Gregory Industries’ after-fabrication hot
      dip galvanizing operation. Operating results of the purchased galvanizing
      business are included in the Company’s financial statements commencing from the
      date of purchase on February 28, 2005.




This
      strategic expansion provides NAG an important, established customer base of
      major fabricators serving industrial, OEM, and highway markets as well as
      residential and commercial markets for lighting poles. Canton’s 52 foot long
      dipping kettle is designed to handle large steel structures, such as bridge
      beams, utility poles and other steel structural components that require
      galvanizing for extended-life corrosion protection. The Canton plant also
      processes small parts used in construction, such as nuts and anchor rods, in
      a
      dedicated facility with a smaller 16 foot dipping kettle and a spinner
      operation.




In
      January 2003, the Company opened its St. Louis galvanizing plant, replacing
      a
      smaller plant at the same location. This larger facility is providing NAG a
      strategic base for extending its geographic area of service. A 51-foot kettle
      at
      this facility provides the largest galvanizing capacity in the St. Louis region.
      In 2004, production tonnage at St. Louis




18




more
      than
      doubled compared to production at the plant it replaced.




In
      January 2003, the Company expanded services at its Nashville galvanizing plant
      with the announced installation of a state-of-the-art spinner line to galvanize
      small products, including bolts and threaded material.







**RESULTS
      OF OPERATIONS**





The
      following table shows the Company’s results of operations for the three- and
      nine-month periods ended September 30, 2006 and 2005:





**(Dollars
                in thousands)****Three
                Months Ended September 30,****2006**
            
            **2005****%
                of**
            
            
            
            **%
                of****Amount**
            
            **Sales**
            
            **Amount**
            
            **Sales**Sales
            
            $
            20,155
            
            
            100.0
            %
            $
            12,687
            
            
            100.0
            %Cost
                of sales
            
            
            15,109
            
            
            75.0
            %
            
            9,721
            
            
            76.6
            %Gross
                profit
            
            
            5,046
            
            
            25.0
            %
            
            2,966
            
            
            23.4
            %Selling,
                general and administrative expenses
            
            
            2,119
            
            
            10.5
            %
            
            1,778
            
            
            14.0
            %Depreciation
                and amortization
            
            
            842
            
            
            4.2
            %
            
            600
            
            
            4.7
            %Operating
                income
            
            
            2,085
            
            
            10.3
            %
            
            588
            
            
            4.6
            %Interest
                expense
            
            
            172
            
            
            0.9
            %
            
            285
            
            
            2.2
            %Income
                before income taxes
            
            
            1,913
            
            
            9.5
            %
            
            303
            
            
            2.4
            %Income
                tax expense
            
            
            809
            
            
            4.0
            %
            
            124
            
            
            1.0
            %Net
                income
            
            $
            1,104
            
            
            5.5
            %
            $
            179
            
            
            1.4
            %








**(Dollars
                in thousands)****Nine
                Months Ended September 30,****2006**
            
            **2005****%
                of**
            
            
            
            **%
                of****Amount**
            
            **Sales**
            
            **Amount**
            
            **Sales**Sales
            
            $
            53,793
            
            
            100.0
            %
            $
            34,768
            
            
            100.0
            %Cost
                of sales
            
            
            38,811
            
            
            72.1
            %
            
            26,254
            
            
            75.5
            %Gross
                profit
            
            
            14,982
            
            
            27.9
            %
            
            8,514
            
            
            24.5
            %Selling,
                general and administrative expenses
            
            
            6,206
            
            
            11.5
            %
            
            5,209
            
            
            15.0
            %Depreciation
                and amortization
            
            
            2,134
            
            
            4.0
            %
            
            1,865
            
            
            5.4
            %Operating
                income
            
            
            6,642
            
            
            12.3
            %
            
            1,440
            
            
            4.1
            %Interest
                expense
            
            
            651
            
            
            1.2
            %
            
            788
            
            
            2.3
            %Income
                before income taxes
            
            
            5,991
            
            
            11.1
            %
            
            652
            
            
            1.9
            %Income
                tax expense
            
            
            2,462
            
            
            4.6
            %
            
            262
            
            
            0.8
            %Net
                income
            
            $
            3,529
            
            
            6.6
            %
            $
            390
            
            
            1.1
            %







19


**2006
      COMPARED TO 2005**





**Sales.** Sales
      for
      the three-months and nine-months ended September 30, 2006 increased 59% and
      55%,
      respectively, over the prior year. The main reason for the increase in third
      quarter revenues was a higher average sales price and a 4% increase in volume.
      Sales prices have increased primarily in response to increases in zinc costs.
      The increase in revenues for the first nine months is due to a higher average
      sales price and a 13% increase in volume over the same period in
      2005.





For
      2006,
      average selling prices for galvanizing and related coating services were 53%
      higher than the prior year third quarter and 37% higher than the first nine
      months of 2005. The London Metals Exchange (LME) market price for zinc in the
      first nine months of 2006 averaged $1.34 per pound, compared to $.59 in the
      first nine months of 2005. At September 30, 2006 the LME market price for zinc
      was $1.52 per pound.





The
      Canton, Ohio galvanizing facility was purchased on February 28, 2005. The
      results for the first nine months of 2006 include nine months for Ohio versus
      only seven months in the first nine months of 2005. The impact of Ohio revenue
      on variances other than price and volume of third quarter and first nine-month
      total revenues, current to prior year, is minimal.





**Gross
      Profit.** For
      the
      quarter ended September 30, 2006, gross profit was $5.0 million compared to
      $3.0
      million for the third quarter of 2005. The Company’s ability to increase average
      selling prices due to zinc cost increases had a favorable impact on gross profit
      of $1.8 million. Increased volumes for the quarter of 4% contributed $.2 million
      to gross profit. In total, other manufacturing costs were in line with the
      prior
      year third quarter. Favorable cost variances on labor and energy were offset
      by
      increased spending on plant overhead, primarily for repairs and
      maintenance.





Pricing
      on the Company’s zinc purchases during the three-months ended September 30, 2006
      did not vary significantly from current market prices. During the six-months
      ended June 30, 2006, the favorable impact from forward purchases of zinc at
      prices lower than current market contributed $2.9 million to gross
      profit.





The
      gross
      profit for the nine-months ended September 30, 2006 increased $6.5 million
      from
      the same prior year period. In addition to the favorable impact from forward
      purchases of zinc, gross profit increased due to increases in average selling
      prices, $2.4 million, and increased volumes, $1.7 million. Cost increases in
      plant overhead, primarily repairs and maintenance, reduced gross profit for
      the
      nine months ended September 30 by $.5 million compared to the same period in
      2005.





**Selling,
      General and Administrative (SG&A) Expenses.** SG&A
      increased $.3 million, or 19%, in the third quarter of 2006 compared to the
      prior year, but decreased as a percentage of revenues from 14.0% in 2005 to
      10.5% in 2006.


In
      the
      first nine months of 2006, SG&A increased $1 million, or 19%, compared to
      the same period in the prior year, but decreased as a percentage of revenues
      from 15% in 2005 to 11.5% in 2006. Increases in both periods were primarily
      due
      to increases in personnel costs, 7.7%, information technology and outsourced
      services related to Sarbanes-Oxley 404 compliance efforts, 5.0%, board of
      director fees, 3.3%, legal fees related to the Lake River litigation, 2.4%,
      and
      other increases, .6%.





**Depreciation
      and Amortization.** Depreciation
      increased $.2 million for the three-months and increased $.3 million for the
      nine-months ended September 30, 2006 compared to the same prior year periods,
      primarily resulting from a change in depreciation method. For newer galvanizing
      facilities, the Company previously used the units of production method for
      machinery and equipment. Effective July 1, 2006, the Company changed methods
      to
      the straight-line method.





**Interest
      Expense.** Interest expense decreased $.1 million for the three-months and nine-months
      ended September 30, 2006 compared to the same prior year periods, due to
      decreased debt outstanding resulting from the payment of long-term debt
      obligations and the August 31, 2006 payment of the subordinated notes payable.




20


**Income
      Taxes.** The
      Company’s effective income tax rates for the third quarter of 2006 and 2005 were
      42.3% and 40.9%, respectively. For the nine months ended September 30, 2006
      and
      2005, the effective tax rates were 41.1% and 40.2%, respectively. The effective
      tax rates differ from the federal statutory rate primarily due to state income
      taxes and minor adjustments to previous tax estimates based on actual tax
      returns filed.





**Net
      Income.** For
      the
      third quarter of 2006, the Company reported net income of $1.1 million compared
      to net income of $.2 million for the third quarter of 2005. The increase in
      net
      income for the third quarter of 2006 versus the prior year is due to an increase
      in average selling prices and volume.





For
      the
      nine months ended September 30, 2006, the Company’s net income was $3.5 million
      compared to $.4 million for the nine months ended September 30, 2005. The
      increase in net income for the nine-months ended September 30, 2006 compared
      to
      the same prior year period is due to an increase in average selling prices
      and
      volume, and purchases of zinc at prices lower than current market.





**LIQUIDITY
      AND CAPITAL RESOURCES**





The
      Company’s cash flow from operations and borrowings under credit facilities have
      consistently been adequate to fund its current facilities’ working capital and
      base capital spending requirements. During 2006 and 2005, operating cash flow
      and borrowings under credit facilities have been the primary sources of
      liquidity. The Company monitors working capital and planned capital spending
      to
      assess liquidity and minimize cyclical cash flow.





Cash
      provided by operating activities was $5.0 million for the nine months ended
      September 30, 2006, compared to $4.2 million in the same prior year period,
      reflecting higher net income offset by a decrease in net deferred tax
      liabilities and a net cash outflow of $.2 million from other operating assets
      and liabilities compared to a net cash inflow of $1.3 million in the prior
      year.





Cash
      used
      in investing activities during the nine months ended September 30, 2006, totaled
      $2.0 million compared to $4.8 million in the same prior year period. The Company
      invested $4.2 million in the first nine months of 2005 to acquire certain assets
      of Gregory Industries’ Inc. Investing activities in the first nine months of
      2006 included the purchase of investments in debt securities totaling $1.0
      million. Additionally, capital expenditures for the first nine months of 2006
      increased by $.3 million compared to the same period in 2005.





Cash
      used
      in financing activities for the nine months ended September 30, 2006 totaled
      $4.3 million primarily due to the payment on long-term obligations of $3.9
      million and early redemption of the $1 million in subordinated notes payable
      scheduled to mature in February of 2007, offset by $.8 million received from
      the
      exercise of stock options.





In
      February 2005, the Company amended the three-year bank credit agreement that
      was
      scheduled to expire in December 2007 and extended its maturity to February
      28,
      2008. Subject to borrowing base limitations, the amended agreement provided
      (i)
      an $8,000,000 maximum revolving credit facility for working capital and general
      corporate purposes and (ii) a $5,001,000 term loan that combined the outstanding
      principal balance of the existing term loan with additional financing for the
      purchase of assets of a galvanizing facility (Note 2). Term loan payments are
      based on a seven-year amortization schedule with equal monthly payments of
      principal and interest, and a final balloon payment in February 2008. The term
      loan may be prepaid without penalty. The revolving line of credit may be paid
      down without penalty, or additional funds may be borrowed up to the maximum
      line
      of credit. At September 30, 2006, the Company had unused borrowing capacity
      of
      $7.4 million under the line of credit, based on the underlying borrowing base
      of
      accounts receivable and inventory. At September 30, 2006, there were no
      borrowings outstanding under the bank credit agreement, and $.6 million was
      reserved for outstanding irrevocable letters of credit to secure payment of
      current and future workers’ compensation claims.





Substantially
      all of the Company’s accounts receivable, inventories, fixed assets and the
      common stock of its subsidiary are pledged as collateral under the agreement,
      and the credit agreement is secured by a full and






21




unconditional
      guaranty from NAG. Amounts borrowed under the agreement bear interest at the
      prime rate of JPMorgan Chase Bank or the LIBOR rate, at the option of the
      Company, subject to a rate margin adjustment determined by the Company’s
      consolidated debt service coverage ratio. The interest rate on these borrowings
      was 8.50% at September 30, 2006. In the event the Company fails to maintain
      a
      consolidated debt service coverage ratio for any fiscal quarter of at least
      1.25
      to 1.00, the Applicable LIBOR Rate Margin will be increased from 3.0% to
      5.75%
      and the Applicable Prime Rate Margin will be increased from .25% to 3.00%.
      Thereafter, the increased rate margin will remain in effect until such time
      as
      the Company has maintained a consolidated debt service coverage ratio greater
      than or equal to 1.25 to 1.00 for a subsequent fiscal quarter.





In
      the
      event the Company fails to maintain a consolidated EBITDA to capital
      expenditures plus current maturity of long-term debt ratio for any fiscal
      quarter of not less than 1.00 to 1.00, the increase in the Applicable LIBOR
      Rate
      Margin ranges from 3.75% to 5.75%, and the increase in the Applicable Prime
      Rate
      Margin ranges from 1.00% to 3.00%.





The
      credit agreement requires the Company to maintain compliance with covenant
      limits for current ratio, debt to tangible net worth ratio, debt service
      coverage ratio and a capital expenditures ratio. At September 30, 2006, the
      Company was in compliance with the covenants. The actual financial ratios
      compared to the required ratios, were as follows: Current Ratio - actual 1.70
      versus minimum required of 1.10; Debt to Tangible Net Worth Ratio - actual
      1.01
      vs. maximum permitted of 2.50; Debt Service Coverage Ratio - actual 3.94 versus
      minimum permitted of 1.25; Capital Expenditures Coverage Ratio - actual 1.98
      versus minimum required of 1.0.





The
      Company has various commitments primarily related to long-term debt, industrial
      revenue bonds, operating lease commitments, zinc purchase commitments and
      vehicle operating leases. The Company’s total off-balance sheet contractual
      obligations at September 30, 2006, consist of approximately $1.8 million for
      long-term operating leases for vehicles, office space, office equipment,
      galvanizing facilities and galvanizing equipment and approximately $1.0 million
      for zinc purchase commitments. The various leases for galvanizing facilities,
      including option renewals, expire from 2006 to 2017. A lease for galvanizing
      equipment expires in 2007. NAG periodically enters into fixed price purchase
      commitments with domestic and foreign zinc producers to purchase a portion
      of
      its requirements for its hot dip galvanizing operations; commitments for the
      future delivery of zinc can be for up to one year.





**ENVIRONMENTAL
      MATTERS**




The
      Company’s facilities are subject to extensive environmental legislation and
      regulations affecting their operations and the discharge of wastes. The cost
      of
      compliance with such regulations in the first nine months of 2006 and 2005
      was
      approximately $948,000 and $953,000, respectively, for the disposal and
      recycling of wastes generated by the galvanizing operations.





On
      August
      30, 2004, the Company was informed by counsel for the Metropolitan Water
      Reclamation District of Greater Chicago (the “Water District”) that the Water
      District had, on August 25, 2004 filed a Second Amended Complaint in the United
      States District Court, Northern District of Illinois, Eastern Division, naming
      North American Galvanizing & Coatings, Inc. (formerly known as Kinark
      Corporation) as an added defendant. Counsel for the Water District also gave
      the
      Company notice of the Water District’s intent to file (or amend the Complaint to
      include) a Citizens Suit under the Resource Compensation and Recovery Act
      (“RCRA”) against North American Galvanizing & Coatings, Inc., pursuant to
      Section 7002 of RCRA, 42 U.S.C. Section 6972. This Second Amended Complaint
      seeks enforcement of an August 12, 2004 default judgment in the amount of
      $1,810,463.34 against Lake River Corporation and Lake River Holding Company,
      Inc. in connection with the operation of a storage terminal by Lake River
      Corporation in violation of environmental laws. Lake River Corporation conducted
      business as a subsidiary of the Company until September 30, 2000, at which
      time
      Lake River Corporation was sold to Lake River Holding Company, Inc. and ceased
      to be a subsidiary of the Company. The Second Amended Complaint asserts that
      prior to the sale of Lake River Corporation, the Company directly operated
      the
      Lake River facility and, accordingly, seeks to have the Court pierce the
      corporate veil of Lake River Corporation and enforce the default judgment order
      of August 12, 2004 against the Company. The Company denies the assertions set
      forth in the Water District’s Complaint and on November 13, 2004 filed a partial
      motion for dismissal of the Second Amended Complaint.




22


In
      December 2004, the Water District filed a Third Amended complaint in the
      litigation, adding two claims: (1) a common law claim for nuisance; and (2)
      a
      claim under the federal Resource Conservation and Recovery Act, in which the
      Water District argues that the Company is responsible for conditions on the
      plaintiff’s property that present an “imminent and substantial endangerment to
      human health and the environment.” In January 2005, the Company filed a partial
      motion to dismiss the Third Amended Complaint. On April 12, 2005, the Court
      issued an order denying in part and granting in part the Company’s partial
      motion to dismiss plaintiff’s third amended complaint. The Company has filed an
      appeal with the Seventh Circuit Court of Appeals requesting dismissal of the
      sole CERCLA claim contained in the Third Amended Complaint that was not
      dismissed by the United States District Court’s April 12, 2005 order. The Water
      District has also appealed those rulings contained in the April 12, 2005
      order that are adverse to the Water District. Meanwhile, litigation in the
      United States District Court continues.




The
      Company has denied any liability with respect to this claim and intends to
      vigorously defend this case. At this time, the Company has not determined the
      amount of any liability that may result from this matter or whether such
      liability, if any, would have a material adverse effect on the Company’s
      financial condition, results of operations, or liquidity.





NAG
      was
      notified in 1997 by the Illinois Environmental Protection
      Agency (“IEPA”) that it was one of approximately 60 potentially responsible
      parties (“PRPs”) under the Comprehensive Environmental Response, Compensation,
      and Liability Information System (“CERCLIS”) in connection with cleanup of an
      abandoned site formerly owned by Sandoval Zinc Co. A number of the PRPs have
      agreed to work together and with IEPA on a voluntary basis. The Company has
      been
      and continues to participate in this volunteer group. The group has retained
      consultants and legal representatives familiar with IEPA regulations. This
      volunteer group, with its consultants, has cooperated with IEPA in attempting
      to
      better define the environmental issues associated with the Sandoval Zinc site.
      To that extent, this voluntary group prepared and submitted to IEPA in August
      2000 a work plan. The purpose of this work plan is to attempt to define the
      extent of environmental remediation that might be required, assess risks, and
      review alternatives to addressing potential remediation. The IEPA has yet to
      respond to this proposed work plan or suggest any other course of action, and
      there has been no activity in regards to this issue during 2006. Therefore,
      the
      Company has no basis for determining potential exposure and estimated
      remediation costs at this time.





The
      Company is committed to complying with all federal, state and local
      environmental laws and regulations and using its best management practices
      to
      anticipate and satisfy future requirements. As is typical in the galvanizing
      business, the Company will have additional environmental compliance costs
      associated with past, present and future operations. Management is committed
      to
      discovering and eliminating environmental issues as they arise. Because of
      frequent changes in environmental technology, laws and regulations management
      cannot reasonably quantify the Company’s potential future costs in this area.





North
      American Galvanizing & Coatings, Inc. and its subsidiary are parties to a
      number of other lawsuits and environmental matters which are not discussed
      herein. Management of the Company, based upon their analysis of known facts
      and
      circumstances and reports from legal counsel, does not believe that any such
      matter will have a material adverse effect on the results of operations,
      financial conditions or cash flows of the Company.





**Item
      3.       Quantitative and Qualitative Disclosures
      About Market Risk**





The
      Company’s operations include managing market risks related to changes in
      interest rates and zinc commodity prices.





**Interest
      Rate Risk.** The
      Company is exposed to financial market risk related to changes in interest
      rates. Changing interest rates will affect interest paid on the Company’s
      variable rate debt. At September 30, 2006, the Company’s outstanding debt of
      $9.6 million consisted of the following: Variable rate debt aggregating $3.9
      million under the bank credit agreement, with an effective rate of 8.50%;
      variable rate debt of $5.4 million under the industrial revenue






23




bond
      agreement, with an effective rate of 3.5%; and capital lease obligations of
      $.2
      million. The borrowings under all of the Company’s debt obligations at September
      30, 2006 are due as follows: $.4 million in 2006; $1.5 million in 2007; $3.9
      million in 2008 and $3.8 million in years 2009 through 2013. Each increase
      of 10
      basis points in the effective interest rate would result in an annual increase
      in interest charges on variable rate debt of approximately $9,600 based on
      September 30, 2006 outstanding borrowings. The actual effect of changes in
      interest rates is dependent on actual amounts outstanding under the various
      loan
      agreements. The Company monitors interest rates and has sufficient flexibility
      to renegotiate the loan agreement, without penalty, in the event market
      conditions and interest rates change.





**Zinc
      Price Risk.** NAG
      periodically enters into fixed price purchase commitments with domestic and
      foreign zinc producers to purchase a portion of its zinc requirements for its
      hot dip galvanizing operations. Commitments for the future delivery of zinc,
      typically up to one (1) year, reflect rates quoted on the London Metals
      Exchange. At September 30, 2006, the aggregate fixed price commitments for
      the
      procurement of zinc were approximately $1.0 million (Note 7). With respect
      to
      these zinc fixed price purchase commitments, a hypothetical decrease of 10%
      in
      the market price of zinc from the September 30, 2006 level represented a
      potential lost gross margin opportunity of approximately $100,000.




The
      Company’s financial strategy includes evaluating the selective use of derivative
      financial instruments to manage zinc and interest costs. As part of its
      inventory management strategy, the Company recognizes that hedging instruments
      may be effective in minimizing the impact of zinc price fluctuations. The
      Company’s current zinc forward purchase commitments are considered derivatives,
      but the Company has elected to account for these purchase commitments as normal
      purchases.





**Item
      4.       Controls and
      Procedures**





As
      of the
      end of the period covered by this report, management, including our chief
      executive officer and chief financial officer, evaluated the effectiveness
      of
      the design and operation of our disclosure controls and procedures. Based upon,
      and as of the date of, the evaluation, our chief executive officer and chief
      financial officer concluded that the disclosure controls and procedures were
      effective, in all material respects, to ensure that information required to
      be
      disclosed in the reports we file and submit under the Exchange Act is recorded,
      processed, summarized and reported as and when required.





The
      Company’s certifying officers have indicated that there were no significant
      changes in internal controls over financial reporting that have occurred during
      the fiscal quarter ended September 30, 2006 that materially affected, or were
      reasonably likely to materially affect, internal controls over financial
      reporting.





**Part
      II** **Other
      Information**





**Item
      1.       Legal Proceedings.**





On
      August
      30, 2004, the Company was informed by counsel for the Metropolitan Water
      Reclamation District of Greater Chicago (the “Water District”) that the Water
      District had, on August 25, 2004 filed a Second Amended Complaint in the United
      States District Court, Northern District of Illinois, Eastern Division, naming
      North American Galvanizing & Coatings, Inc. (formerly known as Kinark
      Corporation) as an added defendant. Counsel for the Water District also gave
      the
      Company notice of the Water District’s intent to file (or amend the Complaint to
      include) a Citizens Suit under the Resource Compensation and Recovery Act
      (“RCRA”) against North American Galvanizing & Coatings, Inc., pursuant to
      Section 7002 of RCRA, 42 U.S.C. Section 6972. This Second Amended Complaint
      seeks enforcement of an August 12, 2004 default judgment in the amount of
      $1,810,463.34 against Lake River Corporation and Lake River Holding Company,
      Inc. in connection with the operation of a storage terminal by Lake River
      Corporation in violation of environmental laws. Lake River Corporation conducted
      business as a subsidiary of the Company until September 30, 2000, at which
      time
      Lake River Corporation was sold to Lake River Holding Company, Inc. and ceased
      to be a subsidiary of the Company. The Second Amended Complaint asserts that
      prior to the sale of Lake River Corporation, the Company directly operated
      the
      Lake River facility and, accordingly, seeks to have the Court pierce the
      corporate veil of Lake River Corporation and enforce the
      default judgment order of August 12, 2004 against the Company. The Company
      denies the assertions set forth in the Water District’s Complaint and on
      November 13, 2004 filed a partial motion for dismissal of the Second Amended
      Complaint.




24




In
      December 2004, the Water District filed a Third Amended complaint in the
      litigation, adding two claims: (1) a common law claim for nuisance; and (2)
      a
      claim under the federal Resource Conservation and Recovery Act, in which the
      Water District argues that the Company is responsible for conditions on the
      plaintiff’s property that present an “imminent and substantial endangerment to
      human health and the environment.” In January 2005, the Company filed a partial
      motion to dismiss the Third Amended Complaint. On April 12, 2005, the Court
      issued an order denying in part and granting in part the Company’s partial
      motion to dismiss plaintiff’s third amended complaint. The Company has filed an
      appeal with the Seventh Circuit Court of Appeals requesting dismissal of the
      sole CERCLA claim contained in the Third Amended Complaint that was not
      dismissed by the United States District Court’s April 12, 2005 order. The Water
      District has also appealed those rulings contained in the April 12, 2005
      order that are adverse to the Water District. Meanwhile, litigation in the
      United States District Court continues.




The
      Company has denied any liability with respect to this claim and intends to
      vigorously defend this case. At this time, the Company has not determined the
      amount of any liability that may result from this matter or whether such
      liability, if any, would have a material adverse effect on the Company’s
      financial condition, results of operations, or liquidity.





The
      Internal Revenue Service is reviewing the Harris County Industrial Development
      Corporation Adjustable Rate Industrial Development Bonds and compliance with
      the
      Internal Revenue Code section (IRC) 144(a)(4)(ii)’s dollar limitation on capital
      expenditures within a relevant period. The IRS review concerns whether two
      operating leases commencing in January 2001 are conditional sales contracts,
      not
      true leases, according to Revenue Ruling 55-540. Should the Company be
      completely unsuccessful in its position that the bonds meet the tax-exempt
      financing requirements, the bonds could lose their tax exempt status, the
      Company could be required to redeem the bonds, which had a principal balance
      of
      $5,390,000 at September 30, 2006, and the Company could be required to pay
      up to
      $145,000 in additional income tax on the interest payments made to the
      bondholders. Management of the Company, based upon their analysis of known
      facts
      and circumstances and advice from legal counsel, does not believe that this
      matter will have a material adverse effect on the results of operations,
      financial conditions or cash flows of the Company and continues to classify
      $4,630,000 of the bond liability as long-term according to the original terms
      of
      the bond agreement. In addition, management believes the Company has sufficient
      long-term borrowing capacity to repay the bonds in the unlikely event it is
      required.





North
      American Galvanizing & Coatings, Inc. and its subsidiary are parties to a
      number of other lawsuits and environmental matters which are not discussed
      herein. Management of the Company, based upon their analysis of known facts
      and
      circumstances and reports from legal counsel, does not believe that any such
      matter will have a material adverse effect on the results of operations,
      financial conditions or cash flows of the Company.





**Item
      1A.     Risk Factors.**





There
      are
      no material changes from risk factors as previously disclosed in the Company’s
      Annual Report on Form 10-K filed on February 10, 2006.





**Item
      2.        Unregistered Sales of Equity
      Securities and Use of Proceeds - Not applicable.**





**Item
      3.        Defaults Upon Senior Securities -
      Not applicable.**





**Item
      4.        Submission of Matters to a Vote of
      Security Holders - Not applicable.**





25


**Item
      5.        Other Information - Not
      applicable.**





**Item
      6.        Exhibits.**





(a)Exhibits





3.1
            The
                Company’s Restated Certificate of Incorporation (incorporated by reference
                to Exhibit 3.1 to the Company’s Pre-Effective Amendment No. 1 to
                Registration Statement on Form S-3 (Reg. No. 333-4937) filed on June
                7,
                1996).





3.2
            The
                Company’s Amended and Restated Bylaws (incorporated by reference to
                Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q dated September
                30, 1996).





10.5
            2004
                Incentive Stock Plan


18
              Letter
                  regarding Change in Accounting
                  Principle


31.1
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.





31.2
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.




32
            Certifications
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.





99
            Cautionary
                Statements by the Company Related to Forward-Looking
                Statements.




**SIGNATURES**





Pursuant
      to the requirements of Section 13 and 15(d) of the Securities and Exchange
      Act
      of 1934, the registrant has duly caused this report to be signed on its behalf
      by the undersigned thereunto duly authorized:




**NORTH
              AMERICAN GALVANIZING & COATINGS, INC.**(Registrant)Date:  
              October 31, 2006
            By:
            /s/ Beth
              B.
              HoodVice
                President and
              Chief
                Financial Officer
              (Principal
                Financial Officer)







26