**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-Q**

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**QuarterlyReport pursuant to Section 13 or 15(d)**

**of theSecurities Exchange Act of 1934**

**For the Quarter Ended September 30, 2006**

Commission File No. 01-15725

**Alpha Pro Tech, Ltd.**

(exact name of registrant as specified in its charter)

| **Delaware, U.S.A.**                            |   | **63-1009183**                        |
|-------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation) |   | (I.R.S. Employer  Identification No.) |

 

| **Suite 112, 60 Centurian Drive**         |       | ** **  |
|-------------------------------------------|------------|-------------|
| **Markham,  Ontario, Canada**             | ** ** | **L3R 9R2** |
| (Address of  principal executive offices) |       | (Zip Code)  |

 

Registrant’s telephonenumber, including area code:  **(905) 479-0654**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.

Yes x  No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2).

Large acceleratedfiler o   Accelerated filer o   Non-accelerated filer x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.)

Yes o   No x

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as ofOctober 31, 2006.

24,150,953 sharesof common stock, $.01 par value

 

 

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**Alpha Pro Tech, Ltd.**

Table of Contents

** **
| PART I.       | FINANCIAL INFORMATION                                                                       | 1                                                                                                        |
|---------------|---------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|          |                                                                                        |                                                                                                     |
| ITEM  1       | Consolidated  Financial Statements (Unaudited)                                              | 1                                                                                                        |
|          |                                                                                        |                                                                                                     |
| (a)           |                                                                                        | Consolidated  Balance Sheets -                                                                           |   | 2 |
|          |                                                                                        | September 30,  2006 and December 31, 2005                                                                |   |   |
|          |                                                                                        |                                                                                                     |   |   |
| (b)           |                                                                                        | Consolidated Income Statements                                                                           |   | 3 |
|          |                                                                                        | for the three and nine months ended September 30, 2006  and September 30, 2005                           |   |   |
|          |                                                                                        |                                                                                                     |   |   |
| (c)           |                                                                                        | Consolidated Statement of Shareholders’ Equity                                                      |   | 4 |
|          |                                                                                        | for the nine months ended September 30, 2006                                                             |   |   |
|          |                                                                                        |                                                                                                     |   |   |
| (d)           |                                                                                        | Consolidated Statements of Cash Flows                                                                    |   | 5 |
|          |                                                                                        | for the nine months ended September 30, 2006 and  September 30, 2005                                     |   |   |
|          |                                                                                        |                                                                                                     |   |   |
| (e)           |                                                                                        | Notes to Consolidated Financial Statements                                                               |   | 6 |
|          |                                                                                        |                                                                                                     |   |   |
| ITEM 2        | Management’s Discussion and Analysis of Financial  Condition and Results of Operations | 14                                                                                                       |
|          |                                                                                        |                                                                                                     |
|          | Cautionary Statements Regarding Forward-Looking  Information                                | 14                                                                                                       |
|          |                                                                                        |                                                                                                     |
|          | New  Accounting Standards                                                                   | 23                                                                                                       |
|          |                                                                                        |                                                                                                     |
| ITEM 3        | Quantitative and Qualitative Disclosures About Market  Risk                                 | 23                                                                                                       |
|          |                                                                                        |
| ITEM  4       | Controls  and Procedures                                                                    | 24                                                                                                       |
|          |                                                                                        |
| PART  II.     | OTHER  INFORMATION                                                                          | 25                                                                                                       |
|          |                                                                                        |
| ITEM 6        | Exhibits and Reports on Form 8-K                                                            | 25                                                                                                       |
|          |                                                                                        |
| SIGNATURES    | 25                                                                                          |
|          |                                                                                        |
| EXHIBITS      |                                                                                        |
|          |                                                                                        |
| Exhibit 31.1: |                                                                                        | Certification by CEO pursuant to Rule 13a-14(b) and  Rule 15d-14(b) of the Exchange Act (filed herewith) |   |   |
|          |                                                                                        |                                                                                                     |   |   |
| Exhibit 31.2: |                                                                                        | Certification by CFO pursuant to Rule 13a-14(b) and  Rule 15d-14(b) of the Exchange Act (filed herewith) |   |   |
|          |                                                                                        |                                                                                                     |   |   |
| Exhibit 32.1: |                                                                                        | Certification by CEO pursuant to Section 906 of the  Sarbanes-Oxley Act (filed herewith)                 |   |   |
|          |                                                                                        |                                                                                                     |   |   |
| Exhibit 32.2: |                                                                                        | Certification by CFO pursuant to Section 906 of the  Sarbanes-Oxley Act (filed herewith)                 |   |   |
|               |                                                                                             |                                                                                                          |  |  |  |  |  |

 

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**AlphaPro Tech, Ltd.**

##### **PART I. FINANCIAL INFORMATION**

#### **ITEM 1.  FINANCIAL STATEMENTS**

We have preparedthe following unaudited interim consolidated financial statements pursuant tothe rules and regulations of the Securities and Exchange Commission. Certain informationand footnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to these rules andregulations.

You should readthe following unaudited interim consolidated financial statements and theaccompanying notes together with our Annual Report on Form 10-K for the yearended December 31, 2005. Our 2005 Annual Report contains information that maybe helpful in analyzing the financial information contained in this report andin comparing our results of operations for the three and nine months endedSeptember 30, 2006 with the same period in 2005.

 

1

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**Alpha Pro Tech, Ltd.Consolidated Balance Sheets (Unaudited)**
| ** **                                                                                                                                                                | ** ** | **September 30,  2006** | ** ** | **December 31,  2005 (1)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------------|------------|
|                                                                                                                                                                      |       |                         |       |                                 |       |
| **Assets**                                                                                                                                                                |       |                         |       |                                 |       |
| Current assets:                                                                                                                                                           |       |                         |       |                                 |       |
| Cash and cash  equivalents                                                                                                                                                |       | $                            | 805,000    |                                 | $          | 1,163,000 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $68,000 at September  30, 2006 and $76,000 at December 31, 2005                                           |       | 5,666,000                    |       | 3,954,000                            |       |
| Inventories, net                                                                                                                                                          |       | 11,580,000                   |       | 10,612,000                           |       |
| Prepaid expenses  and other current assets                                                                                                                                |       | 1,026,000                    |       | 715,000                              |       |
| Deferred income  taxes                                                                                                                                                    |       | 339,000                      |       | 430,000                              |       |
| Total current  assets                                                                                                                                                     |       | 19,416,000                   |       | 16,874,000                           |       |
|                                                                                                                                                                      |       |                         |       |                                 |       |
| Property and equipment,  net                                                                                                                                              |       | 3,378,000                    |       | 3,389,000                            |       |
| Goodwill, net                                                                                                                                                             |       | 55,000                       |       | 55,000                               |       |
| Intangible assets, net                                                                                                                                                    |       | 143,000                      |       | 119,000                              |       |
| Equity investments in  and advances to unconsolidated affiliates                                                                                                          |       | 1,150,000                    |       | 1,434,000                            |       |
| Total assets                                                                                                                                                              |       | $                            | 24,142,000 |                                 | $          | 21,871,000 |   |
|                                                                                                                                                                      |       |                         |       |                                 |       |
| **Liabilities and Shareholders’  Equity**                                                                                                                            |       |                         |       |                                 |       |
| Current liabilities:                                                                                                                                                      |       |                         |       |                                 |       |
| Accounts payable                                                                                                                                                          |       | $                            | 763,000    |                                 | $          | 648,000 |   |
| Accrued  liabilities                                                                                                                                                      |       | 1,012,000                    |       | 1,928,000                            |       |
| Total current  liabilities                                                                                                                                                |       | 1,775,000                    |       | 2,576,000                            |       |
|                                                                                                                                                                      |       |                         |       |                                 |       |
| Deferred income taxes                                                                                                                                                     |       | 658,000                      |       | 652,000                              |       |
| Total  liabilities                                                                                                                                                        |       | 2,433,000                    |       | 3,228,000                            |       |
|                                                                                                                                                                      |       |                         |       |                                 |       |
| Shareholders’ equity                                                                                                                                                 |       |                         |       |                                 |       |
| Common stock,  $.01 par value, 50,000,000 shares authorized, 24,145,955 and 23,787,955  issued and outstanding at September 30, 2006 and December 31, 2005,  respectively |       | 242,000                      |       | 238,000                              |       |
| Additional  paid-in capital                                                                                                                                               |       | 25,088,000                   |       | 24,683,000                           |       |
| Accumulated  deficit                                                                                                                                                      |       | (3,621,000                   | )          | (6,278,000                           | )          |
| Total  shareholders’ equity                                                                                                                                          |       | 21,709,000                   |       | 18,643,000                           |       |
| Total liabilities and  shareholders’ equity                                                                                                                          |       | $                            | 24,142,000 |                                 | $          | 21,871,000 |   |

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(1)             Thecondensed consolidated balance sheet as of December 31, 2005 has been preparedusing information from the audited financial statements at that date.

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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**AlphaPro Tech, Ltd.Consolidated Income Statements (Unaudited)**
| ** **                                                       | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                                                        |       | $                                                                      | 8,952,000  |                                                                  | $          | 8,056,000 |   | $ | 26,802,000 |   | $ | 24,078,000 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Cost of goods  sold, excluding depreciation and amortization     |       | 4,847,0003                                                             |       | 4,407,000                                                             |       | 14,433,000 |   | 13,040,000 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gross margin                                                     |       | 4,105,000                                                              |       | 3,649,000                                                             |       | 12,369,000 |   | 11,038,000 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Expenses:                                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Selling, general and administrative                              |       | 2,635,000                                                              |       | 2,421,000                                                             |       | 7,849,000 |   | 7,289,000 |   |
| Depreciation and amortization                                    |       | 117,000                                                                |       | 130,000                                                               |       | 340,000 |   | 375,000 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income from  operations                                          |       | 1,353,000                                                              |       | 1,098,000                                                             |       | 4,180,000 |   | 3,374,000 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Other income                                                     |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Equity income in unconsolidated affiliates, net of  eliminations |       | 36,000                                                                 |       | —                                                                |       | 16,000 |   | — |   |
| Interest, net                                                    |       | 11,000                                                                 |       | 2,000                                                                 |       | 22,000 |   | 24,000 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income before  provision for income taxes                        |       | 1,400,000                                                              |       | 1,100,000                                                             |       | 4,218,000 |   | 3,398,000 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Provision for  income taxes                                      |       | 518,000                                                                |       | 407,000                                                               |       | 1,561,000 |   | 1,257,000 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income                                                       |       | $                                                                      | 882,000    |                                                                  | $          | 693,000 |   | $ | 2,657,000 |   | $ | 2,141,000 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic net income  per share                                      |       | $                                                                      | 0.04       |                                                                  | $          | 0.03 |   | $ | 0.11 |   | $ | 0.09 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted net  income per share                                    |       | $                                                                      | 0.04       |                                                                  | $          | 0.03 |   | $ | 0.11 |   | $ | 0.09 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic weighted  average shares outstanding                       |       | 24,117,694                                                             |       | 23,679,933                                                            |       | 24,093,373 |   | 23,668,386 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted weighted  average shares outstanding                     |       | 25,150,523                                                             |       | 25,347,172                                                            |       | 25,058,964 |   | 25,155,335 |   |
|                                                             |       |                                                                   |       |                                                                  |       |   |   |   |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

3

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**AlphaPro Tech, Ltd.Consolidated Statement of Shareholders’ Equity (Unaudited)**
| ** **                         | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Accumulated**          | ** ** | ** **  | ** ** |
|------------------------------------|------------|-----------------------|------------|----------------|------------|--------------------------|------------|-------------|------------|
| ** **                         | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Paid-in Capital** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at  December 31, 2005      |       | 23,787,955            |       | $              | 238,000    |                     | $          | 24,683,000  |       | $ | (6,278,000 | ) | $ | 18,643,000 |   |
| Share- based  compensation expense |       |                  |       |           |       | 12,000                   |       |        |       | 12,000 |   |
| Options  exercised                 |       | 358,000               |       | 4,000          |       | 393,000                  |       | —      |       | 397,000 |   |
| Net income                         |       | —                |       | —         |       | —                   |       | 2,657,000   |       | 2,657,000 |   |
| Balance at September  30, 2006     |       | 24,145,955            |       | $              | 242,000    |                     | $          | 25,088,000  |       | $ | (3,621,000 | ) | $ | 21,709,000 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

4

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**AlphaPro Tech, Ltd.Consolidated Statements of Cash Flows (Unaudited)**
| ** **                                                                     | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| **Cash  Flows From Operating Activities:**                                     | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Net income                                                                     |       | $                                                                     | 2,657,000  |   | $ | 2,141,000 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                                                  |       |   |   |
| Share-based compensation expense                                               |       | 12,000                                                                |       | — |   |
| Depreciation and amortization                                                  |       | 340,000                                                               |       | 375,000 |   |
| Deferred income taxes                                                          |       | 97,000                                                                |       | — |   |
| Equity in income of unconsolidated affiliate                                   |       | (16,000                                                               | )          | — |   |
| Changes in assets and liabilities:                                             |       |                                                                  |       |   |   |
| Accounts receivable, net                                                       |       | (1,712,000                                                            | )          | (867,000 | ) |
| Inventories, net                                                               |       | (968,000                                                              | )          | (4,998,000 | ) |
| Prepaid expenses and other current assets                                      |       | (311,000                                                              | )          | 354,000 |   |
| Accounts payable and accrued liabilities                                       |       | (801,000                                                              | )          | (167,000 | ) |
|                                                                           |       |                                                                  |       |   |   |
| Net cash used in  operating activities:                                        |       | (702,000                                                              | )          | (3,162,000 | ) |
|                                                                           |       |                                                                  |       |   |   |
| **Cash  Flows From Investing Activities:**                                     | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                             |       | (299,000                                                              | )          | (509,000 | ) |
| Purchase of intangible assets                                                  |       | (54,000                                                               | )          | (12,000 | ) |
| Investment in and advances to Joint Venture                                    |       | —                                                                |       | (1,350,000 | ) |
| Proceeds from advances to Joint Venture                                        |       | 300,000                                                               |       | — |   |
|                                                                           |       |                                                                  |       |   |   |
| Net cash used in  investing activities                                         |       | (53,000                                                               | )          | (1,871,000 | ) |
|                                                                           |       |                                                                  |       |   |   |
| **Cash  Flows From Financing Activities:**                                     | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Proceeds from the exercise of stock options                                    |       | 397,000                                                               |       | 297,000 |   |
| Payments for the repurchase of common stock                                    |       | —                                                                |       | (22,000 | ) |
| Proceeds from note                                                             |       | —                                                                |       | 177,000 |   |
| Net cash  provided by financing activities                                     |       | 397,000                                                               |       | 452,000 |   |
|                                                                           |       |                                                                  |       |   |   |
| Decrease in cash  during the period                                            |       | (358,000                                                              | )          | (4,581,000 | ) |
|                                                                           |       |                                                                  |       |   |   |
| Cash and cash  equivalents, beginning of period                                |       | 1,163,000                                                             |       | 4,875,000 |   |
| Cash and cash  equivalents, end of period                                      |       | $                                                                     | 805,000    |   | $ | 294,000 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

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**Alpha Pro Tech, Ltd.**

**Notes to Consolidated Financial Statements(Unaudited)**

**1.****                                      TheCompany**

Alpha Pro Tech,Ltd. (Alpha ProTech, the Company, we, our, us) manufactures and distributes aline of disposable protective apparel and a line of infection control productsfor the cleanroom, industrial, pharmaceutical, medical and dental markets. Thedisposable protective apparel consists of a complete line of shoecovers,bouffant caps, coveralls, gowns, frocks and lab coats. The infection controlline of products includes a line of face masks and eye shields. The Companyalso manufactures and distributes a line of medical bed pads and accessories aswell as a line of pet beds.  The Company’sproducts are sold both under the “Alpha Pro Tech” brand name as well as underprivate label and are predominantly sold in the United States of America.

During the firstquarter of 2005, the Company commenced sales from a new business segment, AlphaProTech Engineered Products, Inc., a wholly-owned subsidiary of Alpha Pro Tech.This new segment consists of a line of construction supply weatherizationproducts as well as a line of paint with antimicrobials. The constructionsupply weatherization products consist of house wrap and synthetic roofunderlayment (AlphaProtectorTM — SUL).

**2.****                                      Basisof Presentation**

The interim financial information included herein is unaudited;however, the information reflects all adjustments (consisting of normalrecurring adjustments) that are, in the opinion of management, necessary forthe fair presentation of the consolidated financial position, results ofoperations and cash flows for the interim periods. The consolidated financialstatements should be read in conjunction with the consolidated financialstatements for the year ended December 31, 2005, which are included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005 (“200510-K”). The results of operations for the three and nine months ended September30, 2006 are not necessarily indicative of the results to be expected for thefull year. The consolidated balance sheet at December 31, 2005 was extractedfrom the audited consolidated financial statements contained in the 2005 10-Kand does not include all disclosures required by accounting principlesgenerally accepted in the United States of America for annual consolidatedfinancial statements.

Certain December 31, 2005 balances have been reclassified to conform tothe current year’s presentation.

**3.****                                      StockBased Compensation**

The Company maintains two stock option plans under which the Companymay grant incentive stock options and non-qualified stock options to employeesand non-employee directors.  Stockoptions have been granted with exercise prices at or above the fair marketvalue on the date of grant.  Options vestand expire according to terms established at the grant date.

The Companyadopted Statement of Financial Accounting Standards No. 123R, Share-BasedPayment (“SFAS 123R”) effective January 1, 2006, using the modified prospectiveapplication method. SFAS 123R requires companies to record compensation expensefor the value of all outstanding and unvested share-based payments, includingemployee stock options and similar awards. As of December 31, 2005, the Companyhad no outstanding and unvested share-based awards. During the third quarter of2006, 490,000 stock options were granted under the option plan. As a result,the Company recognized $12,000 in share-based compensation expense in itsconsolidated financial statements for the three and nine months ended September30, 2006.

Prior to theadoption of SFAS 123R, the Company accounted for its stock-based employeecompensation plans using the intrinsic value method prescribed by AccountingPrinciples Board Opinion No. 25, Accounting for Stock Issued to Employees. No stock-basedemployee compensation cost was reflected in net income as all options grantedunder those stock-based

6

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employee compensation plans had exercise prices equalto the market values of the underlying common shares on the dates of grant. Thefollowing table illustrates the effect on net income and earnings per share asif the Company had applied the fair value recognition provisions of SFAS 123Rto stock-based employee compensation.

|                                                                                                                                              | ** ** | **For the  Three Months  Ended  September 30,** | ** ** | **For the  Nine Months  Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**                                                       | ** ** | **2005**                                                      | ** ** |
| Net income, as  reported                                                                                                                     |       | $                                                              | 693,000    |                                                          | $          | 2,141,000 |   |
| Add: Total  stock-based employee compensation expense included in reported net income,  net of related tax effects                           |       | —                                                         |       | —                                                        |       |
| Deduct: Total  stock-based employee compensation expense determined using the fair value  method for all rewards, net of related tax effects |       | (78,000                                                        | )          | (261,000                                                      | )          |
|                                                                                                                                         |       |                                                           |       |                                                          |       |
| Pro forma net  income                                                                                                                        |       | $                                                              | 615,000    |                                                          | $          | 1,880,000 |   |
|                                                                                                                                         |       |                                                           |       |                                                          |       |
| Net income per  share:                                                                                                                       |       |                                                           |       |                                                          |       |
| Basic — as  reported                                                                                                                    |       | $                                                              | 0.03       |                                                          | $          | 0.09 |   |
| Basic — pro  forma                                                                                                                      |       | 0.03                                                           |       | 0.08                                                          |       |
| Diluted — as  reported                                                                                                                  |       | 0.03                                                           |       | 0.09                                                          |       |
| Diluted — pro forma                                                                                                                     |       | 0.02                                                           |       | 0.07                                                          |       |

 

Stock options topurchase 2,945,000 and 2,967,000 shares of common stock were outstanding atSeptember 30, 2006 and 2005, respectively. Of these outstanding stock options,all of the options to purchase common stock at September 30, 2006 and 2005 wereincluded in the computation of diluted earnings per share because the exerciseprices of the stock options were less than the average share price of theCompany’s common stock and, therefore, the effect would have beendilutive.  Based on the application ofthe treasury stock method, the dilutive effect of stock options was 1,032,828and 965,591 for the three and nine months ended September 30, 2006.

The Company usedthe Black-Scholes option pricing model to value the options.  The table below presents the weighted averageexpected life in years.  The Company usedSAB 107’s simplified method for estimating the expected life of theoptions.  The risk-free interest rate forperiods within the contractual life of the award is based on the US Treasuryyield curve in effect at the time of grant. The expected volatility is based onhistorical volatility of the expected life in years.

7

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Thefair value of the share-based payment awards was estimated using theBlack-Scholes option pricing method with the following assumptions and weightedaverage fair values:

**Stock Options (1)**

|                           | ** ** | **For the Three Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|---------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                                                   | ** ** | **2005**                                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|                      |       |                                                                       |       |                                                                      |       |   |   |   |   |
| Exercise price            |       | $                                                                          | 1.98       |                                                                      | —     |   | $ | 1.98 |   | $ | 1.58 |   |
|                      |       |                                                                       |       |                                                                      |       |   |   |   |   |
| Risk-free  interest rate  |       | 4.78                                                                       | %          | —                                                                    |       | 4.78 | % | 3.45 | % |
|                      |       |                                                                       |       |                                                                      |       |   |   |   |   |
| Expected  volatility      |       | 58.95                                                                      | %          | —                                                                    |       | 58.95 | % | 81.4 | % |
|                      |       |                                                                       |       |                                                                      |       |   |   |   |   |
| Black-Scholes  fair value |       | $                                                                          | .93        |                                                                      |       |   | $ | .93 |   | $ | 1.33 |   |
|                      |       |                                                                       |       |                                                                      |       |   |   |   |   |
| Expected life in years    |       | 3.5                                                                        |       | —                                                                    |       | 3.5 |   | 10 |   |

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(1)             The fair valuecalculation was based on the stock options granted during the period.

Thefollowing table summarizes stock option activity during the nine months ended September30, 2006:

|                                                 | ** ** | **Options** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual  Term (in years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-------------------------------------------------|------------|-------------|------------|-------------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Options  outstanding at December 31, 2005  |       | 2,813,000   |       | $                                         | 1.03       |                                                                    |       |                                |       |   |
| Exercised                                       |       | (358,000    | )          | 1.11                                      |       |                                                                    |       |                                |       |
| Granted                                         |       | 490,000     |       | 1.98                                      |       |                                                                    |       |                                |       |
| Forfeited or  expired                           |       | —      |       | —                                    |       |                                                                    |       |                                |       |
| Options  outstanding at September 30, 2006 |       | 2,945,000   |       | $                                         | 1.18       |                                                                    | 2.68       |                                | $          | 3,367,000 |   |
| Options exercisable at  September 30, 2006 |       | 2,455,000   |       | $                                         | 1.02       |                                                                    | 2.24       |                                | $          | 3,201,000 |   |

 

The intrinsicvalue is the amount by which the market value of the underlying common stockexceeds the exercise price of the respective stock option. The intrinsic valueof stock options exercised during the three and nine months ended September 30,2006 was $50,000 and $ 402,000, respectively.

As of September30, 2006 $444,000 of total unrecognized compensation cost related to stockoptions is expected to be recognized over a weighted average period of 2.92years. Cash received from options exercised for the three and nine months endedSeptember 30, 2006 was $48,500 and $396,690, respectively.

8

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**4.****                                     ****New Accounting Standards**

We adoptedStatement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS123R) effective January 1, 2006, using the modified prospective applicationmethod. SFAS 123R requires companies to record compensation expense for thevalue of all outstanding and unvested share-based payments, including employeestock options and similar awards.  As ofSeptember 30, 2006, we had 490,000 outstanding and unvested share-based awards.As a result, we recognized a $12,000 compensation expense related toshare-based payments in our consolidated financial statements for the ninemonths ended September 30, 2006.

In September 2006,the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements” (“SAB 108”). SAB 108 provides guidance on how prior yearmisstatements should be taken into consideration when quantifying misstatementsin current year financial statements for purposes of determining whether thecurrent year’s financial statements are materially misstated. SAB 108 permitsregistrants to record the cumulative effect of initial adoption by recordingthe necessary “correcting” adjustments to the carrying values of assets andliabilities as of the beginning of that year with the offsetting adjustmentrecorded to the opening balance of retained earnings only if material under thedual method. SAB 108 is effective for fiscal years ending on or after November15, 2006. The Company does not expect the adoption of SAB 108 to have amaterial impact on the Company’s financial condition or results of operations. 

The FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”) in June 2006. The interpretationclarifies the accounting for uncertainty in income taxes recognized in ourfinancial statement in accordance with SFAS No. 109, “Accounting for IncomeTaxes.” FIN 48 will be effective for our fiscal year beginning September 30,2007. The Company has not determined the effect, if any; the adoption of FIN 48will have on the Company’s financial position and results of operations.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements.  This statement addresseshow to calculate fair value measurements required or permitted under otheraccounting pronouncements.  Accordingly,this statement does not require any new fair value measurements.  However, for some entities, the application ofthis statement will change current practice. SFAS No. 157 is effective for the Company beginning January 1,2008.  The Company is currentlyevaluating the impact of this standard.

**5.****                                      Inventories**

Inventoriesconsist of the following:

|                                                               | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw materials                                                 |       | $                                | 8,544,000  |                            | $          | 7,489,000 |   |
| Work in process                                               |       | 421,000                          |       | 325,000                         |       |
| Finished goods                                                |       | 2,926,000                        |       | 3,124,000                       |       |
|                                                          |       | 11,891,000                       |       | 10,938,000                      |       |
| Less reserve for  slow-moving, obsolete or unusable inventory |       | (311,000                         | )          | (326,000                        | )          |
|                                                          |       | $                                | 11,580,000 |                            | $          | 10,612,000 |   |

 

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**6.****                                      Investmentin and Advances to Unconsolidated Affiliates**

On June 14, 2005, Alpha ProTech Engineered Products,Inc. entered into a joint venture with a manufacturer in India for theproduction of building products.  Underterms of the joint venture agreement, a private company, Harmony PlasticsPrivate Limited (“Harmony”), was created with ownership interests of 41.66% byAlpha ProTech Engineered Products, Inc. and 58.34% by Maple Industries andAssociates.  Alpha ProTech EngineeredProducts, Inc. contributed $508,000 for share capital and Maple Industries andAssociates contributed $708,000.

This joint venture positions Alpha ProTech EngineeredProducts to respond to current and expected increased product demand for housewrap and synthetic roofing underlayment, and future capacity for sales ofspecialty roofing component products and custom products for industrialapplications requiring high quality extrusion coated fabrics.

The capital from the initial funding along with a bankloan, which is guaranteed exclusively by Maple Industries and Associates andthe assets of Harmony Plastics Private Limited, was utilized to purchase anexisting 33,000 square-foot manufacturing facility in India; this facilityincludes manufacturing equipment necessary to produce roof underlayment.  Harmony has also built a new 60,000square-foot facility for the manufacturing of house wrap and other buildingproducts.

The Company is subject to the provisions of FIN 46which defines the criteria by which the Company determines the properaccounting for its investments in related entities.  Specifically, FIN 46 requires the Company toassess whether or not related entities are variable interest entities (VIEs),as defined.  For those related entitiesthat qualify as variable interest entities, FIN 46 requires the Company todetermine whether or not the Company is the primary beneficiary of the VIE, andif so, to consolidate the VIE.

The Company has determined that Harmony is not a VIEand is therefore considered to be an unconsolidated affiliate.

The Company records its investment in Harmony as “Equityinvestments in and advances to unconsolidated affiliates” on the accompanyingConsolidated Balance Sheets.  The Companyrecords its equity interest in Harmony’s results of operations as equity inincome (loss) of unconsolidated affiliates on the accompanying ConsolidatedStatements of Operations.

The Company reviews its investment in Harmony forimpairment in accordance with APB No. 18, “The Equity Method of Accounting forInvestments in Common Stock.” APB No. 18 requires recognition of a loss whenthe decline in an investment is other-than-temporary.  In determining whether the decline isother-than-temporary, the Company considers the nature of the industry in whichHarmony operates, their historical performance, their performance in relationto their peers and the current economic environment.

Alpha ProTech Engineered Products initially invested$1,450,000 in the joint venture; $508,000 for share capital and $942,000 as along term advance.  Fifty percent of the$942,000 long term advance for materials is to be repaid over a six year termcommencing in July 2006 and the balance is to be paid in the seventh year.  During the third quarter of 2006, Harmonyrepaid $20,000 in scheduled payments and $280,000 in additional payments for atotal of $300,000, leaving a balance of $642,000.  Effective April 2006, interest of 3.5% is tobe paid annually in January on this advance.

Harmony commenced operations in August of 2005.  For the three and nine months ended September30, 2006, Alpha ProTech Engineered Products purchased $965,000 and $4,583,000,respectively from Harmony.  For the threemonths ended September 30, 2006, we recorded equity income in unconsolidatedaffiliates of $36,000.  For the ninemonths ended September 30, 2006, we recorded equity income in unconsolidatedaffiliates of $16,000.  As of September30, 2006, our

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investment in Harmony is $1,150,000 which is comprisedof our original $1,450,000 investment less $300,000 in repayments of theadvance.

**7.****                                      AccruedLiabilities**

Accruedliabilities consist of the following:

|                               | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Payroll accrual               |       | $                                | 95,000     |                            | $          | 188,000 |   |
| Commission and  bonus accrual |       | 687,000                          |       | 669,000                         |       |
| Accrued  professional fees    |       | 136,000                          |       | 160,000                         |       |
| Accrued rebates  and other    |       | 94,000                           |       | 354,000                         |       |
| Income taxes  payable         |       | —                           |       | 557,000                         |       |
|                          |       | $                                | 1,012,000  |                            | $          | 1,928,000 |   |

 

**8.****                                      Basicand Diluted Net Income Per Share**

The following table provides a reconciliation of both net income andthe number of shares used in the computation of “basic” earnings per share(EPS), which utilizes the weighted average number of shares outstanding withoutregard to potential shares, and “diluted” EPS, which includes all such dilutiveshares:

|                                             | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income  (Numerator)                     |       | $                                                                      | 882,000    |                                                                  | $          | 693,000 |   | $ | 2,657,000 |   | $ | 2,141,000 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Shares  (Denominator):                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic weighted average shares outstanding   |       | 24,117,694                                                             |       | 23,679,933                                                            |       | 24,093,373 |   | 23,668,386 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Add: Dilutive effect of stock options       |       | 1,032,828                                                              |       | 1,677,238                                                             |       | 965,591 |   | 1,486,949 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted weighted average shares outstanding |       | 25,150,523                                                             |       | 25,347,172                                                            |       | 25,058,964 |   | 25,155,335 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income per  share:                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic                                       |       | $                                                                      | 0.04       |                                                                  | $          | 0.03 |   | $ | 0.11 |   | $ | 0.09 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted                                     |       | $                                                                      | 0.04       |                                                                  | $          | 0.03 |   | $ | 0.11 |   | $ | 0.09 |   |

 

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** **

**9.****                                      Activityof Business Segments**

The Companyoperates through four segments:

DisposableProtective Apparel Products: consisting of a complete line of disposableprotective clothing such as shoecovers (including the Aqua Track and spunbondshoecovers), bouffant caps, coveralls, frocks, lab coats and hoods, for thepharmaceutical, cleanroom, industrial and medical markets.

Infection ControlProducts: consisting of a line of face masks and eye shields principally forthe medical, dental and industrial markets.

Extended Care Products: consisting of a line ofmedical bed pads using Unreal Lambskin ® (synthetic lambskin).  The Unreal Lambskin ® is used to producemedical bed pads, which prevent decubitus ulcers or bedsores on long term carepatients.  The Unreal Lambskin ® is alsoused to manufacture bedrail pads, knee and elbow protectors, as well aswheelchair accessories. The Company also manufactures a line of pet beds andpet toy accessories with this material.

Engineered Products: consisting of line ofconstruction supply weatherization products as well as a line of paint withantimicrobials. The construction supply weatherization products consist ofbuilding wrap, synthetic roof underlayment and antimicrobial mold resistantframing sealant. The line of paint with antimicrobials is designed to inhibitgrowth of bacteria, fungi and algae on the painted surfaces in hospitals,surgical rooms and cleanrooms and associated controlled environments.  Of note, our equity in income (loss) of unconsolidatedaffiliates (Harmony) is included in the total segment income for Engineeredproducts in the table below.

The accountingpolicies of the segments are the same as those described previously under “Summaryof Significant Accounting Policies” in the 2005 10-K.  Segment data excludes charges allocated tohead office and corporate sales/marketing departments and income taxes.  The Company evaluates the performance of itssegments and allocates resources to them based primarily on net sales

The following table shows net sales for each segmentfor the three and nine months ended September 30, 2006 and 2005:

|                                | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months ended  September 30,** | ** ** |
|--------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Disposable  protective apparel |       | $                                                                      | 5,210,000  |                                                                  | $          | 5,109,000 |   | $ | 14,799,000 |   | $ | 15,771,000 |   |
| Infection  control             |       | 1,475,000                                                              |       | 1,201,000                                                             |       | 4,990,000 |   | 3,583,000 |   |
| Engineered  products           |       | 1,972,000                                                              |       | 1,390,000                                                             |       | 5,964,000 |   | 3,495,000 |   |
| Extended care                  |       | 295,000                                                                |       | 356,000                                                               |       | 1,049,000 |   | 1,229,000 |   |
|                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Consolidated total net  sales  |       | $                                                                      | 8,952,000  |                                                                  | $          | 8,056,000 |   | $ | 26,802,000 |   | $ | 24,078,000 |   |

 

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The following table shows the reconciliation of totalsegment income to total consolidated net income for the three months and ninemonths ended September 30, 2006 and 2005:

|                                          | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                               | ** ** | **2005**                                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Disposable  protective apparel           |       | $                                                                      | 1,969,000  |                                                                 | $          | 1,825,000 |   | $ | 5,403,000 |   | $ | 5,881,000 |   |
| Infection  control                       |       | 596,000                                                                |       | 501,000                                                              |       | 2,284,000 |   | 1,460,000 |   |
| Engineered  products                     |       | 286,000                                                                |       | 65,000                                                               |       | 701,000 |   | (16,000 | ) |
| Extended care                            |       | 3,000                                                                  |       | 32,000                                                               |       | 86,000 |   | 136,000 |   |
|                                     |       |                                                                   |       |                                                                 |       |   |   |   |   |
| Total segment  income                    |       | 2,854,000                                                              |       | 2,423,000                                                            |       | 8,474,000 |   | 7,461,000 |   |
| Unallocated  corporate overhead expenses |       | (1,454,000                                                             | )          | (1,323,000                                                           | )          | (4,256,000 | ) | (4,063,000 | ) |
| Provision for  income taxes              |       | (518,000                                                               | )          | (407,000                                                             | )          | (1,561,000 | ) | (1,257,000 | ) |
|                                     |       |                                                                   |       |                                                                 |       |   |   |   |   |
| Consolidated net income                  |       | $                                                                      | 882,000    |                                                                 | $          | 693,000 |   | $ | 2,657,000 |   | $ | 2,141,000 |   |

 

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**ITEM 2**     MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read thefollowing discussion and analysis together with our consolidated financialstatements and the notes to our consolidated financial statements, which appearelsewhere in this report.

**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING INFORMATION**

This report on Form 10-Q contains “forward-looking statements” that aremade pursuant to the safe-harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. Forward-looking statements include statementsconcerning plans, objectives, goals, strategies, future events, future revenuesor performance, capital expenditures and other information that is nothistorical information. When used in this report, the words “estimates,” “expects,”“anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations ofsuch words or similar expressions are intended to identify forward-lookingstatements. Additional forward-looking statements may be made by us from timeto time. All such subsequent forward-looking statements, whether written ororal and whether made by or on behalf of us, are also expressly qualified bythese cautionary statements.

Ourforward-looking statements are based upon our current expectations and variousassumptions. Our expectations, beliefs and projections are expressed in goodfaith and we believe there is a reasonable basis for them, including withoutlimitation, management’s examination of historical operating trends, data containedin our records and other data available from third parties. However, we cannotassure you that management’s expectations; beliefs and projections will resultor be achieved or accomplished. Our forward-looking statements apply only as ofthe date made. Except as required by law, we undertake no obligation topublicly update or revise forward-looking statements which may be made toreflect events or circumstances after the date made or to reflect theoccurrence of unanticipated events.

**Whereto find more information about us.** We make available free of charge on our Internet website(http://www.alphaprotech.com) our most recent Annual Report on Form 10-K, ourmost recent Quarterly Report on Form 10-Q, any current reports on Form 8-Kfiled since our most recent Annual Report on Form 10-K and any amendments tosuch reports as soon as reasonably practicable following the electronic filingof such report with the SEC. In addition, we provide electronic or paper copiesof our filings free of charge upon request.

**Critical Accounting Policies**

The preparation of ourfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the dates of the financialstatements and the reported amounts of net sales and expenses during thereported periods.  We base estimates onpast experience and on various other assumptions that are believed to bereasonable under the circumstances.  Theapplication of these accounting policies on a consistent basis enables us toprovide timely and reliable financial information.  Our critical accounting polices include thefollowing:

Inventories:Inventories include freight-in, materials, labor and overhead costs and arestated at the lower of cost (computed on a standard cost basis, whichapproximates average cost) or market. Provision is made for slow-moving, obsolete or unusable inventory. Weassess our inventory for estimated obsolescence or unmarketable inventory and,if necessary, write down the difference between the cost of inventory and theestimated market value based upon assumptions about future sales and supplyon-hand. If actual market conditions are less favorable than those projected bymanagement, additional inventory write-downs may be required.

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Revenue Recognition: Forsales transactions, we comply with the provisions of the SEC’s Staff AccountingBulletin (“SAB”) No. 104, “Revenue Recognition,” which states that revenueshould be recognized when the following revenue recognition criteria are met:(1) persuasive evidence of an arrangement exists; (2) the product has beenshipped and the customer takes ownership and assumes the risk of loss; (3) theselling price is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured. These criteria are satisfied upon shipment ofproduct and revenues are recognized accordingly.

Sales are reduced for anyanticipated sales returns, rebates and allowances based on historicalexperience.  Since our return policy isonly 90 days and our products are not generally susceptible to external factorssuch as technological obsolescence or significant changes in demand, we areable to make a reasonable estimate for returns. We offer end-user productspecific and sales volume rebates to select distributors.  Our rebates are based on actual sales andaccrued monthly.

Stock Based Compensation:The Company adopted Statement of Financial Accounting Standards No. 123R,Share-Based Payment (“SFAS 123R”) effective January 1, 2006, using themodified prospective application method. SFAS 123R requires companies to recordcompensation expense for the value of all outstanding and unvested share-basedpayments, including employee stock options and similar awards. As ofJanuary 1, 2006, the Company had no outstanding and unvested share-basedpayments.  The Company recognized $12,000of share-based compensation expense in its consolidated financial statementsfor the three and nine months ended September 30, 2006.

Prior to the adoption of SFAS123R, the Company accounted for its stock-based employee compensation plansusing the intrinsic value method prescribed by Accounting Principles BoardOpinion No. 25, Accounting for Stock Issued to Employees. No stock-basedemployee compensation cost was reflected in net income as all options grantedunder those stock-based employee compensation plans had exercise prices equalto the market values of the underlying common shares on the dates of grant.

The fair values of stockoption grants are determined using the Black-Scholes option pricing model andthe following assumptions: expected stock price volatility based on historicand management’s expectations of future volatility, risk-free interest ratesfrom published sources, weighted average expected option lives based onhistorical data and no dividend yield, as management currently does not intendto pay dividends in the near future. The Black-Scholes option valuation modelwas developed for use in estimating the fair value of traded options that haveno vesting restrictions and that are fully transferable. In addition, optionvaluation models require the input of highly subjective assumptions includingexpected stock price volatility.  Ourstock options have characteristics significantly different from those of tradedoptions and changes in the subjective input assumptions can materially affecttheir fair value.

**OVERVIEW**

Alpha Pro Tech is in thebusiness of protecting people, products and environments. We accomplish this bydeveloping, manufacturing and marketing a line of high-value disposableprotective apparel and infection control products for the cleanroom,industrial, pharmaceutical, medical and dental markets. We also manufacture anddistribute a line of medical bed pads and accessories as well as a line of petbeds.  Our products are sold both underthe “Alpha Pro Tech” brand name as well as under private label.

During the first quarterof 2005, we commenced sales from a new business segment, Alpha ProTechEngineered Products, Inc. (Engineered Products), a wholly-owned subsidiary ofAlpha Pro Tech. This new segment consists of a line of construction supplyweatherization products as well as a line of paint with antimicrobials.  The construction supply weatherizationproducts consists of house wrap (Perma WrapTM) and a synthetic roof underlayment(AlphaProtectorTM — SUL).  The line ofpaint with antimicrobials is designed to inhibit growth of bacteria, fungi andalgae on the painted surfaces in hospitals, surgical rooms and cleanrooms andassociated controlled environments.  Inaddition to our

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paint withantimicrobials, we have also developed a line of sealants with antimicrobialsto be used for mold remediation. The Engineered Products segment is expected tocontribute significantly to revenue growth in 2006.

This line of products isa natural extension of our core capabilities: creating proprietary productsdesigned to protect people and environments. The house wrap offers a weather resistant barrier designed to lowerenergy consumption costs.  Theproprietary synthetic roof underlayment is designed to resist the environment,as opposed to conventional roofing underlayment that is prone to rapiddegradation and mold growth.

Our products areclassified into six groups:  Disposableprotective apparel, consisting of a complete line of shoecovers, bouffant caps,gowns, coveralls and lab coats; infection control products, consisting of a lineof face masks and eye shields; extended care products, consisting of a line ofmedical bed pads, wheelchair covers, geriatric chair surfaces, operating roomtable surfaces and pediatric surfaces;  aline of pet beds; construction weatherization products, consisting of housewrap and synthetic roof underlayment; and a line of paint with antimicrobialsdesigned to inhibit growth of bacteria, fungi and algae on painted surfaces.

Our products asclassified above are grouped into four business segments.  The Disposable Protective Apparel segment,consisting of disposable protective apparel; the Infection Control segment,consisting of face masks and eye shields; the Extended Care segment, consistingof extended care products, namely medical bed pads and pet beds; and theEngineered Products segment, consisting of construction weatherization productssuch as house wrap and synthetic roof underlayment as well as a line ofantimicrobial paint.

Our target markets arepharmaceutical manufacturing, bio-pharmaceutical manufacturing and medicaldevice manufacturing, lab animal research, high technology electronicsmanufacturing which includes the semi-conductor market, medical and dentaldistributors, pet stores and pet distributors and construction supply androofing distributors.

Our products are usedprimarily in cleanrooms, industrial safety manufacturing environments, healthcare facilities such as hospitals, laboratories and dental offices, as well asconstruction supply sites. Our pet beds are used by pet owners and veterinarians.  Our products are distributed principally inthe United States through a network consisting of purchasing groups, nationaldistributors, local distributors, independent sales representatives and our ownsales and marketing force.

Consolidated sales forthe quarter ended September 30, 2006 increased to $8,952,000 from $8,056,000for the same quarter of 2005, representing an increase of $896,000 or11.1%.  Consolidated sales for the ninemonths ended September 30, 2006 increased to $26,802,000 from $24,078,000 forthe nine months ended September 30, 2005, representing an increase of$2,724,000 or 11.3%.

On September 19, 2006 weannounced the signing of a new distribution contract with our largestdistributor. Under the terms of the multiple year contract that was effectiveJanuary 1, 2006, they will retain the exclusive right to sell our private labelCritical Cover® products and we will now have the right to sell Alpha Pro Techbranded products to other new distributors.

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# **RESULTS OF OPERATIONS**

## **Three months and nine months ended September30, 2006, compared to the three and nine months ended September 30, 2005**

The followingtable sets forth certain operational data as a percentage of sales for theperiods indicated:

|                                           | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine months ended  September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Sales                                     |       | 100.0                                                                  | %          | 100.0                                                                 | %          | 100.0 | % | 100 | % |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gross profit                              |       | 45.9                                                                   |       | 45.3                                                                  |       | 46.1 |   | 45.8 |   |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Selling, general  and administrative      |       | 29.4                                                                   |       | 30.1                                                                  |       | 29.3 |   | 30.3 |   |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income from  operations                   |       | 15.1                                                                   |       | 13.6                                                                  |       | 15.6 |   | 14.0 |   |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income before  provision for income taxes |       | 15.6                                                                   |       | 13.7                                                                  |       | 15.7 |   | 14.1 |   |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income                                |       | 9.9                                                                    |       | 8.6                                                                   |       | 9.9 |   | 8.9 |   |

 

**Sales.** Consolidated sales for the quarter ended September 30, 2006 increased to$8,952,000 from $8,056,000 for the quarter ended September 30, 2005,representing an increase of $896,000 or 11.1%. We attribute the increase primarily to increased sales of constructionsupply weatherization products of $582,000, to increased infection controlsegment sales of $274,000 and to increased sales of disposable protectiveapparel products of $101,000, partially offset by decreased sales from ourExtended Care Unreal Lambskin segment of $61,000.

Sales for the DisposableProtective Apparel segment for the quarter ended September 30, 2006 increasedby $101,000 or 2.0% to $5,210,000 compared to $5,109,000 for the same period of2005.  Although the Disposable ProtectiveApparel segment sales were up only slightly in the third quarter of 2006 ascompared to the same period of 2005, sales during this past quarter of $5.2million were in fact the third highest in company history next only to thesecond quarter of 2005 and 2006.  We areencouraged by the response to our recently launched Disposable ProtectiveApparel ComforTech® line of products and expect growth in the coming quartersfrom this product line.

On September 19, 2006 weannounced the signing of a new distribution contract with our largestdistributor. Under the terms of the multiple year contract that was effectiveJanuary 1, 2006, they will retain the exclusive right to sell our private labelCritical Cover® products.  In addition,we will now have the right to sell Alpha Pro Tech branded products to other newdistributors.  This new contract furtherstrengthens our relationship with our largest distributor and will enable us togain additional market share as we develop relationships with new distributors.

Infection Control segmentsales for the quarter ended September 30, 2006 increased by $274,000 or 22.8%to $1,475,000 compared to $1,201,000 for the same period of 2005.  Mask sales in this segment, especially salesof our N-95 NIOSH approved Respirator mask, were strong in the third quarter of2006 as compared to the same quarter last year as concerns about Avian Flucontinued.  Although N-95 Respirator masksales were up compared to the third quarter of last year, they were down fromthe first and second quarter of 2006.  Wedo expect N-95 Respirator mask sales to be stronger in the fourth quarter thanthey were in the third quarter.  Weanticipate continued strength of N-95 mask sales if the Avian Flu continues tobe a worldwide concern.

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The Engineered Productssegment consists of a line of construction supply weatherization products,namely house wrap and roof underlayment (AlphaProtectorTM — SUL), as well as aline of paint with antimicrobials. Engineered Products sales for the quarter ended September 30, 2006increased by $582,000 or 41.9% to $1,972,000 compared to $1,390,000 for thesame period of 2005.  The third quarter of2005 was favorably affected by a strong hurricane season and in particularhurricane Katrina.  The breakdown of theEngineered Products sales is as follows for the quarter ended September 30,2006: 68% house wrap and 32% roof underlayment. Roof underlayment sales increased to 32% of total Engineered Productssales in the third quarter of 2006 from 25% for fiscal 2005.  We are encouraged by the response to ourproduct line, in particular our AlphaProtectorTM — SUL roof underlayment.  We expect significant growth from thissegment.

Sales from ourExtended Care segment, which includes a line of medical bed pads as well as petbeds, decreased by $61,000 or 17.1% to $295,000 for the quarter ended September30, 2006 from $356,000 for the quarter ended September 30, 2005.  The decrease in sales is primarily the resultof less medical bed pad sales, partially offset by increased pet bed sales.  This line of products is not expected to be agrowth segment for the Company.

Consolidated sales forthe nine months ended September 30, 2006 increased to $26,802,000 from$24,078,000 for the nine months ended September 30, 2005, representing anincrease of $2,724,000 or 11.3%.  We attribute the increase primarily to increasedsales of construction supply weatherization products of $2,469,000 and toincreased infection control segment sales of $1,407,000, partially offset bydecreased sales of disposable protective apparel products of $972,000 anddecreased sales from our Extended Care segment of $180,000.

Sales for the DisposableProtective Apparel segment for the nine months ended September 30, 2006 were$14,799,000 compared to $15,771,000 for the same period of 2005, a decrease of$972,000 or 6.2%.  Although sales to ourlargest distributor have decreased for the nine months ended September 30,2006, shipments by them to their end users were up slightly.  Even though this segment is down year todate, the third quarter of 2006 was slightly better than the same quarter lastyear and we expect that the fourth quarter of 2006 will be significantly betterthan the fourth quarter of last year.  Weanticipate that annually this segment will be reasonably flat in 2006 comparedto the prior year and should show growth in 2007 as the ComforTech® line ofproducts takes hold and as we bring on new distributors.

Infection Control segmentsales for the nine months ended September 30, 2006 increased by $1,407,000 or39.3% to $4,990,000 from $3,583,000 in the same period of 2005.  Sales of our N-95 NIOSH approved Respiratormask have been very strong in the nine months ended September 30, 2006 due toconcerns about Avian Flu.  We havesignificant manufacturing capacity for the N-95 Respirator mask in the eventthat demand surges.

The Engineered Productssegment sales for the nine months ended September 30, 2006 increased by$2,469,000 or 70.6% to $5,964,000 from $3,495,000 in the same period of2005.  The breakdown of the constructionsupply weatherization products is as follows for the nine months endedSeptember 30, 2006: 71% house wrap and 29% AlphaProtectorTM — SUL roofunderlayment.  The construction supplyweatherization products account for almost all of the sales for the nine monthsended September 30, 2006.  Managementexpects this segment to contribute significantly to overall consolidatedrevenue growth during the remainder of 2006 and for 2007.

Sales of the Company’sExtended Care segment decreased by $180,000 or 14.6% to $1,049,000 for the ninemonths ended September 30, 2006 from $1,229,000 for the nine months endedSeptember 30, 2005.  This decrease of$180,000 in sales is primarily the result of a decrease in medical bed padsales, partially offset by higher pet bed sales.

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**Gross Profit**  Gross profit increased by 12.5% to $4,105,000for the quarter ended September 30, 2006 from $3,649,000 for the same period in2005.  Gross profit margin increased to45.9% for the quarter ended September 30, 2006 as compared to 45.3% for thesame period in 2005.  Gross profit marginincreased slightly to 46.1% for the nine months ended September 30, 2006 from45.8% for the same period in 2005.

Grossprofit margin on the Engineered Products segment was 32.6% for the quarterended September 30, 2006 as compared to 28.2% for the same period of 2005.  Gross profit margin was 31.1% for the ninemonths ended September 30, 2006 as compared to 25.1% for the same period of2005.  Gross profit on this product lineis expected to trend into the mid 30% range.

**Selling,General and Administrative Expenses.**  Selling, general and administrative expensesincreased by $214,000 or 8.8% to $2,635,000 for the quarter ended September 30,2006 from $2,421,000 for the quarter ended September 30, 2005.  The increase of $214,000 in selling, generaland administrative expenses primarily consists of increased employeecompensation expense of $223,000.  As apercentage of net sales, selling, general and administrative expenses decreasedto 29.4% for the quarter ended September 30, 2006 from 30.1% for the sameperiod in 2005.  We believe that we havebuilt the infrastructure required to substantially grow our business and as ourrevenue grows our expenses are expected to continue to decrease as a percentageof sales.

Selling, general andadministrative expenses increased by $560,000 or 7.7% to $7,849,000 for thenine month ended September 30, 2006 from $7,289,000 for the nine months endedSeptember 30, 2005.  The increase inselling, general and administrative expenses primarily consists of increasedpayroll costs of $607,000.  As apercentage of net sales, selling, general and administrative expenses decreasedto 29.3% for the nine months ended September 30, 2006 from 30.3% for the sameperiod in 2005.

The chiefexecutive officer and president are each entitled to a bonus equal to 5% of thepre-tax profits of the Company.  Bonusesof $156,000 were accrued for the quarter ended September 30, 2006 as comparedto $123,000 in the same period of 2005. Total bonuses of $469,000 were accruedfor the nine months ended September 30, 2006 as compared to $378,000 in thesame period of 2005.

**Depreciation and Amortization.**  Depreciation and amortization expensedecreased by $13,000 or 10.0% to $117,000 for the quarter ended September 30,2006 from $130,000 for the same period in 2005. Depreciation and amortizationexpense decreased by $35,000 to $340,000 for the nine months ended September30, 2006 from $375,000 for the same period in 2005.  The decrease is primarily attributable to areduction in depreciation for office equipment, computers and software, partiallyoffset by increased depreciation for Engineered Products.

**Incomefrom Operations.** Income from operations increased by $255,000 or 23.2%, to $1,353,000 forthe quarter ended September 30, 2006 as compared to income from operations of$1,098,000 for the quarter ended September 30, 2005.  The increase in income from operations is dueto an increase in gross profit of $456,000 and a decrease in depreciation andamortization of $13,000, partially offset by an increase in selling, generaland administrative expenses of $214,000.

Income from operationsincreased by $806,000 or 23.9%, to $4,180,000 for the nine months endedSeptember 30, 2006 as compared to income from operations of $3,374,000 for thenine months ended September 30, 2005. The increase in income from operations isprimarily due to an increase in gross profit of $1,331,000 and a decrease indepreciation and amortization of $35,000, partially offset by an increase inselling, general and administrative expenses of $560,000.

**NetInterest.**  For thequarter ended September 30, 2006, we had net interest income of $11,000compared to net interest income of $2,000 for the quarter ended September 30,2005.  Interest expense remained flat at$2,000 for the quarter ended September 30, 2006 compared to the same period of2005.  Interest income increased to$13,000 for the quarter ended September 30, 2006 as compared to $4,000 for thesame period of 2005.

 

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For the nine months endedSeptember 30, 2006, we had net interest income of $22,000 compared to netinterest income of $24,000 for the quarter ended September 30, 2005.  Interest expense remained unchanged at $7,000for the nine months ended September 30, 2006 compared to $7,000 for the sameperiod of 2005.  Interest incomedecreased by $3,000 to $28,000 for the nine months ended September 30, 2006 ascompared to $31,000 for the same period of 2005.

**Equity income (loss) inunconsolidated affiliates, net of eliminations.**  On June 14, 2005 Alpha ProTech EngineeredProducts, Inc. entered into a joint venture with a manufacturer in India forthe production of building products. Under terms of the joint venture agreement, a private company, HarmonyPlastics Private Limited (Harmony), was created with ownership interests of41.66% by Alpha ProTech Engineered Products, Inc. and 58.34% by MapleIndustries and Associates. Alpha ProTech Engineered Products has invested$1,450,000 in the joint venture; $508,000 for share capital and $942,000 in along term advance.  Effective April 2006,interest of 3.5 % is to be paid on this advance. Contractually, half of this$942,000 advance is to be repaid monthly over a six year term commencing inJuly 2006 and the balance is to be paid in the seventh year.  However, we expect that this advance will bepaid out much faster as  Harmony paid$300,000 towards the advance the third quarter of 2006.

The Company is subject tothe provisions of FASB Interpretation (“FIN”) No. 46, “Consolidation ofVariable Interest Entities—an interpretation of ARB No. 51,” which redefinesthe criteria by which the Company determines the proper accounting for itsinvestments in related entities. Specifically, FIN 46 requires the Company to assess whether or notrelated entities are variable interest entities (“VIE”s), as defined.  For those related entities that qualify asvariable interest entities, FIN 46 requires the Company to determine whether ornot the Company is the primary beneficiary of the VIE, and if so, toconsolidate the VIE.  The Company hasdetermined that Harmony is not a VIE and is therefore considered to be anunconsolidated affiliate.

Harmony commencedoperations in August of 2005.  For thethree months ended September 30, 2006, we recorded equity income inunconsolidated affiliates of $36,000. For the nine months ended September 30, 2006, we recorded equity incomein unconsolidated affiliates of $16,000.

**Income Before Provision forIncome Taxes.**  Incomebefore provision for income taxes for the quarter ended September 30, 2006 was$1,400,000 compared to $1,100,000 for the quarter ended September 30, 2005,representing an increase of $300,000 or 27.3%. The increase in income before provision for income taxes is due to anincrease in gross profit of $456,000, a decrease in depreciation andamortization of $13,000, an increase in net interest income of $9,000 and anincrease in equity income from our unconsolidated affiliate of $36,000,partially offset by an increase in selling, general and administrative expensesof $214,000.

Income before provisionfor income taxes for the nine months ended September 30, 2006 was $4,218,000compared to $3,398,000 for the nine months ended September 30, 2005,representing an increase of $820,000 or 24.1%. The increase in income from operations is primarily due to an increasein gross profit of $1,331,000, a decrease in depreciation and amortization of$35,000 and an increase in equity income from our unconsolidated affiliate of$16,000, partially offset by an increase in selling, general and administrativeexpenses of $560,000 and a decrease in net interest income of $2,000.

**Provision for Income Taxes** The provision for income taxes for thequarter ended September 30, 2006 was $518,000 compared to $407,000 for thequarter ended September 30, 2005.   Theincrease in income taxes is due to higher income before provision for incometaxes in 2006.  The effective tax ratewas 37.0% for the quarters ended September 30, 2006 and 2005.

The provision for incometaxes for the nine months ended September 30, 2006 was $1,561,000, as comparedto $1,257,000 for the nine months ended September 30, 2005.  The increase in income taxes is due to higherincome before provision for income taxes in 2005.  The effective tax rate was approximately37.0% for the nine month periods ended September 30, 2006 and 2005.

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**Net Income.**  Net income for the quarter ended September30, 2006 was $882,000 compared to net income of $693,000 for the quarter endedSeptember 30, 2005, an increase of $189,000 or 27.3%.  The net income increase was primarily due toan increase in income before provision for income taxes of $300,000, partiallyoffset by an increase in income taxes of $111,000.  Net income as a percentage of sales for thequarter ended September 30, 2006 and 2005 was 9.9% and 8.6% respectively.  Basic and diluted income per share for thequarter ended September 30, 2006 and 2005 were $0.04 and $0.03, respectively.

Net income for the ninemonths ended September 30, 2006 was $2,657,000 compared to net income of$2,141,000 for the same period of 2005, an increase of $516,000 or 24.1%.  The net income increase was primarily due toan increase in income before provision for income taxes of $820,000, partiallyoffset by an increase in income taxes of $304,000.  Net income as a percentage of sales for thenine months ended September 30, 2006 and 2005 was 9.9% and 8.9%respectively.  Basic and diluted incomeper share for the nine months ended September 30, 2006 and 2005 were $0.11 and$0.09, respectively

**LIQUIDITY AND CAPITAL RESOURCES**

As of September 30, 2006,we had cash and cash equivalents of $805,000 and working capital of$17,634,000, an increase in working capital of 23.3% or $3,336,000 sinceDecember 31, 2005.  As of September 30,2006, our current ratio was 10.94:1 as compared to 6.55:1 as of December 31,2005.  Cash decreased by $358,000 to$805,000 as of September 30, 2006 as compared to $1,163,000 as of December 31,2005.  The decrease in cash is primarilydue to cash used in operating activities of $702,000, the purchase of propertyand equipment of $299,000 and the purchases of intangible assets of $54,000,partially offset by cash proceeds of $397,000 from the exercise of stockoptions and cash proceeds of $300,000 for repayment of the advance from ourHarmony joint venture.

Wehave a $3,500,000 credit facility with a bank, consisting of a line of creditwith interest at prime plus 0.5%.  AtSeptember 30, 2006, the prime interest rate was 8.25%.  The line of credit was renewed in May 2005and expires in May 2007.  The Company’sborrowing capacity on the line of credit was $3,500,000 at September 30,2006.  The available line of credit isbased on a formula of eligible accounts receivable and inventories.  As of September 30, 2006, we had not borrowedon this line of credit.  As of September30, 2006, we did not have any debt.

Net cash used inoperating activities was $702,000 for the nine months ended September 30, 2006compared to $3,162,000 net cash used in operating activities for the ninemonths ended September 30, 2005.  The netcash used in operating activities of $702,000 for the nine months endedSeptember 30, 2006 is due to net income of $2,657,000, adjusted by thefollowing: an increase in inventory of $968,000, an increase in accountsreceivable of $1,712,000, an increase in prepaid expenses of $311,000, adecrease in accounts payable and accrued liabilities of $801,000, non-cashequity income in unconsolidated affiliates of $16,000, $12,000 of non-cashshare-based compensation expense, a decrease in deferred income taxes of$97,000 and depreciation and amortization of $340,000.  The net cash used in operating activities of$3,162,000 for the nine months ended September 30, 2005 is due to net income of$2,141,000, adjusted by the following: an increase in inventory of $4,998,000,an increase in accounts receivable of $867,000, a decrease in accounts payableand accrued liabilities of $167,000, a decrease in prepaid expenses of $354,000and depreciation and amortization of $375,000.

Accounts receivableincreased by $1,712,000 or 43.3% to $5,666,000 as of September 30, 2006 from$3,954,000 as of December 31, 2005.  Thisincrease is primarily due to increased sales of 38% for the last two months ofthe third quarter of 2006 as compared to the last two months of fourth quarterof 2005.

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Inventory increased by$968,000 or 9.1% to $11,580,000 as of September 30, 2006 from $10,612,000 as ofDecember 31, 2005.  The current inventorylevels have been increased in order to service anticipated sales growth,particularly in the Engineered Products segment.

Prepaid expenses andother current assets increased by $311,000 to $1,026,000 as of September 30,2006 from $715,000 as of December 31, 2005. The increase of $311,000 is primarily due to an increase in prepaidexpenses for Engineered Products of $112,000, an increase in prepaid rent of$43,000, an increase of $23,000 in marketing expenses, and an increase ingeneral prepaid expenses of $8,000 and prepaid income taxes of $180,000,partially offset by a decrease in prepaid insurance of $55,000.

Accounts payable andaccrued liabilities as of September 30, 2006 decreased by $801,000 to$1,775,000 from $2,576,000.  The netchange in 2006 was primarily due a decrease in income tax payable of $557,000,a decrease in accrued rebates and other of $260,000, a decrease in accruedprofessional fees of $24,000 and a decrease in payroll accrual of $93,000,partially offset by a increase in trade payables of $115,000 and an increase inaccrued commission/bonus payable of $18,000.

Net cash used ininvesting activities was $53,000 and $1,871,000 for the nine months endedSeptember 30, 2006 and 2005, respectively. Our investing activity in 2006 consisted primarily of expenditures forproperty and equipment of $299,000, the purchase of intangible assets of$54,000 and repayment of $300,000 from our advance to our Harmony jointventure.  This compared to expendituresfor property and equipment of $509,000, the purchases of intangible assets of$12,000 and an investment in an India joint venture (Harmony) of $1,350,000during the nine months ended September 30, 2005.

We expect to purchaseapproximately $300,000 to $400,000 of equipment in 2006. These expenditureswill be primarily for equipment for the Engineered Products and InfectionControl segments.

For the quarter endedSeptember 30, 2006, net cash provided by financing activities was $397,000compared to cash provided by financing activities of $452,000 for the sameperiod of 2005.  Our financing activitiesin 2006 consisted of cash proceeds of $397,000 from the exercise of 358,000stock options.  Our financing activitiesin 2005 consisted primarily of cash proceeds of $297,000 from the exercise of237,106 stock options and proceeds from notes payable of $177,000, partiallyoffset by payments of $22,000 for the repurchase of 10,000 shares of commonstock.

In August 2004, weannounced that our Board of Directors had approved the buy-back of up to anadditional $500,000 of the Company’s outstanding common stock.  This share repurchase program is the sixth$500,000 buyback authorized by the Board of Directors.  In all instances,we are retiring the shares.  For thequarter ended September 30, 2006, we did not buy back any shares of commonstock.  As of September 30, 2006, we havebought back a total of 2,333,800 shares of common stock at a cost of $2,518,000since the end of 1999.

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As shown below, atSeptember 30, 2006, our contractual cash obligations totaled approximately$1,143,000.

**Contractual Obligations**
| ** **                          | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** | ** **         | ** ** |
|-------------------------------------|------------|------------|------------|-------------------------------------------|------------|--------------------|------------|
| ** **                          | ** ** | **Total**  | ** ** | **1 Year**                           | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 years** | ** ** |
| Operating leases                    |       | $          | 1,143,000  |                                      | $          | 174,000            |       | $ | 748,000 |   | $ | 221,000 |   | — |   |
|                                |       |       |       |                                      |       |               |       |   |   |   |   |
| Line of credit                      |       | —     |       | —                                    |       | —             |       | — |   | — |   |
|                                |       |       |       |                                      |       |               |       |   |   |   |   |
| Total contractual cash  obligations |       | $          | 1,143,000  |                                      | $          | 174,000            |       | $ | 748,000 |   | $ | 221,000 |   | — |   |

 

We believe that cashgenerated from operations, our current cash balance and the funds availableunder our credit facility will be sufficient to satisfy our projected workingcapital and planned capital expenditures for the foreseeable future.

**New Accounting Standards**

Based on the Company’sreview of new accounting standards released during the quarter ended September30, 2006, the Company did not identify any standards requiring adoption thatwould have a significant impact on its consolidated financial statements.

We adopted Statement ofFinancial Accounting Standards No. 123R, Share-Based Payment (“SFAS 123R”)effective January 1, 2006, using the modified prospective application method.SFAS 123R requires companies to record compensation expense for the value ofall outstanding and unvested share-based payments, including employee stockoptions and similar awards.  As ofDecember 31, 2005, the Company had no outstanding and unvested share-basedawards. During the latter part of the third quarter of 2006, 490,000 stockoptions have been granted under the option plan. As a result, the Companyrecognized $12,000 in share-based compensation expense in its consolidatedfinancial statements for the nine months ended September 30, 2006.

**ITEM 3**                       QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We subcontract themanufacture of products in China and Mexico and have a joint venture inIndia.  The Company’s results ofoperations could be negatively affected by factors such as changes in foreigncurrency exchange rates due to stronger economic conditions in those countries.

The Company doesn’texpect any significant effect on its results of operations from inflationary orinterest and currency rate fluctuations. The Company does not hedge its interest rate or foreign exchange risks.

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**ITEM 4**                       CONTROLSAND PROCEDURES

Disclosure Controls andProcedures

The Company’s chiefexecutive officer and its chief financial officer, after evaluating theeffectiveness of the Company’s disclosure controls and procedures as ofSeptember 30, 2006, have concluded that the Company’s disclosure controls andprocedures were designed to ensure that information required to be disclosed bythe Company in the reports that it files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported, withinthe time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Act is accumulated and communicated to the Company’s management,including its chief executive and chief financial officers as appropriate toallow timely decisions regarding required disclosure.

 Changes in Internal Control Over FinancialReporting.

There has been no changein our internal control over financial reporting (as defined in Rules 13a-15(f)and 15d-15(f) under the Exchange Act) that occurred during our fiscal quarterended September 30, 2006, that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

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**PART II -OTHER INFORMATION**

**ITEM 6**                       EXHIBITSAND REPORTS ON FORM 8-K

(a)                                  Exhibits

31.1 Certification Pursuant to Rule 13a-14(b) and Rule15d-14(b) of the Exchange Act, Signed by Chief Executive Officer (filedherewith)

31.2 Certification Pursuant to Rule 13a-14(b) and Rule15d-14(b) of the Exchange Act, Signed by Chief Financial Officer (filedherewith)

32.1 Certification Pursuant to 18 U.S.C Section 1350,as Adopted Pursuant to Section 906 of        the Sarbanes-Oxley Act of 2002, Signed by Chief Executive Officer (filedherewith)

32.2 Certification Pursuant to 18 U.S.C Section 1350, asAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Signed byChief Financial Officer (filed herewith)

(b)                                 Reports on Form 8-K

On  August 3, 2006registrant issued a release announcing that it would have a conference call onAugust 8, 2006  regarding its 2006 secondquarter financial results at 4:30pm Eastern time .

On August 8, 2006 registrant issued a releaseannouncing its financial results for the second quarter of 2006.

On August 25, 2005 registrant issued a releaseannouncing that it will make a presentation at the Roth Capital Partners NewYork Conference on September 6, 2006.

On September 19, 2006 registrant issued a releaseannouncing a new distribution contract with VWR International, Inc.

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15 (d) of the Securities Exchange Act of1934, the Registrant has fully caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

**ALPHA PROTECH, LTD**.
| DATE:  |   | November 3, 2006 |   | BY:    |   | /s/ SHELDON HOFFMAN                               |
|--------|--------|------------------|--------|--------|--------|---------------------------------------------------|
|   |   |             |   |   |   | Sheldon Hoffman                                   |
|   |   |             |   |   |   | Chief Executive Officer and Director              |
|   |   |             |   |   |   |                                              |
| DATE:  |   | November 3, 2006 |   | BY:    |   | /s/ LLOYD HOFFMAN                                 |
|   |   |             |   |   |   | Lloyd Hoffman                                     |
|   |   |             |   |   |   | Chief Financial Officer and Senior Vice President |

 

 

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