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**SECURITIESAND 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, 2008**

 

**Commission File No. 01-15725**

 

**Alpha ProTech, Ltd.**

(exact name ofregistrant 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 by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes xNo 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 accelerated filer o  Acceleratedfiler o  Non-accelerated filer x  Smaller Reporting Company o

 

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 of November 3,2008. 24,249,753 shares of common stock, $.01 par value

 

 

 

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**Alpha Pro Tech, Ltd.**

 

Table of Contents

 
| ** **                | ** **                                                                                                                                        | ** **                                              | **Page No.** |
|---------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|-------------------|
|                      |                                                                                                                                              |                                                    |
| PART I.         | FINANCIAL INFORMATION                                                                                                                             |                                                    |
|                      |                                                                                                                                              |                                                    |
| ITEM 1               | Consolidated Financial Statements  (Unaudited)                                                                                                    |                                                    |
|                      |                                                                                                                                              |                                                    |
|                      | a)                                                                                                                                                | Consolidated Balance Sheets                             | 2                 |
|                      |                                                                                                                                              |                                                    |              |
|                      | b)                                                                                                                                                | Consolidated Income  Statements                         | 3                 |
|                      |                                                                                                                                              |                                                    |              |
|                      | c)                                                                                                                                                | Consolidated Statement of  Shareholders’ Equity    | 4                 |
|                      |                                                                                                                                              |                                                    |              |
|                      | d)                                                                                                                                                | Consolidated Statements of  Cash Flows                  | 5                 |
|                      |                                                                                                                                              |                                                    |              |
|                      | e)                                                                                                                                                | Notes to  Consolidated Financial Statements (unaudited) | 6                 |
|                      |                                                                                                                                              |                                                    |              |
| ITEM 2               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                       | 12                                                      |
|                      |                                                                                                                                              |                                                    |
|                      | Cautionary  Statements Regarding Forward-Looking Information                                                                                      | 12                                                      |
|                      |                                                                                                                                              |                                                    |
|                      | New Accounting  Standards                                                                                                                         | 20                                                      |
|                      |                                                                                                                                              |                                                    |
| ITEM 3               | Quantitative  and Qualitative Disclosures About Market Risk                                                                                       | 21                                                      |
|                      |                                                                                                                                              |                                                    |
| ITEM 4               | Controls and  Procedures                                                                                                                          | 21                                                      |
|                      |                                                                                                                                              |                                                    |
| PART II.   | OTHER INFORMATION                                                                                                                                 |                                                    |
|                      |                                                                                                                                              |                                                    |
| ITEM 1                    | Legal Proceedings                                                                                                                                 | 22                                                      |
|                      |                                                                                                                                              |                                                    |
| ITEM 1A.                  | Risk Factors                                                                                                                                      | 22                                                      |
|                      |                                                                                                                                              |                                                    |
| ITEM 2                    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                      | 22                                                      |
|                      |                                                                                                                                              |                                                    |
| ITEM 3                    | Defaults  upon senior securities                                                                                                                  | 22                                                      |
|                      |                                                                                                                                              |                                                    |
| ITEM 4                    | Submission  of Matters to a Vote Security Holders                                                                                                 | 22                                                      |
|                      |                                                                                                                                              |                                                    |
| ITEM 5                    | Other  Information                                                                                                                                | 22                                                      |
|                      |                                                                                                                                              |                                                    |
| ITEM 6                    | Exhibits and Reports on Form 8-K                                                                                                             |                                                    |
|                      |                                                                                                                                              |                                                    |
| SIGNATURES                | 23                                                                                                                                                |
|                      |                                                                                                                                              |                                                    |
| 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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Tableof Contents

 

**AlphaPro Tech, Ltd.**

 

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

 

#### **ITEM1.  FINANCIAL STATEMENTS**

 

Alpha Pro Tech, Ltd.(Alpha Pro Tech, the Company) prepared the following unaudited interimconsolidated financial statements pursuant to the rules and regulations ofthe Securities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to these rules and regulations.

 

You should read thefollowing unaudited interim consolidated financial statements and theaccompanying notes together with the Company’s current year 10-Q’s and 8-K’s aswell as the Annual Report on Form 10-K for the year ended December 31,2007.  The Company’s 2007 Annual Reportcontains information that may be helpful in analyzing the financial informationcontained in this report and in comparing its results of operations for thethree and nine months ended September 30, 2008 with the same period in2007.

 

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**AlphaPro Tech, Ltd.**

 

# **CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

 
| ** **                                                                                                                                                                          | ** ** | **September 30,  2008** | ** ** | **December 31,  2007 (1)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------------|------------|
|                                                                                                                                                                                |       |                         |       |                                 |       |
| **Assets**                                                                                                                                                                          |       |                         |       |                                 |       |
| Current assets:                                                                                                                                                                     |       |                         |       |                                 |       |
| Cash and cash  equivalents                                                                                                                                                          |       | $                            | 4,817,000  |                                 | $          | 4,064,000 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $64,000 at  September 30, 2008 and $65,000 at December 31, 2007                                           |       | 5,113,000                    |       | 4,422,000                            |       |
| Inventories, net                                                                                                                                                                    |       | 12,655,000                   |       | 14,111,000                           |       |
| Prepaid expenses  and other current assets                                                                                                                                          |       | 1,324,000                    |       | 1,588,000                            |       |
| Deferred income  taxes                                                                                                                                                              |       | 509,000                      |       | 419,000                              |       |
| Total current  assets                                                                                                                                                               |       | 24,418,000                   |       | 24,604,000                           |       |
|                                                                                                                                                                                |       |                         |       |                                 |       |
| Property and  equipment, net                                                                                                                                                        |       | 3,083,000                    |       | 3,439,000                            |       |
| Goodwill, net                                                                                                                                                                       |       | 55,000                       |       | 55,000                               |       |
| Intangible  assets, net                                                                                                                                                             |       | 202,000                      |       | 180,000                              |       |
| Equity investments  in and advances to unconsolidated affiliates                                                                                                                    |       | 1,331,000                    |       | 1,208,000                            |       |
| Total assets                                                                                                                                                                        |       | $                            | 29,089,000 |                                 | $          | 29,486,000 |   |
|                                                                                                                                                                                |       |                         |       |                                 |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                      |       |                         |       |                                 |       |
| Current  liabilities:                                                                                                                                                               |       |                         |       |                                 |       |
| Accounts payable                                                                                                                                                                    |       | $                            | 212,000    |                                 | $          | 457,000 |   |
| Accrued  liabilities                                                                                                                                                                |       | 1,235,000                    |       | 1,478,000                            |       |
| Total current  liabilities                                                                                                                                                          |       | 1,447,000                    |       | 1,935,000                            |       |
|                                                                                                                                                                                |       |                         |       |                                 |       |
| Deferred income  taxes                                                                                                                                                              |       | 751,000                      |       | 747,000                              |       |
| Total  liabilities                                                                                                                                                                  |       | 2,198,000                    |       | 2,682,000                            |       |
|                                                                                                                                                                                |       |                         |       |                                 |       |
| Shareholders’  equity                                                                                                                                                          |       |                         |       |                                 |       |
| Common stock,  $.01 par value, 50,000,000 shares authorized, 24,557,255 and 25,583,655  issued and outstanding at September 30, 2008 and December 31, 2007,  respectively |       | 246,000                      |       | 256,000                              |       |
| Additional  paid-in capital                                                                                                                                                         |       | 25,498,000                   |       | 26,670,000                           |       |
| Retained  earnings (accumulated deficit)                                                                                                                                            |       | 1,147,000                    |       | (122,000                             | )          |
| Total  shareholders’ equity                                                                                                                                                    |       | 26,891,000                   |       | 26,804,000                           |       |
| Total  liabilities and shareholders’ equity                                                                                                                                    |       | $                            | 29,089,000 |                                 | $          | 29,486,000 |   |

 

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(1)                                  Thecondensed consolidated balance sheet as of December 31, 2007 has beenprepared using information from the audited financial statements at that date.

 

The accompanying notes are an integral part of these consolidatedfinancial 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,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                                               | ** ** | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net sales                                                    |       | $                                                                      | 10,217,000 |                                                                  | $          | 9,308,000 |   | $ | 26,654,000 |   | $ | 27,501,000 |   |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Cost of goods  sold, excluding depreciation and amortization |       | 5,862,000                                                              |       | 4,913,000 3                                                           |       | 14,931,000 |   | 14,671,000 3 |   |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gross margin                                                 |       | 4,355,000                                                              |       | 4,395,000                                                             |       | 11,723,000 |   | 12,830,000 |   |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Expenses:                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Selling, general  and administrative                         |       | 3,078,000                                                              |       | 2,949,000                                                             |       | 9,413,000 |   | 9,557,000 |   |
| Depreciation and  amortization                               |       | 151,000                                                                |       | 114,000                                                               |       | 433,000 |   | 349,000 |   |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income from  operations                                      |       | 1,126,000                                                              |       | 1,332,000                                                             |       | 1,877,000 |   | 2,924,000 |   |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Other income                                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Equity in income  of unconsolidated affiliates               |       | 85,000                                                                 |       | 128,000                                                               |       | 123,000 |   | 194,000 |   |
| Interest, net                                                |       | 7,000                                                                  |       | 28,000                                                                |       | 59,000 |   | 58,000 |   |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income before  provision for income taxes                    |       | 1,218,000                                                              |       | 1,488,000                                                             |       | 2,059,000 |   | 3,176,000 |   |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Provision for  income taxes                                  |       | 473,000                                                                |       | 572,000                                                               |       | 790,000 |   | 1,216,000 |   |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income                                                   |       | $                                                                      | 745,000    |                                                                  | $          | 916,000 |   | $ | 1,269,000 |   | $ | 1,960,000 |   |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic net income  per share                                  |       | $                                                                      | 0.03       |                                                                  | $          | 0.04 |   | $ | 0.05 |   | $ | 0.08 |   |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted net  income per share                                |       | $                                                                      | 0.03       |                                                                  | $          | 0.04 |   | $ | 0.05 |   | $ | 0.08 |   |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic weighted  average shares outstanding                   |       | 24,720,617                                                             |       | 25,626,172                                                            |       | 24,979,837 |   | 25,240,202 |   |
|                                                         |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted weighted  average shares outstanding                 |       | 24,720,617                                                             |       | 25,636,151                                                            |       | 24,979,837 |   | 25,630,223 |   |

 

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

 

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**AlphaPro Tech, Ltd.**

 

**Consolidated Statement ofShareholders’ Equity (Unaudited)**

 
| ** **                                   | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | **(Accumulated** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------|------------|
| ** **                                   | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Deficit)**     | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **       | ** ** |
| ** **                                   | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**     | ** ** | **Total**  | ** ** |
| Balance at  December 31, 2007           |       | 25,583,655            |       | $           | 256,000    |           | $          | 26,670,000       |       | $          | (122,000   | ) | $ | 26,804,000 |   |
| Share- based  compensation expense           |       | —                |       | —      |       | 153,000        |       | —           |       | 153,000    |       |
| Common Stock  repurchased & retired |       | (1,026,400            | )          | (10,000     | )          | (1,325,000     | )          | —           |       | (1,335,000 | )          |
| Net income                                   |       | —                |       | —      |       | —         |       | 1,269,000        |       | 1,269,000  |       |
| Balance at  September  30, 2008         |       | 24,557,255            |       | $           | 246,000    |           | $          | 25,498,000       |       | $          | 1,147,000  |   | $ | 26,891,000 |   |

 

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

 

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**AlphaPro Tech, Ltd.**

 

**Consolidated Statements of CashFlows (Unaudited)**

 
| ** **                                                                     | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                                                              | ** ** | **2007** | ** ** |
| **Cash  Flows From Operating Activities:**                                     |       |                                                                  |       |   |   |
| Net income                                                                     |       | $                                                                     | 1,269,000  |   | $ | 1,960,000 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                                                  |       |   |   |
| Share-based  compensation expense                                              |       | 153,000                                                               |       | 104,000 |   |
| Depreciation and  amortization                                                 |       | 433,000                                                               |       | 349,000 |   |
| Deferred income  taxes                                                         |       | (86,000                                                               | )          | (48,000 | ) |
| Equity in income  of unconsolidated affiliates                                 |       | (123,000                                                              | )          | (194,000 | ) |
| Changes in  assets and liabilities:                                            |       |                                                                  |       |   |   |
| Accounts  receivable, net                                                      |       | (691,000                                                              | )          | 878,000 |   |
| Inventories, net                                                               |       | 1,456,000                                                             |       | (1,157,000 | ) |
| Prepaid expenses  and other current assets                                     |       | 264,000                                                               |       | 132,000 |   |
| Accounts payable  and accrued liabilities                                      |       | (488,000                                                              | )          | (803,000 | ) |
|                                                                           |       |                                                                  |       |   |   |
| Net cash  provided by operating activities:                                    |       | 2,187,000                                                             |       | 1,221,000 |   |
|                                                                           |       |                                                                  |       |   |   |
| **Cash  Flows From Investing Activities:**                                     |       |                                                                  |       |   |   |
| Purchase of  property and equipment                                            |       | (56,000                                                               | )          | (341,000 | ) |
| Purchase of  intangible assets                                                 |       | (43,000                                                               | )          | (37,000 | ) |
|                                                                           |       |                                                                  |       |   |   |
| Net cash used in  investing activities                                         |       | (99,000                                                               | )          | (378,000 | ) |
|                                                                           |       |                                                                  |       |   |   |
| **Cash  Flows From Financing Activities:**                                     |       |                                                                  |       |   |   |
| Payments for the  repurchase of common stock                                   |       | (1,335,000                                                            | )          | — |   |
| Income tax  benefit from stock options exercised                               |       | —                                                                |       | 189,000 |   |
| Proceeds from  the exercise of stock options                                   |       | —                                                                |       | 1,318,000 |   |
| Net cash (used  in) provided by financing activities                           |       | (1,335,000                                                            | )          | 1,507,000 |   |
|                                                                           |       |                                                                  |       |   |   |
| Increase in cash  during the period                                            |       | 753,000                                                               |       | 2,350,000 |   |
|                                                                           |       |                                                                  |       |   |   |
| Cash and cash  equivalents, beginning of period                                |       | 4,064,000                                                             |       | 1,837,000 |   |
| Cash and cash  equivalents, end of period                                      |       | $                                                                     | 4,817,000  |   | $ | 4,187,000 |   |

 

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

 

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**Alpha Pro Tech, Ltd.**

 

### **Notes toConsolidated Financial Statements (Unaudited)**

 

**1.****                                      TheCompany**

 

Alpha Pro Tech,Ltd. (“Alpha Pro Tech”, “the Company”) is in the business of protecting people,products and environments.  The Companyaccomplishes this by developing, manufacturing and marketing a line ofdisposable protective apparel for the cleanroom, industrial and pharmaceuticalmarkets, a line of infection control products for the medical and dentalmarkets and a line of construction weatherization products.  The disposable protective apparel consists ofa complete line of shoecovers, bouffant caps, coveralls, gowns, frocks and labcoats. The infection control line of products includes a line of face masks andeye shields.  The line of constructionsupply weatherization products consists of house wrap and synthetic roofunderlayment.  The Company alsomanufactures and distributes a line of medical bed pads and accessories as wellas 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.

 

**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 current year 10-Q’s and 8-K’s,as well as the consolidated financial statements for the year ended December 31,2007, which are included in the Company’s Annual Report on Form 10-K (“200710-K”). The results of operations for the three and nine months ended September 30,2008 are not necessarily indicative of the results to be expected for the fullyear. The consolidated balance sheet at December 31, 2007 was extractedfrom the audited consolidated financial statements contained in the 2007 10-Kand does not include all disclosures required by accounting principlesgenerally accepted in the United States of America for annual consolidatedfinancial statements.

 

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

 

The Companymaintains a stock option plan under which the Company may grant incentive stockoptions and non-qualified stock options to employees and non-employeedirectors.  Stock options have beengranted with exercise prices at or above the fair market value of theunderlying shares of common stock on the date of grant.  Options vest and expire according to termsestablished at the grant date.

 

The Company adopted Statement of Financial Accounting Standards (“SFAS”)No. 123R, “Share-Based Payment (“SFAS 123R”)” effective January 1,2006, using the modified prospective application method. SFAS 123R requirescompanies to record compensation expense for the value of all outstanding andunvested share-based payments, including employee stock options and similarawards.  During the first nine months2008 and 2007 there were 550,000 and 435,000 stock options granted,respectively, under the option plan.  TheCompany recognized $153,000 and $104,000 in share-based compensation expense inits consolidated financial statements for the nine months ended September 30,2008  and 2007, respectively related topreviously issued options.

 

Stock options topurchase 1,870,000 and 1,460,000 shares of common stock were outstanding at September 30,2008 and 2007, respectively. As of September 30, 2008 none of theoutstanding stock options were included in the computation of diluted earningsper share because the exercise prices of all stock options were greater than theaverage share price of the Company’s common stock and, therefore, there was nodilutive effect.  Of the September 30,2007 outstanding stock options totaling 1,460,000, all of the options topurchase common stock were included in the computation of diluted earnings pershare because the exercise prices of the stock options were less than theaverage share price of the Company’s common stock and, therefore, 

 

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**Alpha Pro Tech, Ltd.**

 

### **Notes toConsolidated Financial Statements (Unaudited)**

 

the effect wasdilutive.

 

The Company usedthe Black-Scholes-Merton option pricing model to value the options.  Prior to 2008, The Company used thesimplified method as discussed in Staff Accounting Bulletin (“SAB”) No.107, “Share-Based Payment (“SAB 107”) for estimating the expected life of the options.  For options granted during the quarter ended September 30,2008 the Company used historical data to estimate 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.  The Company uses an estimated dividend payoutratio of zero as the Company has not paid dividends in the past and does notexpect to in the future.

 

 As of September 30, 2008, $487,000 oftotal unrecognized compensation cost related to stock options is expected to berecognized over a weighted average period of 2.8 years.

 

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

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements (“SFAS 157”),”which defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements.  This statementaddresses how to calculate fair value measurements required or permitted underother accounting pronouncements. Accordingly, this statement does not require any new fair valuemeasurements.  However, for someentities, the application of this statement will change current practice.  SFAS 157 was adopted by the Company on January 1,2008.  In February 2008, the FASBdeferred for one year the effective date of SFAS 157 only with respect tononfinancial assets and nonfinancial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurring basis,and removed certain leasing transactions from the scope of SFAS 157. Theadoption of SFAS 157 did not have a material impact on the Company’sconsolidated financial statements.

 

“FinancialLiabilities (“SFAS 159”).” Under SFAS 159, companies may elect to measurecertain financial instruments and certain other items at fair value. Thestandard requires that unrealized gains and losses on items for which the fairvalue option has been elected be reported in earnings. SFAS 159 is effectivefor fiscal years beginning after November 15, 2007. SFAS 159 was adoptedfor fiscal 2008; however, the Company did not elect to apply the fair valueoption to any financial instruments or other items upon adoption of SFAS 159 orduring the three months ended September 30, 2008. Therefore, the adoptionof SFAS 159 did not impact the Company’s consolidated financial position,results of operations or cash flows.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations, (“SFAS141R”),” which changes how business combinations are accounted for and willimpact financial statements both on the acquisition date and in subsequentperiods. SFAS 141R is effective January 1, 2009, and will be appliedprospectively. The impact of adopting SFAS 141R will depend on the nature andterms of future acquisitions.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements (“SFAS 160”),” which changes the accounting and reportingstandards for the noncontrolling interests in a subsidiary in consolidatedfinancial statements.  SFAS 160 recharacterizes minority interests asnoncontrolling interests and requires noncontrolling interests to be classifiedas a component of shareholders’ equity.  SFAS 160 is effective January 1,2009 and requires retroactive adoption of the presentation and disclosurerequirements for existing minority interests.  The Company is currentlyevaluating the impact of SFAS 160 on the consolidated financial statements.

 

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**Alpha Pro Tech, Ltd.**

 

### **Notes toConsolidated Financial Statements (Unaudited)**

 

In May 2008,the FASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccountin*g*Principles (“SFAS 162”).”This Standard identifies the sources of accounting principles and the frameworkfor selecting the principles to be used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principles. SFAS 162 directs the hierarchy to theentity, rather than the independent auditors, as the entity is responsible forselecting accounting principles for financial statements that are presented inconformity with generally accepted accounting principles. The Standard iseffective 60 days following SEC approval of the Public Company AccountingOversight Board amendments to remove the hierarchy of generally acceptedaccounting principles from the auditing standards. SFAS 162 is not expected tohave an impact on the Company’s financial condition, results of operations orcash flows

 

**5.****                                      Inventories**

 

Inventoriesconsist of the following:

 
| ** **                                                    | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials                                                 |       | $                            | 9,049,000  |                        | $          | 10,175,000 |   |
| Work in process                                               |       | 254,000                      |       | 535,000                     |       |
| Finished goods                                                |       | 3,714,000                    |       | 3,728,000                   |       |
|                                                          |       | 13,017,000                   |       | 14,438,000                  |       |
| Less reserve for slow-moving, obsolete or unusable  inventory |       | (362,000                     | )          | (327,000                    | )          |
|                                                          |       | $                            | 12,655,000 |                        | $          | 14,111,000 |   |

 

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

 

On June 14,2005, Alpha ProTech Engineered Products, Inc. entered into a joint venturewith a manufacturer in India for the production of building products.  Under terms of the joint venture agreement, aprivate company, Harmony Plastics Private Limited (“Harmony”), was created withownership interests of 41.66% by Alpha ProTech Engineered Products, Inc.and 58.34% by Maple Industries and Associates. Alpha ProTech Engineered Products, Inc. contributed $508,000 forshare capital and Maple Industries and Associates contributed $708,000.

 

This joint venture positions Alpha ProTech Engineered Products torespond to current and expected increased product demand for house wrap andsynthetic roofing underlayment, and future capacity for sales of specialtyroofing component products and custom products for industrial applicationsrequiring high quality extrusion coated fabrics.

 

The capital from the initial funding along with a bank loan, which isguaranteed exclusively by Maple Industries and Associates and the assets ofHarmony Plastics Private Limited, was utilized to purchase an existing 33,000square-foot manufacturing facility in India; this facility includesmanufacturing equipment necessary to produce synthetic roof underlayment.  Harmony has also built a 60,000 square-footfacility for the manufacturing of house wrap and other building products.

 

The Company is subject to the provisions of FASB Interpretation (“FIN”)No. 46R, “Consolidation of Variable Interest Entities an Interpretation ofARB No. 51 (“FIN 46R”),” which defines the criteria by which the Companydetermines the proper accounting for its investments in related entities.  Specifically, FIN 46R 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 46R requires the Company todetermine whether or not the Company is the primary beneficiary of the VIE, andif so, to consolidate the VIE.

 

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**Alpha Pro Tech, Ltd.**

 

### **Notes toConsolidated Financial Statements (Unaudited)**

 

The Company has determined that Harmony is not a VIE and is thereforeconsidered to be an unconsolidated affiliate.

 

The Company records its investment in Harmony as “Equity investments inand advances to unconsolidated affiliates” on the accompanying ConsolidatedBalance Sheets (unaudited).  The Companyrecords its equity interest in Harmony’s results of operations as “Equity inincome of unconsolidated affiliates” on the accompanying Consolidated IncomeStatements (unaudited).

 

The Company reviews its investment in Harmony for impairment inaccordance with APB No. 18, “The Equity Method of Accounting forInvestments in Common Stock (“APB 18”).” APB 18 requires recognition of a losswhen the 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.  The Company has concluded that no impairmentwas identified.

 

Alpha ProTech Engineered Products initially invested $1,450,000 in thejoint venture; $508,000 for share capital and $942,000 as a long termadvance.  Fifty percent of the $942,000long term advance for materials was to be repaid over a six year termcommencing in July 2006 and the balance is to be paid in the seventhyear.  During 2006, Harmony repaid$39,000 in scheduled payments and $461,000 in additional payments for a totalof $500,000, leaving a balance of $442,000. Harmony has not made any further payments to date.  Effective April 2006, interest of 3.5%is to be paid annually on this advance. The Company has an interest receivable of $27,000 as of September 30,2008 related to this agreement.

 

Harmony commenced operations in August of 2005.  For the nine months ended September 30,2008 and 2007, the Engineered Products segment purchased $1,484,000 and$2,331,000, respectively from Harmony. For the nine months ended September 30, 2008 and 2007, theDisposable Protective Apparel segment purchased $321,000 and $0, respectivelyfrom Harmony.  For the nine months ended September 30,2008 and 2007, the Company recorded equity income in unconsolidated affiliatesof $123,000 and $194,000, respectively. As of September 30, 2008, the Company’s investment in Harmony is$1,331,000 which comprises its original $1,450,000 investment and cumulativeequity in income of unconsolidated affiliates of $381,000 less $500,000 inrepayments of the advance.

 

**7.****                          AccruedLiabilities**

 

Accrued liabilities consist of the following:

 
| ** **                   | ** ** | **September 30,  2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------|------------|------------------------------|------------|----------------------------|------------|
| Payroll                      |       | $                            | 165,000    |                       | $          | 229,000 |   |
| Commission and bonus accrual |       | 409,000                      |       | 706,000                    |       |
| Accrued professional fees    |       | 161,000                      |       | 200,000                    |       |
| Accrued rebates and other    |       | 182,000                      |       | 343,000                    |       |
| Income tax payable           |       | 318,000                      |       | —                     |       |
|                         |       | $                            | 1,235,000  |                       | $          | 1,478,000 |   |

 

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

 

The following table provides a reconciliation of bothnet income and the number of shares used in the computation of “basic” earningsper share (EPS), which utilizes the weighted average number 

 

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**Alpha Pro Tech, Ltd.**

 

### **Notes toConsolidated Financial Statements (Unaudited)**

 

of shares outstanding without regard to potentialshares, and “diluted” EPS, which includes all such dilutive shares:

 
| ** **                                  | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                                               | ** ** | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income (Numerator)                      |       | $                                                                      | 745,000    |                                                                  | $          | 916,000 |   | $ | 1,269,000 |   | $ | 1,960,000 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Shares (Denominator):                       |       |                                                                   |       |                                                                  |       |   |   |   |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic weighted average shares outstanding   |       | 24,720,617                                                             |       | 25,626,172                                                            |       | 24,979,837 |   | 25,240,202 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Add: Dilutive effect of stock options       |       | —                                                                 |       | 9,979                                                                 |       | — |   | 390,021 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted weighted average shares outstanding |       | 24,720,617                                                             |       | 25,636,151                                                            |       | 24,979,837 |   | 25,630,223 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income per share:                       |       |                                                                   |       |                                                                  |       |   |   |   |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic                                       |       | $                                                                      | 0.03       |                                                                  | $          | 0.04 |   | $ | 0.05 |   | $ | 0.08 |   |
|                                        |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted                                     |       | $                                                                      | 0.03       |                                                                  | $          | 0.04 |   | $ | 0.05 |   | $ | 0.08 |   |

 

**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 Trak® and spunbondshoecovers), bouffant caps, coveralls, frocks, lab coats and hoods, for thepharmaceutical, cleanroom, industrial and medical markets.

 

Engineered Products: consisting of a line of construction supply weatherization.  The construction supply weatherizationproducts consist of house wrap and synthetic roof underlayment.  The Company’s equity in income (loss) ofunconsolidated affiliates (Harmony) is included in the total segment income forEngineered Products in the table below.

 

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 UnrealLambskin® is used to produce medical bed pads, which prevent decubitus ulcersor bedsores on long term care patients. The Unreal Lambskin® is also used to manufacture bedrail pads, knee andelbow protectors, as well as wheelchair accessories. The Company alsomanufactures a line of pet beds with this material.

 

The accountingpolicies of the segments excludes charges allocated to corporate officeexpenses, professional fees, public company expenses, executive and managementbonuses and income taxes.  The Companyevaluates the performance of its segments and allocates resources to them basedprimarily on net sales.

 

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**Alpha Pro Tech, Ltd.**

 

### **Notes toConsolidated Financial Statements (Unaudited)**

 

The following table shows net sales for each segmentfor the three and nine months ended September 30, 2008 and 2007:

 
| ** **                    | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Month Ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                                               | ** ** | **2007**                                                             | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                    | ** ** | ** **                                                             | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Disposable Protective Apparel |       | $                                                                      | 5,439,000  |                                                                 | $          | 6,163,000 |   | $ | 15,226,000 |   | $ | 17,377,000 |   |
| Engineered Products           |       | 3,155,000                                                              |       | 1,407,000                                                            |       | 6,439,000 |   | 4,253,000 |   |
| Infection Control             |       | 1,456,000                                                              |       | 1,514,000                                                            |       | 4,384,000 |   | 5,078,000 |   |
| Extended Care                 |       | 167,000                                                                |       | 224,000                                                              |       | 605,000 |   | 793,000 |   |
|                          |       |                                                                   |       |                                                                 |       |   |   |   |   |
| Consolidated total net sales  |       | $                                                                      | 10,217,000 |                                                                 | $          | 9,308,000 |   | $ | 26,654,000 |   | $ | 27,501,000 |   |

 

The following table shows the reconciliation of totalsegment income to total consolidated net income for the three and nine monthsended September 30, 2008 and 2007:

 
| ** **                     | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Month Ended  September 30,** | ** ** |
|--------------------------------|------------|------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2008**                                                               | ** ** | **2007**                                                             | ** ** | **2008** | ** ** | **2007** | ** ** |
| Disposable Protective Apparel  |       | $                                                                      | 1,378,000  |                                                                 | $          | 1,853,000 |   | $ | 3,691,000 |   | $ | 4,916,000 |   |
| Engineered Products            |       | 535,000                                                                |       | (57,000                                                              | )          | 343,000 |   | (490,000 | ) |
| Infection Control              |       | 583,000                                                                |       | 674,000                                                              |       | 1,670,000 |   | 2,185,000 |   |
| Extended Care                  |       | (51,000                                                                | )          | (15,000                                                              | )          | (99,000 | ) | (17,000 | ) |
|                           |       |                                                                   |       |                                                                 |       |   |   |   |   |
| Total segment income           |       | 2,445,000                                                              |       | 2,455,000                                                            |       | 5,605,000 |   | 6,594,000 |   |
| Unallocated corporate expenses |       | (1,227,000                                                             | )          | (967,000                                                             | )          | (3,546,000 | ) | (3,418,000 | ) |
| Provision for income taxes     |       | (473,000                                                               | )          | (572,000                                                             | )          | (790,000 | ) | (1,216,000 | ) |
|                           |       |                                                                   |       |                                                                 |       |   |   |   |   |
| Consolidated net income        |       | $                                                                      | 745,000    |                                                                 | $          | 916,000 |   | $ | 1,269,000 |   | $ | 1,960,000 |   |

 

**10.****                               SubsequentEvents**

 

During the period of October 1, 2008 through October 31,2008, the Company purchased 307,500 shares of its own common stock at a cost of$ 369,000.  These shares will be retired.

 

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**Alpha Pro Tech, Ltd.**

 

**ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

You should read thefollowing discussion and analysis together with our consolidated financialstatements (unaudited) and the notes to our consolidated financial statements(unaudited), which appear elsewhere in this report.

 

**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING INFORMATION**

 

This report on Form 10-Q contains “forward-lookingstatements” that are made pursuant to the safe-harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements includestatements concerning plans, objectives, goals, strategies, future events,future revenues or performance, capital expenditures and other information thatis not historical information. When used in this report, the words “estimates,”“expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” andvariations of such words or similar expressions are intended to identifyforward-looking statements. Additional forward-looking statements may be madeby us from time to time. All such subsequent forward-looking statements,whether written or oral and whether made by or on behalf of us, are alsoexpressly qualified by these cautionary statements.

 

Our forward-looking statements are based upon ourcurrent expectations and various assumptions. Our expectations, beliefs andprojections are expressed in good faith and we believe there is a reasonablebasis for them, including without limitation, management’s examination ofhistorical operating trends, data contained in our records and other dataavailable from third parties. However, we cannot assure you that management’sexpectations; beliefs and projections will result or be achieved oraccomplished. Our forward-looking statements apply only as of the date made.Except as required by law, we undertake no obligation to publicly update orrevise forward-looking statements which may be made to reflect events orcircumstances after the date made or to reflect the occurrence of unanticipatedevents.

 

**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,our most recent Quarterly Report on Form 10-Q, any current reports on Form 8-Kfurnished or filed since our most recent Annual Report on Form 10-K andany amendments to such reports as soon as reasonably practicable following theelectronic filing of such report with the SEC. In addition, we provideelectronic or paper copies of 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 less cost to sell based upon assumptions about futuresales and supply on-hand. If actual market conditions are less favorable thanthose projected by management, additional inventory write-downs may berequired.

 

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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) persuasiveevidence of an arrangement exists; (2) the product has been shipped andthe customer takes ownership and assumes the risk of loss; (3) the sellingprice 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 BasedCompensation:  We adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment (“SFAS123R”)” 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. For the nine months ended September 30, 2008 and September 30,2007, 550,000 and 435,000 options were granted respectively.  We recognized $55,000 and $153,000 inshare-based compensation expense in our consolidated financial statements forthe three and nine months ended September 30, 2008 related to optionsissued in prior periods.  We recognized$42,000 and $104,000 in share-based compensation expense in our consolidatedfinancial statements for the three and nine months ended September 30,2007 related to options issued in prior periods.

 

The Company uses theBlack-Scholes-Merton option pricing model, which was developed for use inestimatiing the fair value of traded options that have no vesting restrictionsand that are fully transferable.  Option valuation models require theinput of highly subjective assumptions including expected stock pricevolatiliy.  Our stock options have characteristics significantly differentfrom those of traded options and changes in the subjective input assumptionscan materially affect their fair value.  Prior to 2008, we used thesimplified method as discussed in Staff Accounting Bulletin (“SAB”) No. 107,“Share-Based Payment (“SAB 107”) for estimating the expected life of options.For options granted during the quarter ended September 30, 2008 theCompany used historical data to estimate the expected life of the options. The risk-free interest rate for periods within the contractual life ofthe award is based on the US Treasury yield curve in effect at the time ofgrant.  The expected volatility is based on historical volatility of theexpected life in years.  We use an estimated dividend payout ratio of zeroas we have not paid dividends in the past and do not expect to in the future.

 

**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 clean room,industrial, pharmaceutical, medical and dental markets. We also manufacture aline of construction weatherization products and a line of medical bed pads andaccessories as well as a line of pet beds. Our products are sold both under the “Alpha Pro Tech” brand name as wellas under private label.

 

Our products are groupedinto four business segments.  TheDisposable Protective Apparel segment, consisting of disposable protectiveapparel; the Infection Control segment, consisting of face masks and eyeshields; the Extended Care segment, consisting of extended care products,namely medical bed pads and pet beds; and the Engineered Products segment,consisting of construction weatherization products such as house wrap andsynthetic roof underlayment.

 

Our target markets arepharmaceutical manufacturing, bio-pharmaceutical manufacturing and medicaldevice manufacturing, lab animal research, high technology electronicsmanufacturing which includes 

 

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the semi-conductormarket, medical and dental distributors, pet stores and pet distributors andconstruction supply and roofing distributors.

 

Our products are usedprimarily in clean rooms, 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 andveterinarians.  Our products aredistributed principally in the United States through a network consisting ofpurchasing groups, national distributors, local distributors, independent salesrepresentatives and our own sales and marketing force.

 

# **RESULTS OF OPERATIONS**

# ** **

The following table setsforth certain operational data as a percentage of sales for the periodsindicated:

 
| ** **                                | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                                               | ** ** | **2007**                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Sales                                     |       | 100.0                                                                  | %          | 100.0                                                                 | %          | 100.0 | % | 100.0 | % |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gross profit                              |       | 42.6                                                                   | %          | 47.2                                                                  | %          | 44.0 | % | 46.7 | % |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Selling, general  and administrative      |       | 30.1                                                                   | %          | 31.7                                                                  | %          | 35.3 | % | 34.8 | % |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income from  operations                   |       | 11.0                                                                   | %          | 14.3                                                                  | %          | 7.0 | % | 10.6 | % |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income before  provision for income taxes |       | 11.9                                                                   | %          | 16.0                                                                  | %          | 7.7 | % | 11.5 | % |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income                                |       | 7.3                                                                    | %          | 9.8                                                                   | %          | 4.8 | % | 7.1 | % |

##  

## **Three and nine monthsended September 30, 2008, compared to the three and nine months ended September 30,2007**

##  

**Sales**  Consolidated sales for the three months endedSeptember 30, 2008 increased to $10,217,000 from $9,308,000 for the threemonths ended September 30, 2007, representing an increase of $909,000 or9.8%.  This increase consists ofincreased sales of Engineered Products segment of $1,748,000, partially offsetby decreased Disposable Protective Apparel products of $724,000, decreasedInfection Control segment sales of $58,000 and decreased sales from ourExtended Care products segment of $57,000. Quarter over quarter sales this year has increased from $7,524,000 inthe first quarter to $8,913,000 in the second quarter to $10,217,000 in thethird quarter of 2008.

 

Sales for the DisposableProtective Apparel segment for the three months ended September 30, 2008decreased by $724,000 or 11.7% to $5,439,000 compared to $6,163,000 for thesame period of 2007.  The decrease isprimarily related to decreased sales to our largest distributor as well aslower sales to other clean room and industrial distributors, partially offsetby increased sales to a major national distributor in which we receivedpreferred vendor status during the first quarter of 2008.  Although sales for this segment were down forthe quarter, sales have increased quarter over quarter in the second and thirdquarters of this year.

 

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Engineered Productssegment sales for the three months ended September 30, 2008 increased by$1,748,000 or 124.2% to $3,155,000 as compared to $1,407,000 for the sameperiod of 2007.  The increase for thequarter is primarily due to a 258.9% or $1,640,000 increase in sales of REXTMSynfelt synthetic roof underlayment and a 14.7% or $108,000 increase in salesof REXTM Wrap house wrap. The sales for the first, second and third quarters of2008 were $1,360,000, $1,924,000 and $3,155,000 respectively.  This segment had growth of 64.0% in the thirdquarter 2008 when compared to the second quarter of 2008 and growth of 41.5% inthe second quarter of 2008 when compared to the first quarter of 2008.

 

REXTM Synfelt syntheticroof underlayment sales of $2,308,000 was by far the highest quarterly salessince the inception of the product line, up from the previous record of$996,000 in second quarter of 2008.  Aswell, this was the second highest revenue quarter for REXTM Wrap house wrapsince the first quarter of 2007, following only the second quarter of2008.  The sales mix of the EngineeredProducts sales for second quarter 2008 was: 72% synthetic roof underlayment and28% house wrap, compared to 45% synthetic roof underlayment and 55% house wrapfor third quarter 2007.

 

Our change indistribution channel strategy is starting to gain momentum as evidencedabove.  Our REXTM synthetic roofunderlayment is being positively received as a cost effective and superioralternative to felt paper.  Our ICC-ESapproval for our REXTM Wrap house wrap significantly expands our marketopportunities as many construction supply companies, builders and architectsrequire this certification to sell the product. Although our house wrap sales are growing and we expect will continue togrow, the downturn in the housing market continues to affect our house wrapsales as fewer houses are being built and distributors continue to keepinventories low.

 

We continue to beoptimistic that the new distribution channel strategy will broaden our abilityto take advantage of market opportunities for house wrap and synthetic roofunderlayment throughout the remainder of 2008 and in the future.  We are currently working on opportunitieswith existing and new distributors and we are optimistic about the future ofthis segment.

 

InfectionControl segment sales for the three months ended September 30, 2008decreased by $58,000 or 3.8% to $1,456,000 compared to $1,514,000 for the sameperiod of 2007.  Mask sales were down2.6% and shield sales were down 7.5% when compared to last year’s thirdquarter.  Medical mask sales were downbut were partially offset by higher dental and industrial mask sales.  Mask sales in this segment for the balance of2008 are expected to be similar to that of 2007.  Shield sales are expected to increaseconsiderably over the next three quarters as subsequent to quarter end, wereceived a $1.7 million shield order from the same customer from which wereceived the non-recurring order from in the first quarter of 2007.

 

Sales from our ExtendedCare segment decreased by $57,000 or 25.4% to $167,000 for the three monthsended September 30, 2008 from $224,000 for the three months ended September 30,2007.  The decrease in sales is primarilythe result of lower pet bed sales.  Thisline of products is not expected to be a growth segment for the Company.

 

Consolidated sales for the nine months ended September 30,2008 decreased to $26,654,000 from $27,501,000 for the nine months ended September 30,2007, representing a decrease of $847,000 or 3.1%.  This decrease consists of decreased sales ofDisposable Protective Apparel products of $2,151,000, decreased InfectionControl segment sales of $694,000, and decreased sales from our Extended Careproducts segment of $188,000, partially offset by increased sales of EngineeredProducts segment of $2,186,000.

 

Sales for the DisposableProtective Apparel segment for the nine months ended September 30, 2008decreased by $2,151,000 or 12.4% to $15,226,000 compared to $17,377,000 for thesame period of 2007.  The decrease isprimarily related to decreased sales to our largest distributor as well aslower sales to other clean room and industrial distributors, partially offsetby increased sales to a major national distributor in which we receivedpreferred vendor status during the first quarter of 2008.  We expect sales for the balance of 2008 to beimproved as compared to the same period last year.

 

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Engineered Productssegment sales for the nine months ended September 30, 2008 increased by$2,186,000 or 51.4% to $6,439,000 as compared to $4,253,000 for the same periodof 2007.  The increase for the ninemonths ended September 30, 2008 is primarily due to a 119.5% or $2,173,000increase in sales of REXTM Synfelt synthetic roof underlayment and a 1.4% or$13,000 increase in sales of REXTM Wrap house wrap.  The sales mix of the Engineered Productssales for the six months ended September 30, 2008: 62% synthetic roof underlaymentand 38% house wrap compared to 43% synthetic roof underlayment and 57% housewrap for the six months ended June 30, 2007.

 

Infection Control segmentsales for the nine months ended September 30, 2008 decreased by $694,000or 13.7% to $4,384,000 compared to $5,078,000 for the same period of 2007.  Shield sales in this segment were down by$566,000 and mask sales were down by $128,000 or 3.7%.  Shield sales were down primarily due to alarge non-recurring order in the first quarter of 2007.  Mask sales overall decreased for the ninemonths primarily due a decrease in N-95 respirator mask sales partially offsetby an increase in dental and industrial mask sales for the first nine months of2008.

 

Sales from our ExtendedCare segment decreased by $188,000 or 23.7% to $605,000 for the nine monthsended September 30, 2008 from $793,000 for the nine months ended September 30,2007.  The decrease in sales is primarilythe result of lower pet bed sales.  Thisline of products is not expected to be a growth segment for the Company.

 

**Gross Profit**   Gross profit decreased by 0.9% to $4,355,000for the three months ended September 30, 2008 from $4,395,000 for the sameperiod in 2007.  The gross profit marginwas 42.6% for the three months ended September 30, 2008 compared to 47.2%for the three months ended September 30, 2007.

 

Gross profit decreased by8.6% to $11,723,000 for the nine months ended September 30, 2008 from$12,830,000 for the same period in 2007. The gross profit margin was 44.0% for the nine months ended September 30,2008 compared to 46.7% for the nine months ended September 30, 2007.

 

Gross profit margin forthe third quarter of 2008 has primarily been affected by the change in productmix in which Engineered Products sales, which has lower margins, was 30.9% ofthird quarter 2008 sales as compared to 15.1% for the same quarter of lastyear.  Additionally, raw material costshave increased in China and the United States due to higher crude oil prices,increased labor costs in China and the strengthening Chinese currency, whichhas also impacted our gross profit margin.

 

We expect our grossmargins for the Disposable Protective Apparel segment to improve in the firstquarter of 2009 as we pass on a price increase to our distributors and as theprice of crude oil continues to decline.

 

**Selling, General andAdministrative Expenses.** Selling, general and administrative expenses increased by $129,000 or4.4% to $3,078,000 for the three months ended September 30, 2008 from$2,949,000 for the three months ended September 30, 2007.  As a percentage of net sales, selling,general and administrative expenses decreased to 30.1% for the three monthended September 30, 2008 from 31.7 % for the same period in 2007.  The decrease is primarily due to increasedemployee compensation of $59,000, increased professional fees $57,000,increased outside service expenses of $56,000, increased general officeexpenses of $44,000, increased travel of $24,000, increased commission of$18,000 and increased loss on foreign exchange of $17,000, partially offset bydecreased marketing expenses of $80,000, decreased public company relatedexpenses of $34,000 and decreased research and development costs of $32,000.

 

Selling, general andadministrative expenses decreased by $144,000 or 1.5% to $9,413,000 for thenine months ended September 30, 2008 from $9,557,000 for the nine monthsended September 30, 2007.  As apercentage of net sales, selling, general and administrative expenses increasedto 35.3% for the nine month ended September 30, 2008 from 34.8 % for thesame period in 2007.  The decrease isprimarily due to decreased expenses for the Engineered Products segment of$214,000, decreased travel of $128,000, decreased executive bonus of $124,000and a severance agreement of $320,000 in 

 

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April 2007,partially offset by increased marketing expense of $90,000, increased publiccompany expenses of $35,000, increased insurance of $28,000, increased employeecompensation of $233,000, increased option expense of $48,000, increasedprofessional fees of $50,000, increased outside service expenses of $93,000 andincreased loss on foreign exchange of $61,000.

 

The chief executiveofficer and president are each entitled to a bonus equal to 5% of the pre-taxprofits of the Company.  Bonuses of$136,000 were accrued for the three months ended September 30, 2008 ascompared to $165,000 in the same period of 2007.  Total bonuses of $229,000 were accrued forthe nine months ended September 30, 2008 as compared to $353,000 in thesame period of 2007.

 

**Depreciation and Amortization.**  Depreciation and amortization expenseincreased by $37,000 or 32.5% to $151,000 for the three months ended September 30,2008 from $114,000 for the same period in 2007. Depreciation and amortization expense increased by $84,000 or 24.1% to$433,000 for the nine months ended September 30, 2008 from $349,000 forthe same period in 2007.

 

The increase is primarilyattributable to increased depreciation for Engineered Products.

 

**Income from Operations.**  Income from operations decreased by $206,000or 15.5%, to $1,126,000 for the three months ended September 30, 2008 ascompared to income from operations of $1,332,000 for the three months ended September 30,2007.  The decrease in income fromoperations is due to a decrease in gross profit of $40,000, an increase indepreciation and amortization of $37,000 and a decrease in selling, general andadministrative expenses of $129,000.

 

Income from operationsdecreased by $1,047,000 or 35.8%, to $1,877,000 for the nine months ended September 30,2008 as compared to income from operations of $2,924,000 for the same period of2007.  The decrease in income fromoperations is due to a decrease in gross profit of $1,107,000, an increase indepreciation and amortization of $84,000, partially offset by a decrease inselling, general and administrative expenses of $144,000.

 

**Net Interest.**  For the three months ended September 30,2008, net interest income was $7,000 compared to net interest income of $28,000for the three months ended September 30, 2007.  For the nine months ended September 30,2008, net interest income was $59,000 compared to net interest income of$58,000 for the nine months ended September 30, 2007.

 

**Income before Provision forIncome Taxes.**  Incomebefore provision for income taxes for the three months ended September 30,2008 was $1,218,000 compared to $1,488,000 for the three months ended September 30,2007, representing a decrease of $270,000 or 18.1%.  The decrease in income before provision forincome taxes is due primarily to a decrease in income from operations of$206,000,  a decrease of $43,000 inequity in income of unconsolidated affiliates (Harmony) and a decrease in netinterest income of $21,000.  For thethree months ended September 30, 2008, the Engineered Products segment hadincome before income taxes of $535,000 compared to a loss before income taxesof $57,000 for the three months ended September 30, 2007.  The second and third quarter of 2008 havebeen the only quarters since the end of 2006 in which Engineered Products hashad income before income taxes.

 

Income before provisionfor income taxes for the nine months ended September 30, 2008 was$2,059,000 compared to $3,176,000 for the nine months ended September 30,2007, representing a decrease of $1,117,000 or 35.2%.  The decrease in income before provision forincome taxes is due primarily to a decrease in income from operations of$1,047,000 and a decrease of $71,000 in equity in income of unconsolidatedaffiliates (Harmony), partially offset by an increase in net interest income of$1,000.

 

**Provision for Income Taxes**The provision for income taxes for the three months ended September 30,2008 was $473,000 compared to $572,000 for the same period of 2007.  The effective tax rate was 

 

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38.8% for the threemonths ended September 30, 2008 as compared to 38.4% for the same periodin 2007.

 

The provision for incometaxes for the nine months ended September 30, 2008 was $790,000 comparedto $1,216,000 for the same period of 2007. The effective tax rate was 38.4% for the nine months ended September 30,2008 as compared to 38.3% for the same period in 2007.

 

**Net Income.**  Net income for the three months ended September 30,2008 was $745,000 compared to net income of $916,000 for the three months endedSeptember 30, 2007, a decrease of $171,000 or 18.7%.  The net income decrease was primarily due toa decrease in income before provision for income taxes of $270,000, partiallyoffset by a decrease in income taxes of $99,000.  Net income as a percentage of sales for thethree months ended September 30, 2008 and 2007 was 7.3% and 9.8%respectively.  Basic and diluted incomeper share for the three months ended September 30, 2008 and 2007 was $0.03and $0.04, respectively.

 

Net income for the ninemonths ended September 30, 2008 was $1,269,000 compared to net income of$1,960,000 for the nine months ended September 30, 2007, a decrease of$691,000 or 35.3%.  The net incomedecrease was primarily due to a decrease in income before provision for incometaxes of $1,117,000, partially offset by a decrease in income taxes of$426,000.  Net income as a percentage ofsales for the nine months ended September 30, 2008 and 2007 was 4.8% and7.1%, respectively.  Basic and dilutedincome per share for the nine months ended September 30, 2008 and 2007 was$0.05 and $0.08, respectively.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

As of September 30,2008, we had cash and cash equivalents of $4,817,000 and working capital of$22,971,000, an increase in working capital of 1.3% or $302,000 since December 31,2007.  As of September 30, 2008, ourcurrent ratio was 16.9:1 as compared to 12.7:1 as of December 30,2007.  Cash increased by $753,000 to$4,817,000 as of September 30, 2008 as compared to $4,064,000 as of December 31,2007.  The increase in cash is due tocash provided by operating activities of $2,187,000 offset by cash paid for therepurchase of common stock of $1,335,000 and cash used in investing activitiesof $99,000.

 

We have a $3,500,000credit facility with a bank, consisting of a line of credit with interest atprime plus 0.5%.  At September 30,2008, the prime interest rate was 5.00%. The line of credit was renewed in May 2007 and expires in May 2009and we intend to renew it.  Our borrowingcapacity on the line of credit was $3,500,000 at September 30, 2008.  The available line of credit is based on aformula of eligible accounts receivable and inventories.  As of September 30, 2008, we did nothave any debt.

 

Net cash provided byoperating activities was $2,187,000 for the nine months ended September 30,2008 compared to $1,221,000 net cash provided by operating activities for thenine months ended September 30, 2007. The net cash provided by operatingactivities of $2,187,000 for the nine months ended September 30, 2008 isdue to net income of $1,269,000, adjusted by the following: an increase inaccounts receivable of $691,000, an increase in net deferred tax asset of$86,000, a decrease in accounts payable and accrued liabilities of $488,000,equity in income of unconsolidated affiliates of $123,000, a decrease ininventory of $1,456,000, a decrease in prepaid expenses of $264,000,  amortization of share-based compensationexpense of $153,000 and  depreciation andamortization of $433,000.

 

The net cash provided inoperating activities of $1,221,000 for the nine months ended September 30,2007 is due to net income of $1,960,000, adjusted by the following: an increasein inventory of $1,157,000, a decrease in accounts receivable of $878,000, adecrease in prepaid expenses of $132,000, a decrease in accounts payable andaccrued liabilities of $803,000, equity in income of unconsolidated affiliatesof $194,000, amortization of share-based compensation of $104,000,  depreciation and amortization of $349,000 andan increase in net deferred tax asset of $48,000

 

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Accounts receivableincreased by $691,000 or 15.6% to $5,113,000 as of September 30, 2008 from$4,422,000 as of December 31, 2007. Although accounts receivable increased by 15.6%, sales in the latter twomonth of the third quarter of 2008 increased by 33.2% as compared to the lattertwo months of the fourth quarter of 2007, which has lead to a decrease innumber of days of sales outstanding.  Thenumber of days of sales outstanding has improved to 46 days as of September 30,2008 as compared to 51 days as of December 31, 2007.

 

Inventory decreased by$1,456,000 or 10.3% to $12,655,000 as of September 30, 2008 from$14,111,000 as of December 31, 2007. The decrease is primarily due to a decrease in inventory for theEngineered Products segment of $1,460,000 to $6,499,000 as of September 30,2008 from $7,959,000 as of December 31, 2007.  In the third quarter of 2008, EngineeredProducts inventory decreased by $1,284,000 when compared to June 30, 2008and we expect our inventory to continue to be reduced in the coming quarters tolevels that are more in line with our sales volume.

 

Prepaid expenses andother current assets decreased by $264,000 to $1,324,000 as of September 30,2008 from $1,588,000 as of December 31, 2007.  The decrease of $264,000 is primarily due toa decrease in prepaid expenses for Engineered Products of $314,000, a decreasein prepaid tax of $231,000, a decrease in prepaid sales and marketing expensesof $60,000 and a decrease in miscellaneous prepaid expenses of $14,000,partially offset an increase in prepaid inventory from Asia of $355,000.

 

Accounts payable andaccrued liabilities as of September 30, 2008 decreased by $488,000 to$1,447,000 from $1,935,000 as of December 31, 2008.  The net change in 2008 was primarily due adecrease in accrued liabilities of $243,000 and a decrease in trade payables of$245,000.  Accrued liabilities are downas follows: commission and bonus accrual $297,000, accrued rebates and other$161,000, accrued professional fees $39,000 and accrued payroll expenses$64,000.  This is partially offset by anincrease in income tax payable of $318,000.

 

Net cash used ininvesting activities was $99,000 for the nine months ended September 30,2008 compared to net cash used in investing activities of $378,000 for the ninemonths ended September 30, 2007. Our investing activity for the nine months in 2008 consisted ofexpenditures for property and equipment of $56,000 and the purchase ofintangible assets of $43,000, compared to $341,000 and $37,000, respectively,for the same period of 2007.  The Companyhas issued a $700,000 purchase order to purchase capital equipment forEngineered Products which is expected to be delivered in the fourth quarter of2008.

 

For the nine months endedSeptember 30, 2008, net cash used in financing activities was $1,335,000compared to cash provided by financing activities of $1,507,000 for the sameperiod of 2007.  Our financing activitiesfor the nine months ended September 30, 2008 consisted of the repurchaseof 1,026,400 shares of common stock at a cost of $1,335,000. Our financingactivities for the same period of 2007 consisted of cash proceeds of $1,318,000from the exercise of 1,506,375 stock options and an income tax benefit fromstock options exercised of $189,000.

 

On April 2, 2008,our Board of Directors authorized the repurchase of up to an additional$2,000,000 of our outstanding common stock. As of September 30, 2008 we have $1,761,000 available on ourrepurchase program.  For the nine monthsended September 30, 2008, we have repurchased and retired 1,026,400 sharesof common stock at a cost of $1,335,000. As of September 30, 2008, we have repurchased and retired a totalof 3,932,500 shares of common stock at a cost of $4,760,000 through ourrepurchase program.  Future repurchasesare expected to be funded from cash on hand and cash-flow from operations.

 

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As shown below, at September 30,2008, our contractual cash obligations totaled approximately $928,000.

 
| ** **                          | ** ** | **Contractual Obligations**          | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
| ** **                          | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** |
| ** **                          | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating leases                    |       | $                                         | 928,000    |   | $ | 174,000 |   | $ | 684,000 |   | $ | 70,000 |   |
|                                |       |                                      |       |   |   |   |   |   |   |
| Total  contractual cash obligations |       | $                                         | 928,000    |   | $ | 174,000 |   | $ | 684,000 |   | $ | 70,000 |   |

 

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.

 

**NewAccounting Standards**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements (“SFAS 157”),”which defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements.  This statementaddresses how to calculate fair value measurements required or permitted underother accounting pronouncements. Accordingly, this statement does not require any new fair valuemeasurements.  However, for someentities, the application of this statement will change current practice.  We adopted SFAS 157 on January 1,2008.  In February 2008, the FASBdeferred for one year the effective date of SFAS 157 only with respect tononfinancial assets and nonfinancial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurring basis,and removed certain leasing transactions from the scope of SFAS 157. Theadoption of SFAS 157 did not have a material impact on our consolidatedfinancial statements.

 

“Financial Liabilities (“SFAS159”).” Under SFAS 159, companies may elect to measure certain financialinstruments and certain other items at fair value. The standard requires thatunrealized gains and losses on items for which the fair value option has beenelected be reported in earnings. SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007. We adopted SFAS 159 for fiscal 2008;however, we did not elect to apply the fair value option to any financialinstruments or other items upon adoption of SFAS 159 or during the three monthsended September 30, 2008. Therefore, the adoption of SFAS 159 did notimpact our consolidated financial position, results of operations or cashflows.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations, (“SFAS141R”),” which changes how business combinations are accounted for and willimpact financial statements both on the acquisition date and in subsequentperiods. SFAS 141R is effective January 1, 2009, and will be appliedprospectively. The impact of adopting SFAS 141R will depend on the nature andterms of future acquisitions

 

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In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements (“SFAS 160”),” which changes the accounting and reportingstandards for the noncontrolling interests in a subsidiary in consolidatedfinancial statements.  SFAS 160 recharacterizes minority interests asnoncontrolling interests and requires noncontrolling interests to be classifiedas a component of shareholders’ equity.  SFAS 160 is effective January 1,2009 and requires retroactive adoption of the presentation and disclosurerequirements for existing minority interests.  We are currently evaluatingthe impact of SFAS 160 on our consolidated financial statements.

 

In May 2008, theFASB issued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples (“SFAS 162”).”  This Standardidentifies the sources of accounting principles and the framework for selectingthe principles to be used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles. SFAS 162 directs the hierarchy to the entity,rather than the independent auditors, as the entity is responsible forselecting accounting principles for financial statements that are presented inconformity with generally accepted accounting principles. The Standard iseffective 60 days following SEC approval of the Public Company AccountingOversight Board amendments to remove the hierarchy of generally accepted accountingprinciples from the auditing standards. SFAS 162 is not expected to have animpact on our financial condition, results of operations or cash flows

 

# **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

# ** **

We subcontract themanufacture of products in China and Mexico and have a joint venture inIndia.  Our results of operations couldbe negatively affected by factors such as changes in foreign currency exchangerates due to stronger economic conditions in those countries.

 

Changes in interest ratesmay result in changes in the fair market value of the company’s cash and cashequivalents and interest income. Due to the short duration and conservativenature of the cash equivalent investment portfolio, the company does not expectany material loss with respect to its cash equivalents. The book value for cashequivalents is considered to be representative of its fair value.

 

As of September 30,2008 the Company has no debt.

 

We do not expect anysignificant effect on our results of operations from inflationary or interestand currency rate fluctuations.  We donot hedge our interest rate or foreign exchange risks.

 

**ITEM 4. CONTROLSAND PROCEDURES**

 

Disclosure Controls andProcedures

 

Our chief executiveofficer and chief financial officer, after evaluating the effectiveness of ourdisclosure controls and procedures as of September 30, 2008, haveconcluded that our disclosure controls and procedures were designed to ensurethat information required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported, within the time periods specified in the SEC’s rules andforms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by us in the reports that wefile or submit under the Act is accumulated and communicated to our management,including our 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) and15d-15(f) under the Exchange Act) that occurred during our fiscal quarterended September 30, 2008, that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II- OTHER INFORMATION**

 

**Item 1.LEGAL PROCEEDINGS**

 

None.

 

**Item 1A.RISK FACTORS**

 

There have been nomaterial changes in our risk factors from those disclosed in our 2007 Annualreport on Form 10-K.

 

**Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 
| **Period**                        | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid per  Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plan** | ** ** | **Approximate Dollar  Value of Shares that  May yet be Purchased  Under the Plan ****(1)** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1 –  31, 2008   |       | 419,100                                          |       | $                                            | 1.56       |                                                                                                          | 3,325,200  |                                                                                                                                         | $          | 443,000 |   |
| February 1 –  29, 2008  |       | —                                           |       | —                                       |       | 3,325,200                                                                                                     |       | $                                                                                                                                            | 443,000    |   |
| March 1-  31, 2008           |       | 47,400                                           |       | $                                            | 1.15       |                                                                                                          | 3,372,600  |                                                                                                                                         | $          | 388,000 |   |
| April 1 –  30, 2008     |       | 71,200                                           |       | $                                            | 1.17       |                                                                                                          | 3,443,800  |                                                                                                                                         | $          | 2,304,000 |   |
| May 1 – 31,  2008       |       | 110,700                                          |       | $                                            | 1.09       |                                                                                                          | 3,554,500  |                                                                                                                                         | $          | 2,182,000 |   |
| June 1 –  30, 2008      |       | 56,700                                           |       | $                                            | 1.01       |                                                                                                          | 3,611,200  |                                                                                                                                         | $          | 2,124,000 |   |
| July 1 –  30, 2008      |       | 109,700                                          |       | $                                            | 1.00       |                                                                                                          | 3,720,900  |                                                                                                                                         | $          | 2,012,000 |   |
| August 1 –  31, 2008    |       | 111,300                                          |       | $                                            | 1.10       |                                                                                                          | 3,832,200  |                                                                                                                                         | $          | 1,887,000 |   |
| September 1  – 30, 2008 |       | 100,300                                          |       | $                                            | 1.20       |                                                                                                          | 3,932,500  |                                                                                                                                         | $          | 1,761,000 |   |

 

We have and will continueto retire all unregistered equity securities.

 

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(1) On April 2,2008, our Board of Directors authorized the repurchase of up to an additional$2,000,000 of our outstanding common stock.

 

**Item 3.DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**Item4.   SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None.

 

**ITEM 5.OTHER INFORMATION**

 

None.

 

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**ITEM 6EXHIBITS AND REPORTS ON FORM 8-K**

 

(a) Exhibits

 

31.1 CertificationPursuant to Rule 13a-14(b) and Rule 15d-14(b) of theExchange Act, Signed by Chief Executive Officer (filed herewith)

 

31.2 CertificationPursuant to Rule 13a-14(b) and Rule 15d-14(b) of theExchange Act, Signed by Chief Financial Officer (filed herewith)

 

32.1 CertificationPursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906of         the Sarbanes-Oxley Act of2002, Signed by Chief Executive Officer (filed herewith)

 

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

 

(b) Reportson Form 8-K

 

On July 31, 2008registrant issued a release announcing that it would have a conference call on August 6,2008 regarding its 2008 second quarter financial results at 4:30pm Easterntime.

 

A Form 8-K was filedduring the quarter covered by this report, reporting the issuance of a releasedated August 6, announcing registrants’ financial results for thesecond  quarter ended June 30, 2008.

 

A Form 8-K was filedduring the quarter covered by this report, reporting the issuance of a releasedated September 9, 2008 announcing registrants’signing of a three- yearrenewable contract with a Fortune 500 Company.

 

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Actof 1934, the Registrant has fully caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
|   | **ALPHA PRO TECH, LTD**.  | ** ** |   |                                 |
|--------|---------------------------|------------|--------|--------------------------------------|
|   | ** **                | ** ** |   |                                 |
| DATE:  | **November 6, 2008** | ** ** | BY:    | /s/ **Sheldon Hoffman**              |
|   |                      |       |   | Sheldon  Hoffman                     |
|   |                      |       |   | Chief Executive Officer and Director |
|   |                      |       |   |                                 |
|   |                      |       |   |
| DATE:  | **November 6, 2008** | ** ** | BY:    | /s/ **Lloyd Hoffman**                |
|   |                      |       |   | Lloyd  Hoffman                       |
|   |                      |       |   | Chief Financial Officer              |

 

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