UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM
10-QSB

[ X ]
QUARTERLY  REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934

For the
quarterly period ended September 30, 2006

[    ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934

Commission
File Number 0-21151

PROFILE TECHNOLOGIES, INC.(Name
of Small Business Issuer in Its Charter)

|Delaware                        | 91-1418002
|------------------------------- | ----------
|(State or other jurisdiction of |           
|incorporation or organization)  |           
|                                |           

|                                         | 
|---------------------------------------- | 
|2 Park Avenue, Suite 201                 | 
|Manhasset, New York                      | 
|(Address of principal executive offices) | 
|                                         | 

(516)
365-1909 (Issuers Telephone Number, Including Area Code)

Securities
registered pursuant to Section 12(b) of the Act: None

Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value



Check
whether  the issuer is not required to file reports pursuant to Section 13 or 15(d) of
the  Exchange Act. [   ]

Check
whether the issuer; (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act  during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and  (2) has been subject to such filing
requirements for the past 90 days.      Yes  [ X ]      No[   ]

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).   Yes [   ]      No  [ X ]

State the
number of shares outstanding of each of the issuers classes of common equity, as of
the  latest practicable date:  12,577,278 shares of common stock as of November 1, 2006.

Transitional
Small Business Disclosure Format (check one):  YES[ X ]   NO [   ]



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TABLE OF CONTENTS

Description
             
                          
                          
                          
                          
                     Page Number

|PART I.   FINANCIAL INFORMATION |        
|------------------------------- | -------
|                                | Item 1.
|                                |        
|                                |        
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|                                |        
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|                                |        
|                                |        
|                                |        
|                                |        
|                                | Item 2.
|                                |        
|                                | Item 3.
|                                |        
|PART II.     OTHER INFORMATION  |        
|                                |        
|                                | Item 1.
|                                |        
|                                | Item 2.
|                                |        
|                                | Item 3.
|                                |        
|                                | Item 4.
|                                |        
|                                | Item 5.
|                                |        
|                                | Item 6.
|                                |        
|SIGNATURES                      |        
|                                |        
|CERTIFICATIONS                  |        

2



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PROFILE
TECHNOLOGIES, INC.Balance Sheet(unaudited)

|                                                                   | September 30,2006
|------------------------------------------------------------------ | -----------------
|                                                                   |                  
|Assets                                                             |                  
|                                                                   |                  
|Current assets:                                                    |                  
|Cash                                                               |                  
|Prepaid expenses and other current assets                          |                  
|                                                                   |                  
|                                                                   |                  
|Total current assets                                               |                  
|                                                                   |                  
|Equipment, net of accumulated depreciation of $545,803             |                  
|Deferred financing fees                                            |                  
|Other assets                                                       |                  
|                                                                   |                  
|                                                                   |                  
|Total assets                                                       |                  
|                                                                   |                  
|                                                                   |                  
|Liabilities and Stockholders Deficit                              |                  
|                                                                   |                  
|Current Liabilities:                                               |                  
|Accounts payable                                                   |                  
|Notes payable to stockholders                                      |                  
|Current portion of convertible debt                                |                  
|Deferred wages                                                     |                  
|Accrued professional fees                                          |                  
|Accrued interest                                                   |                  
|Other accrued expenses                                             |                  
|                                                                   |                  
|                                                                   |                  
|Total current liabilities                                          |                  
|                                                                   |                  
|Long-term convertible debt, net of unamortized discount of $67,187 |                  
|                                                                   |                  
|Stockholders' deficit:                                             |                  
|Common stock, $0.001 par value.  Authorized 25,000,000             |                  
|shares; issued and outstanding 12,456,445 shares                   |                  
|Additional paid-in capital                                         |                  
|Accumulated deficit                                                |                  
|                                                                   |                  
|                                                                   |                  
|Total stockholders' deficit                                        |                  
|                                                                   |                  
|Commitments, contingencies and subsequent events                   |                  
|                                                                   |                  
|Total liabilities and stockholders' deficit                        |                  
|                                                                   |                  
|                                                                   |                  
|                                                                   |                  

See
accompanying notes to financial statements.

3



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PROFILE
TECHNOLOGIES, INC.Statements
of Operations(unaudited)

|                                               | For the three months endedSeptember 30, |                            
|---------------------------------------------- | --------------------------------------- | ---------------------------
|
|Revenue                                        |                                         | $                         
|                                               |                                         |                            
|Cost of revenues                               |                                         |                           
|                                               |                                         |                            
|                                               |                                         |                            
|Gross profit                                   |                                         |                           
|                                               |                                         |                            
|                                               |                                         |                            
|Operating expenses:                            |                                         |                            
|Research and development                       |                                         | 189,489                    
|General and administrative                     |                                         | 111,351                    
|                                               |                                         |                            
|                                               |                                         |                            
|Total operating expenses                       |                                         | 300,840                    
|                                               |                                         |                            
|                                               |                                         |                            
|Loss from operations                           |                                         | (300,840                   
|                                               |                                         |                            
|Interest expense                               |                                         | 3,065                      
|                                               |                                         |                            
|                                               |                                         |                            
|Net loss                                       |                                         | $               (303,905   
|                                               |                                         |                            
|                                               |                                         |                            
|Basic and diluted net loss per share           |                                         | $                     (0.02
|                                               |                                         |                            
|Weighted average shares outstanding used to    |                                         |                            
|calculate basic and diluted net loss per share |                                         | 12,456,445                 
|                                               |                                         |                            
|                                               |                                         |                            

See
accompanying notes to financial statements.

4



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PROFILE
TECHNOLOGIES, INC.Statements of Cash Flows(unaudited)

|                                                                                  | For the three months endedSeptember 30, |                 
|--------------------------------------------------------------------------------- | --------------------------------------- | ----------------
|
|Cash flows from operating activities:                                             |                                         |                 
|Net loss                                                                          |                                         | $   (303,905    
|Adjustments to reconcile net loss to net cash used in operating activities:       |                                         |                 
|Depreciation and amortization                                                     |                                         | 1,763           
|Accreted discount on convertible debt                                             |                                         | 124             
|Amortization of convertible debt discount included in interest expense            |                                         |                
|Accrued interest on convertible debt converted to equity                          |                                         |                
|Amortization of debt issuance costs                                               |                                         | 70              
|Equity issued for services                                                        |                                         | 89,000          
|Changes in operating assets and liabilities:                                      |                                         |                 
|Prepaid expenses and other current assets                                         |                                         | (40             
|Accounts payable                                                                  |                                         | (19,734         
|Deferred wages                                                                    |                                         | 12,419          
|Accrued professional fees                                                         |                                         | 6,000           
|Accrued interest                                                                  |                                         | 23              
|Other accrued expenses                                                            |                                         |                
|                                                                                  |                                         |                 
|                                                                                  |                                         |                 
|Net cash used in operating activities                                             |                                         | (214,280        
|                                                                                  |                                         |                 
|Cash flows from financing activies:                                               |                                         |                 
|Common stock issuance costs                                                       |                                         |                
|Allocated proceeds from issuance of common stock                                  |                                         |                
|Allocated proceeds from issuance of warrants attached to issuance of common stock |                                         |                
|                                                                                  |                                         |                 
|                                                                                  |                                         |                 
|Net cash provided by financing activities                                         |                                         |                
|                                                                                  |                                         |                 
|                                                                                  |                                         |                 
|Increase (decrease) in cash                                                       |                                         | (214,280        
|                                                                                  |                                         |                 
|Cash at beginning of period                                                       |                                         | 852,468         
|                                                                                  |                                         |                 
|                                                                                  |                                         |                 
|Cash at end of period                                                             |                                         | $     638,188   
|                                                                                  |                                         |                 
|                                                                                  |                                         |                 
|Supplemental disclosure of cash flow information:                                 |                                         |                 
|Cash paid for interest                                                            |                                         | $         2,182 
|Convertible debt and related accrued interest converted into 360,740 shares of    |                                         |                 
|common stock during the three months ended September 30, 2005                     |                                         | $              
|                                                                                  |                                         |                 
|                                                                                  |                                         |                 

See
accompanying notes to financial statements.

5



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PROFILE
TECHNOLOGIES, INC.

September
30, 2006

Notes
to Financial Statements (Unaudited)

1.      Description
of Business

Profile
Technologies, Inc. (the Company), was incorporated in 1986 and
commenced operations in fiscal year 1988. The Company is in the business of
inspecting pipelines for corrosion and is in the final stages of researching and
developing a patented, non-destructive and non-invasive, high speed scanning
process, using electro magnetic waves to remotely inspect buried, encased and
insulated pipelines for corrosion.

2.     Basis of
Presentation

The unaudited
interim financial statements and related notes of the Company have been prepared
pursuant to the instructions to Form 10-QSB. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to such instructions. The preparation of
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues, and expenses. On
an on-going basis, the Company evaluates its estimates, including contract
revenue recognition and impairment of long-lived assets. Actual results and
outcomes may differ materially from these estimates and assumptions.

The
financial statements and related notes should be read in conjunction with the
audited financial statements and notes thereto included in the Companys
annual report on Form 10-KSB for the year ended June 30, 2006. The information
furnished reflects, in the opinion of management, all adjustments, consisting of
only normal recurring items, necessary for fair presentation of the results of
the interim periods presented. Interim results are not necessarily indicative of
results for a full year.

3.     Liquidity

The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. The Company incurred cumulative losses of
$13,141,291 through September 30, 2006, and had negative working capital of
$603,388 as of September 30, 2006. Additionally, the Company has expended a
significant amount of cash in developing its technology and patented processes.
These conditions raise substantial doubt about the Companys ability to
continue as a going concern. Management recognizes that in order to meet the
Companys capital requirements, and continue to operate, additional
financing, including seeking industry-partner investment through joint ventures
or other possible arrangements, will be necessary. The Company is evaluating
alternative sources of financing to improve its cash position and is undertaking
efforts to raise capital. If the Company is unable to raise additional capital
or secure revenue contracts and generate positive cash flow, it is unlikely that
the Company will be able to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

4.     Summary
of Significant Accounting Policies

Cash

Cash
includes highly liquid investments with original maturities of three months or
less. On occasion, the Company has amounts deposited with financial
institutions in excess of federally insured limits.

Fair
Value of Financial Instruments

The
Company has the following financial instruments: cash, accounts payable, notes
payable to stockholders, and convertible debt. The carrying value of these
instruments, other than the convertible debt, approximates fair value based on
their liquidity. The fair value of the convertible debt was determined as the
excess of the proceeds over the fair value of the warrants.

6



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Deferred
Financing Fees

The
Company records costs incurred related to debt financings as deferred financing
fees and amortizes, on a straight-line basis, the costs incurred over the life
of the related debt. The amortization is recognized as interest in the financial
statements. Upon conversion into equity or extinguishment of the related debt,
the Company recognizes any unamortized portion of the deferred financing fees as
interest expense.

Contract
Revenue Recognition

The
Company recognizes revenue from service contracts using the percentage of
completion method of accounting. Contract revenues earned are measured using
either the percentage of contract costs incurred to date to total estimated
contract costs or, when the contract is based on measurable units of completion,
revenue is based on the completion of such units. This method is used because
management considers total cost or measurable units of completion to be the best
available measure of progress on contracts. Because of the inherent
uncertainties in estimating costs, it is at least reasonably possible that the
estimates used may change in the near term.

Anticipated
losses on contracts, if any, are charged to earnings as soon as such losses can
be estimated. Changes in estimated profits on contracts are recognized during
the period in which the change in estimate is known.

Cost
of revenues include contract costs incurred to date as well as any idle time
incurred by personnel scheduled to work on customer contracts.

The
Company records claims for additional compensation on contracts upon revision of
the contract to include the amount to be received for the additional work
performed. Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools and repairs, and depreciation costs. Selling, general, and
administrative costs are charged to expense as incurred. Service contracts
generally extend no more than six months.

Research
and Development

Research
and development costs are expensed when incurred. During the three months ended
September 30, 2006 and 2005, the Company incurred $189,489 and $57,100,
respectively, on research and development activities.

Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The
Company reviews long-lived assets, such as equipment and intangibles, for
impairment at least annually or whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset.

Valuation
of Warrants and Options

The
Company estimates the value of warrants and option grants using a Black-Scholes
pricing model based on management assumptions regarding the warrant and option
lives, expected volatility, and risk free interest rates.

Use
of Estimates

The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

7



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Vendor
Concentration

The
Company relies on the expertise of a scientist to facilitate the development and
testing of the Companys hardware and software. The scientist is also
instrumental in interpreting the data captured during the testing of the
hardware and software. The loss of the specialized knowledge provided by this
scientist could have an adverse effect on the ability of the Company to reach
marketability of its hardware and software. During the three months ended
September 30, 2006, the Company incurred cash fees payable to the scientist of
approximately $55,400, representing approximately 29% of research and
development expenses for the three months ended September 30, 2006. During the
three months ended September 30, 2005, the Company incurred cash fees payable to
the scientist of approximately $26,500, representing approximately 46% of
research and development expenses for the three months ended September 30, 2005.
As of September 30, 2006, the Company owed the scientist approximately $73,500,
which is included in accounts payable at September 30, 2006.

The
Company also relies on the computer modeling skills of a consultant to compile
and interpret the data captured during the testing of the hardware and software.
The loss of the know-how of this consultant could have an adverse effect on the
ability of the Company to reach marketability of its hardware and software.
During the three months ended September 30, 2006, the Company incurred cash fees
payable to the consultant of approximately $31,000, which is included in
research and development expenses for the three months ended September 30, 2006.

As
partial compensation for services rendered, during the three months ended
September 30, 2006, the Company granted the consultant a stock option to
purchase 100,000 shares of common stock at an exercise price of $1.05 per share,
expiring July 12, 2011. The 100,000 options had a fair value at the date of
grant of $89,000, which is included in research and development expenses in the
Companys Statements of Operations for the three months ended September 30,
2006.

Total
cash and stock compensation expense incurred for settlement of services rendered
by the consultant totaled $120,000 or approximately 63% of research and
development expense for the three months ended September 30, 2006.

The
Company did not incur any fees payable to the consultant during the three months
ended September 30, 2005. As of September 30, 2006, the Company owed the
consultant approximately $5,700, which is included in accounts payable at
September 30, 2006.

5.     Stock
Based Compensation

Prior
to January 1, 2006, the Company accounted for stock-based awards under the
intrinsic value method, which followed the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related Interpretations. The intrinsic value method of accounting resulted
in compensation expense for stock options to the extent that the exercise prices
were set below the fair market price of the Companys stock at the date of
grant.

As
of January 1, 2006, the Company adopted SFAS No. 123(R) using the
modified prospective method, which requires measurement of compensation cost for
all stock-based awards at fair value on date of grant and recognition of
compensation over the service period for awards expected to vest. The fair value
of stock options is determined using the Black-Scholes valuation model, which is
consistent with the Companys valuation techniques previously utilized for
options in footnote disclosures required under SFAS No. 123, Accounting for
Stock Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure. Such value is
recognized as expense over the service period. To date, all stock option grants
have been fully vested upon grant.

The
Company did not grant any stock options to employees during the three months
ended September 30, 2005 so net loss as reported is the same as the
Companys pro forma net loss as determined in accordance with SFAS
No. 123(R). Therefore, no reconciliation in accordance with SFAS
No. 123(R) is required to be presented.

8



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6.     Net
Loss  Per Share

Basic
net loss per share is computed by dividing the net loss by the weighted average
number of common shares outstanding during the period. Diluted net loss per
share is computed by dividing the net loss by the weighted average number of
common and dilutive common equivalent shares outstanding during the period. As
the Company had a net loss attributable to common shareholders in each of the
periods presented, basic and diluted net loss per share are the same.

Excluded
from the computation of diluted net loss per share for the three months ended
September 30, 2006, because their effect would be antidilutive, are options and
warrants to acquire 12,743,418 shares of common stock with a weighted-average
exercise price of $1.06 per share. Also excluded from the computation of diluted
net loss per share for the three months ended September 30, 2006 are 350,000
shares of common stock that may be issued if investors exercise their conversion
right under the Debentures related to the 2003 Offering as discussed in Note 8
because their effect would be antidilutive.

Excluded
from the computation of diluted net loss per share for the three months ended
September 30, 2005, because their effect would be antidilutive, are options and
warrants to acquire 7,912,618 shares of common stock with a weighted-average
exercise price of $1.22 per share. Also excluded from the computation of diluted
net loss per share for the three months ended September 30, 2005 are 446,000
shares of common stock that may be issued if investors exercise their conversion
right under the Debentures related to the 2003 Offering as discussed in Note 8
because their effect would be antidilutive.

For
the three months ended September 30, 2006 and 2005, additional potential
dilutive securities that were excluded from the diluted net loss per share
computation are the exchange rights discussed in Note 9 that could result in
options to acquire up to 223,000 shares of common stock with an exercise price
of $1.00 per share at September 30, 2006 and 2005.

For
purposes of earnings per share computations, shares of common stock that are
issuable at the end of a reporting period are included as outstanding.

7.     Related
Parties

Notes
Payable  Stockholders

In
April 2002, the Company issued a non-interest bearing bridge note payable to an
officer of the Company in the amount of $7,500. The note is payable in full when
the Company determines it has sufficient working capital to do so. On September
29, 2002, the officer who was owed the $7,500 died.

The
Company entered into various loan agreements with Murphy Evans, President, a
director and stockholder of the Company. On March 6, 2003, the Companys
Board of Directors approved the Loan Amendment and Promissory Note (the
Amended Evans Loan) between the Company and Murphy Evans. The
Amended Evans Loan aggregated all previous debt and superseded and replaced all
of the terms of the previous loans with Mr. Evans, including any conversion
features. The Amended Evans Loan bore interest on the aggregate principal
balance at a rate of 5% per annum, payable on June 30 and December 31 of each
year, with the principal balance due and payable in full on December 31, 2003.
The Amended Evans Loan was exempt from registration under Section 4(2) of the
Securities Act.

In
January 2006, Mr. Evans converted the entire then outstanding principal and
accrued interest on the Amended Evans Loan pursuant to the terms of the 2005
Offering as defined below.

Interest
expense related to the Amended Evans Loan was $0 and $8,734 for the three months
ended September 30, 2006 and 2005, respectively.

In
September 2002, the Company entered into two non-interest bearing bridge loans
in the respective principal amounts of $40,000 and $10,000 (the
Stockholder Loans) payable to two stockholders of the Company. The
terms of the Stockholder Loans provide for payment at such time as the Company
determines it has sufficient working capital to repay the principal balances of
the Stockholder Loans. The Stockholder Loans are convertible into 57,142 and
14,286 equity units, respectively, at any time prior to re-payment. Each equity
unit is comprised of one share of the Companys common stock, with a
detachable 5-year warrant to purchase one additional share at an exercise price
of $1.05 per share. Neither stockholder has converted either Stockholder Loan
into equity units.

9



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The
following is a summary of notes payable to stockholders as of September 30,
2006:

|                      | 
|--------------------- | 
|                      | 
|Deceased Officer Note | 
|Stockholder Loans     | 
|                      | 
|Total                 | 
|                      | 
|                      | 

8.      Convertible
Debt

On
June 19, 2003, the Board of Directors approved the offering (the 2003
Offering) of $1,000,000 in convertible debentures (the
Debentures). The Debentures are convertible into that number of
shares of the Companys common stock equal to the amount of the converted
indebtedness divided by $0.50 per share. The Debentures bear interest at a rate
of 5% per annum, payable quarterly. Delinquent interest payments bear interest
at a rate of 12% per annum. The Company is required to redeem each Debenture on
the 5th anniversary of the date of the Debenture. The Company may, in its
discretion, redeem any Debenture at any time prior to the mandatory redemption
date of the Debenture by providing no less than 60 days prior written
notice to the holder of the Debenture. Certain events of default will result in
the Debentures being redeemable by the Company upon demand of the holder.

Upon
the purchase of, and for each $0.50 of the Debentures principal amount,
the Company issued to each investor a warrant (the Warrant) to
purchase one (1) share of the Companys common stock at an exercise price
of $0.75 per share. The Warrants are exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture.

Warrants
issued in connection with the 2003 Offering were recorded based on their
relative fair value as compared to the fair value of the debt at issuance. The
relative fair value of the warrants was recorded as paid-in capital. The
intrinsic value of the Debentures results in a beneficial conversion feature,
recorded as a discount against the Debentures, which reduces the book value of
the convertible debt to not less than zero. The Company amortizes the discount
using the effective interest method over the five-year life of the Debentures.

During
the quarter ended March 31, 2005, the Board of Directors terminated the 2003
Offering. As of the closing date of the 2003 Offering, the Company had raised
$503,000 from the 2003 Offering.

During
the three months ended September 30, 2005, four investors exercised their
conversion right under the terms of the Debentures. Accordingly, the carrying
value of the convertible debt was reclassified as equity upon conversion. Since
the convertible debt instruments include a beneficial conversion feature, the
remaining unamortized discount of approximately $170,000 at the conversion date
was recognized as interest expense during the three months ended September 30,
2005.

As
of September 30, 2006, accrued interest on the Debentures was $2,205. The
Company recorded interest expense related to the accretion of the discount on
the Debentures of $124 for the three months ended September 30, 2006. The
Company recorded interest expense related to the accretion of the discount on
the Debentures and amortization of the convertible debt discount as a result of
the conversions discussed above of $169,985 for the three months ended September
30, 2005. As of September 30, 2006 the carrying value of the long-term portion
of the Debentures was $313, net of unamortized debt discount of $67,187

9.     Deferred
Wages and Accrued Professional Fees

To
reduce cash outflows, certain of the Companys employees, officers,
consultants, and directors have agreed to defer a portion of their salaries and
professional fees until the Company has sufficient resources to pay the amounts
owed or to exchange such amounts into options as described below. At September
30, 2006, the Company has accrued $922,170 related to the deferred payment of
salaries and professional fees of which $724,020 is included under deferred
wages and $198,150 in accrued professional fees. On March 18, 2002, the Board
approved a conversion right on all deferred wages and accrued professional fees
deferred as of March 18, 2002 (the Conversion Right). Pursuant to
the Conversion Right, employees, officers, consultants, and directors may elect
to convert $1.00 of fees owed to them as of March 18, 2002 for an option to
purchase two shares of the Companys common stock, at an exercise price of
$1.00 per share for a term of five years. Of the total $922,170 deferred
salaries and professional fees, the amount subject to the Conversion Right is
$111,500, resulting in the potential issuance of 223,000 options under the terms
mentioned above. No conversions have occurred to date. At March 18, 2002, there
was no intrinsic value associated with these exchange rights. As such, no
additional compensation cost was recorded.

10



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10.     Common
Stock and Warrants

On January
19, 2005, the Board of Directors approved the offering (the 2005
Offering) of 2,000,000 units (the Units) to accredited
investors for a total offering price of $1,000,000. Each Unit consists of one
share of common stock and a warrant to acquire common stock. On November 21,
2005, the Board of Directors approved an increase in the number of Units offered
in the 2005 Offering to 6,000,000 Units, for a total offering price of
$3,000,000. The purchase price of one Unit is $0.50. Each Unit consists of one
share of common stock and a warrant to purchase one share of common stock at an
exercise price of $0.75. The warrants are exercisable at any time prior to the
fifth anniversary from the date of their issuance.

The
2005 Offering was terminated on June 9, 2006. As of the closing date of the 2005
Offering, the Company had raised $1,801,000 from the 2005 Offering.

The
Company engaged a brokerage firm to help in the fund raising efforts of the 2005
Offering. Pursuant to the terms of the agreement with the brokerage firm, the
Company paid the brokerage firm a ten percent cash commission on all funds that
the brokerage firm helped raise. During the three months ended September 30,
2005, the Company incurred $51,650 of fees that were paid in cash to the
brokerage firm. The brokerage firm and the Company also agreed that the Company
would issue warrants to purchase a total of 439,600 shares of common stock at an
exercise price of $0.60. The warrants are exercisable for up to five years from
the date of issuance, which is the date the proceeds were received under the
2005 Offering. Of the total 439,600 warrants that the brokerage firm received,
103,300 were earned during the three months ended September 30, 2005 as a result
of the funds raised by the brokerage firm during that period. Accordingly,
during the three months ended September 30, 2005, the Company recorded $68,178
as a reduction to paid-in capital for the fair value of the 103,300 warrants.
The fair value of the warrant grants were estimated using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
volatility of 168%, risk-free interest rate of 4.14%, expected life of five
years, and a 0% dividend yield.

11.      Subsequent
Events

On
October 18, 2006, a non-employee Board member exercised stock options and a
warrant to purchase shares of the Companys common stock. The following is
a summary of the stock options and warrant exercised on October 18, 2006 by the
non-employee Board member:

|             | Number of Shares ofCommon Stock Acquired | Exercise Price of StockOption or Warrant
|------------ | ---------------------------------------- | ----------------------------------------
|Stock Option |                                          | 20,000                                  
|             |                                          |                                         
|Stock Option |                                          | 10,000                                  
|             |                                          |                                         
|Stock Option |                                          | 20,000                                  
|             |                                          |                                         
|Warrant      |                                          | 20,833                                  
|             |                                          |                                         

11



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On
October 18, 2006 the same non-employee Board member exercised his conversion
right under the terms of the Debentures (as described more fully in Note 8:
Convertible Debt) and converted his $25,000 Debenture into 50,000 shares of
common stock.

Pursuant
to Section 16(a) of the Exchange Act of 1934, the non-employee Board member
reported his ownership of the common stock of the Company and changes to such
ownership by filing a Form 4 with the SEC on October 20, 2006.

Item 2.     
Management's Discussion and Analysis or Plan of Operations.

Plan of
Operations

The
Company is currently focused on the buried pipe market in the United States.
Accordingly, the Company redesigned and improved the hardware underlying the EMW
Inspection Process, which provides a different pulse waveform specifically
tailored to the buried pipe environment.

Initial
testing of the new buried-pipe inspection hardware has been completed at the
Companys Ferndale, Washington pipe test facility. This hardware has also
been field tested on a natural gas pipeline in Washington and is now being
tested on natural gas pipelines in Pennsylvania.

The
results of all these tests should provide the Company with critical information  as to
the detection capabilities of its new hardware in different real  world conditions
and accelerate the commercial deployment of the  Companys new hardware and software.

Although
several important milestones have been achieved in the testing of the
Companys new hardware and software, there can be no assurance that
necessary additional field testing can be funded or that the new hardware and
software can be successfully deployed on a commercial basis. Failure to do so
could have a serious and material effect on the business and financial condition
of the Company.

Capital
will be expended to support operations until the Company can generate sufficient
cash flows from operations. In order for the Company to generate cash flows from
operations, the Company must obtain revenue generating contracts. Management is
currently directing the Companys activities towards obtaining service
contracts, which, if obtained, will necessitate the Company attracting, hiring,
training and outfitting qualified technicians. If service contracts are
obtained, it will also necessitate additional field test equipment purchases in
order to provide the services. The Company expects that if revenue contracts are
secured, working capital requirements will increase. The Company will incur
additional expenses as it hires and trains field crews and support personnel
related to the successful receipt of commercial contracts. Additionally, the
Company anticipates that cash will be used to meet capital expenditure
requirements necessary to develop infrastructure to support future growth.

The
Company has expended a significant amount of cash in developing its technology
and patented processes. These conditions raise substantial doubt about the
Companys ability to continue as a going concern. Management recognizes
that in order to meet the Companys capital requirements, and continue to
operate, additional financing, including seeking industry-partner investment
through joint ventures or other possible arrangements, will be necessary within
the next twelve months. The Company is evaluating alternative sources of
financing to improve its cash position and is undertaking efforts to raise
capital. If the Company is unable to raise additional capital or secure revenue
contracts and generate positive cash flow, it is unlikely that the Company will
be able to continue as a going concern.

12



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Liquidity
and Capital Resources

Deferred
Wages and Accrued Professional Fees

To reduce
cash outflows, certain of the Companys employees, officers, consultants,
and directors have agreed to defer a portion of their salaries and professional
fees until the Company has sufficient resources to pay the amounts owed or to
exchange such amounts into options as described below. At September 30, 2006,
the Company has accrued $922,170 related to the deferred payment of salaries and
professional fees of which $724,020 is included under deferred wages and
$198,150 in accrued professional fees. On March 18, 2002, the Board approved a
conversion right on all deferred wages and accrued professional fees deferred as
of March 18, 2002 (the Conversion Right). Pursuant to the Conversion
Right, employees, officers, consultants, and directors may elect to convert
$1.00 of fees owed to them as of March 18, 2002 for an option to purchase two
shares of the Companys common stock, at an exercise price of $1.00 per
share for a term of five years. Of the total $922,170 deferred salaries and
professional fees, the amount subject to the Conversion Right is $111,500,
resulting in the potential issuance of 223,000 options under the terms mentioned
above. No conversions have occurred to date. At March 18, 2002, there was no
intrinsic value associated with these exchange rights. As such, no additional
compensation cost was recorded.

Convertible
Debt

On
June 19, 2003, the Board of Directors approved the offering (the 2003
Offering) of $1,000,000 in convertible debentures (the
Debentures). The Debentures are convertible into that number of
shares of the Companys common stock equal to the amount of the converted
indebtedness divided by $0.50 per share. The Debentures bear interest at a rate
of 5% per annum, payable quarterly. Delinquent interest payments bear interest
at a rate of 12% per annum. The Company is required to redeem each Debenture on
the 5th anniversary of the date of the Debenture. The Company may, in its
discretion, redeem any Debenture at any time prior to the mandatory redemption
date of the Debenture by providing no less than 60 days prior written
notice to the holder of the Debenture. Certain events of default will result in
the Debentures being redeemable by the Company upon demand of the holder.

Upon
the purchase of, and for each $0.50 of the Debentures principal amount,
the Company issued to each investor a warrant (the Warrant) to
purchase one (1) share of the Companys common stock at an exercise price
of $0.75 per share. The Warrants are exercisable at any time prior to the 5th
anniversary date of the redemption of the Debenture.

Warrants
issued in connection with the 2003 Offering were recorded based on their
relative fair value as compared to the fair value of the debt at issuance. The
relative fair value of the warrants was recorded as paid-in capital. The
intrinsic value of the Debentures results in a beneficial conversion feature,
recorded as a discount against the Debentures, which reduces the book value of
the convertible debt to not less than zero. The Company amortizes the discount
using the effective interest method over the five-year life of the Debentures.

During
the quarter ended March 31, 2005, the Board of Directors terminated the 2003
Offering. As of the closing date of the 2003 Offering, the Company had raised
$503,000 from the 2003 Offering.

During
the three months ended September 30, 2005, four investors exercised their
conversion right under the terms of the Debentures. Accordingly, the carrying
value of the convertible debt was reclassified as equity upon conversion. Since
the convertible debt instruments include a beneficial conversion feature, the
remaining unamortized discount of approximately $170,000 at the conversion date
was recognized as interest expense during the three months ended September 30,
2005.

As
of September 30, 2006, accrued interest on the Debentures was $2,205. The
Company recorded interest expense related to the accretion of the discount on
the Debentures of $124 for the three months ended September 30, 2006. The
Company recorded interest expense related to the accretion of the discount on
the Debentures and amortization of the convertible debt discount as a result of
the conversions discussed above of $169,985 for the three months ended September
30, 2005. As of September 30, 2006 the carrying value of the long-term portion
of the Debentures was $313, net of unamortized debt discount of $67,187.

13



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Other
Commitments

The
Companys other contractual obligations consist of commitments under an
operating lease and repayment of loans payable to certain stockholders.

As
of September 30, 2006, the Company had outstanding  loans payable to certain
stockholders with principal  amounts,  in the  aggregate,  equal to $57,500.  The terms
of the various  notes are  described  above under Note 7: Related  Parties:  Notes
Payable -  Stockholders.

As
of September 30, 2006, the Company has future minimum lease payments of
approximately $8,427 under its operating lease.

Off Balance
Sheet Arrangements

The Company
has no off-balance sheet arrangements.

FORWARD-LOOKING
STATEMENTS

This
Quarterly Report on Form 10-QSB contains forward-looking statements.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company
believes, anticipates, expects or words of
similar import. Similarly, statements that describe the Companys projected
future results, future plans, objectives or goals or future conditions or events
are also forward looking statements. Actual results are inherently difficult to
predict. Any such forward-looking statements are subject to the risks and
uncertainties that could cause actual results of operations, financial
condition, acquisitions, financing transactions, operations, expenditures,
expansion and other events to differ materially from those expressed or implied
in such forward-looking statements. Any such forward-looking statements would be
subject to a number of assumptions regarding, among other things, future
economic, competitive and market conditions generally. Such assumptions would be
based on facts and conditions as they exist at the time such statements are made
as well as predictions as to future facts and conditions, the accurate
prediction of which may be difficult and involve the assessment of events beyond
the Companys control.

The
forward-looking statements contained in this report are based on current
expectations that involve a number of risks and uncertainties. Such
forward-looking statements are based on assumptions that the Company will obtain
or have access to adequate financing to continue its operations, that the
Company will market and provide products and services on a timely basis, that
there will be no material adverse competitive or technological change with
respect to the Companys business, demand for the Companys products
and services will significantly increase, that the Company will be able to
secure additional fee-for-services or licensing contracts, that the
Companys executive officers will remain employed as such by the Company,
that the Companys forecast accurately anticipate market demand, and that
there will be no material adverse change in the Companys operations,
business or governmental regulation affecting the Company or its customers. The
foregoing assumptions are based on judgments with respect to, among other
things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the Companys control. Although the Company
believes the expectations reflected in the forward-looking statements are
reasonable, the Company cannot guarantee future results, levels of activity,
performance or achievements.

Item 3.     
Controls and Procedures.

Evaluation
of Disclosure Controls and Procedures

(a)     
Evaluation of Disclosure Controls and Procedures

| | The
term disclosure controls and procedures is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange
Act). This term refers to the controls and procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports that it
files under the Exchange Act is recorded, processed, summarized, and reported within the
required time periods. The Companys Chief Executive Officer and the Companys Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the
period covered by this report. They have concluded that, as of that date, the Companys disclosure
controls and procedures were effective at ensuring that required information will be
disclosed on a timely basis in the Companys reports filed under the Exchange Act.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14



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(b)     Changes
in Internal Control over Financial Reporting

| | No
change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the period covered by this report that
has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PART II  OTHER
INFORMATION

Item 1.      Legal
Proceedings.

The
Company is not aware of any legal proceedings contemplated by any governmental
authority or any other party involving the Company or its properties. As of the
date of this report, no director, officer or affiliate is a party adverse to the
Company in any legal proceeding or has an adverse interest to the Company in any
legal proceedings. The Company is not aware of any other legal proceedings
pending or that have been threatened against the Company or its properties.

Item 2.     
Unregistered Sales of Equity Securities and Use of Proceeds.

Stock
Options

On
July 13, 2006, the Board approved an option grant to a consultant to purchase
100,000 shares of the Companys common stock at an exercise price of $1.05
per share. The option was granted in consideration for work the consultant is
performing for the Company. The option was fully vested upon grant and is
exercisable until July 13, 2011. During the three months ended September 30,
2006, the Company recognized $89,000 as research and development expense for the
fair value of the option grant. The fair value of the option grant was estimated
using the Black-Scholes option pricing model with the following weighted average
assumptions: expected volatility of 160%, risk-free interest rate of 5.04%,
expected life of five years, and a 0% dividend yield. These securities were
issued in reliance on exemptions from registration provided by Section 4(2) of
the Securities Act.

Item 3.     
Defaults Upon Senior Securities.

None.

Item 4.     
Submission of Matters to a Vote of Shareholders.

None.

Item 5.     Other
Information.

None.

Item 6.     
Exhibits.

The
following exhibits are filed with or incorporated by reference into this report:

15



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Exhibit  No.        
 
Description of Exhibit

|Exhibit 3.1 |  | Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the
Companys Registration Statement on Form SB-2 filed with the Commission on
May 10, 1996).
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 3.2 |  | Bylaws of the Company (incorporated by reference to Exhibit 3.3 to the
Companys Registration Statement on Form SB-2 filed with the Commission on
May 10, 1996).
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 3.3 |  | Amendment to Certificate of Incorporation (incorporated by reference to
Exhibit A to the Companys Definitive Proxy Statement filed with the
Commission on October 28, 2002).
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 3.4 |  | Amendment to Certificate of Incorporation (incorporated by reference to
Exhibit A to the Companys Preliminary Proxy Statement filed with the
Commission on September 13, 2006).
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 10.1 |  | Service Agreement dated as of August 16, 2001 between Profile Technologies,
Inc. and BP Exploration (Alaska) Inc. (incorporated by reference to Exhibit 10.1
to the Companys Annual Report on Form 10-KSB filed with the Commission on
September 28, 2001).
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 10.2 |  | Loan Agreement dated March 6, 2003, by and between the Company and Murphy
Evans (incorporated by reference to Exhibit 4.1 to the Companys Quarterly
Report on Form 10-QSB filed with the Commission on May 15, 2003).
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 10.3 |  | Loan Amendment and Promissory Note dated March 6, 2003, by and between the
Company and Murphy Evans (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-QSB filed with the Commission on May
20, 2003).
|------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 10.4 |  | Lease Agreement dated January 26, 2001 by and between the Company and Fatum
LLC. (incorporated by reference to Exhibit 10.4 to the Companys Annual
Report on Form 10-KSB filed with the Commission on October 12, 2004).
|------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 10.5 |  | Lease Extension dated February 26, 2003 by and between the Company and
Fatum LLC. (incorporated by reference to Exhibit 10.5 to the Companys
Annual Report on Form 10-KSB filed with the Commission on October 12, 2004).
|------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 10.6 |  | Royalty Agreement (incorporated by reference to Exhibit 10.1 to the
Companys Registration Statement on Form SB-2 filed with the Commission on
May 10, 1996).
|------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 10.7 |  | Assignment of Patent Rights (incorporated by reference to Exhibit 10.2 to
the Companys Registration Statement on Form SB-2 filed with the Commission
on May 10, 1996).
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 10.8 |  | ConocoPhillips Alaska, Inc., Contract No. AK 990156, Amendment No. 3 dated
February 1, 2003, by and between the Company and ConocoPhillips Alaska, Inc.
(incorporated by reference to Exhibit 10.2 to the Companys Quarterly
Report on Form 10-QSB filed with the Commission on May 20, 2003).
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 10.9 |  | 1999 Stock Option Plan (incorporated by reference to Exhibit 10.9 to the
Companys Annual Report on Form 10-KSB filed with the Commission on October
12, 2004).
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

16



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|Exhibit 10.10 |  | First Amendment to the 1999 Stock Option Plan (incorporated by reference
to Appendix B to the Companys Preliminary Proxy Statement filed with the
Commission on September 13, 2006).
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 14.1 |  | Code of Ethics (incorporated by reference to Exhibit 14 to the
Companys Annual Report on Form 10-KSB filed with the Commission on October
12, 2004).
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of Henry E. Gemino, as Chief
Executive Officer and Chief Financial Officer of the Company.
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------------

|Exhibit 31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of Philip L. Jones, as Chief
Operating Officer and Executive Vice President of the Company.
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------

|Exhibit 32.1 |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002 by Henry
E. Gemino, as Chief Executive Officer and Chief Financial Officer of the
Company.
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 32.2 |  | Certification under Section 906 of the Sarbanes-Oxley Act of 2002 by Philip
L. Jones, as Chief Operating Officer and Executive Vice President of the
Company.
|------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

17



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SIGNATURES

In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

| | PROFILE
TECHNOLOGIES, INC.(Registrant)
| | --------------------------------------

Date:   November
13, 2006

| | /s/   
Henry E. GeminoHenry E. Gemino Chief Executive Officer andChief Financial Officer
| | ----------------------------------------------------------------------------------------

18