You should read the following discussion and analysis together with our consolidated financial statements (unaudited) and the notes to our consolidated financial statements (unaudited), included elsewhere in this report, and our audited financial statements and the notes thereto, which appear in our Form 10-K for the year ended December 31, 2008.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

This report on Form 10-Q contains "forward-looking statements" that are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures and other information that is not historical information. When used in this report, the words "estimates", "expects", "anticipates", "forecasts", "plans", "intends", "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. Additional forward-looking statements may be made by 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 also expressly qualified by these cautionary statements.

Our forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe that there is a reasonable basis for them, including, without limitation, management's examination of historical operating trends, data contained in our records and other data available from third parties. However, we cannot assure you that management's expectations, beliefs and projections will result or be achieved or accomplished. Our forward-looking statements apply only as of the date made. Except as required by law, we undertake no obligation to publicly update or revise forward-looking statements that may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

Where to 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-K furnished or filed since our most recent Annual Report on Form 10-K and any amendments to such reports as soon as reasonably practicable following the electronic filing of such report with the Securities and Exchange Commission (the "SEC"). In addition, we provide electronic or paper copies of our filings free of charge upon request.

Critical Accounting Policies

The Financial Accounting Standards Board ("FASB") recognized the complexity of its standard-setting process and embarked on a revised process in 2004 that culminated in the release on July 1, 2009 of the FASB Accounting Standards Codification TM (the "FASB ASC"), which is also sometimes referred to as the "Codification" or the " ASC". The Codification does not change how the Company accounts for its transactions or the nature of related disclosures made. To the Company, this means instead of following the rules in Statement of Financial Accounting Standards No. 123R ("SFAS No. 123R"), Share-Based Payment, we will follow the guidance in Topic 718, Stock Compensation. References to generally accepted accounting principles ("GAAP") issued by the FASB, within Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements (Unaudited) included elsewhere in this report are to the Codification. The FASB finalized the Codification effective for periods ending on or after September 15, 2009. Prior FASB standards like SFAS No. 123R, are no longer being issued by the FASB.

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods.

We base estimates on past experience and on various other assumptions that are believed to be reasonable under the circumstances. The application of these accounting policies on a consistent basis enables us to provide timely and reliable financial information. Our critical accounting polices include the following:

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

Revenue Recognition:For sales transactions, we comply with the provisions of the SEC's Staff Accounting Bulletin No. 104, Revenue Recognition,which states that revenue should be recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) the product has been shipped and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. These criteria are satisfied upon shipment of product and revenues are recognized accordingly.

Sales are reduced for any anticipated sales returns, rebates and allowances based on historical experience. Since our return policy is only 90 days and our products are not generally susceptible to external factors, such as technological obsolescence or significant changes in demand, we are able to make a reasonable estimate for returns. We offer end-user product specific and sales volume rebates to select distributors. Our rebates are based on actual sales and are accrued monthly.

Stock Based Compensation: The Company adopted FASB ASC Topic 718, Stock Compensation, effective January 1, 2006, using the modified prospective application method. Topic 718 requires companies to record compensation expense for the value of all outstanding and unvested share-based payments, including employee stock options and similar awards.

The fair values of stock option grants are determined using the Black-Scholes-Merton option pricing model and the following assumptions:
expected stock price volatility based on historical volatility and management's expectations of future volatility, risk-free interest rates from published sources, years to maturity based on historical data and no dividend yield, as management currently does not intend to pay dividends in the near future. The Black-Scholes-Merton option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. In addition, the option valuation model requires the input of highly subjective assumptions, including expected stock price volatility. Our stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect their fair value.

OVERVIEW

Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of high-value, disposable protective apparel and infection control products for the cleanroom, industrial, pharmaceutical, medical and dental markets. We also manufacture a line of building supply construction weatherization products. Our products are sold both under the "Alpha Pro Tech" brand name, as well as under private label.

Our products are grouped into three business segments: the Disposable Protective Apparel segment, consisting of disposable protective apparel; the Building Supply segment (formerly known as the Engineered Products segment), consisting of construction weatherization products, such as house wrap and synthetic roof underlayment; and the Infection Control segment, consisting of face masks, eye shields and medical bed pads as well as a line of pet beds. Previously, the line of medical bed pads and pet beds were reported as a separate segment under the name of Extended Care. Because

management is now looking at the Extended Care segment in conjunction with the Infection Control segment, and since the majority of the Extended Care revenue is now generated from the medical bed pads, as of the first quarter of 2009, these products are consolidated in the Infection Control segment. All numbers have been updated to reflect the updated segmentation.

Our target markets are pharmaceutical manufacturing, bio-pharmaceutical manufacturing and medical device manufacturing, lab animal research, high technology electronics manufacturing (which includes the semi-conductor market), medical and dental distributors, pet distributors and construction, building supply and roofing distributors.

Our products are used primarily in cleanrooms, industrial safety manufacturing environments, health care facilities, such as hospitals, laboratories and dental offices, as well as building and re-roofing sites. Our products are distributed principally in the United States through a network consisting of purchasing groups, national distributors, local distributors, independent sales representatives and our own sales and marketing force.

RESULTS OF OPERATIONS


The following table sets forth certain operational data as a percentage of sales
for the periods indicated:



                                     For the Three Months Ended        For the Nine Months Ended
                                            September 30,                    September 30,
                                        2009             2008            2009             2008
Sales                                      100.0 %          100.0 %         100.0 %          100.0 %

Gross profit                                48.6 %           42.6 %          47.1 %           44.0 %

Selling, general and
administrative                              21.7 %           30.1 %          25.3 %           35.3 %

Income from operations                      26.0 %           11.0 %          20.6 %            7.0 %

Income before provision for
income taxes                                26.3 %           11.9 %          21.2 %            7.7 %

Net income                                  16.7 %            7.3 %          13.5 %            4.8 %

Three and Nine Months ended September 30, 2009, compared to Three and Nine Months ended September 30, 2008

Sales: Consolidated sales for the three months ended September 30, 2009 increased to $16,889,000 from $10,217,000 for the three months ended September 30, 2008, representing an increase of $6,672,000, or 65.3%. This increase consisted of increased sales in the Infection Control segment of $4,709,000 and increased Building Supply segment sales of $2,137,000, partially offset by decreased Disposable Protective Apparel segment sales of $174,000.

The Building Supply segment (formerly known as the Engineered Products segment) sales for the three months ended September 30, 2009 increased by $2,137,000, or 67.7%, to a quarterly record of $5,292,000, compared to $3,155,000 for the same period of 2008. This quarterly record follows on the heels of a previous quarterly record of $3,758,000 in the second quarter of 2009. The segment increase was primarily due to a 72.6% increase in sales of REX™ Synfelt synthetic roof underlayment and a 52.0% increase in sales of REX™ Wrap house wrap. The sales mix within the Building Supply segment for the third quarter of 2009 and 2008 was 75% and 72%, respectively, for synthetic roof underlayment and 25% and 28%, respectively, for house wrap.

Our REX™ Synfelt synthetic roof underlayment is perceived as a superior product in the industry and as the market evolves from felt paper to sythethic roof underlayment, which is a significant opportunity for us; we believe that we are in a very good position to pick up market share. Additionally, we believe that our high-quality, multi-color printed house wrap gives us a distinct competitive advantage in the marketplace and that our market share is growing even during this weak building market and economic downturn.

Our Building Supply segment distribution channel strategy continues to strengthen each and every quarter and should continue to broaden our ability to take advantage of market opportunities throughout this year and into the future.

Sales for the Disposable Protective Apparel segment for the three months ended September 30, 2009 decreased by $174,000, or 3.2%, to $5,265,000, compared to $5,439,000 for the same period of 2008, which were the highest quarterly sales of 2008. Sales in the third quarter of this year were adversely affected by a supply chain issue in which goods from Asia were delayed due to the high demand for products relating to the global H1N1 Influenza A pandemic.

Infection Control segment sales for the three months ended September 30, 2009 increased by $4,709,000, or 290.1%, to a quarterly record of $6,332,000, compared to $1,623,000 for the same period of 2008. This quarterly record follows on the heels of a previous quarterly record of $4,712,000 in the second quarter of 2009. Mask sales were up by 378.9%, or $4,193,000, shield sales were up by 156.5%, or $547,000, and medical bed pad and pet beds were down by 18.3%, or $31,000, compared to the three months ended September 30, 2008.

N-95 respirator mask sales were up significantly in the third quarter of 2009, compared to the same quarter last year and compared to the second quarter of 2009. Our N-95 respirator mask sales are expected to continue to grow significantly in the fourth quarter from current levels and are expected to be substantially stronger than normal for the foreseeable future amidst concerns relating to the global H1N1 Influenza A pandemic. Shield sales also improved in the third quarter of 2009, primarily due to the H1N1 outbreak.

Consolidated sales for the nine months ended September 30, 2009 increased to $40,763,000 from $26,654,000 for the nine months ended September 30, 2008, representing an increase of $14,109,000, or 52.9%. This increase consisted of increased sales in the Infection Control segment of $8,291,000, increased Building Supply segment sales of $4,868,000 and increased Disposable Protective Apparel segment sales of $950,000.

Building Supply segment sales for the nine months ended September 30, 2009 increased by $4,868,000, or 75.6%, to $11,307,000, compared to $6,439,000 for the same period of 2008. The segment increase was primarily due to a 100.2% increase in sales of REX™ Synfelt synthetic roof underlayment and a 32.7% increase in sales of REX™ Wrap house wrap. The sales mix within the Building Supply segment for the first nine months of 2009 and 2008 was 71% and 62%, respectively, for synthetic roof underlayment and 29% and 38%, respectively, for house wrap.

Sales for the Disposable Protective Apparel segment for the nine months ended September 30 2009 increased by $950,000, or 6.2%, to $16,176,000, compared to $15,226,000 for the same period of 2008. The year-to-date increase was related primarily to increased sales to our largest distributor, as well as increased sales to a broad base of our distribution network.

Infection Control segment sales for the nine months ended September 30, 2009 increased by $8,291,000, or 166.2%, to $13,280,000, compared to $4,989,000 for the same period of 2008. Mask sales were up by 201.1%, or $6,632,000, shield sales were up by 173.8%, or $1,885,000, and medical bed pad and pet beds were down 37.3%, or $226,000, compared to the nine months ended September 30, 2008.

The overall increase in mask sales for the first nine months of 2009 was primarily attributable to the surge in N-95 respirator mask sales in the second and third quarters of 2009 due to concerns relating to the H1N1 Influenza A pandemic. Shield sales were up primarily due to approximately $1.3 million in shields being shipped in 2009 from a $1.7 million non-recurring shield order received in the fourth quarter of 2008 and due to the H1N1 Influenza A pandemic.

Gross Profit: Gross profit increased by $3,854,000, or 88.5%, to $8,209,000 for the three months ended September 30, 2009 from $4,355,000 for the same period of 2008. The gross profit margin was 48.6% for the three months ended September 30, 2009, compared to 42.6% for the three months ended September 30, 2008.

Gross profit increased by $7,476,000, or 63.8%, to $19,199,000 for the nine months ended September 30, 2009 from $11,723,000 for the same period of 2008. The gross profit margin was 47.1% for the nine months ended September 30, 2009, compared to 44.0% for the nine months ended September 30, 2008.

Gross profit margin for the three and nine months ended September 30, 2009 was positively affected by the change in product mix in which Infection Control sales, which have higher margins, increased as a percentage of total sales.

Selling, General and Administrative Expenses: Selling, general and administrative expenses increased by $581,000, or 18.9%, to $3,659,000 for the three months ended September 30, 2009 from $3,078,000 for the three months ended September 30, 2008. As a percentage of net sales, selling, general and administrative expenses decreased to 21.7% for the three months ended September 30, 2009 from 30.1% for the same period of 2008. The $581,000 increase in expenses was primarily due to increased employee compensation of $119,000, increased executive bonus of $356,000 (which is based on pre-tax income), increased sales commission of $96,000 and increased miscellaneous expenses of $10,000.

Selling, general and administrative expenses increased by $886,000, or 9.4%, to $10,299,000 for the nine months ended September 30, 2009 from $9,413,000 for the nine months ended September 30, 2008. As a percentage of net sales, selling, general and administrative expenses decreased to 25.3% for the nine months ended September 30, 2009 from 35.3% for the same period of 2008. The increase of $886,000 in expenses was primarily due to a $225,000 severance agreement for our previous Senior Vice President of Marketing, which was expensed during the first quarter of 2009, increased employee compensation of $159,000, increased executive bonus of $730,000 and increased commissions of $233,000. The increase was partially offset by decreased travel expenses of $160,000, decreased marketing expenses of $91,000, decreased professional fees and public company expenses of $109,000 and a decreased foreign exchange loss of $101,000.

Selling, general and administrative expenses as a percentage of net sales were significantly lower for the three and nine months ended September 30, 2009, compared to the same periods of 2008. We believe that we can now effectively leverage the infrastructure that we have built to substantially grow the business while decreasing expenses as a percentage of sales from historical levels.

The chief executive officer and president are each entitled to a bonus equal to 5% of the pre-tax profits of the Company. Bonuses of $492,000 were accrued for the three months ended September 30, 2009 as compared to $136,000 in the same period of 2008. Total bonuses of $959,000 were accrued for the nine months ended September 30, 2009, compared to $229,000 in the same period of 2008.

Depreciation and Amortization: Depreciation and amortization expense increased by $14,000, or 9.3%, to $165,000 for the three months ended September 30, 2009 from $151,000 for the same period of 2008. Depreciation and amortization expense increased by $54,000, or $12.5%, to $487,000 for the nine months ended September 30, 2009 from $433,000 for the same period of 2008. The increase was primarily attributable to increased depreciation for the Building Supply segment.

Income from Operations: Income from operations increased by $3,259,000, or 289.4%, to $4,385,000 for the three months ended September 30, 2009, compared to income from operations of $1,126,000 for the three months ended September 30, 2008. The increase in income from operations was due to an increase in gross profit of $3,854,000, partially offset by an increase in selling, general and administrative expenses of $581,000 and an increase in depreciation and amortization of $14,000.

Income from operations increased by $6,536,000, or 348.2%, to $8,413,000 for the nine months ended September 30, 2009, compared to income from operations of $1,877,000 for the nine months ended September 30, 2008. The increase in income from operations was due to an increase in gross profit of $7,476,000, partially offset by an increase in selling, general and administrative expenses of $886,000 and an increase in depreciation and amortization of $54,000.

Equity in Income of Unconsolidated Affiliates: For the three months ended September 30, 2009, we recorded equity in income of unconsolidated affiliates (Harmony) of $47,000, compared to $85,000 for the same period of 2008. For the nine months ended September 30, 2009, we recorded equity in income of unconsolidated affiliates (Harmony) of $217,000, compared to $123,000 for the same period of 2008.

Net Interest Income: For the three months ended September 30, 2009, net interest income was $5,000, compared to net interest income of $7,000 for the same period of 2008. For the nine months ended September 30, 2009, net interest income was $7,000, compared to net interest income of $59,000 for the same period of 2008. The change in net interest income for the three and nine months ended September 30, 2009 was primarily due to lower interest rates in 2009 compared to 2008.

Income Before Provision for Income Taxes: Income before provision for income taxes for the three months ended September 30, 2009 was $4,437,000, compared to $1,218,000 for the three months ended September 30, 2008, representing an increase of $3,219,000, or 264.3%. The increase in income before provision for income taxes was due primarily to an increase in income from operations of $3,259,000, partially offset by a decrease of $38,000 in equity in income of unconsolidated affiliates (Harmony) and a decrease in net interest income of $2,000.

Income before provision for income taxes for the nine months ended September 30, 2009 was $8,637,000, compared to $2,059,000 for the nine months ended September 30, 2008, representing an increase of $6,578,000, or 319.5%. The increase in income before provision for income taxes was due primarily to an increase in income from operations of $6,536,000, an increase of $94,000 in equity in income of unconsolidated affiliates (Harmony) and a decrease in net interest income of $52,000.

Provision for Income Taxes: The provision for income taxes for the three months ended September 30, 2009 was $1,615,000, compared to $473,000 for the same period of 2008. The effective tax rate was 36.3% for the three months ended September 30, 2009, compared to 38.8% for the same period of 2008.

The provision for income taxes for the nine months ended September 30, 2009 was $3,132,000, compared to $790,000 for the same period of 2008. The effective tax rate was 36.3% for the nine months ended September 30, 2009, compared to 38.4% for the same period of 2008.

Management expects the effective tax rate to be in the 36%-37% range for 2009.

Net Income: Net income for the three months ended September 30, 2009 was $2,822,000, compared to net income of $745,000 for the three months ended September 30, 2008, an increase of $2,077,000, or 278.8%. The net income increase was primarily due to an increase in income before provision for income taxes of $3,219,000, partially offset by an increase in income taxes of $1,142,000. Net income as a percentage of sales for the three months ended September 30, 2009 and 2008 was 16.7% and 7.3%, respectively. Basic income per share for the three months ended September 30, 2009 and 2008 was $0.13 and $0.03, respectively. Diluted income per share for the three months ended September 30, 2009 and 2008 was $0.12 and $0.03, respectively.

Net income for the nine months ended September 30, 2009 was $5,505,000, compared to net income of $1,269,000 for the nine months ended September 30, 2008, an increase of $4,236,000, or 333.8%. The net income increase was primarily due to an increase in income before provision for income taxes of $6,578,000, partially offset by an increase in income taxes of $2,342,000. Net income as a percentage of sales for the nine months ended September 30, 2009 and 2008 was 13.5% and 4.8%, respectively. Basic income per share for the nine months ended September 30, 2009 and 2008 was $0.24 and $0.05, respectively. Diluted income per share for the nine months ended September 30, 2009 and 2008 was $0.24 and $0.05, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2009, we had cash and cash equivalents of $9,084,000 and working capital of $25,395,000, an increase in working capital of 17.1%, or $3,702,000, since December 31, 2008. As of September 30, 2009, our current ratio was 6:1, compared to 13:1 as of December 31, 2008. Cash increased by 98.4%, or $4,506,000, to $9,084,000 as of September 30, 2009, compared to $4,578,000 as of December 31, 2008. The increase in cash was due to cash provided by operating activities of $6,815,000 and cash provided by the exercise of stock options of $96,000, offset by cash paid for the repurchase of common stock of $2,109,000 and cash used in investing activities of $296,000 for the aggregate purchase of property and equipment and intangible assets.

We have a $3,500,000 credit facility with Wells Fargo, consisting of a line of credit with interest at prime plus 0.5%. As of September 30, 2009, the prime interest rate was 3.25%. This credit line was renewed in May 2009 and expires in May 2011. Our borrowing capacity on the line of credit was $3,500,000 as of September 30, 2009. The available line of credit is based on a formula of eligible accounts receivable and inventories. As of September 30, 2009, we did not have any borrowings under this credit facility.

Net cash provided by operating activities was $6,815,000 for the nine months ended September 30, 2009, compared to $2,187,000 net cash provided by operating activities for the nine months ended September 30, 2008. The net cash provided by operating activities of $6,815,000 for the nine months ended September 30, 2009 was due to net income of $5,505,000, adjusted by the following: an increase in amortization of share-based compensation expense of $175,000, depreciation and amortization of $487,000, a decrease in deferred income taxes of $22,000, an increase in equity in income of unconsolidated affiliates of $217,000, an increase in accounts receivable of $4,602,000, a decrease in inventory of . . .