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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2006


o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from to

Commission File Number: 0-439

American Locker Group Incorporated

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		16-0338330 (I.R.S. Employer Identification No.)

815 South Main Street, Grapevine, Texas (Address of principal executive offices)		76051 (Zip code)

(817) 329-1600
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

1,568,516 shares of common stock, par value $1.00, issued and outstanding as of July 17, 2008

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain known and unknown risks and uncertainties, including, among others, those contained in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used in this Quarterly Report on Form 10-Q, the words “anticipates,” “plans,” “believes,” “estimates,” “intends,” “expects,” “projects,” “will” and similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words. Such statements, including, but not limited to, the Company’s statements regarding business strategy, implementation of its restructuring plan, competition, new product development and liquidity and capital resources are based on management’s beliefs, as well as on assumptions made by, and information currently available to, management, and involve various risks and uncertainties, some of which are beyond the Company’s control. The Company’s actual results could differ materially from those expressed in any forward-looking statement made by or on the Company’s behalf. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will in fact prove to be accurate. The Company has undertaken no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I — FINANCIAL INFORMATION


Item 1.		Financial Statements.

The interim financial statements included herein are unaudited but reflect, in management’s opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of financial position and the results of our operations for the interim periods presented.

The interim financial statements should be read in conjunction with the financial statements of American Locker Group Incorporated (the “Company”) and the notes thereto contained in the Company’s audited financial statements for the year ended December 31, 2005 presented in the Company’s Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (the “SEC”) on August 31, 2007.

Interim results are not necessarily indicative of results for the full fiscal year.

American Locker Group Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)
(Unaudited)


	September 30,			December 31,
	2006			2005

Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	148,786		$	138,168
Accounts payable		1,547,956			2,296,168
Commissions, salaries, wages and taxes		173,648			159,881
Other accrued expenses		725,555			710,721

Total current liabilities		2,595,945			3,304,938

Long-term liabilities:
Long-term debt		2,064,975			2,178,042
Pension, benefits and other long-term liabilities		842,754			1,144,245

		2,907,729			3,322,287

Total liabilities		5,503,674			6,627,225

Commitments and contingencies
Stockholders’ equity:
Common stock, $1.00 par value:
Authorized shares — 4,000,000
Issued shares — 1,740,656 in 2006 and 1,738,146 in 2005, Outstanding shares — 1,548,656 in 2006 and 1,546,146 in 2005		1,740,656			1,738,146
Other capital		141,534			132,071
Retained earnings		9,922,958			9,235,785
Treasury stock at cost (192,000) shares		(2,112,000	)		(2,112,000	)
Accumulated other comprehensive loss		(371,101	)		(521,838	)

Total stockholders’ equity		9,322,047			8,472,164


Total liabilities and stockholders’ equity	$	14,825,721		$	15,099,389

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

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Operations
(Unaudited)


	Nine Months Ended September 30,
				(Restated)
	2006			2005


Net Sales	$	19,293,216		$	25,289,115

Cost of products sold		12,652,235			17,870,227

Gross profit		6,640,981			7,418,888

Asset impairment — goodwill		—			6,155,204
Selling, general and administrative expenses		5,341,049			6,108,405
Restructuring costs		—			1,953,000

		1,299,932			(6,797,721	)
Other income (expense):
Interest income		18,986			62,060
Other income (expense) — net		(99,071	)		44,232
Interest expense		(139,893	)		(280,339	)

Total other income (expense)		(219,978	)		(174,047	)

Income (loss) before income taxes		1,079,954			(6,971,768	)
Income tax expense (benefit)		392,781			(332,141	)


Net income (loss)	$	687,173		$	(6,639,627	)


Earnings (loss) per share of common stock:
Basic	$	0.44		$	(4.32	)


Diluted	$	0.44		$	(4.32	)


Dividends per share of common stock	$	0.00		$	0.00

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

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Operations
(Unaudited)


	Three Months Ended September 30,
				(Restated)
	2006			2005


Net Sales	$	6,488,683		$	6,791,828

Cost of products sold		4,302,091			5,134,719

Gross profit		2,186,592			1,657,109

Asset impairment — goodwill		—			—
Selling, general and administrative expenses		1,916,145			2,015,042
Restructuring costs		—			523,000

		270,447			(880,933	)
Other income (expense):
Interest income		8,602			18,346
Other income (expense) — net		(52,256	)		15,327
Interest expense		(45,722	)		(86,204	)

Total other income (expense)		(89,376	)		(52,531	)

Income (loss) before income taxes		181,071			(933,464	)
Income tax expense		60,101			(384,798	)


Net income (loss)	$	120,970		$	(548,666	)


Earnings (loss) per share of common stock:
Basic	$	0.08		$	(0.35	)


Diluted	$	0.08		$	(0.35	)


Dividends per share of common stock	$	0.00		$	0.00

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

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Cash Flows
(Unaudited)


	Nine Months Ended September 30,
				(Restated)
	2006			2005


Operating activities
Net (loss) income	$	687,173		$	(6,639,627	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		313,545			513,151
Asset impairment charge — goodwill		—			6,155,204
Provision for uncollectible accounts		78,000			50,000
Deferred income taxes		301,485			(23,227	)
Loss on disposal of assets		—			(374	)
Change in assets and liabilities:
Accounts and notes receivable		653,061			819,725
Inventories		(408,023	)		2,204,688
Prepaid expenses		(30,818	)		43,311
Accounts payable and accrued expenses		(734,018	)		(1,494,620	)
Pension and other benefits		(276,015	)		(86,859	)
Income taxes		613,842			(1,175,206	)

Net cash provided by operating activities		1,198,232			366,166

Investing activities
Purchase of property, plant and equipment		(73,745	)		(387,688	)

Net cash used in investing activities		(73,745	)		(387,688	)

Financing activities
Long-term debt payments		(102,449	)		(3,319,438	)
Issuance of common stock		11,973			33,750

Net cash used in financing activities		(90,476	)		(3,285,688	)
Effect of exchange rate changes on cash		64,631			(69,982	)

Net (decrease) increase in cash		1,098,642			(3,377,192	)
Cash and cash equivalents at beginning of period		1,278,015			5,780,215

Cash and cash equivalents at end of period	$	2,376,657		$	2,403,023

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

American Locker Group Incorporated and Subsidiaries

Notes to Consolidated Financial Statements

1.		Basis of Presentation

		The accompanying unaudited consolidated financial statements of American Locker Group Incorporated (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company’s management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of such condensed financial statements, have been included. Operating results for the nine month period ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.

		The consolidated balance sheet at December 31, 2005 has been derived from the Company’s audited financial statements at that date, but does not include all of the financial information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Company’s consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

		On February 8, 2005, the Company announced that it was notified that its contract with the United States Postal Service (“USPS”) for polycarbonate and aluminum cluster box units (“CBUs”) would not be renewed, and the contract expired on May 31, 2005. During 2005 and 2004, sales to the USPS accounted for 21.4% and 53.9%, respectively, of the Company’s net sales. In addition, sales of the current model polycarbonate and aluminum CBUs to the private market accounted for an additional 32.5% and 18.6% of the Company’s sales in 2005 and 2004, respectively. From May 31, 2005 through September 8, 2007, the Company experienced continuing sales of its aluminum CBU model (Model E) to the private market.

		On May 8, 2007, the USPS notified the Company that the Technical Data Package for the USPS’s new generation USPS-B-1118 CBU was available, and by prior agreement, the Company would be permitted to manufacture and sell the current CBU version for only four more months terminating on September 8, 2007. The Company continued to sell existing inventories of the Model E CBU through September 2007. After September 2007, the Company’s revenues have been adversely affected by this decertification.

		The Company submitted financial and other data as part of its application for the new CBU license program in September 2007 as step one in a multi-stage application process required by the USPS. The Company was notified by the USPS in November 2007 that its application to manufacture the USPS-B-1118 CBU had been rejected. In rejecting the Company’s application, the USPS cited weaknesses in the Company’s financial and inventory controls that existed in 2005 and 2006. Although the Company remedied many of these weaknesses during the 2007 fiscal year, the USPS noted the remedies had not been in place long enough to be subjected to review as part of the Company’s annual audit. However, the USPS did advise the Company that it could resubmit its application within a reasonable period of time. Accordingly, the Company intends to evaluate the feasibility of reapplying to manufacture the USPS-B-1118 CBU at a later time. The Company is implementing a restructuring plan to compensate for the loss of revenues from the aluminum CBU, which plan includes reducing administrative expenses, adoption of lean manufacturing processes and expanding the Company’s sales efforts and product offerings in its private postal and non-postal markets.

		The loss of revenues resulting from the non-renewal of the Company’s CBU contract with the USPS, in addition to the loss of sales of CBUs in the private market, make the Company’s future uncertain. On May 18, 2005, after the February 2005 USPS notification of non-renewal of the CBU contract, the Company’s Board of Directors announced a restructuring plan to significantly reduce annual selling, general and administrative expenses. Most of these savings were achieved by the Company not renewing its building leases in Jamestown, New York upon their respective expiration dates in September 2005 and November 2005 and relocating Company headquarters from the leased facilities in Jamestown, New York to Company-owned facilities in Grapevine, Texas. Further, the Company discontinued its Jamestown-based assembly operations, eliminated many of its 37 salaried and hourly positions in Jamestown and froze benefits under its current pension plan

		covering employees in the United States. Due to the non-renewal of the CBU contract, all polycarbonate CBU assembly operations in Jamestown ceased in the fall of 2005.

		Additional risks and uncertainties not presently known or that the Company currently deems immaterial may also impair its business operations. Should one or more of these risks or uncertainties materialize, the Company’s business, financial condition or results of operations could be materially adversely affected.

2.		Restatement of Prior Years’ Consolidated Financial Statements

		Subsequent to the issuance of the Company’s consolidated financial statements for the quarter ended September 30, 2005, management determined that accounting errors, as described below, were included in our previously issued consolidated financial statements for the fiscal years ended December 31, 2003 and 2004, and for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005. These errors were corrected and the restated financial statements were presented, in the Company’s Annual Report on Form 10-K for the 2005 fiscal year. Accordingly, we have restated the September 30, 2005 quarterly consolidated financial statements included herein for comparative purposes to correct the accounting errors described below that were corrected in the Company’s fiscal 2005 audited financial statements. The following table presents the impact of the restatement on the September 30, 2005 net income (loss) and earnings per share:


	For the nine months						For the three months
	ended September 30, 2005						ended September 30, 2005
	Amount			Diluted EPS			Amount			Diluted EPS

Net income, as originally reported	$	(6,611,876	)	$	(4.30	)	$	(539,318	)	$	(0.35	)
Canadian defined benefit pension plan (2)		(27,751	)		(0.02	)		(9,348	)		(0.01	)
Net income, as restated	$	(6,639,627	)	$	(4.32	)	$	(548,666	)	$	(0.35	)

The following tables present the effects of the adjustment on our previously issued consolidated statement of income for the nine and three months ended September 30, 2005:


	For the nine months ended September 30, 2005
	As
	previously
	reported		Adjustments		As restated

Net sales (1)	$	24,758,791	$	530,324	$	25,289,115

Selling, administrative and general expenses (1) and (2)	$	5,550,330	$	558,075	$	6,108,405


	For the three months ended September 30, 2005
	As
	previously
	reported		Adjustments		As restated

Net sales (1)	$	6,612,149	$	179,679	$	6,791,828

Selling, administrative and general expenses (1) and (2)		1,826,015		189,027		2,015,042

The errors corrected in the September 30, 2005 consolidated financial statements, as reflected and noted on the table above, are as follows:

	(1)		Failure to classify freight billed to customers as revenue and instead classifying it as a reduction of selling, administrative and general expenses. This adjustment had the effect of increasing revenue by $530,324 and $179,679 for the nine months and three months ended September 30, 2005, respectively and reducing selling, general and administrative expenses by a corresponding amount. This adjustment had no effect on net income.

	(2)		Failure to recognize the liability for and disclose the existence of the Company’s Canadian defined benefit pension plan. This adjustment had the effect of decreasing net income for the nine months and three months ended September 30, 2005 by $27,751 and $9,348, respectively.

3.		Inventories

		Inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out method for over 50% of the inventories. For the remaining inventories, cost is determined by the first-in, first out method (FIFO). The Company uses the gross profit method to determine cost of sales and inventory for interim periods. Inventory components are estimated based on historical relationships as follows:


	September 30,			December 31,
	2006			2005

Finished goods	$	592,497		$	610,759
Work-in-process		1,110,933			774,190
Raw materials		1,818,289			1,910,048

		3,521,719			3,294,997

Less allowance to reduce to LIFO basis		(47,320	)		(228,710	)


	$	3,474,399		$	3,066,287

4.		Income Taxes

		Provision for income taxes is based upon the estimated annual effective tax rate.

		In May 2005, the Company received a repatriation dividend from its Canadian operations in the amount of CDN$800,000, an amount equivalent to US$604,000 at the time. This amount is net of Canadian withholding taxes of CDN$40,000.

5.		Stockholders Equity

		Changes in stockholders equity were due to changes in comprehensive income as well as the issuance of stock as compensation to non-employee directors in March 2006. On March 31, 2006, the Company issued 770 shares of common stock to non-employee directors and increased other capital by $2,965, representing compensation expense of $3,735. On June 30, 2006, the Company issued 900 shares to non-employee directors and increasing other capital by $3,600 representing compensation expense of $4,500. On September 30, 2006, the Company issued 840 shares to non-employee directors and increasing other capital by $2,898 representing compensation expense of $3,738.

		On June 29, 2005, 12,000 options were exercised at a price of $2.81 per share. In addition to the $33,750 of proceeds received by the Company upon exercise of those options, the Company also increased other capital by $13,000, representing the tax benefit the Company estimated it would receive.

6.		Comprehensive Income (Loss)

		The following table summarizes net income (loss) plus changes in accumulated other comprehensive loss, a component of stockholders’ equity in the consolidated statement of financial position.


	Nine Months Ended September 30,
			(Restated)
	2006		2005


Net income (loss)	$	687,173	$	(6,639,627	)
Foreign currency translation adjustments		65,678		(83,533	)
Minimum pension liability adjustments, net of tax effect of $59,583 in 2006 and $1,236 in 2005		85,059		1,854

Total comprehensive income	$	837,910	$	(6,721,306	)


	Three Months Ended September 30,
			(Restated)
	2006		2005


Net income (loss)	$	120,970	$	(548,666	)
Foreign currency translation adjustments		7,216		9,491
Minimum pension liability adjustments, net of tax effect of $20,139 in 2006 and $412 in 2005		30,209		618

Total comprehensive income	$	158,395	$	(538,557	)

7.		Pension Benefits

		The following sets forth the components of net periodic employee benefit cost of the Company’s defined benefit pension plan for the nine and three months ended September 30, 2006 and 2005:


	Nine Months Ended September 30,
	Pension Benefits
	U.S. Plan						Canadian Plan
										(Restated)
	2006			2005			2006			2005

Service cost	$	22,865		$	250,365		$	21,899		$	24,353
Interest cost		138,283			195,843			43,466			37,675
Expected return on plan assets		(134,151	)		(188,091	)		(51,735	)		(36,064	)
Net actuarial loss		22,437			47,094			2,315			—
Amortization or prior service cost		—			14,812			—			—

Net periodic benefit cost	$	49,434		$	320,023		$	15,945		$	25,964


	Three Months Ended September 30,
	Pension Benefits
	U.S. Plan						Canadian Plan
										(Restated)
	2006			2005			2006			2005

Service cost	$	7,622		$	83,455		$	7,300		$	8,118
Interest cost		46,094			65,281			14,489			12,558
Expected return on plan assets		(44,717	)		(62,697	)		(17,245	)		(12,021	)
Net actuarial loss		7,479			15,698			771			—
Amortization or prior service cost		—			377			—			—

Net periodic benefit cost	$	16,478		$	102,114		$	5,315		$	8,655

		The Company has frozen the accrual of any additional benefits under the U.S. defined benefit pension plan effective July 15, 2005.

		For additional information on the defined benefit pension plans, please refer to Note 9 of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

8.		Earnings Per Share

		The Company reports earnings per share in accordance with the Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” The following table sets forth the computation of basic and diluted earnings per common share:


	Nine Months Ended September 30,
			(Restated)
	2006		2005

Numerator:
Net income (loss)	$	687,173	$	(6,639,627	)


Denominator:
Denominator for basic earnings per share — weighted average shares		1,546,965		1,538,234
Effect of Dilutive Securities:
Stock options		—		—


Denominator for diluted earnings per share — adjusted weighted average shares and assumed conversion		1,546,965		1,538,234


Basic earnings (loss) per common share:
Net income (loss)	$	0.44	$	(4.32	)


Diluted earnings (loss) per common share:
Net income (loss)	$	0.44	$	(4.32	)


	Three Months Ended September 30,
			(Restated)
	2006		2005

Numerator:
Net income (loss)	$	120,970	$	(548,666	)


Denominator:
Denominator for basic earnings per share — weighted average shares		1,547,816		1,546,146
Effect of Dilutive Securities:
Stock options		—		—


Denominator for diluted earnings per share — adjusted weighted average shares and assumed conversion		1,547,816		1,546,146


Basic earnings (loss) per common share:
Net income (loss)	$	0.08	$	(0.35	)


Diluted earnings (loss) per common share:
Net income (loss)	$	0.08	$	(0.35	)

		The Company had 33,600 stock options outstanding at September 30, 2006, which were not included in the common share computation for earnings (loss) per share, as the common stock equivalents were anti-dilutive.

9.		Asset Impairment — Goodwill

		Due to the significance of the reduction in business volume resulting from the loss of the USPS contract, which expired May 31, 2005, management determined that the fair value of the Company had declined significantly. In accordance with FAS No. 142, “Goodwill and Other Intangible Assets”, the carrying value of goodwill is tested for impairment when such events occur and a charge to earnings is required for any identified impairments. This charge to earnings is to be recorded in the period in which the events causing impairment occurred. Based on management’s recent analysis, the fair value of the Company, after learning of the loss of the USPS contract on February 8, 2005, is no longer in excess of the carrying value of the net underlying assets, including goodwill. The second step of the Company’s test for impairment indicated that no goodwill exists. Accordingly, the Company recorded an impairment charge of approximately $6,155,000 in the quarter ended March 31, 2005.

		The Company also evaluated its inventory for impairment in accordance with ARB No. 43, “Accounting for Inventory”, and expected losses related to committed purchase orders. As a result, the Company recorded an inventory impairment charge of $147,000 and accrued $125,000 for an anticipated loss on committed purchase orders. The expense was included in cost of sales for the quarter ended March 31, 2005.

10.		Debt

		As discussed in Notes 6 and 20 of the Company’s consolidated financial statements included in the 2005 Annual Report on Form 10-K, on March 18, 2005, the Company received a notice of default and reservation of rights letter from its lender regarding its bank notes as a result of the non-renewal of the Company’s CBU contract with the USPS. After discussions with its lender following the notice of the non-renewal of the USPS contract, the Company agreed to accelerate repayment of its bank notes and has repaid them in full.

		On March 5, 2007, the Company entered into a new credit facility with The F&M Bank and Trust Company which was used to repay the existing mortgage loan. The new credit facility consists of a $2,200,000 term loan and a $750,000 revolving line of credit. The loan bears interest at prime plus 75 basis points (0.75%). The revolving line of credit was renewed on March 5, 2008. The revolving line of credit matures on March 5, 2009 and the term loan matures on March 5, 2012. The term loan is payable in monthly installments of $22,493 in principal and accrued interest (subject to upward adjustment based upon the current interest rate in effect). The line of credit is secured by all accounts receivable, inventory, and equipment. The term loan and the revolving line of credit are secured by a Deed of Trust covering the Company’s primary manufacturing and headquarters facility in Grapevine, Texas. The credit agreement underlying the bank notes payable requires compliance with certain covenants.

		On July 24, 2008, the Company received a waiver from The F&M Bank and Trust Company under its credit facility with respect to, among other things, waiver of any default or event of default arising under the Credit Facility as a result of our failure to comply with certain reporting covenants requiring the delivery of financial statements for the first quarter of 2008. Additionally, the covenant requiring the maintenance of a certain debt service coverage ratio was waived through January 1, 2009.

11.		Restructuring

		In May 2005, the Company announced that it would undertake restructuring initiatives to realign its organization in response to the loss of its CBU contract with the USPS. The Company’s plan called for significant reductions in selling, general and administrative costs. A majority of the cost reductions were realized by relocating the Company’s headquarters, from leased facilities in Jamestown, New York to the Company’s facility in Grapevine, Texas. In addition, savings were realized by eliminating certain corporate level staff and several satellite sales offices.

		To implement the restructuring plan, management anticipated incurring aggregate impairment charges (exclusive of goodwill impairment) and costs of approximately $2,329,000. In accordance with Financial Accounting Standards (FAS) No. 146 “Accounting for Costs Associated with Exit or Disposal Activities,” costs associated with an exit or disposal activity are recognized when the associated liabilities are incurred.

The following table summarizes restructuring and related costs incurred by the Company in the nine months ended September 30, 2006 and 2005:


	Nine Months Ended
	September 30,
	2006		2005
Cost of sales:
Equipment depreciation	$	—	$	92,000
Inventory impairment		—		147,000
Purchase order commitments		—		125,000

Subtotal		—	$	364,000

Sales, general and administrative:
Severance		—	$	500,000
Leases		—		30,000
Professional fees		—		1,059,000

Subtotal		—	$	1,589,000

Total restructuring costs	$	—	$	1,953,000


	Three Months Ended
	September 30,
	2006		2005
Cost of sales:
Equipment depreciation	$	—	$	17,000
Inventory impairment		—		—
Purchase order commitments		—		—

Subtotal		—	$	17,000

Sales, general and administrative:
Severance		—	$	27,000
Leases		—		—
Professional fees		—		479,000

Subtotal		—	$	506,000

Total restructuring costs	$	—	$	523,000

The following table analyzes the changes in the Company’s reserve with respect to the restructuring plan from December 31, 2005 to September 30, 2006:


	December 31,		Expense		Payments/		September 30,
	2005				Charges		2006
Purchase order committments	$	—	$	—	$	—	$	—
Severance		133,000		—		95,000		38,000
Other		—		—		—		—

Total	$	133,000	$	—	$	95,000	$	38,000

12.		Commitments and Contingencies

		In July 2001, the Company received a letter from the New York State Department of Environmental Conservation (the “NYSDEC”) advising the Company that it is a potentially responsible party (PRP) with respect to environmental contamination at and alleged migration from property located in Gowanda, New York which was sold by the Company to Gowanda Electronics Corporation prior to 1980. In March 2001, the NYSDEC issued a Record of Decision with respect to the Gowanda site in which it set forth a remedy, including continued operation of an existing extraction well and air stripper, installation of groundwater pumping wells and a collection trench, construction of a treatment system in a separate building on the site, installation of a reactive iron wall covering 250 linear feet, which is intended to intercept any contaminates, and implementation of an on-going monitoring system. The NYSDEC has estimated that its selected remediation plan will cost approximately $688,000 for initial construction and a total of $1,997,000 with respect to expected operation and maintenance expenses over a 30-year period after completion of initial construction. The Company has not conceded to the NYSDEC that the Company is liable with respect to this matter and has not agreed with the NYSDEC that the remediation plan selected by NYSDEC is the most appropriate plan. This matter has not been litigated, and at the present time the Company has only been identified as a PRP. The Company also believes that other parties may have been identified by the NYSDEC as PRPs, and the allocation of financial responsibility of such parties has not been litigated. Based upon currently available information, the Company is unable to estimate timing with respect to the resolution of this matter. The NYSDEC has not commenced implementation of the remedial plan and has not indicated when construction will start, if ever. The Company’s primary insurance carrier has assumed the cost of the Company’s defense in this matter, subject to a reservation of rights.

		Beginning in September 1998 and continuing through the date of filing of this Quarterly Report on Form 10-Q, the Company has been named as an additional defendant in approximately 165 cases pending in state court in Massachusetts. The plaintiffs in each case assert that a division of the Company manufactured and furnished components containing asbestos to a shipyard during the period from 1948 to 1972 and that injury resulted from exposure to such products. The assets of this division were sold by the Company in 1973. During the process of discovery in certain of these actions, documents from sources outside the Company have been produced which indicate that the Company appears to have been included in the chain of title for certain wall panels which contained asbestos and which were delivered to the Massachusetts shipyards. Defense of these cases has been assumed by the Company’s insurance carrier, subject to a reservation of rights. Settlement agreements have been entered in approximately 20 cases with funds authorized and provided by the Company’s insurance carrier. Further, over 100 cases have been terminated as to the Company without liability to the Company under Massachusetts procedural rules. Therefore, the balance of unresolved cases against the Company as of May 9, 2008 is approximately 45 cases.

		While the Company cannot estimate potential damages or predict the ultimate resolution of these asbestos cases as the discovery proceedings on the cases are not complete, based upon the Company’s experience to date with similar cases, as well as the assumption that insurance coverage will continue to be provided with respect to these cases, at the present time, the Company does not believe that the outcome of these cases will have a significant adverse impact on the Company’s operations or financial condition.

		The Company is involved in other claims and litigation from time to time in the normal course of business. The Company does not believe these matters will have a significant adverse impact on the Company’s operations or financial condition.


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

Effect of New Accounting Guidance

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. SFAS No. 151 amends guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The Statement requires that these items be recognized as current-period charges. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company adopted SFAS No. 151 on January 1, 2005, and the initial adoption did not have a material impact on the results of operations.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,” requiring retrospective application to prior-period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also redefines “restatement” as the revising of previously issued financial statements to reflect correction of errors made. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted this standard in 2006 and the initial adoption did not have a material impact on the results of operations, financial position or cash flows.

On January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payments” on a modified-prospective-transition method. Under this method, the Company’s prior periods do not reflect any restated amounts. The Company recognized no compensation expense related to stock options during the period ended March 31, 2006, as a result of the adoption of Statement 123R. Prior to January 1, 2006, the Company had applied the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 and had adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148. Accordingly, the compensation expense of any employee stock options granted was the excess, if any, of the quoted market price of the Company’s common stock at the grant date over the amount the employee must pay to acquire the stock. All options issued in prior period have fully vested, thus no compensation expense is required to be recognized during the period ended March 31, 2006.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN48). FIN48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109. “Accounting for Income Taxes,” by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. If a tax position is more likely than not to be sustained upon examination, then an enterprise would be required to recognize in its financial statements the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The provisions of FIN 48 will be effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company adopted FIN 48 on January 1, 2007 and the impact on the Company’s consolidated financial statements was immaterial.

In June 2006, the FASB ratified its consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (EITF No. 06-3). The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is imposed concurrent with or subsequent to a revenue-producing transaction between a seller and a customer. For taxes within the scope of this issue that are significant in amount, the consensus requires the following disclosures: (i) the accounting policy elected for these taxes and (ii) the amount of the taxes reflected gross in the income statement on an interim and annual basis for all periods presented. The disclosure of those taxes can be done on an aggregate basis. The consensus is effective for interim and annual periods beginning after December 15, 2006, with earlier application permitted. Adoption of EITF No. 06-3 is not expected to affect our financial position or results of operations.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” Statement No. 157 defines fair value, established a framework for measuring fair value under GAAP, and expands disclosures about fair value measures. Statement No. 157 is effective for fiscal years beginning after November 15, 2007, with early adoption

encouraged. The provisions of Statement No. 157 are to be applied on a prospective basis, with the exception of certain financial instruments for which retrospective application is required. The adoption of Statement No. 157 is not expected to materially affect our financial position or results of operations.

In September 2006, FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” This statement requires an employer to recognize the overfunded or underfunded status of a single-employer defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 is effective for years ending after December 15, 2006. There was no impact on our consolidated financial statements with respect to the adoption of SFAS No. 158.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108 to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that registrants quantify the impact on the current year’s financial statements of correcting all misstatements, including the carryover and reversing effects of prior years’ misstatements, as well as the effects of errors arising in the current year. SAB 108 is effective as of the first fiscal year ending after November 15, 2006, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006, for errors that were not previously deemed material, but are material under the guidance in SAB No. 108. There was no impact on our consolidated financial statements with respect to the adoption of SAB No. 108.

Results of Operations — the Nine Months Ended September 30, 2006 Compared to the Nine Months Ended September 30, 2005

Overall Results and Outlook

The first nine months of 2006 reflect a decline of $5,995,899 to $19,293,216 when compared to net sales of $25,289,115 for the same period of 2005, representing a 23.7% decline. This decrease was attributable primarily to the loss of the USPS contract, which is discussed below in greater detail. Pre-tax operating results increased to a pre-tax profit of $1,079,954 for the first nine months of 2006 from a reported pre-tax loss of $6,971,768 for the first nine months of 2005. Results for the first nine months of 2005 were negatively impacted by an impairment charge of $6,155,204 related to the write-down of previously recorded goodwill and one-time charge of $1,953,000 for restructuring charges. After tax operating results increased to a reported net profit of $687,173 for the first nine months of 2006 compared to a net loss of $6,639,627 for the first nine months of 2005. Net income per share was $.44 per share on a diluted basis for the first nine months of 2006, up from a net loss per share of $4.32 for the same period in 2005.

Non-Renewal of USPS Contract and Other Events

On February 8, 2005, the Company announced that it was notified that its contract with the United States Postal Service (“USPS”) for polycarbonate and aluminum cluster box units (“CBUs”) would not be renewed, and the contract expired on May 31, 2005. During 2005 and 2004, sales to the USPS accounted for 21.4% and 53.9%, respectively, of the Company’s net sales. In addition, sales of the current model polycarbonate and aluminum CBUs to the private market accounted for an additional 32.5% and 18.6% of the Company’s sales in 2005 and 2004, respectively. From May 31, 2005 through September 8, 2007, the Company experienced continuing sales of its aluminum CBU model (Model E) to the private market.

On May 8, 2007, the USPS notified the Company that the Technical Data Package for the USPS’s new generation USPS-B-1118 CBU was available, and by prior agreement, the Company would be permitted to manufacture and sell the current CBU version for only four more months terminating on September 8, 2007. The Company continued to sell existing inventories of the Model E CBU through September 2007. After September 2007, the Company’s revenues have been adversely affected by this decertification.

The Company submitted financial and other data as part of its application for the new CBU license program in September 2007 as step one in a multi-stage application process required by the USPS. The Company was notified by the USPS in November 2007 that its application to manufacture the USPS-B-1118 CBU had been rejected. In rejecting the Company’s application, the USPS cited weaknesses in the Company’s financial and inventory controls

that existed in 2005 and 2006. Although the Company remedied many of these weaknesses during the 2007 fiscal year, the USPS noted the remedies had not been in place long enough to be subjected to review as part of the Company’s annual audit. However, the USPS did advise the Company that it could resubmit its application within a reasonable period of time. Accordingly, the Company intends to evaluate the feasibility of reapplying to manufacture the USPS-B-1118 CBU at a later time. The Company is implementing a restructuring plan to compensate for the loss of revenues from the aluminum CBU, which plan includes reducing administrative expenses, adoption of lean manufacturing processes and expanding the Company’s sales efforts and product offerings in its private postal and non-postal markets.

The loss of revenues resulting from the non-renewal of the Company’s CBU contract with the USPS, in addition to the loss of sales of CBUs in the private market, make the Company’s future uncertain. On May 18, 2005, after the USPS notification of non-renewal of the CBU contract, the Company’s Board of Directors announced a restructuring plan to significantly reduce annual selling, general and administrative expenses. Most of these savings were achieved by the Company not renewing its building leases in Jamestown, New York upon their respective expiration dates in September 2005 and November 2005 and relocating Company headquarters from the leased facilities in Jamestown, New York to the Company’s facilities in Grapevine, Texas. Further, the Company discontinued its Jamestown-based assembly operations, eliminated many of its 37 salaried and hourly positions in Jamestown and froze benefits under its current pension plan that covers employees in the United States. Due to the non-renewal of the CBU contract, all polycarbonate CBU assembly operations in Jamestown ceased in the fall of 2005.

In March 2007 and in furtherance of the restructuring plan, the Company successfully negotiated a new credit facility with the F&M Bank and Trust Company. The new credit facility consists of a $2,200,000 term loan, the proceeds of which were used to repay the Company’s then existing mortgage loan, and a $750,000 revolving line of credit.

By entering into a new credit agreement with a new lender, the Company expects to have adequate cash to meet its debt obligations and to have sufficient working capital to meet its current operational needs.

Net Sales

Consolidated net sales for the nine months ended September 30, 2006 were $19,293,216, a decrease of $5,995,899, or 23.7%, compared to net sales of $25,289,115 for the same period of 2005. The reported decrease is due primarily to reduced volume of plastic postal products sold after the termination of the Company’s CBU contract with the USPS on May 31, 2005. Total plastic sales for the nine months ended September 31, 2006, including both CBUs and Outdoor Parcel Lockers, were zero compared to $9,025,765 during the same period of 2005. Sales of Metal Locker Products, which include metal lockers and metal postal products including the aluminum CBUs sold to the private market, for the nine months ended September 30, 2006 were $19,293,216, an increase of $3,029,866, or 18.6%, compared to sales of $16,263,350 for the same period of 2005, due primarily to increased sales of metal postal lockers.


	Nine Months Ended September 30,				Increase
	2006		2005		(decrease)
Plastic Locker Sales		—		9,025,765		—
Metal Locker Products		19,293,216		16,263,350		18.6	%

Cost of Products Sold

Cost of products sold for the nine months ended September 30, 2006 was $12,652,235, or 65.6% of net sales, compared to $17,870,227, or 70.7% of net sales for the same period of 2005, a decrease of $5,217,992, or 29.2%. The decreased percentage relates to reduced costs from reduced personnel related expenses as a result of the implementation of the restructuring as well as a favorable shift in sales mix away from the lower margin polycarbonate CBU.

Asset Impairment Charge — Goodwill

Due to the loss of the Company’s CBU contract with the USPS (see Note 9 to the Company’s consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q), management has determined that the fair value of the Company has declined significantly. Therefore, the Company, in accordance with the provisions of Financial Accounting Standards Board Statement No. 142, “Goodwill and Other Intangible Assets,” recorded a goodwill impairment charge against 2005 first quarter operating results in the amount of $6,155,204.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended September 30, 2006 were $5,341,049, or 27.7% of net sales, compared to $6,108,405, or 24.2% of net sales, for the same period of 2005, a decrease of $767,356, or 12.6%. This decrease in 2006 was primarily due to a reduction in personnel related expenses as a result of the implementation of the Company’s restructuring plan.

Restructuring Costs

Restructuring costs for the nine months ended September 30, 2006 were zero compared to $1,953,000 for the same period of 2005. Please refer to Note 11 to the Company’s consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for detail related to restructuring costs incurred during the nine months ended September 30, 2006.

Interest Expense

Interest expense for the nine months ended September 30, 2006 was $139,893, a decrease of $140,446, or 50.1%, compared to interest expense of $280,339 for the same period of 2005. The decrease results from lower average outstanding debt during the first nine months of 2006 compared to the same period in 2005 as the Company continues to make payments on its outstanding debt. No new long-term debt was incurred during 2006 or 2005. The Company reduced its outstanding debt by $102,449 during the first nine months of 2006 by making its scheduled debt payments.

Income Taxes

For the nine months ended September 30, 2006, the Company recorded an income tax expense of $392,781 compared to an income tax benefit of $332,141 for the same period of 2005. The Company’s effective tax rate on earnings was approximately 36.4% for the first nine months of 2006 and 40.7% in the first nine months of 2005, excluding a 2005 asset impairment charge associated with goodwill. The impairment charge related to the write-off of goodwill in the amount of $6,155,204 is not deductible for income tax reporting purposes because the goodwill was originally recorded as part of a tax-free exchange.

Results of Operations — The Third Quarter of 2006 Compared to the Third Quarter of 2005

Overall Results and Outlook

The third quarter of 2006 reflects a decline in net sales of $303,145 to $6,488,683 when compared to net sales of $6,791,828 for the same period of 2005, representing a 4.5% decline. This decrease was attributable primarily to the loss of the USPS contract, which is discussed in more detail above. Pre-tax operating results increased to a pre-tax profit of $181,071 for the third quarter of 2006 from a reported pre-tax loss of $933,464 for the third quarter of 2005. Results for the third quarter of 2005 were negatively impacted by a one-time charge of $523,000 for restructuring charges. After-tax operating results increased to a reported net profit of $120,970 for the third quarter of 2006 from a net loss of $548,666 for the third quarter of 2005. Net income per share was $0.08 per share on a diluted basis in the third quarter of 2006, up from a net loss per share of $0.35 for the third quarter of 2005.

Net Sales

Consolidated net sales for the third quarter of 2006 were $6,488,683, a decrease of $303,145, or 4.5%, compared to net sales of $6,791,828 for the same period of 2005. The reported decrease is due primarily to reduced volume of plastic postal products sold after the termination of the Company’s CBU contract with the USPS on May 31, 2005.

Total plastic sales for the third quarter of 2006, including both CBUs and Outdoor Parcel Lockers, were zero compared to $939,289 during the same period of 2005. Sales of Metal Locker Products, which include metal lockers and metal postal products including the aluminum CBUs sold to the private market, for the third quarter of 2006 totaled $6,488,683, an increase of $636,144 or 10.9%, compared to sales of $5,852,539 for the same period of 2005, due primarily to increased sales of metal postal lockers to the private market.


	Three Months Ended September 30,				Increase
	2006		2005		(decrease)
Plastic Locker Sales	$	—	$	939,289		—
Metal Locker Products	$	6,488,683	$	5,852,539		10.9	%

Cost of Products Sold

Cost of products sold for the third quarter of 2006 was $4,302,091, or 66.3% of net sales, compared to $5,134,719, or 75.6% of net sales, for the same period of 2005, a decrease of $832,628, or 16.2%. The decreased percentage relates to reduced costs from reduced personnel related expenses as a result of the implementation of the restructuring as well as a favorable shift in sales mix away from the lower margin polycarbonate CBU.

Selling, General and Administrative Expenses

Selling, general and administrative expenses during the third quarter of 2006 totaled $1,916,145, or 29.5% of net sales, compared to $2,015,042, or 29.7% of net sales, during the same period of 2005, a decrease of $98,897, or 4.9%. This decrease in 2006 was primarily due to a reduction in personnel related expenses as a result of the implementation of the Company’s restructuring plan, partially offset by an increase in legal, accounting and consulting fees related to the fiscal year 2005 audit.

Restructuring Costs

Restructuring costs for the third quarter of 2006 were zero compared to $523,000 for the same period of 2005. Please refer to Note 11 to the Company’s consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for detail related to restructuring costs incurred during the third quarter of 2006.

Interest Expense

Interest expense for the third quarter of 2006 was $45,722 compared to $86,204 for the same period of 2005. The decrease results from lower average outstanding debt during the third quarter of 2006 compared to the same period in 2005 as the Company continues to make payments on its outstanding debt. No new long-term debt was incurred during 2006 or 2005. The Company reduced its outstanding debt by $34,515 during the third quarter of 2006 by making its scheduled debt payments.

Income Taxes

For the third quarter of 2006, the Company recorded an income tax expense of $60,101 compared to an income tax benefit of $384,798 for the same period of 2005. The Company’s effective tax rate on earnings was approximately 33.2% and 41.2% in the third quarter of 2006 and 2005, respectively.

Liquidity and Sources of Capital

The Company’s liquidity is reflected by its current ratio, which is the ratio of current assets to current liabilities, and its working capital, which the excess of current assets over current liabilities. These measures of liquidity were as follows:


	As of September 30,		As of December 31,
	2006		2005
Current Ratio		4.1 to 1		3.2 to 1
Working Capital	$	8,055,390	$	7,361,525

The increase in working capital of $693,865 relates primarily to the net income for the first nine months of 2006 of $687,173 net of capital expenditures of $73,745.

During 2005 and 2006, the Company was in technical default of its long-term debt agreement with its then primary lender, rendered the entire $6,668,596 outstanding principal balance due upon demand. During 2005, the Company repaid $4,352,386 of the outstanding debt and in March 2007, entered into a new long-term debt agreement with The F&M Bank and Trust Company. The new credit facility consists of a $2,200,000 term loan and a $750,000 revolving line of credit. The loan bears interest at prime plus 75 basis points (0.75%). The revolving line of credit matures on March 5, 2008 and the term loan matures on March 5, 2012. The term loan is payable in monthly installments of $22,493 in principal and accrued interest (subject to upward adjustment based upon the current interest rate in effect). The line of credit is secured by all accounts receivable, inventory and equipment. The term loan is secured by a Deed of Trust covering the Company’s primary manufacturing and headquarters facility in Grapevine, Texas. The credit agreement underlying the bank notes payable requires compliance with certain covenants.

As a result of securing the new debt facility, in March 2007, the Company used the proceeds of the term loan to repay the then existing mortgage. Accordingly, the mortgage note balance outstanding at March 31, 2006 and 2005 is classified as to current and long-term under its originally scheduled payment terms.

On July 24, 2008, the Company received a waiver from The F&M Bank and Trust Company under its credit facility with respect to, among other things, waiver of any default or event of default arising under the Credit Facility as a result of our failure to comply with certain reporting covenants requiring the delivery of financial statements for the first quarter of 2008. Additionally, the covenant requiring the maintenance of a certain debt service coverage ratio was waived through January 1, 2009.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company.


Item 3.		Quantitative and Qualitative Disclosures About Market Risk.

Raw Materials

The Company does not have any long-term commitments for the purchase of raw materials. With respect to its products that use steel and aluminum the Company expects that any raw material price changes would be reflected in adjusted sales prices. The Company believes that the risk of supply interruptions due to such matters as strikes at the source of supply or to logistics systems is limited. Present sources of supplies and raw materials incorporated into the Company’s products are generally considered to be adequate and are currently available in the marketplace.

Foreign Currency

The Company’s Canadian operation subjects the Company to foreign currency risk, though it is not considered a significant risk since the Canadian operation’s net assets represented only 11% of the Company’s aggregate net assets at September 30, 2006. Presently, management does not hedge its foreign currency risk.

Interest Rate Risks

The Company had an 8.04% fixed interest rate on its outstanding mortgage loan at September 30, 2006. On March 5, 2007, the Company entered into a new credit agreement providing for a $2,200,000 term loan, the proceeds of which were used to repay the then outstanding mortgage balance, and a $750,000 line of credit. These loans bear interest at the lender’s prime rate plus 0.75%.


Item 4.		Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and principal accounting officer, of the effectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of September 30, 2006. These disclosure controls and procedures are designed to provide reasonable assurance to the Company’s management and board of directors that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to its management, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, including consideration of the existence of the material weaknesses discussed below, the principal executive officer and principal accounting officer of the Company have concluded that the Company’s disclosure controls and procedures as of September 30, 2006 were not effective, at the reasonable assurance level, to ensure that (a) material information relating to the Company is accumulated and made known to the Company’s management, including its principal executive officer and principal accounting officer, to allow timely decisions regarding required disclosure and (b) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

In connection with the preparation of the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2005, which was filed late with the SEC on August 31, 2007 as a result of the previously disclosed restructuring plan approved after the loss of the Company’s contract with the USPS, a number of material weaknesses in the Company’s internal control over financial reporting were identified. These material weaknesses were identified in Item 9A of that Form 10-K. During the third quarter of 2005, the Company commenced the implementation of procedures to provide a more thorough and detailed review of financial information commenced by centralizing and relocating many financial reporting functions and all administrative functions to the Company’s new headquarters in Grapevine, Texas. The Company also hired a corporate controller during the fourth quarter of 2006, who became the Company’s Chief Financial Officer in August 2007. There were no other changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2006.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Taking into account the communication dated August 30, 2007 by the Company’s independent registered public accounting firm to the Audit Committee of the Board of Directors, management has identified the following material weaknesses in the Company’s internal control over financial reporting:

	1)		The Company lacked adequate accounting personnel to oversee the financial accounting and reporting responsibilities of an SEC registrant and maintain internal control over financial reporting to produce financial statements in accordance with U.S. generally accepted accounting principles.

	2)		The Company’s independent registered public accounting firm proposed numerous material adjustments as a result of its audit procedures related to the following:

	•		Bank account reconciliations were not prepared in a timely manner and the Company’s management did not monitor the timeliness of the reconciliation process.

	•		Failure to routinely maintain the Company’s perpetual inventory system. In addition, Company inventory maintained offsite was not reconciled with the general ledger, except annually.

	•		Inadequate procedures in place to ensure that purchases or sale transactions are recorded in the appropriate accounting period.

	•		Reconciliations of subsidiary ledger systems for various other accounts were not reconciled to the general ledger in a timely manner.

	•		Failure to appropriately account for and disclose pension liabilities, which resulted in a restatement to the previously issued financial statements.

The Company has insufficient entity level controls, as defined by COSO, to ensure that the Company meets its disclosure and reporting obligations.

Management has endeavored to address the material weaknesses discussed above and is committed to effectively remediating known weaknesses. Although the Company’s remediation efforts with respect to the material weaknesses discussed above are on-going, the Company will not consider control weaknesses to be

remediated until new internal controls over financial reporting are implemented and operational for a period of time and are tested, and management concludes that the new controls are operating effectively. However, management has addressed the following items:

	•		Hired a Chief Financial Officer.

	•		Implemented more thorough and detailed reviews of financial information.

	•		Developed a reporting package that includes interim financial statements, gross margin analysis, sales reports and material non-financial data by subsidiary.

	•		Implemented a prescribed timetable for the prompt, regular reconciliations of bank accounts, with the bank reconciliations reviewed by management.

	•		The Company no longer maintains offsite inventory as of June 2006.

	•		Implementation of additional procedures to ensure that purchase or sale transactions are recorded in the appropriate accounting periods.

	•		Regularly update and reconcile the Company’s perpetual inventory records.

In addition, management is considering implementing entity level controls, such as: (i) a detailed policy and procedures manual; (ii) a strategic plan and business model; (iii) a budgeting/forecasting control activity; (iv) formalized and enhanced management reporting procedures, including reports to the audit committee; and (v) formal self-monitoring procedures.


	Page No.
FORWARD-LOOKING INFORMATION		3

PART I — FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Consolidated Balance Sheets (Unaudited) as of September 30, 2006 and December 31, 2005		4
Consolidated Statements of Operations (Unaudited) for the Nine Months Ended September 30, 2006 and September 30, 2005		6
Consolidated Statements of Operations (Unaudited) for the Three Months Ended September 30, 2006 and September 30, 2005		7
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2006 and September 30, 2005		8
Notes to Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		22
Item 4. Controls and Procedures		23

PART II — OTHER INFORMATION		25
Item 6. Exhibits		25

SIGNATURES		26
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Certifications Pursuant to 18 U.S.C. Section 1350


	September 30,			December 31,
	2006			2005

Assets
Current assets:
Cash and cash equivalents	$	2,376,657		$	1,278,015
Accounts receivable, less allowance for doubtful accounts of $205,000 in 2006 and $120,000 in 2005		3,236,108			3,966,875
Inventories, net		3,474,399			3,066,287
Prepaid expenses		81,716			50,873
Prepaid income taxes		439,838			1,038,729
Deferred income taxes		1,042,617			1,265,684

Total current assets		10,651,335			10,666,463

Property, plant and equipment:
Land		500,500			500,500
Buildings		3,432,196			3,411,817
Machinery and equipment		7,118,392			7,024,835

		11,051,088			10,937,152
Less allowance for depreciation		(6,915,277	)		(6,561,552	)

Property, plant and equipment, net		4,135,811			4,375,600

Deferred income taxes		38,575			57,326


Total assets	$	14,825,721		$	15,099,389


Exhibit
Number				Description

31.1				Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.

31.2				Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.

32.1				Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	AMERICAN LOCKER GROUP INCORPORATED
July 25, 2008	By:	/s/ Allen D. Tilley
	Allen D. Tilley
	Chief Executive Officer


July 25, 2008	By:	/s/ Paul M. Zaidins
	Paul M. Zaidins
	President, Chief Operating Officer and Chief Financial Officer

o Large accelerated filer

o Accelerated filer

þ Non-accelerated filer

o Smaller reporting company

(Do not check if a smaller reporting company)