Portec Rail Products (PRPX) 10-Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

OR

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

For the transition period from _______________ to _______________

Commission File Number:000-50543

PORTEC RAIL PRODUCTS, INC.

(Exact Name of Registrant as Specified in its Charter)

West Virginia	55-0755271
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
900 Old Freeport Road, Pittsburgh, Pennsylvania	15238-8250
(Address of Principal Executive Offices)	(Zip Code)

(412) 782-6000

(Registrant’s Telephone Number)

(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 twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YESþ NOo

     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):

Large accelerated filer o Accelerated filer o  Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

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

     As of October 31, 2008, there were 9,602,029 shares issued and outstanding of the Registrant’s Common Stock.

PORTEC RAIL PRODUCTS, INC.

INDEX TO FORM 10-Q

Item
Number		Page Number
PART I — FINANCIAL INFORMATION
1.	Financial Statements:
	Condensed Consolidated Balance Sheets September 30, 2008 (Unaudited) and December 31, 2007	3
	Condensed Consolidated Statements of Income (Unaudited) Three and nine months ended September 30, 2008 and 2007	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 2008 and 2007	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
3.	Quantitative and Qualitative Disclosures About Market Risk	31
4T.	Controls and Procedures	31
PART II — OTHER INFORMATION
1.	Legal Proceedings	31
1A.	Risk Factors	32
2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
3.	Defaults Upon Senior Securities	32
4.	Submission of Matters to a Vote of Security Holders	32
5.	Other Information	32
6.	Exhibits	33
	Signatures	34
EX-31.1
EX-31.2
EX-32

2

PART I — FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

Portec Rail Products, Inc.
Condensed Consolidated Balance Sheets

	September 30			December 31
	2008			2007
	(Unaudited)			(Audited)
	(In Thousands)
Assets
Current assets
Cash and cash equivalents	$	6,115		$	4,273
Accounts receivable, net		17,824			17,411
Inventories, net		25,810			22,990
Prepaid expenses and other current assets		1,230			586
Deferred income taxes		236			375
Total current assets	$	51,215		$	45,635
Property, plant and equipment, net of accumulated depreciation of $13,315 and $13,540 at September 30, 2008 and December 31, 2007, respectively.		11,438			11,121
Intangible assets, net of accumulated amortization of $3,989 and $3,140 at September 30, 2008 and December 31, 2007, respectively		30,113			31,542
Goodwill		14,166			15,059
Other assets		920			869
Total assets	$	107,852		$	104,226
Liabilities and Shareholders’ Equity
Current liabilities
Current maturities of long-term debt	$	10,016		$	6,865
Accounts payable		7,592			6,167
Accrued income taxes		960			706
Customer deposits		1,847			1,380
Accrued compensation		2,459			2,979
Other accrued liabilities		3,220			2,795
Deferred purchase price — current portion		—			298
Total current liabilities		26,094			21,190
Long-term debt, less current maturities		7,507			9,463
Deferred income taxes		10,306			11,524
Accrued pension costs		357			1,175
Other long-term liabilities		960			977
Total liabilities		45,224			44,329
Commitments and Contingencies		—			—
Shareholders’ equity:
Common stock, $1 par value, 50,000,000 shares authorized, 9,602,029 shares issued and outstanding at September 30, 2008 and 9,601,779 outstanding at December 31, 2007, respectively		9,602			9,602
Additional paid-in capital		25,417			25,342
Retained earnings		27,696			23,161
Accumulated other comprehensive (loss)/gain		(87	)		1,792
Total shareholders’ equity		62,628			59,897
Total liabilities and shareholders’ equity	$	107,852		$	104,226

See Notes to Condensed Consolidated Financial Statements

3

Portec Rail Products, Inc.
Condensed Consolidated Statements of Income
(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2008		2007		2008			2007
	(Dollars in Thousands, Except Per Share Data)
Net sales	$	29,644	$	27,998	$	84,681		$	84,572
Cost of sales		19,731		18,803		57,140			58,228
Gross profit		9,913		9,195		27,541			26,344
Selling, general and administrative		5,872		5,563		17,267			16,875
Amortization expense		296		315		891			924
Operating income		3,745		3,317		9,383			8,545
Interest expense		205		323		640			947
Other expense (income), net		44		191		(77	)		289
Income before income taxes		3,496		2,803		8,820			7,309
Provision for income taxes		980		913		2,556			2,327
Net income	$	2,516	$	1,890	$	6,264		$	4,982
Earnings per share
Basic and diluted	$	0.26	$	0.20	$	0.65		$	0.52
Weighted average shares outstanding
Basic and diluted		9,602,029		9,601,779		9,601,894			9,601,779
Dividends per share	$	0.06	$	0.06	$	0.18		$	0.18

See Notes to Condensed Consolidated Financial Statements

4

Portec Rail Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

	Nine Months Ended
	September 30
	2008			2007
	(In Thousands)
Operating Activities
Net income	$	6,264		$	4,982
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		1,367			1,763
Amortization expense		891			924
Provision for doubtful accounts		132			79
Deferred income taxes		291			(217	)
Pension (income) expense		(30	)		53
Defined benefit pension plan contributions		(814	)		(186	)
Loss on disposal of assets		48			133
Stock based compensation expense		73			38
Impairment of long-lived assets		—			50
Changes in operating assets and liabilities:
Accounts receivable		(1,739	)		(5,106	)
Inventories		(3,923	)		1,481
Prepaid expenses and other current assets		(851	)		(889	)
Accounts payable		2,286			1,123
Income taxes payable		324			(219	)
Accrued expenses		406			92
Net cash provided by operating activities		4,725			4,101
Investing Activities
Purchases of property, plant and equipment		(2,304	)		(1,484	)
Proceeds from sale of assets		12			2,436
Contingent consideration — business acquisition		(148	)		(116	)
Net cash (used in) provided by investing activities		(2,440	)		836
Financing Activities
Net increase in working capital facilities		3,087			3,237
Book overdrafts		(245	)		171
Principal payments on promissory notes		(280	)		(280	)
Proceeds from term loans		1,800			54
Principal payments on term loans		(2,731	)		(4,326	)
Principal payments on capital leases		—			(62	)
Fees paid to obtain new financing		(21	)		—
Issuance of common stock		2			—
Cash dividends paid to shareholders		(1,728	)		(1,728	)
Net cash used in financing activities		(116	)		(2,934	)
Effect of exchange rate changes on cash and cash equivalents		(327	)		220
Increase in cash and cash equivalents		1,842			2,223
Cash and cash equivalents at beginning of period		4,273			1,822
Cash and cash equivalents at end of period	$	6,115		$	4,045
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	676		$	953
Income taxes	$	2,145		$	2,860

See Notes to Condensed Consolidated Financial Statements

5

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1: Organization

Portec Rail Products, Inc. (sometimes herein referred to as “we”, “our”, “us”, the “Company”, or “Portec Rail Products”) was incorporated in West Virginia in 1997, in conjunction with the purchase of rail-related assets and select material handling assets of Portec, Inc. We along with our predecessor, Portec Inc., have served the railroad industry since 1906 by manufacturing, supplying and distributing a broad range of rail products, including rail joints, rail anchors, rail spikes, railway friction management products and systems, railway wayside data collection and data management systems and freight car securement devices. We also manufacture material handling equipment at our Leicester, England operation. We serve both the domestic and international markets. Our manufacturing facilities are located in Huntington, West Virginia; St. Jean, Quebec, Canada; Vancouver, British Columbia, Canada; Leicester, England, United Kingdom; and Sheffield, England, United Kingdom. We operate an engineering and assembly facility in Dublin, Ohio, and have offices near Chicago, Illinois, and Montreal, Quebec, Canada. Our corporate headquarters is located near Pittsburgh, Pennsylvania.

Note 2: Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Portec Rail Products, Inc.; Salient Systems, Inc. (Salient Systems), our wholly-owned United States subsidiary; Portec Rail Nova Scotia Company, our wholly-owned Canadian subsidiary; and Portec Rail Products (UK) Ltd., our wholly-owned United Kingdom subsidiary (United Kingdom). All significant intercompany accounts and transactions have been eliminated in consolidation. The foregoing financial information has been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and rules and regulations of the Securities and Exchange Commission for interim financial reporting. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The results of operations for the nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year. The accompanying interim financial information is unaudited; however, we believe that the financial information reflects all adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted. These interim financial statements should be read in conjunction with the 2007 Annual Report on Form 10-K. The balance sheet information as of December 31, 2007 was derived from our audited balance sheet included in our 2007 Annual Report on Form 10-K. Unless otherwise indicated, all dollar amounts are in U.S. dollars. Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on net earnings.

6

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 3: Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method for all inventories. Inventory costs include material, labor and manufacturing overhead.

The major components of inventories are as follows:

	September 30		December 31
	2008		2007
	(In Thousands)
Raw materials	$	11,952	$	9,849
Work in process		325		521
Finished goods		14,512		13,017
		26,789		23,387
Less reserve for slow-moving and obsolete inventory		979		397
Net inventory	$	25,810	$	22,990

Note 4: Long-Term Debt

Long-term debt consists of the following:

	September 30		December 31
	2008		2007
	(In Thousands)
National City Bank Credit Facility:(a)
Term loan — Kelsan acquisition	$	6,101	$	8,435
Term loan — Vulcan asset acquisition		1,850		2,300
Revolving credit facility — United States		5,950		2,300
Revolving credit facility — Canada		—		—
United Kingdom loans:(b)
Term loan — Coronet Rail acquisition		1,519		2,119
Working capital facility		—		575
Term loans — vehicles		23		39
Promissory notes — Salient Systems acquisition(c)		280		560
Credit facility — Boone County Bank, Inc.(d)		1,800		—
		17,523		16,328
Less current maturities		10,016		6,865
	$	7,507	$	9,463

(a) National City Bank Credit Facility

Our credit facility with National City Bank is a term loan and revolving credit facility that provided the financing for the Kelsan acquisition in November 2004 and the Vulcan asset acquisition in October 2006, and also supports the working capital requirements of our United States and Canadian business units. The components of this facility are as follows: 1) a $7.0 million United States revolving credit facility; 2) a $4.2 million ($5.0 million CDN) revolving credit facility for our Canadian operations; 3) an outstanding term loan in the original amount of $14.9 million ($17.6 million CDN) provided

7

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

for the Kelsan acquisition in November 2004; and 4) an outstanding term loan in the original amount of $3.0 million provided in November 2006 for the Vulcan Chain product line acquisition. There were no outstanding borrowings on the Canadian revolving credit facility as of September 30, 2008 and 2007. As of September 30, 2008, we had the ability to borrow an additional $5.3 million under the U.S. and Canadian revolving credit facilities.

This agreement contains financial covenants that require us to maintain a current ratio, cash flow coverage and leverage ratios, and to maintain minimum amounts of tangible net worth. This credit facility further limits capital expenditures, sales of assets, and additional indebtedness. At September 30, 2008, we were in compliance with all of these financial covenants.

Term Loan — Kelsan Acquisition:

To finance the acquisition of Kelsan on November 30, 2004 we borrowed $14.9 million ($17.6 million CDN) from National City Bank (Canada) through Portec Rail Nova Scotia Company, a wholly-owned subsidiary of Portec Rail Products, Inc. Portec Rail Nova Scotia Company is the borrower of the funds under the credit agreement, and Portec Rail Products, Inc. is the sole guarantor of the term loan with substantially all of our United States assets pledged as collateral. Under this seven-year term loan, our monthly principal payments are approximately $197,000 ($210,000 CDN). We have the option to direct outstanding borrowings under a Canadian prime lending rate option, a Canadian Banker’s Acceptance Equivalent Note (“BA Note”) option, or utilize a combination of both of these options at our discretion. Interest rates under these options are the prevailing Canadian prime rate plus an applicable margin of 0.75% to 1.75% (prime rate option), or the BA Note interest rate plus an applicable margin of 1.75% to 2.75% (BA Note option). As of September 30, 2008, we had outstanding borrowings of approximately $6.1 million ($6.5 million CDN) that were priced under the BA Note rate option at 4.86%. This term loan is scheduled to mature on November 30, 2011.

Term Loan — Vulcan Asset Acquisition:

On November 7, 2006, we borrowed $3.0 million from National City Bank to finance the Vulcan product line acquisition. Portec Rail Products, Inc. is the sole guarantor of the term loan with substantially all of our United States assets pledged as collateral. Under this five-year term loan, our monthly principal payments are $50,000. The outstanding principal balance accrues interest based upon the 30-day LIBOR rate plus 1.5%. As of September 30, 2008, we had outstanding borrowings of $1.9 million, which accrued interest at 4.69%. This term loan is scheduled to mature on October 31, 2011.

Revolving Credit Facility — United States:

Our U.S. revolving credit facility permits borrowings up to $7.0 million to support the working capital requirements of our United States operations. Included in the $7.0 million is a sub-limit of $1.6 million for standby and commercial letters-of-credit. Outstanding borrowings under this facility can be priced at a prime-based rate or a LIBOR-based rate. As of September 30, 2008, outstanding borrowings under this facility were $6.0 million and accrued interest at 4.69%. As of September 30, 2008, we had no outstanding letters-of-credit. This credit facility is scheduled to expire on September 30, 2010.

Revolving Credit Facility — Canada:

The working capital requirements for our Canadian operations are supported by a $4.2 million ($5.0 million CDN) revolving credit facility. Included within the $4.2 million is a sub-limit of $335,000 ($400,000 CDN) for standby and commercial letters of credit. The interest rate is the Canadian prime rate plus 1.0%. Borrowings on this facility accrued interest at 5.75% at September 30, 2008. As of September 30, 2008 and 2007, there were no outstanding borrowings under this facility or standby commercial letters of credit. This facility is scheduled to expire on December 31, 2011.

8

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(b) United Kingdom Loans

Term Loan — Coronet Rail Acquisition:

Our United Kingdom subsidiary has a term loan in the original amount of $2.6 million (£1.5 million pounds sterling) outstanding at September 30, 2008. This term loan was originally provided by a United Kingdom financial institution to finance the acquisition of Coronet Rail, Ltd. (“Coronet Rail”) in April 2006. As of September 30, 2008, the outstanding principal balance was approximately $1.5 million (£854,000 pounds sterling), and the interest rate on the principal balance outstanding was 6.75%. This loan is scheduled to mature on April 12, 2011. This agreement contains financial covenants that require us to maintain senior interest and cash flow coverage ratios. We were in compliance with these financial covenants as of September 30, 2008.

Working Capital Facility:

In May 2008, we entered into a new working capital facility with a United Kingdom financial institution for our United Kingdom operations, which includes an overdraft availability of $1.6 million (£900,000 pounds sterling); $311,000 (£175,000 pounds sterling) for the issuance of performance bonds, and $142,000 (£80,000 pounds sterling) for the negotiation of foreign checks. This credit facility supports the working capital requirements of Portec Rail Products (UK) Ltd. and Coronet Rail, and is collateralized by substantially all of our United Kingdom assets. The interest rate on this overdraft facility is the financial institution’s base rate plus 1.5%. For any borrowings in excess of $1.6 million (£900,000 pounds sterling) that the financial institution approves, the interest rate is the financial institution’s base rate plus 3.5%. As of September 30, 2008, the interest rate on this facility was 6.00%. There were no outstanding borrowings on this facility as of September 30, 2008; however, our availability under this credit facility was reduced due to outstanding performance bonds in the amount of $277,000 (£156,000 pounds sterling) as of September 30, 2008. This facility is scheduled to expire on April 30, 2009.

Prior to May 2008, our working capital facility for Portec Rail Products (UK) Ltd. included $1.2 million (£700,000 pounds sterling) of overdraft availability; $311,000 (£175,000 pounds sterling) for the issuance of performance bonds, and $71,000 (£40,000 pounds sterling) for the negotiation of foreign checks. This credit facility supported the working capital requirements of Portec Rail Products (UK) Ltd. Additionally, Coronet Rail had an accounts receivable factoring facility (“invoice discounting”) with a United Kingdom financial institution that permitted borrowings up to 85% of its eligible accounts receivable, to a maximum of $1.3 million (£750,000 pounds sterling) for its working capital requirements. The interest rate on this working capital facility was the financial institution’s base rate plus 1.85%. This credit facility was terminated in May 2008.

(c) Salient Systems Promissory Notes

In connection with the acquisition of Salient Systems on September 30, 2004, we executed two promissory notes. One promissory note was executed with Harold Harrison, the founder and former President and Chief Executive Officer of Salient Systems. This promissory note, in the aggregate principal amount of $1,064,000 is due to Mr. Harrison in four equal, annual installments of $266,000 beginning January 3, 2006 and ending January 3, 2009. A second promissory note was executed with Falls River Group, LLC, which acted as a financial advisor to Salient Systems. This promissory note, in the aggregate principal amount of $56,000 is due to Falls River Group, LLC in four equal, annual installments of $14,000 beginning January 3, 2006 and ending January 3, 2009. Principal payments of $266,000 and $14,000, and accrued interest of $46,000, were made to the note holders in January 2008. The unpaid principal balance of the promissory notes accrues interest at the prime rate as published in theWall Street Journal. All accrued and unpaid interest is payable annually beginning January 3, 2006. The outstanding balance on the promissory notes accrued interest at

9

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

5.00% as of September 30, 2008. As of September 30, 2008 we had accrued interest of $11,000 related to these promissory notes.

(d) Credit Facility — Boone County Bank, Inc.

We previously had a $2.0 million line of credit with Boone County Bank, Inc. for our United States business segments. Advances on this line were made to term notes and the line availability was reduced by that amount. In April 2008 we terminated this credit facility. In July 2008, we entered into an agreement with Boone County Bank, Inc. for a draw down line of credit in the maximum amount of $2.1 million to finance certain capital expenditures at our manufacturing facility in Huntington, West Virginia. As of September 30, 2008, the outstanding balance on this facility was $1.8 million. This facility requires interest-only payments at prime rate until the capital projects are completed, at which time this facility will convert into a 60 month term loan at prime rate less 0.25%. As of September 30, 2008, the interest rate on this facility was 5.0%.

Boone County Bank, Inc. is a wholly-owned subsidiary of Premier Financial Bancorp, Inc., located in Madison, West Virginia. Our Chairman of the Board is the Chairman of the Board and a shareholder of Premier Financial Bancorp, Inc. We believe that our credit facility with Boone County Bank, Inc. is on terms comparable to those obtained by a non-affiliated third party.

Note 5: Income Taxes

Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(FIN 48) became effective for us on January 1, 2007. The adoption of FIN 48 during the first quarter 2007 resulted in a transition adjustment reducing beginning retained earnings by $313,000; $195,000 in taxes and $118,000 in interest and penalties. This potential liability resulted from an analysis of services performed in certain states where tax returns had not previously been filed. Additional state tax liability of $76,000 was calculated as part of the review completed during the first quarter 2008. The additional liability was partially offset by reductions for tax positions in previous years of $50,000.

We evaluated uncertain tax provisions pursuant to the guidance found within FIN 48 for the quarter ended September 30, 2008. We are not aware of any changes to our assessment of positions taken in the U.S. Federal and foreign jurisdictions and therefore continue to identify no potential exposure to the financial statements in these areas.

We also reviewed the state tax liability calculation during the third quarter of 2008. We determined that there have been no significant changes since the beginning of the evaluation period to the states in which we have business operations. In addition, a quantitative analysis was performed to calculate the maximum average quarterly impact that this exposure would have on our financial statements. We determined that the resulting value was immaterial to the consolidated financial statements.

We have determined that no adjustment to the FIN 48 liability was necessary as a result of this quarterly assessment. A reconciliation of the beginning and ending amount of unrecognized tax positions is as follows:

10

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

	Nine Months Ended
	September 30, 2008
	(In Thousands)
Balance at January 1, 2008	$	313
Additions based on tax positions related to the current year		76
Reductions for tax positions of prior years		(50	)
Balance at September 30, 2008	$	339

We continue to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003. The Company was notified by the Internal Revenue Service in July 2008, and an examination began in August 2008, covering our fiscal year-end 2006 federal tax return. We are currently unable to assess whether any significant increase or decrease to the unrecognized tax position will be recorded during the next twelve months.

Note 6: Retirement Plans

The components of our net periodic pension (benefit) cost of our United States defined benefit pension plan are as follows for the three and nine months ended September 30, 2008 and 2007:

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2008			2007			2008			2007
	(In Thousands)
Interest cost	$	138		$	133		$	414		$	401
Expected return on plan assets		(166	)		(157	)		(496	)		(471	)
Amortization of unrecognized loss		18			33			53			97
Pension (benefit) cost	$	(10	)	$	9		$	(29	)	$	27

Two contributions have been made to this pension plan in 2008. The first was in April 2008 in the amount of $287,000. The second was in September 2008 in the amount of $328,000. No contributions were made to this pension plan during calendar year 2007.

The components of net periodic pension cost (benefit) of our United Kingdom defined benefit pension plans (the Portec Rail Plan and Conveyors Plan) are as follows for the three and nine months ended September 30, 2008 and 2007:

11

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

	Portec Rail Plan
	Three Months Ended						Nine Months Ended
	September 30						September 30
	2008			2007			2008			2007
	(In Thousands)
Service cost	$	10		$	—		$	31		$	—
Interest cost		80			81			248			240
Expected return on plan assets		(94	)		(89	)		(290	)		(263	)
Amortization of transition amount		(14	)		(15	)		(44	)		(45	)
Amortization of unrecognized loss		20			34			62			100
Pension cost	$	2		$	11		$	7		$	32

	Conveyors Plan
	Three Months Ended						Nine Months Ended
	September 30						September 30
	2008			2007			2008			2007
	(In Thousands)
Service cost	$	1		$	—		$	3		$	—
Interest cost		18			19			56			55
Expected return on plan assets		(19	)		(19	)		(59	)		(55	)
Amortization of transition amount		(3	)		(3	)		(9	)		(9	)
Amortization of unrecognized loss		—			1			—			3
Pension (benefit)	$	(3	)	$	(2	)	$	(9	)	$	(6	)

United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined benefit pension plans. We contributed $132,000 (£74,000) and $34,000 (£19,000) to the Portec Rail Plan and the Conveyors Plan, respectively, for the nine months ended September 30, 2008. We did not make any contributions to either plan during the three months ended September 30, 2008. In August 2007, we contributed $132,000 (£74,000) and $34,000 (£19,000) to the Portec Rail Plan and the Conveyors Plan, respectively.

Note 7: Comprehensive Income

Comprehensive income for the three and nine months ended September 30, 2008 and 2007 is as follows:

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2008			2007			2008			2007
	(In Thousands)
Net income	$	2,516		$	1,890		$	6,264		$	4,982
Minimum pension liability adjustment, net of tax		94			(41	)		94			(95	)
Foreign currency translation adjustments, net of tax		(1,584	)		1,127			(1,974	)		2,334
Comprehensive income	$	1,026		$	2,976		$	4,384		$	7,221

12

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 8: Earnings Per Share

Basic earnings per share (EPS) is computed as net income available to common shareholders divided by the weighted average common shares outstanding. Diluted earnings per share considers the potential dilution that occurs related to the issuance of common stock under stock option plans. We calculated the dilutive effect of our stock options in accordance with Statement of Financial Accounting Standards No. 128,Earnings Per Share(SFAS 128). For both the three and nine months ended September 30, 2008, we determined that our stock options have an anti-dilutive effect on earnings per share, as the incremental shares related to the 2008 and 2007 stock option grants (see Note 12, Stock Options, Page 17) would reduce our average shares outstanding by 9,672 shares and 11,333 shares, respectively. For the three and nine months ended September 30, 2007, the incremental shares related to the 2007 stock option grant would reduce our average shares outstanding by 3,068 shares and 7,273 shares, respectively. As such, the anti-dilutive shares are not included in the calculation of diluted earnings per share.

Note 9: Commitments and Contingencies

Contractual Obligations

The following is a summary of our contractual obligations as of September 30, 2008, due on a calendar year basis:

			Less						More
			than 1		1 — 3		3 — 5		than 5
Contractual Obligations	Total		year		years		years		years
	(In Thousands)
Term loans	$	9,773	$	894	$	7,367	$	1,512	$	—
Purchase obligations		7,192		4,897		2,295		—		—
Working capital facilities		7,750		7,750		—		—		—
Operating leases		5,256		362		2,417		1,146		1,331
Pension plan contributions (1)		3,952		—		1,302		1,450		1,200
Future interest payments (2)		657		114		519		24		—
Total contractual obligations (3)	$	34,580	$	14,017	$	13,900	$	4,132	$	2,531

(1)	Pension plan contributions that may be required more than one year from September 30, 2008 will be dependent upon the performance of plan assets.
(2)	Represents future interest payments on long-term debt obligations as of September 30, 2008. Assumes that the interest rates on our debt obligations at September 30, 2008 (See Note 4, Long-Term Debt, Page 7) will continue for the life of the agreements.
(3)	During the first quarter 2007, we recognized a liability of $313,000 for uncertain tax positions in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (FIN 48). During the first quarter 2008, we recognized $26,000 of additional liability. See Note 5, Income Taxes, Page 10. The total amount of $339,000 is included within other long-term liabilities on the September 30, 2008 consolidated balance sheet. However, because of the high degree of uncertainty regarding the timing of future cash outflows associated with this FIN 48 liability, we cannot reasonably estimate the periods of related future payments, and as such, we have excluded the FIN 48 liability from the contractual obligations table.

Contingencies

During the second quarter 2007, we became aware of a problem with RMP’s Bonded to Rail (BTR) joint bars in which the epoxy that is used as the primary method of adhesion to the rail appeared to fail in certain instances. The BTR is a

13

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

finished good which includes two sections of rail, two joint bars and necessary hardware, and is sold as a final assembled product. We notified our BTR customers of this problem as soon as we became aware of it. We investigated the cause of the epoxy failure, identified the potential time period during which these BTRs were assembled, performed field inspections of BTRs that may have been affected, and corrected known or possible deficiencies. We feel reasonably certain that we have identified the causes of the problem and that we have corrected these deficiencies.

The BTR products manufactured by RMP are covered by a standard one-year replacement warranty. Accordingly, we have accounted for any contingent costs associated with the remediation of the BTRs under Statement of Financial Accounting Standards No. 5,Accounting for Contingencies,specificallyAccrual for Loss Contingencies and Obligations Related to Product Warranties and Product Defects (SFAS 5). Warranty expense of $300,000 and $1.1 million was recognized during the three and nine months ended September 30, 2007, respectively. For the year ended December 31, 2007, we recognized warranty expense of $1.3 million related to defective BTRs. Warranty expense is included in cost of goods sold for the RMP business segment. No additional warranty expense was recognized during the three or nine months ended September 30, 2008. The balance in the BTR warranty reserve at September 30, 2008 is $216,000, which management expects to be adequate to cover potential future costs associated with defective BTRs. Although we believe that $216,000 is a reasonable estimate of our potential exposure for warranty claims on BTRs as of September 30, 2008, changes in the components of our estimate due to new information and future events could cause this estimate to vary significantly. There can be no assurance at this point that future costs pertaining to this issue will not have a material impact on our financial condition or results of operations.

Litigation

We are involved from time to time in lawsuits that arise in the normal course of business. We actively and vigorously defend all lawsuits. We have been named with numerous other defendants in an environmental lawsuit. The plaintiff seeks to recover costs which it has incurred, and may continue to incur, to investigate and remediate its former property as required by the New York State Department of Environmental Conservation (NYSDEC). We have not been named as a liable party by the NYSDEC and believe we have no liability to the plaintiff in the case. We filed a motion for summary judgment seeking a ruling to have us dismissed from the case. In November 2003, the motion for summary judgment was granted and we were dismissed from the case by the United States District Court for the Northern District of New York. In March 2004, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Second Circuit, appealing, in part, the District Court’s decision to dismiss all claims against us. In April 2005, the plaintiff’s appeal was dismissed by the Second Circuit Court without prejudice, and the matter was remanded to the United States District Court for the Northern District of New York for consideration in light of a recent United States Supreme Court decision. As a result, in June 2006, the District Court dismissed all claims brought by the plaintiff pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). On July 24, 2006, the plaintiff filed a notice of appeal to the Second Circuit. In January 2008, the plaintiff’s appeal was dismissed again by the Second Circuit Court without prejudice, and the matter was remanded to the District Court for consideration in light of a more recent United States Supreme Court decision. On July 16, 2008, the District Court decided that the United States Supreme Court decision did not necessitate any change in the District Court’s prior determinations in this case and held that all of its prior rulings stand. On August 4, 2008, the plaintiff filed a notice of appeal to the Second Circuit Court. This appeal is currently in the briefing process. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not estimable at this time.

Note 10: Segment Information

We operate four business segments consisting of the Railway Maintenance Products Division (RMP), the Shipping Systems Division (SSD), Portec Rail Nova Scotia Company (Canada) and Portec Rail Products (UK) Ltd. (United Kingdom), along with corporate functional shared service. The presentation of segment information reflects the manner in which we organize and manage our segments by geographic areas for making operating decisions, assessing performance

14

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

and allocating resources. Intersegment sales are conducted at arm’s-length prices, reflecting prevailing market conditions within the United States, Canada and the United Kingdom. Such sales and associated costs are eliminated in the consolidated financial statements.

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2008			2007			2008			2007
	(In Thousands)
External Sales
RMP	$	12,352		$	13,234		$	34,929		$	38,430
SSD		2,345			2,012			8,287			6,227
Canada		7,502			4,579			21,457			18,265
United Kingdom		7,445			8,173			20,008			21,650
Total	$	29,644		$	27,998		$	84,681		$	84,572
Intersegment Sales
RMP	$	1,092		$	544		$	2,489		$	1,662
SSD		—			—			—			(3	)
Canada		1,875			1,632			5,358			5,418
United Kingdom		—			—			—			146
Total	$	2,967		$	2,176		$	7,847		$	7,223
Total Sales
RMP	$	13,444		$	13,778		$	37,418		$	40,092
SSD		2,345			2,012			8,287			6,224
Canada		9,377			6,211			26,815			23,683
United Kingdom		7,445			8,173			20,008			21,796
Total	$	32,611		$	30,174		$	92,528		$	91,795
Operating Income (Loss)
RMP	$	1,960		$	2,162		$	5,066		$	5,148
SSD		238			323			1,609			961
Canada		1,486			325			3,165			2,450
United Kingdom		872			1,259			2,059			2,608
Corporate Shared Services		(811	)		(752	)		(2,516	)		(2,622	)
Total		3,745			3,317			9,383			8,545
Interest Expense		205			323			640			947
Other (Income) Expense, net		44			191			(77	)		289
Income Before Income Taxes	$	3,496		$	2,803		$	8,820		$	7,309
Depreciation Expense
RMP	$	154		$	215		$	408		$	619
SSD		54			43			153			110
Canada		199			180			597			547
United Kingdom		70			177			160			405
Corporate Shared Services		15			29			49			82
Total	$	492		$	644		$	1,367		$	1,763

15

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2008		2007		2008		2007
	(In Thousands)
Amortization Expense
RMP	$	6	$	2	$	12	$	4
SSD		55		54		163		161
Canada		176		195		533		555
United Kingdom		59		64		183		204
Corporate Shared Services		—		—		—		—
Total	$	296	$	315	$	891	$	924
Capital Expenditures
RMP	$	157	$	211	$	1,891	$	504
SSD		26		32		72		497
Canada		24		136		117		270
United Kingdom		34		13		187		148
Corporate Shared Services		17		17		37		65
Total	$	258	$	409	$	2,304	$	1,484

	September 30		December 31
	2008		2007
	(In Thousands)		(In Thousands)
Total Assets
RMP	$	43,194	$	40,360
SSD		8,204		7,862
Canada		38,327		36,014
United Kingdom		17,945		19,775
Corporate Shared Services		182		215
Total	$	107,852	$	104,226

Note 11: Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141R,Business Combinations — a revision of SFAS 141(SFAS 141R), which will significantly alter the way that companies account for business combinations under the acquisition method. Under SFAS 141R, an acquiring entity will be required to recognize the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. In addition, the following specific changes will be made: (1) all acquisition costs will be expensed as incurred; (2) any restructuring charges related to the business combination will generally be expensed subsequent to the acquisition date; (3) non-controlling interests will be recorded at fair value at the acquisition date; (4) acquired contingent liabilities will be recorded at fair value at acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies; (5) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; and (6) changes in the deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will generally affect income tax expense. For calendar year companies, SFAS 141R prospectively applies to business combinations for which the acquisition date is on or after January 1, 2009. The adoption of SFAS 141R will have an impact on future business combinations which we may engage in; however, at this time, we cannot determine the impact to the Company.

16

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement 115(SFAS 159) that provides companies with an option to report certain financial assets and liabilities in their entirety at fair value. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The fair value option may be applied instrument by instrument, and may be applied only to entire instruments. A business entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The adoption of this statement did not materially impact our consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2), to partially defer the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements(SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. The expanded disclosures in this statement about the use of fair value to measure assets and liabilities should provide users of financial statements with better information about the extent to which fair value is used to measure recognized assets and liabilities, the inputs used to develop the measurements, and the effect of certain measurements on earnings (or changes in net assets) for the period. Whereas SFAS No. 157 is effective for financial statements issued for fiscal year beginning after November 15, 2007, FSP 157-2 defers the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. The adoption of this statement did not materially impact our consolidated financial statements.

Note 12: Stock Options

On July 2, 2008, January 30, 2008 and January 16, 2007, the Company granted 1,750, 72,750 and 79,250 stock options, respectively, to certain employees with an exercise price of $12.01, $9.68, and $9.65 per stock option, respectively, which is equal to the closing stock price on the date of grants. The stock options will vest ratably over a 5-year period and will expire on July 2, 2018, January 30, 2018 and January 16, 2017, respectively. These options were granted under the Portec Rail Products, Inc. 2006 Stock Option Plan (the Option Plan), which authorizes the issuance of up to 150,000 shares of common stock of Portec Rail Products, Inc. pursuant to grants of incentive and non-statutory stock options and will remain in effect for a period of ten years. In 2007, 2,000 stock options from the 2007 stock option grant were forfeited; these were re-granted on January 30, 2008. The 1,750 stock options issued on July 2, 2008 were also re-grants of options that had been forfeited in 2008.

We adopted Statement of Financial Accounting Standards No. 123(R),Share-Based Payments(SFAS 123(R)), effective January 1, 2006; however, we did not incur any compensation expense during 2006. For the three and nine months ended September 30, 2008, we recognized compensation expense of approximately $26,000 and $73,000, respectively, related to the 2008 and 2007 stock option grants. For the three and nine months ended September 30, 2007, we recognized compensation expense of approximately $13,000 and $38,000, respectively, related to the 2007 stock option grant. We expect to recognize additional compensation expense of approximately $212,000 and $177,000 over the remaining vesting periods of the 2008 and 2007 stock option grants, respectively. During the second quarter 2008, 250 stock options were exercised. Total forfeitures for the three and nine months ended September 30, 2008 were 2,200 and 3,200 for the 2007 grant and 1,750 and 2,500 for the 2008 grants respectively. There were no forfeitures for the comparable period in 2007.

To calculate our fair value price per stock option, we utilized a Black-Scholes Model. The following inputs were used in our Black-Scholes Model calculation:

17

Portec Rail Products, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

			Stock Price		Exercise		Annual									Expected
	Fair Value		on Grant		Price per		Dividend			Risk-free			Expected			Term (in
Grant Date	Price		Date		Stock Option		Yield			Rate			Volatility			years)
7/02/08	$	1.42	$	12.01	$	12.01		2.00	%		4.25	%		36.36	%		7.5
1/30/08	$	3.67	$	9.68	$	9.68		2.48	%		4.00	%		38.87	%		7.5
1/16/07	$	3.61	$	9.65	$	9.65		2.50	%		4.73	%		39.40	%		6.5

Note 13: Subsequent Events

On October 24, 2008, PNC Financial Services Group Inc. of Pittsburgh, Pennsylvania announced it has signed an agreement to acquire National City Corp. of Cleveland, Ohio. As disclosed in Note 4, Long Term Debt, Page 7, we have a number of lending facilities with National City Bank. At this time, we are unaware of the impact, if any, this will have on our ability to finance our working capital requirements.

18

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the condensed consolidated financial statements of Portec Rail Products, Inc. and the related notes beginning on page 3. Unless otherwise specified, any reference to the “three months ended” or “nine months ended” is to the three or nine months ended September 30. Additionally, when used in this Form 10-Q, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Portec Rail Products, Inc. and its business segments.

Cautionary Statement Relevant to Forward-looking Statements

     This Form 10-Q contains or incorporates by reference forward-looking statements relating to the Company. Forward-looking statements typically are identified by the use of terms, such as “may,” “will,” “plan,” “should,” “expect,” “anticipate,” “believe,” “if,” “estimate,” “intend,” and similar words, although some forward-looking statements are expressed differently. You should consider statements that contain these and similar words carefully because they describe our expectations, plans, strategies, goals and beliefs concerning future business conditions, our results of operations, our financial position, and our business outlook, or state other “forward-looking” information based on currently available information. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors. We undertake no obligation to update publicly or revise any forward-looking statements. You should not place undue reliance on the forward-looking statements.

     The Company identifies important factors that could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. In particular, the Company’s future results could be affected by a variety of factors, such as:

• customer demand;

• competitive dynamics in the North American and worldwide railroad and railway supply industries;

• capital expenditures by the railway industry in North America and worldwide;

• economic conditions, including changes in inflation rates or interest rates;

• product development and the success of new products;

• our ability to successfully pursue, consummate and integrate attractive acquisition opportunities;

• changes in laws and regulations;

• the development and retention of sales representation and distribution agreements with third parties;

• limited international protection of our intellectual property;

• the loss of key personnel;

• fluctuations in the cost and availability of raw materials and supplies, and any significant disruption of supplies;

• foreign economic conditions, including currency rate fluctuations;

• political unrest in foreign markets and economic uncertainty due to terrorism or war;

• exposure to pension liabilities;

• seasonal fluctuations in our sales;

• technological innovations by our competitors; and

• the importation of lower cost competitive products into our markets.

     The Company specifically declines to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events.

19

Overview

     In the United States, Canada and the United Kingdom, we are a manufacturer, supplier and distributor of a broad range of rail products, including rail joints, rail anchors, rail spikes, railway friction management products and systems, railway wayside data collection and data management systems and load securement products. End users of our rail products include Class I railroads, regional railroads, short-line railroads and transit systems. Our North American business segments along with the rail division of our United Kingdom business segment serve these end users. In addition, our United Kingdom business segment also manufactures and supplies material handling products primarily to end users within the United Kingdom. These products include overhead and floor conveyor systems, racking systems and mezzanine flooring systems. The end users of our material handling products are primarily in the manufacturing, distribution, garment and food industries.

     Our operations are organized into four business segments consisting of the Railway Maintenance Products Division (RMP), the Shipping Systems Division (SSD), Portec Rail Nova Scotia Company (Canada) and Portec Rail Products (UK) Ltd. (United Kingdom), along with corporate shared services. The presentation of segment information reflects the manner in which we organize and manage our segments by geographic areas for making operating decisions, assessing performance and allocating resources. Intersegment sales do not have an impact on our consolidated financial condition or results of operations.

     The demand for some of our products is subject to seasonal fluctuations. Our railroad product lines normally experience strong sales during the second and third quarters as a result of seasonal pick-up in construction and trackwork due to favorable weather conditions. In contrast, our railroad product lines experience normal downturns in sales during the first and fourth quarters due in part to reductions in construction and trackwork during the winter months, particularly in the northern United States and Canada. This reduction in sales generally has a negative impact on our first and fourth quarter results. Notwithstanding seasonal trends, quarterly fluctuations in railroad spending for capital programs and routine maintenance can alter the expected seasonal impact on our business.

     During 2007, the exchange rate of the U.S. dollar deteriorated significantly compared to foreign currencies of the countries in which we have operating locations. The increase in value of the Canadian dollar compared to the U.S. dollar could result in an economic disadvantage for our Canadian operating locations, as lower cost products from the United States may become more economically viable alternatives to the products we offer. During the first nine months of 2008, foreign exchange rates between the U.S. dollar and Canadian dollar remained at relatively the same levels as they were during the fourth quarter 2007, which are historically high, with a ratio of approximately 1:1. During the month of October 2008, the value of the U.S. dollar in relation to the Canadian dollar and British pound sterling has strengthened considerably. However, management can provide no assurance that this trend will continue. If the value of the U.S. dollar continues to deteriorate, or remain at the current levels for an extended period of time, this could result in negative business consequences for our Canadian operations. Alternatively, products that we produce in the United States may be more competitive in foreign markets that we serve. We do not have any control over exchange rates, as these are largely driven by worldwide economic factors.

     During 2008, the United States economy and other worldwide economies experienced a significant downturn. In addition, credit facilities were significantly curtailed during the nine months ended September 30, 2008. While we have not experienced any significant adverse effects to our operations or financial condition as a result of the foregoing, there can be no assurance that our operations or ability to obtain financing will not be materially or adversely affected in future periods.

Results of Operations

Three Months Ended September 30, 2008 compared to Three Months Ended September 30, 2007

     Net Sales.Net sales increased to $29.6 million for the three months ended September 30, 2008, an increase of $1.6 million or 5.9%, from $28.0 million during the comparable period in 2007. Net sales increases of $2.9 million and $335,000 at our Canadian operations and SSD, respectively, were partially offset by net sales decreases of $884,000 and $727,000 at RMP and our United Kingdom operations, respectively. The increase in net sales of $2.9 million at our Canadian operations is primarily due to higher sales of friction management products at both our Montreal and Vancouver locations. The increase in net sales of $335,000 at SSD primarily reflects higher sales of chain securement systems. The $884,000 decrease in net sales at RMP is primarily due to lower sales of Salient Systems’ products. Net sales at our United Kingdom operations decreased $727,000 in the current period, which reflects foreign currency translation that negatively impacted sales by $521,000, along with lower sales volume of material handling products.

20

     Gross Profit.Gross profit increased to $9.9 million for the three months ended September 30, 2008, an increase of $718,000 or 7.8%, from $9.2 million for the comparable period in 2007. The increase in gross profit is attributable to higher gross profit of $1.5 million at our Canadian operations, partially offset by lower gross profit of $555,000 at our United Kingdom operations. Gross profit at our Canadian operations increased $1.5 million in the current period, primarily due to higher sales of friction management products at our Montreal and Vancouver locations. Gross profit at our United Kingdom operations declined $555,000, primarily due to lower gross profit from lower sales volume of material handling products, along with a foreign currency translation of $162,000 that negatively impacted gross profit.

     Selling, General and Administrative Expenses.Selling, general and administrative expenses increased to $5.9 million for the three months ended September 30, 2008, an increase of $310,000 or 5.6%, from $5.6 million for the comparable period in 2007. The increase is primarily due to increased expenses of $321,000 at our Canadian operations and $99,000 at RMP, partially offset by lower expenses of $163,000 at our United Kingdom operations. The $321,000 increase in selling, general and administrative expenses at our Canadian operations is primarily due to higher incentive expense due to increased profitability, higher salaries and benefits, higher business travel expenses, and increased sales commissions due to higher sales volumes. The increase in selling, general and administrative expenses of $99,000 at RMP is primarily due to higher incentive expense due to increased profitability, and higher salaries and benefits. The decrease of $163,000 at our United Kingdom operations is primarily due to a foreign currency translation of $102,000 which reduced expenses, along with lower salaries and benefit costs and lower trade show and convention expenses.

     Interest Expense.Interest expense decreased to $205,000 for the three months ended September 30, 2008, a decrease of $118,000 or 36.5%, from $323,000 for the comparable period in 2007. This lower interest expense is a reflection of lower overall interest rates along with lower debt balances. Total debt obligations decreased to $17.5 million at September 30, 2008, from $19.7 million at September 30, 2007.

     Other Expense.Other expense decreased to $44,000 for the three months ended September 30, 2008, a decrease of $147,000 or 77.0%, from other expense of $191,000 for the comparable period in 2007. Other expense in the current period primarily includes loss on disposal of assets of $27,000 and foreign currency transaction losses of $17,000. Other expense in the prior period includes foreign currency transaction losses of $126,000 and loss on disposal of assets of $28,000.

     Provision for Income Taxes.Provision for income taxes increased to $980,000 for the three months ended September 30, 2008, from $913,000 for the comparable period in 2007, reflecting an increase in income before taxes from $2.8 million for the three months ended September 30, 2007 to $3.5 million for the three months ended September 30, 2008. The effective tax rates on taxable income were 28.0% and 32.5% for the three months ended September 30, 2008 and 2007, respectively. Our consolidated effective tax rate is impacted by our segments’ pro-rata share of consolidated income before taxes and related tax expense or benefit. Our consolidated effective tax rate also reflects the benefit of Canadian research and development tax credits, which reduced income tax expense by $169,000 and $41,000, or 4.8% and 1.5% for the three months ended September 30, 2008 and 2007, respectively. As reported in our 2007 annual filing on Form 10-K, the U.S. Internal Revenue Service (IRS) enacted new regulations, which became effective in 2008, that eliminate advantageous tax benefits that we previously received as a result of our Canadian business segment’s favorable tax structure. As a result, the tax benefits lost during the three months ended September 30, 2008 were approximately $27,000 or 0.8%. We are not certain if these tax benefits, or future tax benefits, will be permanently lost.

     Net Income.Net income increased to $2.5 million for the three months ended September 30, 2008, an increase of $626,000 or 33.1%, from $1.9 million for the comparable period in 2007. Our basic and diluted net income increased to $0.26 per share for the three months ended September 30, 2008, from $0.20 per share for the comparable period in 2007, on average basic and diluted shares outstanding of 9.6 million for each of the three months ended September 30, 2008 and 2007.

Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007

     Net Sales.Net sales increased to $84.7 million for the nine months ended September 30, 2008, an increase of $109,000 or 0.1%, from $84.6 million for the comparable period in 2007. Higher sales of $2.1 million and $3.2 million at SSD and at our Canadian operations, respectively, were partially offset by net sales decreases of $3.5 million at RMP and $1.6 million at our United Kingdom operations, respectively. The increase in net sales of $2.1 million at SSD is primarily due to higher sales volume of both automotive products and chain securement systems. The increase in net sales at our Canadian operations of $3.2 million is primarily due to $1.7 million of higher sales volume of friction management products and a foreign currency translation of $1.4 million that positively impacted net sales. Net sales at RMP declined $3.5 million, primarily due to lower demand for our track component and friction management products, along with lower demand for Salient Systems products. Net sales declined $1.6 million at our United Kingdom operations, primarily due to

21

lower sales of material handling products, along with a foreign currency translation of $540,000 that negatively impacted net sales.

     Gross Profit.Gross profit increased to $27.5 million for the nine months ended September 30, 2008, an increase of $1.2 million or 4.6%, from $26.3 million for the comparable period in 2007. The increase in gross profit is attributable to higher gross profit of $820,000 at SSD and $1.2 million at our Canadian operations, partially offset by lower gross profit of $812,000 at our United Kingdom operations. Higher gross profit of $820,000 at SSD is primarily due to higher gross profit from automotive products, primarily due to sales of our WinChock^TM product. Gross profit at our Canadian operations increased $1.2 million primarily due to higher gross profit on higher sales volume of friction management products, along with a foreign currency translation of $524,000 that positively impacted gross profit. The decrease in gross profit of $812,000 at our United Kingdom operations is a combination of lower gross profit due to lower sales volume, primarily material handling products, along with a foreign currency translation that negatively impacted gross profit in the amount of $172,000.

     Selling, General and Administrative Expenses.Selling, general and administrative expenses increased to $17.3 million for the nine months ended September 30, 2008, an increase of $392,000 or 2.3%, from $16.9 million for the comparable period in 2007. This increase is primarily due to increased expenses of $170,000 at SSD and $480,000 at our Canadian operations, partially offset by lower expenses of $238,000 at our United Kingdom operations and $107,000 in corporate shared services. The increase in selling, general and administrative expenses of $170,000 at SSD is primarily due to higher salaries and benefits, primarily incentive expense. Selling, general, and administrative expenses at our Canadian operations increased $480,000 reflecting a foreign currency translation of $277,000 that negatively impacted expenses along with an increase in salaries and benefit costs, primarily incentive expense, due to increased profitability. The $238,000 decrease in expenses at our United Kingdom operations is primarily due to a decrease in salaries and benefit costs, lower convention and trade show expenses, and lower business travel costs, along with a foreign currency translation of $114,000 which reduced selling, general, and administrative expenses. The decrease of $107,000 in corporate shared services is primarily due to lower professional fees related to Sarbanes-Oxley compliance efforts, partially offset by higher consulting expenses, legal fees, and stock compensation expense related to the 2008 stock option grant.

     Interest Expense.Interest expense decreased to $640,000 for the nine months ended September 30, 2008, a decrease of $307,000 or 32.4%, from $947,000 for the comparable period in 2007. This lower interest expense is a reflection of lower overall interest rates along with lower debt balances. Total debt obligations decreased to $17.5 million at September 30, 2008, from $19.7 million at September 30, 2007.

     Other (Income)/Expense.Other (income)/expense decreased to $77,000 of income for the nine months ended September 30, 2008, a decrease of $366,000 or 126.6%, from other expense of $289,000 for the comparable period in 2007. Other income in the current period includes foreign currency transaction gains of $60,000, and interest income of $42,000, partially offset by losses on disposal of assets. Other expense in the prior period includes foreign currency transaction losses of $280,000 and a $50,000 impairment loss on the Troy, New York property, partially offset by interest income and rental income.

     Provision for Income Taxes.Provision for income taxes increased to $2.6 million for the nine months ended September 30, 2008 from $2.3 million for the comparable period in 2007, reflecting an increase in income before taxes from $7.3 million for the nine months ended September 30, 2007 to $8.8 million for the nine months ended September 30, 2008. The effective tax rates on reported taxable income were 29.0% and 31.8% for the nine months ended September 30, 2008 and 2007, respectively. Our consolidated effective tax rate is impacted by our segments’ pro-rata share of consolidated income before taxes and related tax expense or benefit. Additionally, our consolidated effective tax rate reflects the benefit of Canadian research and development tax credits, which reduced income tax expense by $402,000 and $270,000, or 4.6% and 3.7% for the nine months ended September 30, 2008 and 2007, respectively. The IRS enacted new regulations, which became effective in 2008, that eliminate advantageous tax benefits that we previously received as a result of our Canadian business segment’s favorable tax structure. As a result, the tax benefits lost during the nine months ended September 30, 2008 were approximately $98,000 or 1.1%. We are not certain if these tax benefits, or future tax benefits, will be permanently lost. During the nine months ended September 30, 2007, income tax expense was higher by approximately $128,000 due to the income tax on the gain recorded in the United Kingdom on the sale in March 2007 of the Wrexham, Wales, United Kingdom facility, which impacted our consolidated effective tax rate by 1.7%. In conjunction with this transaction, the gain reported in the United Kingdom was effectively eliminated in the U.S. by the write-off of the remaining step-up basis, which originated in connection with the purchase of the Company in 1997.

     Net Income.Net income increased to $6.3 million for the nine months ended September 30, 2008, an increase of $1.3 million or 25.7%, from $5.0 million for the comparable period in 2007. Our basic and diluted net income per share

22

increased to $0.65 for the nine months ended September 30, 2008, from $0.52 per share for the comparable period in 2007, on average basic and diluted shares outstanding of 9.6 million for both periods.

Business Segment Review

     Railway Maintenance Products Division — “RMP”.Our RMP business segment manufactures and assembles track components and related products, friction management products, and wayside data collection and data management systems. We also provide services to railroads, transit systems and railroad contractors, and are a distributor and reseller of purchased track components, and lubricants manufactured by third parties. Our manufactured and assembled track component and friction management products consist primarily of standard and insulated rail joints, friction management systems, and wayside data collection and data management systems. Our purchased and distributed products consist primarily of various lubricants.

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2008		2007		2008		2007
	(In Thousands)
External sales	$	12,352	$	13,234	$	34,929	$	38,430
Intersegment sales		1,092		544		2,489		1,662
Operating income		1,960		2,162		5,066		5,148
Sales by product line(1)
Track component products	$	6,791	$	6,724	$	19,469	$	21,782
Friction management products and services		4,668		4,235		11,659		12,166
Wayside data collection and data management systems		1,039		2,238		3,764		4,773
Other products and services		946		581		2,526		1,371
Total product and service sales	$	13,444	$	13,778	$	37,418	$	40,092

(1) Includes intersegment sales.

     For the three months ended September 30, 2008, external sales for RMP decreased by $882,000 or 6.7%, to $12.4 million from $13.2 million during the comparable period in 2007. The decrease in external sales is primarily due to lower sales of Salient Systems’ wayside data collection and data management products. Operating income for the three months ended September 30, 2008 decreased to $2.0 million from $2.2 million for the comparable period in 2007, a decrease of $202,000 or 9.3%, primarily due to lower gross profit from lower sales volume of Salient Systems’ products, offset by increases in gross profit on track components and friction management products. Operating income for the three months ended September 30, 2007 includes warranty expense of $300,000 for warranty claims associated with potentially defective BTRs (see Note 9 Commitments and Contingencies, Page 13).

     For the nine months ended September 30, 2008, external sales for RMP decreased by $3.5 million or 9.1%, to $34.9 million from $38.4 million during the comparable period in 2007. The decrease in external sales is primarily due to lower sales volume of track components, friction management products and Salient Systems’ products, partially offset by an increase in sales volume of other products and services, which includes car repair and service revenue. Operating income for the nine months ended September 30, 2008 decreased by $82,000 or 1.6% to $5.1 million from approximately $5.2 million for the comparable period in 2007, primarily due to lower gross profit from lower sales volume of both the wayside data collection products and track component products. Operating income for the nine months ended September 30, 2007 includes warranty expense of $1.1 million for warranty claims associated with potentially defective BTRs (see Note 9 Commitments and Contingencies, Page 13).

23

     Shipping Systems Division — “SSD”.SSD engineers and sells load securement systems and related products to the railroad freight car market. These systems are used to secure a wide variety of products and lading onto freight cars. SSD is also a major supplier of new and reconditioned tie-down systems for the shipment of new automobiles and vans by the rail industry. The majority of assembly work for SSD is performed at RMP’s manufacturing facility located in Huntington, West Virginia.

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2008		2007		2008		2007
	(In Thousands)
External sales	$	2,345	$	2,012	$	8,287	$	6,227
Intersegment sales		—		—		—		(3	)
Operating income		238		323		1,609		961
Sales by product line(1)
Automotive products	$	1,326	$	1,171	$	5,125	$	3,286
Chain securement systems		730		406		2,285		1,662
Strap securement systems		113		231		260		676
Other load securement systems		176		204		617		600
Total product and service sales	$	2,345	$	2,012	$	8,287	$	6,224

(1) Includes intersegment sales.

     For the three months ended September 30, 2008, external sales for SSD increased by $333,000 or 16.6%, to $2.3 million from $2.0 million during the comparable period in 2007. The increase in external sales reflects higher sales of automotive products, primarily sales of our WinChock^TMUni-Level Vehicle Securement System, along with higher sales of chain securement systems. Operating income for the three months ended September 30, 2008 decreased to $238,000 from $323,000 during the comparable period in 2007, a decrease of $85,000 or 26.3%, primarily due to lower gross profit on lower overall sales volumes.

     For the nine months ended September 30, 2008, external sales for SSD increased by $2.1 million or 33.1%, to $8.3 million from $6.2 million during the comparable period in 2007. The increase in external sales reflects higher sales of automotive products, primarily sales of our WinChock^TMUni-Level Vehicle Securement System and chain securement systems, partially offset by lower sales of strap securement systems. Operating income for the nine months ended September 30, 2008 increased to $1.6 million from $961,000 during the comparable period in 2007, an increase of $648,000 or 67.4%. This increase is primarily due to higher gross profit on increased sales volume, partially offset by higher salary and benefit costs, along with higher incentive expense due to increased profitability.

     Portec Rail Nova Scotia Company — “Canada”.Our Canadian operations include a manufacturing operation near Montreal, Quebec, and a manufacturing and technology facility in Vancouver, British Columbia (Kelsan Technologies Corp. — “Kelsan”). At our Canadian operation near Montreal, we manufacture rail anchors and rail spikes and assemble friction management products primarily for the two largest Canadian railroads. Rail anchors and spikes are devices to secure rails to the ties to restrain the movement of the rail tracks. Kelsan’s two primary product lines are stick lubrication and application systems and a liquid friction modifier, Keltrack^®. Kelsan manufactures its stick and applicator systems in Vancouver and subcontracts the manufacturing of the Keltrack^® product line.

24

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2008		2007		2008		2007
	(In Thousands, Except Translation Rate)
External sales	$	7,502	$	4,579	$	21,457	$	18,265
Intersegment sales		1,875		1,632		5,358		5,418
Operating income		1,486		325		3,165		2,450
Average translation rate of Canadian dollar to United States dollar		0.9598		0.9578		0.9814		0.9153
Sales by product line(1)
Rail anchors and spikes	$	3,461	$	2,934	$	12,820	$	12,542
Friction management products and services		5,426		2,950		12,745		10,089
Other products and services		490		327		1,250		1,052
Total product and service sales	$	9,377	$	6,211	$	26,815	$	23,683

(1) Includes intersegment sales.

     For the three months ended September 30, 2008, external sales for Canada increased by $2.9 million or 63.8%, to $7.5 million from $4.6 million during the comparable period in 2007. This increase in sales reflects $2.9 million of higher sales primarily related to friction management products. Operating income for the three months ended September 30, 2008 increased to $1.5 million from $325,000 during the comparable period in 2007, an increase of $1.2 million or 357.2%. The increase is primarily due to higher gross profit on increased sales volume of friction management products. Operating income was for Canada was negatively impacted by approximately $163,000 for the three months September 30, 2008 due to potentially defective raw material on one of our track component product lines. We are working with the supplier to resolve this issue.

     For the nine months ended September 30, 2008, external sales for Canada increased by $3.2 million or 17.5%, to $21.5 million from $18.3 million during the comparable period in 2007. This increase reflects a $1.4 million foreign currency translation that positively impacted external sales, along with higher sales of friction management products. Operating income for the nine months ended September 30, 2008 increased to $3.2 million from $2.5 million during the comparable period in 2007, an increase of $715,000 or 29.2%. This increase is primarily due to higher gross profit on increased sales volume of friction management products, along with a foreign currency translation of $211,000 that positively impacted operating income. Operating income for Canada was negatively impacted by approximately $163,000 for the nine months September 30, 2008 due to potentially defective raw material on one of our track component product lines. We are working with the supplier to resolve this issue.

     Portec Rail Products (UK) Ltd. — “United Kingdom”.In the United Kingdom, we operate and serve our customers in two different markets. The United Kingdom’s rail business includes friction management products and services and track component products such as insulated rail joints and track fasteners. The rail products are primarily sold to the United Kingdom passenger rail network and international customers. The United Kingdom’s material handling business includes product lines such as overhead and floor conveyor systems, racking systems and mezzanine flooring systems. The end users of our material handling products are primarily United Kingdom-based companies in the manufacturing, distribution, garment and food industries.

25

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2008		2007		2008		2007
	(In Thousands, Except Translation Rate)
External sales	$	7,445	$	8,173	$	20,008	$	21,650
Intersegment sales		—		—		—		146
Operating income		872		1,259		2,059		2,608
Average translation rate of British pound sterling to United States dollar		1.8937		2.0262		1.9454		1.9979
Sales by product line(1)
Friction management products and services	$	3,448	$	3,166	$	8,709	$	8,016
Material handling products		2,715		3,730		7,060		9,479
Track component products		1,282		1,277		4,239		4,301
Total product and service sales	$	7,445	$	8,173	$	20,008	$	21,796

(1) Includes intersegment sales.

     For the three months ended September 30, 2008, external sales at our United Kingdom operations decreased by $728,000 or 8.9%, to $7.4 million from $8.2 million during the comparable period in 2007. This decrease is primarily due to lower sales of material handling products, along with a foreign currency translation of $521,000 that negatively impacted external sales, partially offset by higher sales of friction management products. Operating income for the three months ended September 30, 2008 decreased to $872,000 from $1.3 million during the comparable period in 2007, a decrease of $387,000 or 30.7%, which is primarily due to lower gross profit on lower sales volume of material handling products, along with a foreign currency translation of $56,000 that negatively impacted operating income.

     For the nine months ended September 30, 2008, external sales at our United Kingdom operations decreased $1.6 million or 7.6%, to $20.0 million from $21.7 million during the comparable period in 2007. This decrease is primarily due to lower sales of our material handling products, along with a foreign currency translation of $540,000 that negatively impacted external sales, partially offset by higher sales of friction management products. Operating income for the nine months ended September 30, 2008 decreased to $2.1 million from $2.6 million during the comparable period in 2007, a decrease of $549,000 or 21.1%. The decrease in operating income is primarily due to lower gross profit on lower sales of material handling products, along with a foreign currency translation of $54,000 that negatively impacted operating income.

Liquidity and Capital Resources

     Our cash flow from operations is the primary source of financing for internal growth, capital expenditures, repayment of long-term obligations, dividends to our shareholders, and other commercial commitments. The most significant risk associated with our ability to generate sufficient cash flow from operations is the overall level of demand for our products. Our total cash balance was $6.1 million at September 30, 2008. In addition to cash generated from operations, we have revolving and overdraft credit facilities in place to support the working capital needs of each of our business segments. We believe that our cash flow from operations and the ability to borrow additional cash under our working capital facilities along with our existing cash balances will be sufficient to meet our cash flow requirements and growth objectives over the next twelve months.

     On October 24, 2008, PNC Financial Services Group Inc. of Pittsburgh, Pennsylvania announced it has signed an agreement to acquire National City Corp. of Cleveland, Ohio. As disclosed in Note 4, Long Term Debt, Page 7, we have a number of lending facilities with National City Bank. At this time, we are unaware of the impact, if any, this will have on our ability to finance our working capital requirements. See Note 13 Subsequent Events, Page 18, for additional details.

     Cash Flow Analysis.During the nine months ended September 30, 2008 we generated $4.7 million in cash from operating activities compared to generating $4.1 million in cash from operating activities during the same period in 2007. Cash generated from operations in the current period is due to net income of $6.3 million in the current period, compared to $5.0 million during the same period of 2007, an increase of $1.3 million. Additionally, we incurred depreciation and amortization expense of $2.3 million compared to $2.7 million in 2007, a decrease of $429,000, primarily because several assets related to the December 1997 purchase of the Company were fully-depreciated as of December 31, 2007. As a result, we expect depreciation expense for 2008 to be approximately $340,000 lower than 2007, which will primarily affect the RMP segment. This decrease will be partially offset by depreciation expense on assets which will be placed in

26

service during 2008. Cash provided by operations also includes a $2.3 million increase in accounts payable balances, primarily due to the timing of payments to vendors. Cash used in operations during the nine months ended September 30, 2008 includes a $3.9 million increase in inventory balances to meet customer demand, a $1.7 million increase in accounts receivable balances due to increased net sales, and $814,000 in defined benefit pension plan contributions.

     Net cash used in investing activities was $2.4 million for the nine months ended September 30, 2008, compared to cash provided by investing activities of $836,000 during the same period in 2007. Cash used in investing activities is primarily due to capital expenditures of $2.3 million. We previously obtained Board of Director approval for approximately $1.9 million of capital improvements, specifically related to our track component products, to be made to our Huntington, West Virginia manufacturing facility. We anticipate that these projects will be finalized during the fourth quarter of 2008. As of September 30, 2008, we have spent approximately $1.7 million on these projects. Our capital expenditures upgrade our machinery and equipment, improve our facilities, support new strategic initiatives or develop new products. We believe that the overall level of capital spending for our business segments is sufficient to remain competitive.

     Net cash used in financing activities was $116,000 for the nine months ended September 30, 2008, compared to $2.9 million of cash used in financing activities during the comparable period in 2007. Cash used for financing activities in 2008 includes repayments of long-term debt obligations of $3.0 million and proceeds from a new term loan of $1.8 million to fund capital improvements, primarily related to track component products, at our Huntington, West Virginia manufacturing facility. Cash used from financing activities also includes payment of cash dividends of $1.7 million on common stock paid to shareholders. Cash provided by financing activities in 2008 includes $3.1 million of net borrowings on working capital facilities.

Financial Condition

     At September 30, 2008, total assets were $107.9 million, an increase of $3.6 million or 3.5%, from $104.2 million at December 31, 2007. The increase at September 30, 2008 is primarily due to higher inventory balances of $2.8 million to support customer demand. In addition, cash and cash equivalents increased $1.8 million, primarily due to operating activities, which generated $4.7 million of cash during the current period.

     Total outstanding debt obligations were $17.5 million at September 30, 2008, an increase of $1.2 million or 7.3% from $16.3 million at December 31, 2007. The increase primarily reflects short-term borrowings, which increased by $3.1 million during the current period, along with accessing $1.8 million from a line of credit with Boone County Bank, to fund capital expenditures at our Huntington, West Virginia manufacturing facility. See Note 4 Long Term Debt, Page 7 for more information. During the nine months ended September 30, 2008, we repaid $3.0 million of long-term debt obligations.

     The products that we manufacture and sell, such as our rail joints, rail anchors and rail spikes, require steel as a major element in the production process. Worldwide demand for steel began to significantly increase in 2004, which resulted in market price increases for steel, along with surcharges, being added to our raw material costs. Over the next few years we began to see a transition from surcharges on some purchases to higher base prices for steel used in our track component products. During the first six months of 2008, steel prices remained historically high, and we continued to see a combination of higher base prices and steel surcharges. We have been able to successfully pass on some higher material costs and most of the steel surcharges to our customers, but higher material costs have had an impact on our financial results. There have been periods of tighter availability in some markets due to the increased demand, which resulted in some changes to our purchasing patterns. However, with the current global economic crisis, the steel markets have softened somewhat and we have seen some decreases in steel prices during the current quarter. If a prolonged increase in steel prices should continue and we are unable to pass on higher costs to our customers, our future earnings could be negatively impacted.

Discussion of Critical Accounting Policies

     Our discussion and analysis of our financial condition and results of operations is based upon our audited and unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate the appropriateness of these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying value of assets and liabilities that are not readily apparent from

27

other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

     Revenue Recognition.Revenue from product sales is recognized at the time products are delivered and title has passed or when service is performed. Delivery is determined by our shipping terms, which are primarily FOB shipping point. Shipments are made only under a valid contract or purchase order where the sales price is fixed or determinable and collectability of the resulting receivable is reasonably assured. Revenue is recognized net of returns, discounts and other allowances.

     Revenue from installation of material handling equipment and railway wayside data collection and data management systems is generally recognized by applying percentages of completion for each contract to the total estimated profits for the respective contracts. The length of each contract varies, but is typically about two to five months. The percentages of completion are determined by relating the actual costs of work performed to date, to the current estimated total costs of the respective contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, repairs and depreciation costs.

     When the estimate on a contract indicates a loss, the entire loss is immediately recorded in the accounting period that the loss is determined. The cumulative effect of revisions in estimates of total costs or revenue during the course of the work is reflected in the accounting period in which the facts that caused the revision first become known.

     Allowances for Doubtful Accounts.We maintain a reserve to absorb potential losses relating to bad debts arising from uncollectible accounts receivable. The allowance for doubtful accounts is maintained at a level that we consider adequate to absorb potential bad debts inherent in the accounts receivable balance and is based on ongoing assessments and evaluations of the collectability, historical loss experience of accounts receivable and the financial status of customers with accounts receivable balances. Bad debts are charged and recoveries are credited to the reserve when incurred.

     We believe the accounting estimate related to the allowance for doubtful accounts is a “critical accounting estimate” because we have a significant concentration of accounts receivable in the rail industry. The economic conditions could affect our customers’ ability to pay and changes in the estimate could have a material effect on net income.

     Inventories.We establish obsolescence reserves for slow-moving and obsolete inventories. Obsolescence reserves reduce the carrying value of slow moving and obsolete inventories to their estimated net realizable value, which generally approximates the recoverable scrap value. We utilize historical usage, our experience, current backlog and forecasted usage to evaluate our reserve amounts. We also periodically evaluate our inventory carrying value to ensure that the amounts are stated at the lower of cost or market. If actual market conditions are less favorable than those projected by us, additional inventory reserves may be required.

     Goodwill and Other Intangible Assets.We assess the impairment of goodwill and other intangible assets at least annually and whenever events or significant changes in circumstances indicate that the carrying value may not be recoverable. We evaluate the goodwill of each of our reporting units and our indefinite-lived intangible assets for impairment as required under SFAS No. 142 “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill be tested for impairment using a two-step process. The first step is to identify a potential impairment and the second step measures the amount of an impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit’s goodwill exceeds its estimated fair value. The fair values of our reporting units are determined using a discounted cash flow analysis based upon historical and projected financial information. The intangible assets of Salient Systems are tested following the same process. The estimates of future cash flows, discount rates, and long-term growth rates, based on reasonable and supportable assumptions and projections, require our judgment. Factors that could change the result of our goodwill and intangible asset impairment test include, but are not limited to, different assumptions used to forecast future revenue, expenses, capital expenditures and working capital requirements used in our cash flow models. In addition, selection of a risk adjusted discount rate on the estimated undiscounted cash flow is susceptible to future changes in market conditions and when unfavorable, can adversely affect our original estimates of fair values. As such, to account for the uncertainty inherent in our estimates and future projections, we perform sensitivity analyses to determine our margin of error. Since adoption of SFAS No. 142, we have not recognized any impairment of goodwill or intangible assets.

     Our amortizable intangible assets are evaluated for impairment in accordance with SFAS No. 144Accounting for Impairment or Disposal of Long-Lived Assets.SFAS No. 144 requires amortizable intangible assets to be tested for impairment when events or circumstances indicate that the carrying value of the asset may not be recoverable. Furthermore, SFAS No. 144 presents six factors that should be considered in conjunction with a company’s intangible

28

assets as the presence of any one of these factors might indicate that the asset is impaired. Since the adoption of SFAS No. 144, we have not recognized any impairment of intangible assets.

     In conjunction with the acquisitions of Coronet Rail and the assets of Vulcan, we recorded the fair value of the acquired tangible and intangible assets in accordance with SFAS No. 142. As part of our procedures to assign fair values to all acquired assets, we engaged an independent valuation expert to evaluate the technology and intellectual property along with other intangible assets that could be assigned a fair value under these acquisitions. We supplied the independent valuation expert with the historical and estimated cash flows of the companies along with an estimate of future costs to maintain these technologies. The independent valuation expert used these estimates and other assumptions to determine the present value of the discounted cash flows of these various technologies. In addition, we evaluated the future lives of the identified intangible assets to determine if they have definite or indefinite lives.

     As a result of the Vulcan asset acquisition, we assigned fair values of $2.2 million to customer relationships, $890,000 to a unique customer relationship, $342,000 to vehicle restraint assembly technology (G-Van patent), $47,000 to a supply agreement and $5,000 to non-compete agreements. We also determined that there was $830,000 of goodwill to be recorded as part of this transaction. The goodwill balance increased to $1.1 million at September 30, 2008, primarily due to an accrued earn-out based upon sales volume, which is recorded as an increase of the total purchase price. During the three and nine months ended September 30, 2008, total earn-out payments of $97,000 and $195,000, respectively, were paid to the former owners of Vulcan. During the three and nine months ended September 30, 2007, total earn out payments of $35,000 and $77,000, respectively, were paid to the former owners of Vulcan. In addition, we have estimated that the customer relationships, a unique customer relationship, vehicle restraint assembly technology, supply agreement, and non-compete agreements have definite lives of 19 years, 17 years, 11 years, 3 years and 7 years, respectively, due to our estimates that the projected economic earnings associated with these intangible assets will begin to lapse after these time frames. We will monitor these assets to determine if certain events occur that could cause the lives assigned to these intangible assets to become shorter than originally assigned. We would then assign a shorter future estimated life based on the years that we feel that the product would have value in the marketplace and record an impairment charge in the proper accounting period.

     During the first quarter 2008, our customer, on whom the value of our unique customer relationship intangible asset is based, was forced to temporarily shut down operations at one of its plants due to a supplier strike. As a result of this shutdown, sales of our G-Van product to this customer were negatively affected. Our G-Van product is designed by utilizing our patented vehicle restraint assembly technology (G-Van patent); as such, the value assigned to this patent is based upon the revenue stream from sales of the G-Van product. In May 2008, the supplier strike ended, and our customer re-opened its operations. As a result, in June 2008, we resumed sales of our G-Van product to this customer. At September 30, 2008, we have not experienced and do not anticipate further shutdowns at our customer’s plant; however, future shutdowns could negatively impact sales of our G-Van product to this customer, which could negatively impact financial projections associated with these intangible assets. Lower financial projections could result in lower fair values for these intangible assets, which could trigger an impairment charge.

     As a result of the Coronet Rail acquisition, we assigned a fair value of $3.3 million (£1.9 million pounds sterling) to customer relationships, $188,000 (£108,000 pounds sterling) to non-compete agreements, and $34,000 (£19,000 pounds sterling) to a supply agreement. We also determined that there was $1.9 million (£1.1 million pounds sterling) of goodwill to be recorded as part of this transaction. In addition, we have estimated that the customer relationships, non-compete agreements, and supply agreement have definite lives of 20 years, 5 years, and 10 years, respectively, due to our estimates that projected economic earnings associated with these intangible assets will begin to lapse after these time frames. We will monitor these intangible assets to determine if certain events occur that could cause the lives assigned to these intangible assets to become shorter than originally assigned. We would then assign a shorter estimated life based on the years that we feel that the product would have value in the marketplace and then record an impairment charge in the proper accounting period.

     Warranty Reserves.Most of our products are covered by a replacement warranty. We establish warranty reserves for expected warranty claims based upon our historical experience, or for known warranty issues and their estimable replacement costs. During the second quarter 2007, we became aware of a problem with RMP’s Bonded to Rail (BTR) joint bars manufactured in Huntington, West Virginia. Warranty expense of $760,000 was recognized during the three and six months ended June 30, 2007. For the year ended December 31, 2007, we recognized warranty expense of $1.3 million related to defective BTRs. No warranty expense for potentially defective BTRs was recognized during the three or nine months ended September 30, 2008. The balance in the BTR warranty reserve at September 30, 2008 is $216,000, which management expects to be adequate to cover expected future costs associated with potentially defective BTRs. Although we believe that $216,000 is a reasonable estimate of our potential exposure for warranty claims on BTRs as of September 30, 2008, changes in the components of our estimate due to new information and future events could

29

cause this estimate to vary significantly. There can be no assurance at this point that future costs pertaining to this issue will not have a material impact on our financial condition or results of operations. See Note 9, Commitments and Contingencies, Page 13 for further details.

     Retirement Benefit Plans.We maintain defined benefit pension plans that cover a significant number of our active employees, former employees and retirees. We account for these plans as required under SFAS No. 87,Employers’ Accounting for Pensionsand SFAS No. 158,Employer’s Accounting for Defined Benefit Plans and Other Postretirement Plans. The liabilities and expenses for pensions require significant judgments and estimates. These amounts are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, inflation, the long-term rate of return on plan assets and mortality tables. Management has mitigated the future liability for active employees by freezing all defined benefit pension plans effective December 31, 2003. The rate used to discount future estimated liabilities is determined based upon a hypothetical double A yield curve represented by a series of annualized individual discount rates from one-half to thirty years. Our inflation assumption is based on an evaluation of external market indicators. The long-term rate of return is estimated by considering historical returns and expected returns on current and projected asset allocations. The effects of actual results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligations in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our obligations and future expense.

     As interest rates decline, the actuarially calculated retirement benefit plan liability increases. Conversely, as interest rates increase, the actuarially calculated retirement benefit plan liability decreases. Past declines in interest rates and equity markets have had a negative impact on the retirement benefit plan liability and fair value of our plan assets. As a result, the accumulated benefit obligation exceeded the fair value of plan assets at December 31, 2007; however, as a result of an increase in interest rates during 2007, which increased the discount rate used to calculate our 2007 retirement benefit plan liability, our liability at December 31, 2007 is less than the liability at December 31, 2006, which resulted in a $1,380,000, net of tax, increase in shareholders’ equity. As a result of the current economic uncertainty and unstable financial markets, we may have a significant impact to the market value of our plan assets resulting in additional required plan contributions. At this time, we are projecting $4.0 million of additional contributions to our retirement benefit plans over the next five years. See Note 9, Commitments and Contingencies, page 13 for additional information.

     We maintain a post-retirement benefit plan at our Canadian operation near Montreal, which provides retiree life insurance, health care benefits and, for a closed group of employees, dental care. We account for this plan under SFAS No. 158. The liabilities and expenses for post-retirement benefit plans require significant judgments and estimates. These amounts are actuarially determined using the projected benefit method pro rated on service and significant management assumptions, including salary escalation, retirement ages of employees and expected health care costs. Retirement benefit plan adjustments and changes in assumptions are amortized to earnings over the estimated average remaining service life of the members and, therefore, generally affect recognized expense and the recorded obligations in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our obligations and future expense.

     Income Taxes.Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax assets. As a company with international operations, we record an estimated liability or benefit for our current income tax provision and other taxes based on what we determine will likely be paid in various jurisdictions in which we operate. We use our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent on various matters including the resolution of the tax audits in the various affected tax jurisdictions and may differ from the amounts recorded. An adjustment to the estimated liability would be recorded through income in the period in which it becomes probable that the amount of the actual liability differs from the recorded amount. We do not believe that such a charge would be material.

     The process of recording deferred tax assets and liabilities involves summarizing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income and to the extent that we believe that recovery is not likely, a valuation allowance is established. If a valuation allowance is established in a period, an expense is recorded. The valuation allowance is based on our experience and current economic situation. We believe that operations will provide taxable income levels to recover the deferred tax assets.

     As of January 1, 2007, we adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109(FIN 48), which prescribes a recognition threshold and a measurement

30

attribute for the financial statement recognition and measurement of uncertain tax positions to be taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The determination of the amount of benefits to be recognized and the sustainability of our tax positions upon examination require us to make certain estimates and to use our best judgment based upon historical experience.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to interest rate risk on our long-term debt obligations and our working capital facilities are under floating interest rate arrangements. We have determined that these risks are not significant enough to warrant hedging programs. If interest rates increase we will be exposed to higher interest rates and we will be required to use more cash to settle our long-term debt obligations. As interest rates increase on our variable long-term debt, it will have a negative impact on future earnings because the interest rates will increase our interest expense. Conversely, if interest rates decrease on our variable long-term debt, it will have a positive impact on future earnings because lower interest rates will decrease our interest expense. Based upon our long-term debt amounts as of September 30, 2008, for every 100 basis points increase or decrease in the interest rate on our long-term debt, our annual interest expense will fluctuate by approximately $175,000.

     In addition, we are exposed to foreign currency translation fluctuations with our international operations. We do not have any foreign exchange derivative contracts to hedge against foreign currency exposures. Therefore, we are exposed to the related effects when foreign currency exchange rates fluctuate. If the U.S. dollar strengthens against the Canadian dollar and/or the British pound sterling, the translation rate for these foreign currencies will decrease, which will have a negative impact on our operating income. For example, for the three and nine months ended September 30, 2008, for every 1/100 change in the exchange rate of the Canadian dollar to the U.S. dollar, our Canadian operation’s operating income would have changed by $14,000 and $32,000, respectively. Further, for every 1/100 change in the exchange rate of the British pound sterling to the U.S. dollar, the impact on operating income for our United Kingdom operation for the three and nine months ended September 30, 2008 would have been $4,000 and $10,000, respectively. Foreign currency translation fluctuations have no impact on cash flows as long as we continue to reinvest any profits back into the respective foreign operations.

ITEM 4T.CONTROLS AND PROCEDURES

     Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

     We are involved from time to time in lawsuits that arise in the normal course of business. We actively and vigorously defend all lawsuits. We have been named with numerous other defendants in an environmental lawsuit. The plaintiff seeks to recover costs which it has incurred, and may continue to incur, to investigate and remediate its former property as required by the New York State Department of Environmental Conservation (NYSDEC). We have not been named as a liable party by the NYSDEC and believe we have no liability to the plaintiff in the case. We filed a motion for summary judgment seeking a ruling to have us dismissed from the case. In November 2003, the motion for summary

31

judgment was granted and we were dismissed from the case by the United States District Court for the Northern District of New York. In March 2004, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Second Circuit, appealing, in part, the District Court’s decision to dismiss all claims against us. In April 2005, the plaintiff’s appeal was dismissed by the Second Circuit Court without prejudice, and the matter was remanded to the United States District Court for the Northern District of New York for consideration in light of a recent United States Supreme Court decision. As a result, in June 2006, the District Court dismissed all claims brought by the plaintiff pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). On July 24, 2006, the plaintiff filed a notice of appeal to the Second Circuit. In January 2008, the plaintiff’s appeal was dismissed again by the Second Circuit Court without prejudice, and the matter was remanded to the District Court for consideration in light of a more recent United States Supreme Court decision. On July 16, 2008, the District Court decided that the United States Supreme Court decision did not necessitate any change in the District Court’s prior determinations in this case and held that all of its prior rulings stand. On August 4, 2008, the plaintiff filed a notice of appeal to the Second Circuit Court. This appeal is currently in the briefing process. Ongoing litigation may be protracted, and we may incur additional ongoing legal expenses, which are not estimable at this time.

ITEM 1A. RISK FACTORS

Recent economic uncertainty in the United States and other worldwide economies may affect our results of operations or financial condition, or adversely impact our ability to access our credit facilities.

     During 2008 the United States economy and other worldwide economies experienced a significant downturn. In addition, credit facilities were significantly curtailed during the nine months ended September 30, 2008. While we have not experienced any significant adverse effects to our operations or financial condition as a result of the foregoing, there can be no assurance that our operations or ability to obtain financing will not be materially and adversely affected in future periods.

     Items that could be impacted by the economic uncertainty include the ability to borrow from our existing working capital facilities. The current worldwide economic uncertainty has resulted in a much tighter availability of credit from financial institutions. Additionally, the weakening of foreign currencies, relative to the U.S. dollar, caused by the economic uncertainty may adversely impact the results of operations from our international operating divisions.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     Nothing to report under this item.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     Nothing to report under this item.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Nothing to report under this item.

ITEM 5. OTHER INFORMATION

     Nothing to report under this item.

32

ITEM 6. EXHIBITS

(a) Exhibits filed as part of this Form 10-Q:

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

33

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PORTEC RAIL PRODUCTS, INC.
Date: November 6, 2008	By:	/s/ Richard J. Jarosinski
		Richard J. Jarosinski, President and
		Chief Executive Officer
Date: November 6, 2008	By:	/s/ John N. Pesarsick
		John N. Pesarsick, Chief Financial Officer

34

EXHIBIT INDEX

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

35