UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM  10 - QSB



|           |  |                                                                                     |  |  | 
|---------- |  | ----------------------------------------------------------------------------------- |  |  | 
|(Mark One) |  |                                                                                     | 
|           |  |                                                                                     |  | 
|( X )      |  | Quarterly report under section 13 or 15(d) of the Securities Exchange Act of 1934. 
|           |  |                                                                                     |  | 
|           |  | For the quarterly period ended March 31, 2007                                       |  | 
|           |  |                                                                                     |  | 
|           |  | or                                                                                  |  | 
|           |  |                                                                                     |  | 
|(    )     |  | Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934.
|           |  |                                                                                     |  | 
|           |  | For the transition period from _____to  _____                                       |  | 



Commission file number 0-7441



SIERRA MONITOR CORPORATION



(Exact name of small business issuer as specified in its charter)





|                                |  |  |                    
|------------------------------- |  |  | -------------------
|California                      |  |  | 95-2481914         
|(State or other jurisdiction of |  |  | (I.R.S. Employer   
|incorporation or organization)  |  |  | Identification No.)





1991 Tarob Court

Milpitas, California 95035



(Address and zip code of principal executive offices)





(408) 262-6611

(Issuer's telephone number, including area code)



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



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

Yes X

No ____



The number of shares of the issuer's common stock outstanding, as of May 14, 2007 was 11,075,192.



Transitional Small Business Disclosure Format:  Yes _

No X



Page 1 of 17

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PART I:  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SIERRA MONITOR CORPORATION

Condensed Balance Sheet

March 31, 2007

(Unaudited)

|                                                              |                                                                                                        |                                            |           |          
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------------------------------------ | --------- | ---------
|Assets                                                        |                                                                                                       
|Current assets:                                               |                                                                                                        |                                           
|                                                              | Cash                                                                                                   | $                                          | 211,687  
|                                                              | Trade receivables, less allowance for doubtful accounts                                                |                                            |          
|                                                              |                                                                                                        | of approximately $62,000                   |           | 1,543,216
|                                                              | Inventories, net                                                                                       |                                            | 2,401,119
|                                                              | Prepaid expenses                                                                                       |                                            | 166,547  
|                                                              | Income taxes receivable                                                                                |                                            | 509      
|                                                              | Deferred income taxes                                                                                  |                                            | 244,933  
|                                                              |                                                                                                        | Total current assets                       |           | 4,568,011
|Property and equipment, net                                   |                                                                                                        | 155,318                                   
|Deferred income taxes                                         |                                                                                                        | 50,921                                    
|Other assets                                                  |                                                                                                        | 141,047                                   
|                                                              |                                                                                                        | Total assets                               | $         | 4,915,297
|                                                              |                                                                                                       
|Liabilities and Shareholders' Equity                          |                                                                                                       
|Current liabilities:                                          |                                                                                                        |                                           
|                                                              | Accounts payable                                                                                       | $                                          | 670,583  
|                                                              | Accrued compensation expenses                                                                          |                                            | 360,423  
|                                                              | Other current liabilities                                                                              |                                            | 94,410   
|                                                              |                                                                                                        | Total current liabilities                  |           | 1,125,416
|Commitments and contingencies
Shareholders' equity:           |                                                                                                        |                                           
|                                                              | Common stock, $0.001 par value; 20,000,000 shares authorized; 11,075,192 shares issued and outstanding |                                            | 11,075   
|                                                              | Additional paid-in capital                                                                             |                                            | 3,281,430
|                                                              | Retained earnings                                                                                      |                                            | 497,376  
|                                                              |                                                                                                        | Total shareholders' equity                 |           | 3,789,881
|                                                              |                                                                                                        | Total liabilities and shareholders equity | $         | 4,915,297
|See accompanying notes to the condensed financial statements.



Page 2 of 17

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| |  |  |  | 
| |  |  |  | 

SIERRA MONITOR CORPORATION

Condensed Statements of Operations

(Unaudited)



|                                                                                     |                            |                            |                            |           |                |           |           |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------ | -------------------------- | -------------------------- | -------------------------- | --------- | -------------- | --------- | --------- |  |  |  |  |  |  | 
|                                                                                     |                            |                            | For the three months ended
|                                                                                     |                            |                            | March 31,
2007             |           | March 31,
2006
|                                                                                     | Net sales                  | $                          | 2,823,211                  |           | $              | 2,580,176
|Cost of goods sold                                                                   |                            | 1,218,698                  |                            |           | 1,051,532     
|                                                                                     |                            | Gross profit               |                            | 1,604,513 |                |           | 1,528,644
|Operating expenses                                                                   |                            |                            |                            |           |               
|                                                                                     | Research and development   |                            | 535,284                    |           |                | 423,528  
|                                                                                     | Selling and marketing      |                            | 640,557                    |           |                | 696,932  
|                                                                                     | General and administrative |                            | 354,669                    |           |                | 318,787  
|                                                                                     |                            |                            |                            | 1,530,510 |                |           | 1,439,247
|                                                                                     |                            | Income from operations     |                            | 74,003    |                |           | 89,397   
|Interest expense                                                                     |                            | (438)                      |                            |           | (3,924)       
|                                                                                     |                            | Income before income taxes |                            | 73,565    |                |           | 85,473   
|Income tax provision                                                                 |                            | (29,426)                   |                            |           | (38,561)      
|                                                                                     |                            | Net  income                | $                          | 44,139    |                | $         | 46,912   
|Net income available to common shareholders per common share:
Basic                  | $                          | 0.00                       |                            | $         | 0.00          
|Diluted                                                                              | $                          | 0.00                       |                            | $         | 0.00          
|Weighted-average number of common shares outstanding
used in per share computations: |                            |                            |                            |           |               
|Basic                                                                                |                            | 11,058,525                 |                            |           | 11,048,213    
|Diluted                                                                              |                            | 11,657,430                 |                            |           | 11,526,200    
|See accompanying notes to the condensed financial statements.                       





Page 3 of 17

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SIERRA MONITOR CORPORATION

Condensed Statements of Cash Flows

(Unaudited)



|                                                              |                                                                               |                                             |           |                            |           |                |          |          
|------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------- | --------- | -------------------------- | --------- | -------------- | -------- | ---------
|                                                              |                                                                               |                                             |           | For the three months ended
|                                                              |                                                                               |                                             |           | March 31,
2007             |           | March 31,
2006
|Cash flows from operating activities:                         |                                                                               |                                             |           |                            |           |               
|                                                              | Net income                                                                    |                                             | $         | 44,139                     |           | $              | 46,912  
|                                                              | Adjustments to reconcile net income to net cash used in
operating activities: |                                             |           |                            |           |                |         
|                                                              |                                                                               | Depreciation and amortization               |           |                            | 30,805    |                |          | 35,755   
|                                                              |                                                                               | Provision for bad debt expense              |           |                            | (2,381)   |                |          | (5,993)  
|                                                              |                                                                               | Provision for inventory losses              |           |                            |          |                |          | (24,860) 
|                                                              |                                                                               | Deferred income taxes                       |           |                            |          |                |          | 38,561   
|                                                              |                                                                               | Stock-based compensation expense            |           |                            | 9,546     |                |          | 10,929   
|                                                              |                                                                               | Change in operating assets and liabilities: |           |                            |           |                |          |          
|                                                              |                                                                               | Trade receivables                           |           |                            | 101,636   |                |          | (447,161)
|                                                              |                                                                               | Inventories                                 |           |                            | (145,216) |                |          | 26,286   
|                                                              |                                                                               | Prepaid expenses and other current assets   |           |                            | (20,767)  |                |          | (13,817) 
|                                                              |                                                                               | Accounts payable                            |           |                            | (272,225) |                |          | 9,970    
|                                                              |                                                                               | Income taxes payable                        |           |                            | 14,773    |                |          |         
|                                                              |                                                                               | Accrued compensation expenses               |           |                            | 67,459    |                |          | 86,325   
|                                                              |                                                                               | Other current liabilities                   |           |                            | (11,613)  |                |          | 14,340   
|                                                              |                                                                               | Net cash used in operating activities       |           |                            | (183,844) |                |          | (222,753)
|Cash flows from investing activities:                         |                                                                               |                                             |           |                            |           |               
|                                                              | Capital expenditures:                                                         |                                             |           | (45,628)                   |           |                | (32,723)
|                                                              | Other assets additions                                                        |                                             |           | (12,036)                   |           |                |        
|                                                              |                                                                               | Net cash used in investing activities       |           |                            | (57,664)  |                |          | (32,723) 
|Cash flows from financing activities:                         |                                                                               |                                             |           |                            |           |               
|                                                              | Proceeds from exercise of stock options:                                      |                                             |           | 6,800                      |           |                |        
|                                                              |                                                                               | Net cash provided by financing activities   |           |                            | 6,800     |                |          |         
|Net decrease in cash                                          |                                                                               |                                             | (234,708) |                            |           | (255,476)     
|Cash at beginning of period                                   |                                                                               |                                             | 446,395   |                            |           | 656,003       
|Cash at end of period                                         |                                                                               | $                                           | 211,687   |                            | $         | 400,527       
|Supplemental cash flow information:                           |                                                                               |                                             |           |                            |           |               
|Cash paid for income taxes                                    |                                                                               | $                                           | 14,653    |                            | $         | 1,359         
|See accompanying notes to the condensed financial statements. |                                                                               |                                             |           |                            |           |               



Page 4 of 17

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| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 

SIERRA MONITOR CORPORATION

Notes to the Interim Condensed Financial Statements

(Unaudited)

March 31, 2007

Basis of Presentation

The accompanying unaudited interim condensed financial statements have been prepared by Sierra Monitor Corporation (the Company), pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading.  These financial statements and the notes hereto should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2006, which was filed with the SEC on March 21, 2007.  In the opinion of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the interim period have been included.  The results of operations for the interim period are not necessarily indicative of the results for the full year.

Summary of Business

The Company was founded in 1978 to design and develop hazardous gas monitoring devices for protection of personnel and facilities in industrial work-places.  In addition to gas monitoring systems, the Company also manufactures microprocessor-based systems used to monitor and control environmental conditions in small, remote structures used for cellular and hard wire telephone equipment. The Company also manufactures a line of products known as communications bridges.  These products provide a means for many industrial instruments to communicate with each other even when they have different communications protocols.  Communications bridges are sold under the name FieldServer by the FieldServer Technologies division of the Company. In addition, the Company provides technical support and training for its gas detection and environment controller products and custom development of its FieldServer products.

Gas monitoring products manufactured by the Company are sold primarily to oil and gas drilling and refining companies, chemical plants, waste-water treatment plants, companies in the semiconductor industry and are used in other applications which involve the handling or generation of hazardous gases.  Environment controllers, which provide management of environmental conditions in small structures such as local DSL distribution nodes and buildings at cell tower sites (cell sites), are sold to telecommunications companies and their suppliers.  FieldServer products are typically sold to integration companies that service building and plant automation projects.

The Companys common stock is quoted on the OTC Bulletin Board under the symbol SRMC.OB.

Accounting Policies

a)

Revenue Recognition

The Company recognizes revenues in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, when all of the following conditions exist:  a) persuasive evidence of an arrangement exists in the form of an accepted purchase order; b) delivery has occurred, based on shipping terms, or services have been rendered; c) the Companys price to the buyer is fixed or determinable, as documented on the accepted purchase order; and d) collectibility is reasonably assured.  By product and service type, revenues are recognized when the following specific conditions are met:



Page 5 of 17

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Gas Detection and Environment Control Products

Gas Detection and Environment Control products are sold as off-the-shelf products with prices fixed at the time of order. Orders delivered to the Company by phone, fax, mail or email are considered valid purchase orders and once accepted by the Company are deemed to be the final understanding between us and our customer as to the specific nature and terms of the agreed-upon sale transaction.  Products are shipped and are considered delivered when (a) for FOB factory orders they leave our shipping dock or (b) for FOB customer dock orders upon confirmation of delivery.  The creditworthiness of customers is generally assessed prior to the Company accepting a customers first order. Additionally, international customers and customers who have developed a history of payment problems are generally required to prepay or pay through a letter-of-credit.



Gas Detection and Environment Control Services

Gas Detection and Environment Control Services consist of field service orders (technical support) and training, which are provided separate from product orders.  Orders are accepted in the same forms as discussed for Gas Detection and Environment Control Products above with hourly prices fixed at the time of order. Revenue recognition occurs only when the service activity is completed.  Such services are provided to current and prior customers, and, as noted above, creditworthiness has generally already been assessed. In cases where the probability of receiving payment is low, a credit card number is collected for immediate processing.



FieldServer Products

FieldServer products are sold in the same manner as Gas Detection and Environment Control products (as discussed above) except that the products contain embedded software, which is integral to the operation of the device.  The software embedded in FieldServer products includes two items:  (a) a compiled program containing (i) the basic operating system for FieldServers, which is common to every unit, and (ii) the correct set of protocol drivers based on the customer order (see FieldServer Services below for more information); and (b) a configuration file that identifies and links each data point as identified by the customer.  The Company does not deem the hardware, operating systems with protocol drivers and configuration files to be separate units of accounting, as defined in EITF 00-21, Revenue Arrangements with Multiple Deliverables, because the Company does not believe that they have value on a stand-alone basis.  The hardware is useless without the software, and the software is only intended to be used in FieldServer hardware.  Additionally, the software included in each sale is deemed to not require significant production, modification or customization, as described in Statement of Position (SOP) 97-02, Software Revenue Recognition, as amended, and therefore the Company recognizes revenues upon the shipment or delivery of products (depending on shipping terms), as described in Gas Detection and Environment Control Products above.



FieldServer Services

FieldServer services consist of orders for custom development of protocol drivers.  Generally customers place orders for FieldServer products concurrently with their order for protocol drivers.  However, if custom development of the protocol driver is required, the product order is not processed until development of the protocol driver is complete. Orders are received in the same manner as described in FieldServer Products above, but due to the non-recurring engineering aspect of the customized driver development the Company is more likely to have a written evidence trail of a quotation and a hard copy order.  The driver development involves further research after receipt of order, preparation of a scope document to be approved by the customer and then engineering time to write, test and release the driver program.  When development of the driver is complete the customer is notified and can proceed with a FieldServer product (see FieldServer Products above).  Revenues for driver development are billed and recognized upon shipment or delivery of



Page 6 of 17

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the related product that includes the developed protocol drivers (as noted in FieldServer Products above). Collectibility is reasonably assured as described in FieldServer Products above.

Discounts and Allowances

Discounts are applied at time of order entry and sales are processed at net pricing.  No allowances are offered to customers.

b)

Recent Accounting Standards

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, which supplements Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires the tax effect of a position to be recognized only if it is more-likely-than-not to be sustained based solely on its technical merits as of the reporting date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are recognized. This is a different standard for recognition than was previously required. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment is recorded directly to opening retained earnings in the period of adoption and reported as a change in accounting principle. The Company adopted the provisions of FIN 48 on January 1, 2007.  Management believes that the Companys tax position is more-likely-than-not to be sustained based on its technical merits as of the reporting date.  As a result there is no material impact to the financial statements reported herein.

In July 2006, the FASB issued FASB Staff Position (FSP) No. FAS 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction, that provides guidance on how a change or a potential change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects the accounting by a lessor for the lease. We adopted the provisions of FSP No. FAS 13-2 on January 1, 2007. Our adoption of this FSP did not have a material impact on our financial position, results of operations or cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, to define how the fair value of assets and liabilities should be measured in more than 40 other accounting standards where it is allowed or required. In addition to defining fair value, the statement establishes a framework within GAAP for measuring fair value and expands required disclosures surrounding fair-value measurements. While it will change the way companies currently measure fair value, it does not establish any new instances where fair-value measurement is required. SFAS No. 157 defines fair value as an amount that a company would receive if it sold an asset or paid to transfer a liability in a normal transaction between market participants in the same market where the company does business. It emphasizes that the value is based on assumptions that market participants would use, not necessarily only the company that might buy or sell the asset. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption allowed. We are currently evaluating the impact of adopting this Statement.



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In February 2007, FASB No. 159, The Fair Value Option for Financial Assets and Financial Liabilitieswas released. SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 will be effective for the Company beginning January 1, 2008. The Company is currently evaluating the potential effect of SFAS No. 159 on its financial statements.

Other recent accounting pronouncements discussed in the notes to the December 31, 2006 audited financial statements, filed previously with the Securities and Exchange Commission in Form 10-KSB, that were required to be adopted during the year ending December 31, 2007, did not have or are not expected to have a significant impact on the Companys 2007 financial statements.

c)

Employee Stock-Based Compensation

At March 31, 2007, the Company had one approved stock-based employee compensation plan, the 2006 Stock Plan.  The Companys 1996 Stock Plan expired by its terms in March 2006, but the 1996 Stock Plan will continue to govern awards previously granted thereunder that had not expired or otherwise terminated.

Under the 2006 Stock Plan, the Company initially reserved 500,000 shares of common stock for issuance. Options are granted under the 2006 Stock Plan at the fair market value of the Company's common stock at the grant date, vest ratably over 4 years, and expire 10 years from the grant date. Prior to January 1, 2006, the Company accounted for grants for these plans under Accounting Principals Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations, and applied SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," for disclosure purposes only. Under APB 25, stock-based compensation cost related to stock options was not recognized in net income since the options underlying those plans had exercise prices greater than or equal to the market value of the underlying stock on the date of the grant.

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), "Share Based Payment," ("SFAS No. 123(R)") which revises SFAS No. 123 and supersedes APB 25. SFAS No. 123(R) requires that all share-based payments to employees be recognized in the financial statements based on their fair values at the date of grant. The calculated fair value is recognized as expense (net of any capitalization) over the requisite service period, net of estimated forfeitures, using the straight-line method under SFAS No. 123(R). The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. The statement was adopted using the modified prospective method of application which requires compensation expense to be recognized in the financial statements for all unvested stock options beginning in the quarter of adoption. No adjustments to prior periods have been made as a result of adopting SFAS No. 123(R). Under this transition method, compensation expense for share-based awards granted prior to January 1, 2006, but not yet vested as of January 1, 2006, will be recognized in the Company's financial statements over their remaining service period. The cost was based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123. As required by SFAS No. 123(R), compensation expense recognized in future periods for share-based compensation granted prior to adoption of the standard will be adjusted for the effects of estimated forfeitures.



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Under the modified prospective method described above, the Company recorded stock-based compensation expense totaling $9,546 and $10,929 for the three-month periods ended March 31, 2007 and 2006, respectively, related to stock options granted to employees prior to January 1, 2007. Such amounts are included in general and administrative expenses in the accompanying condensed statements of operations. The Company did not modify the terms of any previously granted stock options during the three-month periods ended March 31, 2007 and 2006.

Inventories

A summary of inventories as of March 31, 2007 follows:



|                     |  |   |          
|-------------------- |  | - | ---------
|Raw Materials        |  | $ | 710,403  
|Work-in-process      |  |   | 1,305,229
|Finished goods       |  |   | 483,867  
|Obsolescence reserve |  |   | (98,380) 
|                     |  | $ | 2,401,119

Net earnings per share

Basic earnings per share (EPS) is computed using the weighted average number of common shares outstanding during the period.  Diluted EPS is computed using the weighted average number of common and dilutive potential common shares outstanding during the period.  Dilutive potential common shares consist of common stock issuable upon exercise of stock options using the treasury stock method.  No adjustments to earnings were made for purposes of per share calculations.

At March 31, 2007, there were no common shares that had an exercise price higher than the stock price used in the EPS calculation.  However at March 31, 2006, outstanding options to acquire 296,500 shares of common stock were not considered potentially dilutive common shares due to the exercise price being higher than the stock price used in the EPS calculation.

The following is a reconciliation of the shares used in the computation of basic and diluted EPS for the periods ended March 31, 2007 and 2006, respectively:



| |                                                                                                |  |                    |                |  |                |  |  |  | 
| | ---------------------------------------------------------------------------------------------- |  | ------------------ | -------------- |  | -------------- |  |  |  | 
| |                                                                                                |  | Three months ended
| |                                                                                                |  |                    | March 31,
2007 |  | March 31,
2006
| | Basic EPS  weighted-average number of common shares outstanding                               |  |                    | 11,058,525     |  | 11,048,213    
| | Effect of dilutive potential common shares  stock options outstanding                         |  |                    | 598,905        |  | 477,987       
| | Diluted EPS  weighted-average number of common shares and potential common shares outstanding |  |                    | 11,657,430     |  | 11,526,200    



Comprehensive Income

The Company has no significant components of other comprehensive income and, accordingly, comprehensive income is the same as net income for all periods presented.



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Concentrations

No customer individually made up more than 10% of accounts receivable at March 31, 2007.  Also, no customers individually made up more than 10% of net sales for the three month period ended March 31, 2007.



Segment Information

The Company operates in one segment, industrial instrumentation.  The Companys chief operating decision maker, the Chief Executive Officer, evaluates the performance of the Company and makes operating decisions based on financial data consistent with the presentation in the accompanying financial statements.

In addition, the CEO reviewed the following information on revenues by product category for the three months ended March 31:



|                        |  |      |           |      |   |          
|----------------------- |  | ---- | --------- | ---- | - | ---------
|                        |  | 2007 |           | 2006
|Gas detection devices   |  | $    | 1,215,531 |      | $ | 1,592,802
|Environment controllers |  |      | 257,233   |      |   | 307,780  
|FieldServers            |  |      | 1,350,449 |      |   | 679,594  
|                        |  | $    | 2,823,213 |      | $ | 2,580,176

Line-of-Credit

No borrowings have been made under the Companys bank line-of-credit during the first three months of fiscal year 2007 and the balance was $0 at March 31, 2007.  The Company is in compliance at March 31, 2007 with covenants required by the line.



Stock Options

During the three month period ended March 31, 2007, a total of 216,500 options were granted under the Companys 2006 Stock Plan with an exercise price of $1.50.  Options are granted under the 2006 Stock Plan at the fair market value of the Companys common stock at the grant date, vest ratably over 4 years, and expire 10 years from the grant date.  Such options had a per-share grant date fair value of $1.50, as calculated by the Black-Scholes option pricing model using the following assumptions: expected life of 8 years; estimated volatility of 210%; risk-free interest rate of 5.25%; and no expected dividends. Stock-based compensation expense related to these options was immaterial for the three months ended March 31, 2007.

A total of 20,000 stock options were exercised by employees for cash proceeds of $6,800 during the three month period ended March 31, 2007, while no options expired during the same period.





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This Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Statements that are not statements of historical fact may be deemed to be forward-looking statements.  The words believe, expect, intend, plan, project, will and similar words and phrases as they relate to the Company also identify forward-looking statements.  Such statements reflect the current views and assumptions of the Company and are not guarantees of future performance.  These statements are subject to various risks and uncertainties.  The Companys actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors described in this Form 10-QSB, including those under the heading Certain Factors That May Affect Future Results and those issues described under the heading Critical Accounting Policies.  The Company expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any changes in expectations, or any change in events or circumstances on which those statements are based, unless otherwise required by law.

ITEM 2:

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

For the three months ended March 31, 2007, Sierra Monitor Corporation reported net sales of $2,823,211 compared to $2,580,176 for the three months ended March 31, 2006.  The results for the first quarter of fiscal 2006 represent a 9% increase from the same period in the prior year.

Sales of our gas detection products, which accounted for approximately 43% of total revenue, were 24% lower in the first quarter of 2007 compared to the first quarter of 2006.  In a typical period, half of our gas detection sales are for integrated systems comprised of controllers, gas sensor modules and accessory components.  In the first quarter of 2006, our gas detection sales included a single large order representing approximately ten percent of net sales for the quarter and various other integrated systems.  Our shipments of integrated systems in the first quarter of 2007 were lower than the first quarter of the prior year resulting in lower overall gas detection sales.

Sales of environment controllers to the telecommunications industry currently represent approximately 9% of our total net sales.  In the first quarter of 2007, our sales to the telecommunications industry were 16% lower compared to the first quarter of 2006.   The results reflect a continued low level of infrastructure spending by the larger land-line telephone companies.

Sales of communications bridge products by our FieldServer Technologies division increased 99% in the first quarter of 2007 compared to the first quarter of 2006.  We sell FieldServer Technologies products in two formats, a box level product branded as FieldServer and a board level product branded as ProtoCessor.  FieldServer box level product sales increased approximately 27% as strong demand continued primarily from customers in the building automation industry.  Shipments of ProtoCessor products have increased steadily since product introduction in 2005 resulting in a seven fold sales increase in the first quarter of 2007 compared to first quarter of 2006.

Gross profit for the three-month period ended March 31, 2007 was $1,604,513 compared to $1,528,644 in the same period in the previous year.  In the current period, the gross margin was approximately 57% of net sales compared to 59% of net sales in the same period in the previous year.  The reduction in gross margin was due, primarily, to the increase in sales of ProtoCessor products.  ProtoCessor products are original equipment modules that are sold in high unit volumes at lower margins than the remaining product groups.  The increase in gross profit was due to higher sales in the first quarter of 2007.



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Expenses for research and development, which include new product development and engineering to sustain existing products, were $535,284 or 19% of net sales, for the three-month period ended March 31, 2007, compared with $423,528 or 16% of net sales, in the comparable period in 2006.   The higher research and development expenses are primarily the results of salary and consulting expenses as we increase engineering resources to support the higher level of FieldServer and ProtoCessor sales and continued development of new gas detection products.  We anticipate maintaining, or increasing the current level of engineering expense.

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses, for the three month period ended March 31, 2007 were $640,557 or 23% of net sales, compared to $696,932 or 27% of net sales, in the same period in the prior year.  Selling expenses in the first quarter of 2006 included extraordinary costs of a sales conference and temporary sales staffing.  Selling expenses in the first quarter of 2007 did not include similar costs and were generally consistent with historical levels.

General and administrative expenses for the first quarter of 2007 were $354,669 or 13% of net sales compared to $318,787 or 12% of net sales in the same period in the prior year.  Except for increases in wage and salary costs there were no significant changes in administration expenses in the first quarter of 2007 compared to the first quarter of 2006.

Our income from operations for the three-month period ended March 31, 2007 was $74,003, compared to $89,397 in the same period in the prior year.  The lower operating income after an increase in sales revenue was, primarily, the result of lower margins and higher engineering expenses.

Net income for the three-month period ended March 31, 2007 was $44,139 or approximately 2% of net sales, compared to $46,912, or approximately 2% of net sales, for the same period in the prior year.  The primary difference between operating income and net income is the provision for income taxes.

Liquidity and Capital Resources

Working capital was approximately $3,443,000 at March 31, 2007, an increase of approximately $34,000 from December 31, 2006.  Current assets decreased by approximately $168,000 due to decreases in cash and accounts receivable offset by an increase in inventory.  Current liabilities decreased by approximately $202,000 due to lower accounts payable offset by an increase in accrued compensation expenses.  Cash, accounts receivable, inventories, accounts payable and accrued liabilities are the primary components of our working capital.

Management believes that its present resources, including cash and accounts receivable, are sufficient to fund its anticipated level of operations through at least the next twelve months.

Certain Factors That May Affect Future Results

The Company's future operating results may be affected by a number of factors, including general economic conditions in both foreign and domestic markets, cyclical factors affecting our industry, lack of growth in our end-markets, and our ability to develop, manufacture, and sell both new and existing products at a profitable yet competitive price.

We are currently profitable but there can be no assurance that we will maintain profitability.  If we are not able to maintain profitability, we may not be able to sustain operations.

The industry in which we compete is highly competitive and we expect such competition to continue in the future.  Most of our competitors are larger than our company and have substantially greater financial, technical, marketing and manufacturing resources.  While we have invested in new products, there can be no assurance that we can continue to introduce new products on a timely basis or that certain of our products will not be rendered non-competitive or obsolete by our competitors.



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Our operations are concentrated in a single building in Milpitas, California.  Our operations could be interrupted by fire, earthquake, power loss, telecommunications failure and other events beyond our control.  Although we maintain offsite storage of back-up data files and other records, we do not maintain a detailed disaster recovery plan.  In addition, we do not carry sufficient business interruption insurance to compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse effect on our business.

Our short-term liquidity is dependent upon our ability to reduce collection cycles, reduce inventories and manage expenses and cash distribution.  We must also renew or expand our bank line of credit in June 2007 under terms we expect to be similar to the current terms of the line of credit in order to avoid the necessity of more costly funds.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Companys consolidated financial statements and the accompanying notes.  The amounts of assets and liabilities reported on our balance sheets and the amounts of revenues and expenses reported for each of our fiscal periods are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, accounts receivable, doubtful accounts and inventories.  Actual results could differ from these estimates.  The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the consolidated financial statements:

a)

Revenue Recognition

The Company recognizes revenues in accordance with Staff Accounting Bulleting (SAB) No. 104, Revenue Recognition, when all of the following conditions exist:  a) persuasive evidence of an arrangement exists in the form of an accepted purchase order; b) delivery has occurred, based on shipping terms, or services have been rendered; c) the Companys price to the buyer is fixed or determinable, as documented on the accepted purchase order; and d) collectibility is reasonably assured.  By product and service type, revenues are recognized when the following specific conditions are met:



Gas Detection and Environment Control Products

Gas Detection and Environment Control products are sold as off-the-shelf products with prices fixed at the time of order. Orders delivered to the Company by phone, fax, mail or email are considered valid purchase orders and once accepted by the Company are deemed to be the final understanding between us and our customer as to the specific nature and terms of the agreed-upon sale transaction.  Products are shipped and are considered delivered when (a) for FOB factory orders they leave our shipping dock or (b) for FOB customer dock orders upon confirmation of delivery.  The creditworthiness of customers is generally assessed prior to the Company accepting a customers first order. Additionally, international customers and customers who have developed a history of payment problems are generally required to prepay or pay through a letter-of-credit.



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Gas Detection and Environment Control Services

Gas Detection and Environment Control Services consist of field service orders (technical support) and training, which are provided separate from product orders.  Orders are accepted in the same forms as discussed for Gas Detection and Environment Control Products above with hourly prices fixed at the time of order. Revenue recognition occurs only when the service activity is completed.  Such services are provided to current and prior customers, and, as noted above, creditworthiness has generally already been assessed. In cases where the probability of receiving payment is low, a credit card number is collected for immediate processing.



FieldServer Products

FieldServer products are sold in the same manner as Gas Detection and Environment Control products (as discussed above) except that the products contain embedded software, which is integral to the operation of the device.  The software embedded in FieldServer products includes two items:  (a) a compiled program containing (i) the basic operating system for FieldServers, which is common to every unit, and (ii) the correct set of protocol drivers based on the customer order (see FieldServer Services below for more information); and (b) a configuration file that identifies and links each data point as identified by the customer.  The Company does not deem the hardware, operating systems with protocol drivers and configuration files to be separate units of accounting, as defined in EITF 00-21, Revenue Arrangements with Multiple Deliverables, because the Company does not believe that they have value on a stand-alone basis.  The hardware is useless without the software, and the software is only intended to be used in FieldServer hardware.  Additionally, the software included in each sale is deemed to not require significant production, modification or customization, as described in Statement of Position (SOP) 97-02, Software Revenue Recognition, as amended, and therefore the Company recognizes revenues upon the shipment or delivery of products (depending on shipping terms), as described in Gas Detection and Environment Control Products above.



FieldServer Services

FieldServer services consist of orders for custom development of protocol drivers.  Generally customers place orders for FieldServer products concurrently with their order for protocol drivers.  However if custom development of the protocol driver is required, the product order is not processed until development of the protocol driver is complete. Orders are received in the same manner as described in FieldServer Products above, but due to the non-recurring engineering aspect of the customized driver development the Company is more likely to have a written evidence trail of a quotation and a hard copy order.  The driver development involves further research after receipt of order, preparation of a scope document to be approved by the customer and then engineering time to write, test and release the driver program.  When development of the driver is complete the customer is notified and can proceed with a FieldServer product (see FieldServer Products above).  Revenues for driver development are billed and recognized upon shipment or delivery of the related product that includes the developed protocol drivers (as noted in FieldServer Products above). Collectibility is reasonably assured as described in FieldServer Products above.

Discounts and Allowances

Discounts are applied at time of order entry and sales are processed at net pricing.  No allowances are offered to customers.



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b)

Accounts Receivable and Related Allowances

Our domestic sales are generally made on an open account basis unless specific experience or knowledge of the customers potential inability or unwillingness to meet the payment terms dictate secured payments.  Our international sales are generally made based on secure payments including cash wire advance payments and letters of credit.  International sales are made on open account terms where sufficient historical experience justifies the credit risks involved.  In many of our larger sales, the customers are frequently construction contractors who are in need of our field services to complete their work and obtain payment.   Managements ability to manage the credit terms and take advantage of the leverage of the need for our services is critical to the effective application of credit terms and minimization of accounts receivable losses.

We maintain an allowance for doubtful accounts which is analyzed on a periodic basis to insure that it is adequate.  We believe that we have demonstrated the ability to make reasonable and reliable estimates of allowances for doubtful accounts based on significant historical experience.

c)

Inventories

Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method.  The Company uses an Enterprise Requirements Planning (ERP) software system which provides data upon which management relies to determine inventory trends and identify excesses.  The carrying value of inventory is reduced to market for slow moving and obsolete items based on historical experience and current product demand.  We evaluate the carrying value of inventory quarterly.  The adequacy of these carrying amounts is dependent upon managements ability to forecast demands accurately, manage product changes efficiently, and interpret the data provided by the ERP system.

d)

Off Balance Sheet Arrangements

As of March 31, 2007, the Company had no off balance sheet arrangements as defined in Item 303(c) of the Securities and Exchange Commissions Regulation S-B.

ITEM 3.  CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of Gordon R. Arnold, our principal executive and principal financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-QSB. Based on this evaluation, our management has concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in internal control over financial reporting.There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-QSB that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II:  OTHER INFORMATION

Item 6.

Exhibits

(a)

Exhibits.

Exhibit

Number

Description

3.1(1)

Articles of Incorporation of the Registrant.

3.2(2)

Bylaws of the Registrant.

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 18 U.S.C. Section 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 1989.

(2)

Incorporated by reference to the Companys Quarterly Report on Form 10-QSB (File No. 000-07441) filed with the SEC on August 14, 1998.



SIGNATURE



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



SIERRA MONITOR CORPORATION

Registrant



Date:

May 14, 2007

By:

/s/ Gordon R. Arnold

Gordon R. Arnold

President

Chief Executive Officer

Chief Financial Officer



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Index to Exhibits



Exhibit

Number

Description

3.1(1)

Articles of Incorporation of the Registrant.

3.2(2)

Bylaws of the Registrant.

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 18 U.S.C. Section 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 1989.

(2)

Incorporated by reference to the Companys Quarterly Report on Form 10-QSB (File No. 000-07441) filed with the SEC on August 14, 1998



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