**SECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON,D.C. 20549**

** **

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**FORM 10-Q**

 

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**Quarterly Report pursuant to Section 13 or 15(d)**

**of the Securities Exchange Act of 1934**

 

**For the Quarter Ended March 31, 2008**

 

**Commission File No. 01-15725**

 

**Alpha Pro Tech, Ltd.**

(exact name ofregistrant as specified in its charter)

 

| **Delaware,  U.S.A.**                           |   | **63-1009183**                        |
|-------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation) |   | (I.R.S. Employer  Identification No.) |

 

| **Suite 112,  60 Centurian Drive**   |   |        |
|-------------------------------------------|--------|-------------|
| **Markham,  Ontario, Canada**             |   | **L3R 9R2** |
| (Address of principal  executive offices) |   | (Zip Code)  |

 

Registrant’stelephone number, including area code:  **(905) 479-0654**

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes  xNo  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See 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 x                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

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

 

 Yes   o   No  x

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of May 12, 2008.

 

25,027,853 sharesof common stock,     $.01 par value

 

 

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**Alpha Pro Tech, Ltd.**

 

Table of Contents

 
|                                                  |                                                                                        | **Page No.**                                                                                                        |
|-------------------------------------------------------|---------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                                  |                                                                                        |                                                                                                                     |
| PART I.  FINANCIAL INFORMATION                   |                                                                                        |                                                                                                                     |
|                                                  |                                                                                        |                                                                                                                     |
| ITEM  1 Consolidated Financial Statements (Unaudited) |                                                                                        |
|                                                  |                                                                                        |                                                                                                                     |
|                                                  | a)                                                                                          | Consolidated Balance Sheets - March 31, 2008 and  December 31, 2007                                            | 2 |
|                                                  |                                                                                        |                                                                                                                     |
|                                                  | b)                                                                                          | Consolidated Income Statements for the three months  ended March 31, 2008 and March 31, 2007                   | 3 |
|                                                  |                                                                                        |                                                                                                                     |
|                                                  | c)                                                                                          | Consolidated Statement of Shareholders’ Equity for the  three months ended March 31, 2008                      | 4 |
|                                                  |                                                                                        |                                                                                                                     |
|                                                  | d)                                                                                          | Consolidated Statements of Cash Flows for the three  months ended March 31, 2008 and March 31, 2007            | 5 |
|                                                  |                                                                                        |                                                                                                                     |
|                                                  | e)                                                                                          | Notes to Consolidated Financial Statements                                                                               | 6 |
|                                                  |                                                                                        |                                                                                                                     |
| ITEM  2                                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12                                                                                                                       |
|                                                  |                                                                                        |                                                                                                                     |
|                                                  | Cautionary Statements Regarding Forward-Looking  Information                                | 12                                                                                                                       |
|                                                  |                                                                                        |                                                                                                                     |   |   |
|                                                  | New Accounting Standards                                                                    | 18                                                                                                                       |
|                                                  |                                                                                        |                                                                                                                     |
| ITEM 3                                                | Quantitative  and Qualitative Disclosures About Market Risk                                 | 18                                                                                                                       |
|                                                  |                                                                                        |                                                                                                                     |
| ITEM 4                                                | Controls  and Procedures                                                                    | 19                                                                                                                       |
|                                                  |                                                                                        |                                                                                                                     |
| PART II.   OTHER INFORMATION                | 20                                                                                          |
|                                                  |                                                                                        |                                                                                                                     |
| ITEM 6                                                | Exhibits  and Reports on Form 8-K                                                      | 20                                                                                                                       |
|                                                  |                                                                                        |                                                                                                                     |
| SIGNATURES                                            | 20                                                                                          |
|                                                  |                                                                                        |                                                                                                                     |
| EXHIBITS                                              |                                                                                        |
|                                                  |                                                                                        |                                                                                                                     |
|                                                  | Exhibit 31.1:                                                                          | Certification  by CEO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the  Exchange Act (filed herewith) |   |
|                                                  |                                                                                        |                                                                                                                     |
|                                                  | Exhibit 31.2:                                                                          | Certification  by CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the  Exchange Act (filed herewith) |   |
|                                                  |                                                                                        |                                                                                                                     |
|                                                  | Exhibit 32.1:                                                                          | Certification  by CEO pursuant to Section 906 of the Sarbanes-Oxley Act (filed  herewith)                           |   |
|                                                  |                                                                                        |                                                                                                                     |
|                                                  | Exhibit 32.2:                                                                          | Certification  by CFO pursuant to Section 906 of the Sarbanes-Oxley Act (filed  herewith)                           |   |
|                                                  |                                                                                        |                                                                                                                     |                          |
|                                                       |                                                                                             |                                                                                                                          |  |  |  |  |  |  |

##### *** ***

##### ******

##### *** ***

**Alpha Pro Tech, Ltd.**

 

##### ***PART I. FINANCIAL INFORMATION***

##### *** ***

#### **ITEM 1. FINANCIAL STATEMENTS**

#### ** **

Alpha Pro Tech,Ltd. (Alpha Pro Tech, the Company) prepared the following unaudited interimconsolidated financial statements pursuant to the rules and regulations ofthe Securities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to these rules and regulations.

 

You should readthe following unaudited interim consolidated financial statements and theaccompanying notes together with the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007. The Company’s 2007 Annual Reportcontains information that may be helpful in analyzing the financial informationcontained in this report and in comparing its results of operations for thethree three months ended March 31, 2008 with the same period in 2007.

 

1

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# ** **

**Alpha Pro Tech, Ltd.**

 

### **ConsolidatedBalance Sheets (Unaudited)**

 
| ** **                                                                                                                                                                     | ** ** | **March 31,  2008** | ** ** | **December 31,  2007 (1)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------------|------------|
|                                                                                                                                                                           |       |                     |       |                                 |       |
| **Assets**                                                                                                                                                                     |       |                     |       |                                 |       |
| Current assets:                                                                                                                                                                |       |                     |       |                                 |       |
| Cash and cash equivalents                                                                                                                                                      |       | $                        | 2,806,000  |                                 | $          | 4,064,000 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $64,000 at March 31, 2008 and $65,000 at December 31,  2007                                          |       | 4,145,000                |       | 4,422,000                            |       |
| Inventories, net                                                                                                                                                               |       | 14,384,000               |       | 14,111,000                           |       |
| Prepaid expenses and other current assets                                                                                                                                      |       | 1,691,000                |       | 1,588,000                            |       |
| Deferred income taxes                                                                                                                                                          |       | 404,000                  |       | 419,000                              |       |
| Total current assets                                                                                                                                                           |       | 23,430,000               |       | 24,604,000                           |       |
|                                                                                                                                                                           |       |                     |       |                                 |       |
| Property and equipment, net                                                                                                                                                    |       | 3,314,000                |       | 3,439,000                            |       |
| Goodwill, net                                                                                                                                                                  |       | 55,000                   |       | 55,000                               |       |
| Intangible assets, net                                                                                                                                                         |       | 178,000                  |       | 180,000                              |       |
| Equity investments in and advances to unconsolidated  affiliates                                                                                                               |       | 1,229,000                |       | 1,208,000                            |       |
| Total assets                                                                                                                                                                   |       | $                        | 28,206,000 |                                 | $          | 29,486,000 |   |
|                                                                                                                                                                           |       |                     |       |                                 |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                                  |       |                     |       |                                 |       |
| Current liabilities:                                                                                                                                                           |       |                     |       |                                 |       |
| Accounts payable                                                                                                                                                               |       | $                        | 633,000    |                                 | $          | 457,000 |   |
| Accrued liabilities                                                                                                                                                            |       | 540,000                  |       | 1,478,000                            |       |
| Total current liabilities                                                                                                                                                      |       | 1,173,000                |       | 1,935,000                            |       |
|                                                                                                                                                                           |       |                     |       |                                 |       |
| Deferred income taxes                                                                                                                                                          |       | 751,000                  |       | 747,000                              |       |
| Total liabilities                                                                                                                                                              |       | 1,924,000                |       | 2,682,000                            |       |
|                                                                                                                                                                           |       |                     |       |                                 |       |
| Shareholders’ equity                                                                                                                                                      |       |                     |       |                                 |       |
| Common stock, $.01 par value, 50,000,000 shares  authorized, 25,117,155 and 25,583,655 issued and outstanding at  March 31, 2008 and December 31, 2007, respectively |       | 252,000                  |       | 256,000                              |       |
| Additional paid-in capital                                                                                                                                                     |       | 26,013,000               |       | 26,670,000                           |       |
| Retained earnings (accumulated deficit)                                                                                                                                        |       | 17,000                   |       | (122,000                             | )          |
| Total shareholders’ equity                                                                                                                                                |       | 26,282,000               |       | 26,804,000                           |       |
| Total liabilities and shareholders’ equity                                                                                                                                |       | $                        | 28,206,000 |                                 | $          | 29,486,000 |   |

 

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(1)                               Thecondensed consolidated balance sheet as of December 31, 2007 has beenprepared using information from the audited financial statements at that date.

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

2

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### ** **

**Alpha Pro Tech, Ltd.**

 

### **Consolidated Income Statements (Unaudited)**

 
| ** **                                                   | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Net sales                                                    |       | $                                                                  | 7,524,000  |   | $ | 9,044,000 |   |
|                                                         |       |                                                               |       |   |   |
| Cost of goods sold, excluding depreciation and  amortization |       | 4,074,000                                                          |       | 4,880,000 |   |
|                                                         |       |                                                               |       |   |   |
| Gross margin                                                 |       | 3,450,000                                                          |       | 4,164,000 |   |
|                                                         |       |                                                               |       |   |   |
| Expenses:                                                    |       |                                                               |       |   |   |
| Selling, general and administrative                          |       | 3,141,000                                                          |       | 3,223,000 |   |
| Depreciation and amortization                                |       | 141,000                                                            |       | 115,000 |   |
|                                                         |       |                                                               |       |   |   |
| Income from operations                                       |       | 168,000                                                            |       | 826,000 |   |
|                                                         |       |                                                               |       |   |   |
| Other income                                                 |       |                                                               |       |   |   |
| Equity in income of unconsolidated affiliates                |       | 21,000                                                             |       | 25,000 |   |
| Interest, net                                                |       | 34,000                                                             |       | 16,000 |   |
|                                                         |       |                                                               |       |   |   |
| Income before provision for income taxes                     |       | 223,000                                                            |       | 867,000 |   |
|                                                         |       |                                                               |       |   |   |
| Provision for income taxes                                   |       | 84,000                                                             |       | 332,000 |   |
|                                                         |       |                                                               |       |   |   |
| Net income                                                   |       | $                                                                  | 139,000    |   | $ | 535,000 |   |
|                                                         |       |                                                               |       |   |   |
| Basic net income per share                                   |       | $                                                                  | 0.01       |   | $ | 0.02 |   |
|                                                         |       |                                                               |       |   |   |
| Diluted net income per share                                 |       | $                                                                  | 0.01       |   | $ | 0.02 |   |
|                                                         |       |                                                               |       |   |   |
| Basic weighted average shares outstanding                    |       | 25,210,691                                                         |       | 24,834,005 |   |
|                                                         |       |                                                               |       |   |   |
| Diluted weighted average shares outstanding                  |       | 25,210,691                                                         |       | 25,811,883 |   |
|                                                         |       |                                                               |       |   |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

3

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**Alpha Pro Tech, Ltd.**

 

### **Consolidated Statement of Shareholders’ Equity(Unaudited)**

 
| ** **                                  | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | **(Accumulated** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------|------------|
| ** **                                  | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Deficit)**     | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **       | ** ** |
| ** **                                  | ** ** | **Shares **      | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**     | ** ** | **Total**  | ** ** |
| ** **                                  | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** |
| Balance at December 31, 2007           |       | 25,583,655            |       | $           | 256,000    |           | $          | 26,670,000       |       | $          | (122,000   | ) | $ | 26,804,000 |   |
|                                        |       |                  |       |        |       |           |       |             |       |       |       |
| Share- based compensation expense           |       | —                |       | —      |       | 47,000         |       | —           |       | 47,000     |       |
|                                        |       |                  |       |        |       |           |       |             |       |       |       |
| Common Stock repurchased & retired |       | (466,500              | )          | (4,000      | )          | (704,000       | )          |             |       | (708,000   | )          |
|                                        |       |                  |       |        |       |           |       |             |       |       |       |
| Net income                                  |       | —                |       | —      |       | —         |       | 139,000          |       | 139,000    |       |
|                                        |       |                  |       |        |       |           |       |             |       |       |       |
| Balance at March 31, 2008              |       | 25,117,155            |       | $           | 252,000    |           | $          | 26,013,000       |       | $          | 17,000     |   | $ | 26,282,000 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

4

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### ** **

**Alpha Pro Tech, Ltd.**

 

### **ConsolidatedStatements of Cash Flows (Unaudited)**

 
| ** **                                                                     | ** ** | **For the Three months Ended   March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                                                                 | ** ** | **2007** | ** ** |
| **Cash  Flows From Operating Activities:**                                     |       |                                                                     |       |   |   |
| Net income                                                                     |       | $                                                                        | 139,000    |   | $ | 535,000 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                                                     |       |   |   |
| Share-based  compensation expense                                              |       | 47,000                                                                   |       | 38,000 |   |
| Depreciation and  amortization                                                 |       | 141,000                                                                  |       | 115,000 |   |
| Deferred income  taxes                                                         |       | 19,000                                                                   |       | — |   |
| Equity in income  of unconsolidated affiliates                                 |       | (21,000                                                                  | )          | (25,000 | ) |
| Changes in  assets and liabilities:                                            |       |                                                                     |       |   |   |
| Accounts  receivable, net                                                      |       | 277,000                                                                  |       | 819,000 |   |
| Inventories, net                                                               |       | (273,000                                                                 | )          | (2,067,000 | ) |
| Prepaid expenses  and other current assets                                     |       | (103,000                                                                 | )          | (116,000 | ) |
| Accounts payable  and accrued liabilities                                      |       | (762,000                                                                 | )          | (682,000 | ) |
|                                                                           |       |                                                                     |       |   |   |
| Net cash used in  operating activities:                                        |       | (536,000                                                                 | )          | (1,383,000 | ) |
|                                                                           |       |                                                                     |       |   |   |
| **Cash  Flows From Investing Activities:**                                     |       |                                                                     |       |   |   |
| Purchase of  property and equipment                                            |       | (10,000                                                                  | )          | (50,000 | ) |
| Purchase of  intangible assets                                                 |       | (4,000                                                                   | )          | (23,000 | ) |
|                                                                           |       |                                                                     |       |   |   |
| Net cash used in  investing activities                                         |       | (14,000                                                                  | )          | (73,000 | ) |
|                                                                           |       |                                                                     |       |   |   |
| **Cash  Flows From Financing Activities:**                                     |       |                                                                     |       |   |   |
| Payments for the  repurchase of common stock                                   |       | (708,000                                                                 | )          | — |   |
| Income tax  benefit from stock options exercised                               |       | —                                                                   |       | 236,000 |   |
| Proceeds from  the exercise of stock options                                   |       | —                                                                   |       | 469,000 |   |
| Net cash (used  in) provided by financing activities                           |       | (708,000                                                                 | )          | 705,000 |   |
|                                                                           |       |                                                                     |       |   |   |
| Decrease in cash  during the period                                            |       | (1,258,000                                                               | )          | (751,000 | ) |
|                                                                           |       |                                                                     |       |   |   |
| Cash and cash  equivalents, beginning of period                                |       | 4,064,000                                                                |       | 1,837,000 |   |
| Cash and cash  equivalents, end of period                                      |       | $                                                                        | 2,806,000  |   | $ | 1,086,000 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

5

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**Alpha Pro Tech, Ltd.**

 

**Notes toConsolidated Financial Statements (Unaudited)**

 

**1.****                                     ****The Company**

 

Alpha Pro Tech,Ltd. (“Alpha Pro Tech”, “the Company”) is in the business of protecting people,products and environments.  The Companyaccomplishes this by developing, manufacturing and marketing a line ofdisposable protective apparel for the cleanroom, industrial and pharmaceuticalmarkets, a line of infection control products for the medical and dentalmarkets and a line of construction weatherization products.  The disposable protective apparel consists ofa complete line of shoecovers, bouffant caps, coveralls, gowns, frocks and labcoats. The infection control line of products includes a line of face masks andeye shields.  The line of construction supplyweatherization products consists of house wrap and synthetic roofunderlayment.  The Company alsomanufactures and distributes a line of medical bed pads and accessories as wellas a line of pet beds.  The Company’sproducts are sold both under the “Alpha Pro Tech” brand name as well as underprivate label and are predominantly sold in the United States of America.

 

**2.****                                     ****Basis of Presentation**

 

The interim financialinformation included herein is unaudited; however, the information reflects alladjustments (consisting of normal recurring adjustments) that are, in theopinion of management, necessary for the fair presentation of the consolidatedfinancial position, results of operations and cash flows for the interimperiods. The consolidated financial statements should be read in conjunction withthe consolidated financial statements for the year ended December 31,2007, which are included in the Company’s Annual Report on Form 10-K (“200710-K”). The results of operations for the three months ended March 31,2008  are not necessarily indicative ofthe results to be expected for the full year. The consolidated balance sheet atDecember 31, 2007 was extracted from the audited consolidated financialstatements contained in the 2007 10-K and does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica for annual consolidated financial statements.

 

**3.****                                     ****Stock Based Compensation**

 

The Companymaintains a stock option plan under which the Company may grant incentive stockoptions and non-qualified stock options to employees and non-employeedirectors.  Stock options have beengranted with exercise prices at or above the fair market value of theunderlying shares of common stock on the date of grant.  Options vest and expire according to termsestablished at the grant date.

 

The Company adoptedStatement of Financial Accounting Standards No. 123R, Share-Based Payment(“SFAS 123R”) effective January 1, 2006, using the modified prospectiveapplication method. SFAS 123R requires companies to record compensation expensefor the value of all outstanding and unvested share-based payments, includingemployee stock options and similar awards. During the first quarter 2008 and 2007 there were no stock optionsgranted under the option plan.  TheCompany recognized $47,000 and $38,000 in share-based compensation expense inits consolidated financial statements for the three months ended March 31,2008  and 2007 respectively related topreviously issued options.

 

Stock options topurchase 1,320,000 and 2,070,000 shares of common stock were outstanding at March 31,2008 and 2007, respectively. Of the March 31, 2008 outstanding stockoptions totaling 1,320,000, none were included in the computation of dilutedearnings per share because the exercise prices of all stock options weregreater than the average share price of the Company’s common stock and,therefore, there was no dilutive effect. Of the March 31, 2007 outstanding stock options totaling 2,070,000,all of the options to purchase common stock were included in 

 

6

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**Alpha Pro Tech, Ltd.**

 

**Notes toConsolidated Financial Statements (Unaudited)**

 

the computation ofdiluted earnings per share because the exercise prices of the stock optionswere less than the average share price of the Company’s common stock and,therefore, the effect would have been dilutive.

 

The Company usedthe Black-Scholes option pricing model to value the options.  The table below presents the weighted averageexpected life in years.  The Company usedSAB 107’s simplified method for estimating the expected life of theoptions.  The risk-free interest rate forperiods within the contractual life of the award is based on the US Treasuryyield curve in effect at the time of grant. The expected volatility is based onhistorical volatility of the expected life in years.

 

The following tablesummarizes stock option activity during the three months ended March 31,2008 :

 
| ** **                                     | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted –  Average  Remaining  Contractual  Term (in  years)** | ** ** | **Aggregate  Intrinsic   Value** | ** ** |
|------------------------------------------------|------------|-------------|------------|-----------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| Options  outstanding at December 31, 2007 |       | 1,320,000   |       | $                                       | 1.71       |                                                                             | 5.02       |                                  | $          | (71,000 | ) |
| Exercised                                      |       | —      |       | —                                  |       |                                                                             |       |                                  |       |
| Granted                                        |       | —      |       | —                                  |       |                                                                             |       |                                  |       |
| Forfeited or  expired                          |       | —      |       | —                                  |       |                                                                             |       |                                  |       |
| Options  outstanding at March 31, 2008    |       | 1,320,000   |       | $                                       | 1.71       |                                                                             | 4.77       |                                  | $          | (693,000 | ) |
| Options  exercisable at March 31, 2008    |       | 445,000     |       | $                                       | 1.63       |                                                                             | 6.47       |                                  | $          | (202,000 | ) |

 

As of March 31, 2008, $354,000 of totalunrecognized compensation cost related to stock options is expected to berecognized over a weighted average period of 2.4 years.

 

**4.****                                     ****New****Accounting Standards**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements.  This statementaddresses how to calculate fair value measurements required or permitted underother accounting pronouncements. Accordingly, this statement does not require any new fair valuemeasurements.  However, for someentities, the application of this statement will change current practice.  SFAS No. 157 was adopted by the Companyon January 1, 2008.  In February 2008,the FASB deferred for one year the effective date of SFAS 157 only with respectto nonfinancial assets and nonfinancial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurring basis,and removed certain leasing transactions from the scope of SFAS 157. Theadoption of SFAS No. 157 did not have a material impact on the Company’sfinancials.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities—Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financialinstruments and certain other items at fair value. The objective is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. This Statement is expected to expand the use of fair valuemeasurement, which is consistent with the FASB’s long-term measurementobjectives for accounting for financial instruments.  SFAS No. 159was 

 

7

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**Alpha Pro Tech, Ltd.**

 

**Notes toConsolidated Financial Statements (Unaudited)**

 

adopted by the Company onJanuary 1, 2008. The adoption of SFAS No. 159 did not have amaterial impact on the Company’s consolidated financial position, results ofoperations or cash flows.  The Companydid not elect the fair value option for any of its financial assets orfinancial liabilities.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements,” which changes the accounting and reporting standards forthe noncontrolling interests in a subsidiary in consolidated financialstatements.  SFAS 160 recharacterizes minority interests as noncontrollinginterests and requires noncontrolling interests to be classified as a componentof shareholders’ equity.  SFAS 160 is effective January 1, 2009 andrequires retroactive adoption of the presentation and disclosure requirementsfor existing minority interests.  We are currently evaluating the impactof SFAS 160 on our consolidated financial statements.

 

**5.****                                     ****Inventories**

 

Inventories consist ofthe following:

 
| ** **                                                    | ** ** | **March 31,  2007** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials                                                 |       | $                        | 11,158,000 |                        | $          | 10,175,000 |   |
| Work in process                                               |       | 195,000                  |       | 535,000                     |       |
| Finished goods                                                |       | 3,358,000                |       | 3,728,000                   |       |
|                                                          |       | 14,711,000               |       | 14,438,000                  |       |
| Less reserve for  slow-moving, obsolete or unusable inventory |       | (327,000                 | )          | (327,000                    | )          |
|                                                          |       | $                        | 14,384,000 |                        | $          | 14,111,000 |   |

 

**6.****                                     ****Investment in and Advances toUnconsolidated Affiliates**

 

On June 14, 2005,Alpha ProTech Engineered Products, Inc. entered into a joint venture witha manufacturer in India for the production of building products.  Under terms of the joint venture agreement, aprivate company, Harmony Plastics Private Limited (“Harmony”), was created withownership interests of 41.66% by Alpha ProTech Engineered Products, Inc.and 58.34% by Maple Industries and Associates. Alpha ProTech Engineered Products, Inc. contributed $508,000 forshare capital and Maple Industries and Associates contributed $708,000.

 

This joint venturepositions Alpha ProTech Engineered Products to respond to current and expectedincreased product demand for house wrap and synthetic roofing underlayment, andfuture capacity for sales of specialty roofing component products and customproducts for industrial applications requiring high quality extrusion coatedfabrics.

 

The capital from theinitial funding along with a bank loan, which is guaranteed exclusively byMaple Industries and Associates and the assets of Harmony Plastics PrivateLimited, was utilized to purchase an existing 33,000 square-foot manufacturingfacility in India; this facility includes manufacturing equipment necessary toproduce synthetic roof underlayment. Harmony has also built a new 60,000 square-foot facility for themanufacturing of house wrap and other building products.

 

The Company is subject tothe provisions of FIN 46 which defines the criteria by which the Companydetermines the proper accounting for its investments in related entities.  Specifically, FIN 46 requires the Company toassess whether or not related entities are variable interest entities (VIEs),as defined.  For those related entitiesthat qualify as variable interest entities, FIN 46 

 

8

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**Alpha Pro Tech, Ltd.**

 

**Notes toConsolidated Financial Statements (Unaudited)**

 

requires the Company todetermine whether or not the Company is the primary beneficiary of the VIE, andif so, to consolidate the VIE.

 

The Company hasdetermined that Harmony is not a VIE and is therefore considered to be anunconsolidated affiliate.

 

The Company records itsinvestment in Harmony as “Equity investments in and advances to unconsolidatedaffiliates” on the accompanying Consolidated Balance Sheets.  The Company records its equity interest inHarmony’s results of operations as “Equity in income of unconsolidatedaffiliates” on the accompanying Consolidated Income Statements.

 

The Company reviews itsinvestment in Harmony for impairment in accordance with APB No. 18, “TheEquity Method of Accounting for Investments in Common Stock.” APB No. 18requires recognition of a loss when the decline in an investment isother-than-temporary.  In determiningwhether the decline is other-than-temporary, the Company considers the natureof the industry in which Harmony operates, their historical performance, theirperformance in relation to their peers and the current economicenvironment.  The Company has concludedthat no impairment was identified.

 

Alpha ProTech EngineeredProducts initially invested $1,450,000 in the joint venture; $508,000 for sharecapital and $942,000 as a long term advance. Fifty percent of the $942,000 long term advance for materials was to berepaid over a six year term commencing in July 2006 and the balance is tobe paid in the seventh year.  During2006, Harmony repaid $39,000 in scheduled payments and $461,000 in additionalpayments for a total of $500,000, leaving a balance of $442,000.  Harmony has not made any further payments todate.  Effective April 2006,interest of 3.5% is to be paid annually on this advance and $19,000 is accruedas of March 31, 2008.

 

Harmony commencedoperations in August of 2005.  Forthe three months ended March 31, 2008 and 2007, Alpha ProTech EngineeredProducts purchased $801,000 and $598,000, respectively from Harmony.  For the three months ended March 31,2008 and 2007, the Company recorded equity income in unconsolidated affiliatesof $21,000 and $25,000, respectively.  Asof March 31, 2008, the Company’s investment in Harmony is $1,229,000 whichcomprises its original $1,450,000 investment and cumulative equity in income ofunconsolidated affiliates of $279,000 less $500,000 in repayments of theadvance.

 

**7.****                                     ****Accrued Liabilities**

 

Accrued liabilitiesconsist of the following:

 
| ** **                    | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Payroll expenses              |       | $                            | 138,000    |                            | $          | 229,000 |   |
| Commission and  bonus accrual |       | 72,000                       |       | 706,000                         |       |
| Income tax  accrual           |       | —                       |       | —                          |       |
| Accrued  professional fees    |       | 113,000                      |       | 200,000                         |       |
| Accrued rebates  and other    |       | 217,000                      |       | 343,000                         |       |
|                          |       | $                            | 540,000    |                            | $          | 1,478,000 |   |

 

9

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**Alpha Pro Tech, Ltd.**

 

**Notes toConsolidated Financial Statements (Unaudited)**

 

**8.****                                     ****Basic and Diluted Net Income PerShare**

 

The following tableprovides a reconciliation of both net income and the number of shares used inthe computation of “basic” earnings per share (EPS), which utilizes theweighted average number of shares outstanding without regard to potential shares,and “diluted” EPS, which includes all such dilutive shares:

 
| ** **                                   | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Net income  (Numerator)                      |       | $                                                                  | 139,000    |   | $ | 535,000 |   |
|                                         |       |                                                               |       |   |   |
| Shares  (Denominator):                       |       |                                                               |       |   |   |
|                                         |       |                                                               |       |   |   |
| Basic weighted  average shares outstanding   |       | 25,210,691                                                         |       | 24,834,005 |   |
|                                         |       |                                                               |       |   |   |
| Add: Dilutive  effect of stock options       |       | —                                                             |       | 977,878 |   |
|                                         |       |                                                               |       |   |   |
| Diluted weighted  average shares outstanding |       | 25,210,691                                                         |       | 25,811,883 |   |
|                                         |       |                                                               |       |   |   |
| Net income per  share:                       |       |                                                               |       |   |   |
|                                         |       |                                                               |       |   |   |
| Basic                                        |       | $                                                                  | 0.01       |   | $ | 0.02 |   |
|                                         |       |                                                               |       |   |   |
| Diluted                                      |       | $                                                                  | 0.01       |   | $ | 0.02 |   |

 

**9.****                                     ****Activity of Business Segments**

 

The Company operatesthrough four segments:

 

Disposable ProtectiveApparel Products: consisting of a complete line of disposable protectiveclothing such as shoecovers (including the Aqua Trak® and spunbond shoecovers),bouffant caps, coveralls, frocks, lab coats and hoods, for the pharmaceutical,cleanroom, industrial and medical markets.

 

Infection ControlProducts: consisting of a line of face masks and eye shields principally forthe medical, dental and industrial markets.

 

Extended Care Products:consisting of a line of medical bed pads using Unreal Lambskin® (syntheticlambskin). The Unreal Lambskin® is used to produce medical bed pads, whichprevent decubitus ulcers or bedsores on long term care patients.  The Unreal Lambskin® is also used tomanufacture bedrail pads, knee and elbow protectors, as well as wheelchairaccessories. The Company also manufactures a line of pet beds with thismaterial.

 

10

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**Alpha Pro Tech, Ltd.**

 

**Notes toConsolidated Financial Statements (Unaudited)**

 

Engineered Products:consisting of a line of construction supply weatherization.  The construction supply weatherizationproducts consist of house wrap and synthetic roof underlayment.  Of note, the Company’s equity in income(loss) of unconsolidated affiliates (Harmony) is included in the total segmentincome for Engineered Products in the table below.

 

The accounting policiesof the segments excludes charges allocated to corporate office expenses,professional fees, public company expenses, executive and management bonusesand income taxes.  The Company evaluatesthe performance of its segments and allocates resources to them based primarilyon net sales.

 

The following table showsnet sales for each segment for the three months ended March 31, 2008 and2007:

 
| ** **                     | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| ** **                     | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Disposable  Protective Apparel |       | $                                                                  | 4,454,000  |   | $ | 5,376,000 |   |
| Infection  Control             |       | 1,444,000                                                          |       | 2,011,000 |   |
| Engineered  Products           |       | 1,360,000                                                          |       | 1,316,000 |   |
| Extended Care                  |       | 266,000                                                            |       | 341,000 |   |
|                           |       |                                                               |       |   |   |
| Consolidated  total net sales  |       | $                                                                  | 7,524,000  |   | $ | 9,044,000 |   |

 

Thefollowing table shows the reconciliation of total segment income to totalconsolidated net income for the three months ended March 31, 2008 and2007:

 
| ** **                      | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| Disposable  Protective Apparel  |       | $                                                                  | 976,000    |   | $ | 1,276,000 |   |
| Infection  Control              |       | 542,000                                                            |       | 846,000 |   |
| Engineered  Products            |       | (308,000                                                           | )          | (324,000 | ) |
| Extended Care                   |       | (20,000                                                            | )          | 12,000 |   |
|                            |       |                                                               |       |   |   |
| Total segment  income           |       | 1,190,000                                                          |       | 1,810,000 |   |
| Unallocated  corporate expenses |       | (967,000                                                           | )          | (943,000 | ) |
| Provision for  income taxes     |       | (84,000                                                            | )          | (332,000 | ) |
|                            |       |                                                               |       |   |   |
| Consolidated net  income        |       | $                                                                  | 139,000    |   | $ | 535,000 |   |

 

11

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

 

You should read thefollowing discussion and analysis together with our consolidated financialstatements and the notes to our consolidated financial statements, which appearelsewhere in this report.

 

**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING INFORMATION**

 

This report on Form 10-Qcontains “forward-looking statements” that are made pursuant to the safe-harborprovisions of the Private Securities Litigation Reform Act of 1995.Forward-looking statements include statements concerning plans, objectives,goals, strategies, future events, future revenues or performance, capitalexpenditures and other information that is not historical information. Whenused in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,”“plans,” “intends,” “believes” and variations of such words or similarexpressions are intended to identify forward-looking statements. Additionalforward-looking statements may be made by us from time to time. All suchsubsequent forward-looking statements, whether written or oral and whether madeby or on behalf of us, are also expressly qualified by these cautionarystatements.

 

Our forward-looking statements are based upon ourcurrent expectations and various assumptions. Our expectations, beliefs andprojections are expressed in good faith and we believe there is a reasonablebasis for them, including without limitation, management’s examination ofhistorical operating trends, data contained in our records and other dataavailable from third parties. However, we cannot assure you that management’sexpectations; beliefs and projections will result or be achieved oraccomplished. Our forward-looking statements apply only as of the date made.Except as required by law, we undertake no obligation to publicly update orrevise forward-looking statements which may be made to reflect events orcircumstances after the date made or to reflect the occurrence of unanticipatedevents.

 

**Whereto find more information about us.**We make available free of charge on our Internetwebsite (http://www.alphaprotech.com) our most recent Annual Report on Form 10-K,our most recent Quarterly Report on Form 10-Q, any current reports on Form 8-Kfiled since our most recent Annual Report on Form 10-K and any amendmentsto such reports as soon as reasonably practicable following the electronicfiling of such report with the SEC. In addition, we provide electronic or papercopies of our filings free of charge upon request.

 

**Critical Accounting Policies**

 

The preparation of ourfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the dates of the financialstatements and the reported amounts of net sales and expenses during thereported periods.  We base estimates onpast experience and on various other assumptions that are believed to bereasonable under the circumstances.  Theapplication of these accounting policies on a consistent basis enables us toprovide timely and reliable financial information.  Our critical accounting polices include thefollowing:

 

Inventories:Inventories include freight-in, materials, labor and overhead costs and arestated at the lower of cost (computed on a standard cost basis, whichapproximates average cost) or market. Provision is made for slow-moving, obsolete or unusable inventory. Weassess our inventory for estimated obsolescence or unmarketable inventory and,if necessary, write down the difference between the cost of inventory and theestimated market value less cost to sell based upon assumptions about futuresales and supply on-hand. If actual market conditions are less favorable thanthose projected by management, additional inventory write-downs may berequired.

 

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Revenue Recognition: Forsales transactions, we comply with the provisions of the SEC’s Staff AccountingBulletin (“SAB”) No. 104, “Revenue Recognition,” which states that revenueshould be recognized when the following revenue recognition criteria are met: (1) persuasiveevidence of an arrangement exists; (2) the product has been shipped andthe customer takes ownership and assumes the risk of loss; (3) the sellingprice is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured. These criteria are satisfied upon shipment ofproduct and revenues are recognized accordingly.

 

Sales are reduced for anyanticipated sales returns, rebates and allowances based on historicalexperience.  Since our return policy isonly 90 days and our products are not generally susceptible to external factorssuch as technological obsolescence or significant changes in demand, we areable to make a reasonable estimate for returns. We offer end-user productspecific and sales volume rebates to select distributors.  Our rebates are based on actual sales andaccrued monthly.

 

Stock BasedCompensation:  We adopted Statement ofFinancial Accounting Standards No. 123R, Share-Based Payment (“SFAS 123R”)effective January 1, 2006, using the modified prospective applicationmethod. SFAS 123R requires companies to record compensation expense for thevalue of all outstanding and unvested share-based payments, including employeestock options and similar awards.  For thethree months ended March 31, 2008 and March 31, 2007 no options weregranted.  We recognized $47,000 inshare-based compensation expense in our consolidated financial statements forthe three months ended March 31, 2008 related to options issued in priorperiods.

 

The fair values ofstock option grants are determined using the Black-Scholes option pricing modeland the following assumptions: expected stock price volatility based onhistoric and management’s expectations of future volatility, risk-free interestrates from published sources, years to maturity based on historical data and nodividend yield, as management currently does not intend to pay dividends in thenear future. The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand that are fully transferable. In addition, option valuation models requirethe input of highly subjective assumptions including expected stock pricevolatility.  Our stock options have characteristicssignificantly different from those of traded options and changes in thesubjective input assumptions can materially affect their fair value.

 

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OVERVIEW

 

Alpha Pro Tech is in thebusiness of protecting people, products and environments. We accomplish this bydeveloping, manufacturing and marketing a line of high-value disposableprotective apparel and infection control products for the clean room,industrial, pharmaceutical, medical and dental markets. We also manufacture aline of construction weatherization products and a line of medical bed pads andaccessories as well as a line of pet beds. Our products are sold both under the “Alpha Pro Tech” brand name as wellas under private label.

 

Our products are groupedinto four business segments.  TheDisposable Protective Apparel segment, consisting of disposable protectiveapparel; the Infection Control segment, consisting of face masks and eyeshields; the Extended Care segment, consisting of extended care products,namely medical bed pads and pet beds; and the Engineered Products segment,consisting of construction weatherization products such as house wrap andsynthetic roof underlayment.

 

Our target markets arepharmaceutical manufacturing, bio-pharmaceutical manufacturing and medicaldevice manufacturing, lab animal research, high technology electronicsmanufacturing which includes the semi-conductor market, medical and dentaldistributors, pet stores and pet distributors and construction supply androofing distributors.

 

Our products are usedprimarily in clean rooms, industrial safety manufacturing environments, healthcare facilities such as hospitals, laboratories and dental offices, as well asconstruction supply sites. Our pet beds are used by pet owners and veterinarians.  Our products are distributed principally inthe United States through a network consisting of purchasing groups, nationaldistributors, local distributors, independent sales representatives and our ownsales and marketing force.

 

# **RESULTS OF OPERATIONS**

# ** **

The following table setsforth certain operational data as a percentage of sales for the periodsindicated:

 
| ** **                                | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| Sales                                     |       | 100.0                                                              | %          | 100.0 | % |
|                                      |       |                                                               |       |   |   |
| Gross profit                              |       | 45.9                                                               | %          | 46.0 | % |
|                                      |       |                                                               |       |   |   |
| Selling, general  and administrative      |       | 41.8                                                               | %          | 35.6 | % |
|                                      |       |                                                               |       |   |   |
| Income from  operations                   |       | 2.2                                                                | %          | 9.1 | % |
|                                      |       |                                                               |       |   |   |
| Income before  provision for income taxes |       | 3.0                                                                | %          | 9.6 | % |
|                                      |       |                                                               |       |   |   |
| Net income                                |       | 1.9                                                                | %          | 5.9 | % |

 

## **Three months ended March 31, 2008,compared to the three months ended March 31, 2007**

## ** **

**Sales**  Consolidatedsales for the three months ended March 31, 2008 decreased to $7,524,000from $9,044,000 for the three months ended March 31, 2007, representing adecrease of $1,520,000 or 16.8%.  Thisdecrease consists of decreased sales of Disposable Protective Apparel productsof $922,000, decreased Infection Control segment sales of $567,000, anddecreased sales from our 

 

14

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Extended Care products segment of $75,000, partiallyoffset by increased sales of Engineered Products segment of $44,000.

 

Sales for the DisposableProtective Apparel segment for the three months ended March 31, 2008decreased by $922,000 or 17.2% to $4,454,000 compared to $5,376,000 for thesame period of 2007. The decrease is primarily related to decreased sales toour largest distributor as well as lower sales other clean room and industrialdistributors.  Shipments to our largestdistributor were weak in the first quarter of 2008 primarily due to their lossof some accounts which can be attributed to the closure of some pharmaceuticalmanufacturing facilities that they sell to and to the loss of a few accounts inwhich we expect will purchase our products through other distributors.  As well, our largest distributor has adjustedtheir inventory levels which have affected our sales to them in the firstquarter of 2008.  We expect growth inthis segment in 2008 due to our expanded distribution network which we furthersolidified by achieving preferred vendor status with a major nationaldistributor during the first quarter of 2008.

 

Infection Control segmentsales for the three months ended March 31, 2008 decreased by $567,000 or28.2% to $1,444,000 compared to $2,011,000 for the same period of 2007.  Shield sales in this segment were down by$544,000 and mask sales were down by $23,000. Shield sales were down primarily due to a large non-recurring order inthe first quarter of 2007.  Medical masksales were down slightly partially offset by higher dental mask sales.  Sales in this segment for the balance of 2008are expected to be similar to that of 2007.

 

Engineered Productssegment sales for the three months ended March 31, 2008 increased by$44,000 or 3.3% to $1,360,000 as compared to $1,316,000 for the same period of2007. The increase for the quarter is primarily due to a 132.3% or $429,000increase in sales of REX SynfeltTM synthetic roof underlayment, partially offsetby a 36.1% or $356,000 decrease in sales of REX WrapTM house wrap.  The breakdown of the Engineered Productssales is as follows for the first quarter: 54% synthetic roof underlayment and46% house wrap. This compares to 25% synthetic roof underlayment and 75% housewrap and for the first quarter last year. This segment had growth of 39.6% when compared to the preceding quarter.

 

The Engineered Productssegment sales were impacted by the weak housing market and our change indistribution channel strategy.  Thedownturn in the housing market has particularly hurt our house wrap sales asfewer houses are being built and distributors continue to keep inventories low.  Our recent ICC-ES approval for our REX WrapTMhouse wrap significantly expands our market opportunities as many constructionsupply companies, builders and architects require this certification to sellthe product.  In addition, we continue tobe optimistic that the new distribution channel strategy will broaden ourability to take advantage of market opportunities for house wrap and syntheticroof underlayment in 2008.  We arecurrently working on some significant opportunities with existing and newdistributors.  We continue to expect thatthis segment will increase significantly in 2008, with the bulk of the growthcoming in the second half of the year.

 

Sales from our ExtendedCare segment decreased by $75,000 or 22.0% to $266,000 for the three monthsended March 31, 2008 from $341,000 for the three months ended March 31,2007.  The decrease in sales is primarilythe result of lower pet bed sales.  Thisline of products is not expected to be a growth segment for the Company.

 

**Gross Profit**  Gross profit decreased by 17.2% to $3,450,000 for the three months endedMarch 31, 2008 from $4,164,000 for the same period in 2007.  The gross profit margin was 45.9% for thethree months ended March 31, 2008 compared to 46.0% for the three monthsended March 31, 2007.

 

**Selling, General andAdministrative Expenses.**  Selling, general andadministrative expenses decreased by $82,000 or 2.5% to $3,141,000 for thethree months ended March 31, 2008 from $3,223,000 for the three monthsended March 31, 2007.  As apercentage of net sales, selling, general and administrative expenses increasedto 41.8% for the three month ended March 31, 2008 from 35.6 % for the sameperiod in 2007, this is due to the decrease in sales in the first quarter of2008.  The decrease is primarily due todecreased expenses for the Engineered Products segment of $53,000 and decreasedexecutive bonus of $71,000, partially offset by increased sales &marketing salaries of $36,000.

 

15

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The Engineered Productssegment decrease of $53,000 is primarily due to a decrease of $104,000 inmarketing expenses partially offset by a $41,000 increase in commission forindependent representatives.

 

The chief executiveofficer and president are each entitled to a bonus equal to 5% of the pre-taxprofits of the Company.  Bonuses of$25,000 were accrued for the three months ended March 31, 2008 as comparedto $96,000 in the same period of 2007.

 

**Depreciation and Amortization.** Depreciation and amortization expense increased by $26,000 or 22.6% to$141,000 for the three months ended March 31, 2008 from $115,000 for thesame period in 2007.  The increase isprimarily attributable to increased depreciation for Engineered Products.

 

**Income from Operations.** Income from operations decreased by $658,000 or 79.7%, to $168,000 forthe three months ended March 31, 2008 as compared to income fromoperations of $826,000 for the three months ended March 31, 2007.  The decrease in income from operations is dueto a decrease in gross profit of $714,000, an increase in depreciation andamortization of $26,000, partially offset by a decrease in selling, general andadministrative expenses of $82,000.

 

**Net Interest.** For the three months ended March 31, 2008, we had net interestincome of $34,000 compared to net interest income of $16,000 for the threemonths ended March 31, 2007. Interest income increased by $18,000 to $36,000 for the three monthended March 31, 2008 as compared to $18,000 for the same period of 2007,due to higher cash balances and an interest income accrual for Harmony.  Interest expense was constant at $2,000 forthe three month ended March 31, 2008 and 2007.

 

**Income Before Provision forIncome Taxes.**  Income before provision for income taxes forthe three months ended March 31, 2008 was $223,000 compared to $867,000 forthe three months ended March 31, 2007, representing a decrease of $644,000or 74.3%.  The decrease in income beforeprovision for income taxes is due primarily to a decrease in income fromoperations of $658,000, partially offset by an increase in net interest incomeof $18,000.

 

**Provision for Income Taxes** The provision for income taxes for thethree months ended March 31, 2008 was $84,000 compared to $332,000 for thethree months ended March 31, 2007. The effective tax rate was 37.7% for the three months ended March 31,2008 as compared to 38.3% for the same period in 2007.  The decrease in the effective tax rate is dueto a reduction in state taxes.

 

**Net Income.** Net income for the three months ended March 31, 2008 was $139,000compared to net income of $535,000 for the three months ended March 31,2007, a decrease of $396,000 or 74.0%. The net income decrease was primarily due to a decrease in income beforeprovision for income taxes of $644,000, partially offset by a decrease inincome taxes of $248,000.  Net income asa percentage of sales for the months ended March 31, 2008 and 2007 was1.9% and 5.9% respectively.  Basic anddiluted income per share for the three months ended March 31, 2008 and2007 was $0.01 and $0.02 respectively.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

As of March 31,2008, we had cash and cash equivalents of $2,806,000 and working capital of$22,257,000, a decrease in working capital of 1.8% or $412,000 since December 31,2007.  As of March 31, 2008, ourcurrent ratio was 20.0:1 as compared to 12.7:1 as of December 30,2007.  Cash decreased by $1,258,000 to$2,806,000 as of March 31, 2008 as compared to $4,064,000 as of December 31,2007.  The decrease in cash is dueprimarily to cash used in operating activities of $536,000, and cash paid forthe repurchase of common stock of $708,000.

 

We have a $3,500,000credit facility with a bank, consisting of a line of credit with interest atprime plus 0.5%.  At March 31, 2008,the prime interest rate was 5.25%.  Theline of credit was renewed in May 

 

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2007 and expires in May 2009and we intend to renew it.  Our borrowingcapacity on the line of credit was $3,500,000 at March 31, 2007.  The available line of credit is based on aformula of eligible accounts receivable and inventories.  As of March 31, 2008, we did not haveany debt.

 

Net cash used inoperating activities was $536,000 for the three months ended March 31,2008 compared to $1,383,000 net cash used in operating activities for the threemonths ended March 31, 2007. The net cash used in operating activities of$536,000 for the three months ended March 31, 2008 is due to net income of$139,000, adjusted by the following: an increase in inventory of $273,000, adecrease in accounts receivable of $277,000, an increase in prepaid expenses of$103,000, a decrease in accounts payable and accrued liabilities of $762,000,equity in income of unconsolidated affiliates of $21,000, $47,000 inamortization of share-based compensation, depreciation and amortization of $141,000 and an decrease in netdeferred tax asset of $19,000.

 

The net cash used inoperating activities of $1,383,000 for the three month ended March 31,2007 is due to net income of $535,000 adjusted by the following: a decrease inaccounts payable and accrued liabilities of $682,000, an increase in inventoryof $2,067,000, an increase in prepaid expenses of $116,000, non-cash equityincome in unconsolidated affiliates of $25,000, a decrease in accountsreceivable of $819,000, $38,000 of non-cash share-based compensation expenseand depreciation and amortization of $115,000.

 

Accounts receivabledecreased by $277,000 or 6.3% to $4,145,000 as of March 31, 2008 from$4,422,000 as of December 31, 2007. This decrease is primarily due to decreased sales of 5.4% in the firstquarter of 2008 as compared to the fourth quarter of 2007.  The number of days of sales outstanding was50 days as of March 31, 2008 as compared to 51 days as of December 31,2007.

 

Inventory increased by$273,000 or 1.9% to $14,384,000 as of March 31, 2008 from $14,111,000 asof December 31, 2007.  The increaseis primarily due to an increase in Disposable Protective Apparel segmentinventory of $217,000 and to an increase in inventory for the EngineeredProducts segment of $102,000 to $8,061,000 as of March 31, 2008 from$7,959,000 as of December 31, 2007. Commencing in April 2008, the Engineered Products segment will notbe placing any purchase orders for our current product line with our jointventure partner until inventory levels have been reduced to levels that aremore in line with our sales volume.

 

Prepaid expenses andother current assets increased by $103,000 to $1,691,000 as of March 31,2008 from $1,588,000 as of December 31, 2007.  The increase of $103,000 is primarily due toan increase in prepaid tax of $70,000, and an increase in prepaid insurance forEngineered Products of $22,000.

 

Accounts payable andaccrued liabilities as of March 31, 2008 decreased by $762,000 to$1,173,000 from $1,935,000.  The net changein 2008 was primarily due a decrease in accrued liabilities of $938,000,partially offset by an increase in trade payables of $176,000.  Accrued liabilities are down as follows:commission and bonus accrual $634,000, accrued rebates and other $126,000,payroll expenses $91,000 and accrued professional fees $87,000.

 

Net cash used ininvesting activities was $14,000 for the three months ended March 31, 2008compared to net cash used in investing activities of $73,000 for the threemonths ended March 31, 2007.  Ourinvesting activity in 2008 consisted primarily of expenditures for property andequipment of $10,000 and compared to expenditures for property and equipment of$50,000 and the purchase of intangible assets of $23,000 during the threemonths ended March 31, 2007.

 

For the three monthsended March 31, 2008, net cash used in financing activities was $708,000compared to cash provided by financing activities of $705,000 for the sameperiod of 2007.  Our financing activitiesfor the quarter ended March 31, 2008 consisted of the repurchase of466,500 shares of common stock at a cost of $708,000. Our financing activitiesfor the same period of 2007 consisted of cash proceeds of $469,000 from theexercise of 511,000 stock options and an income tax benefit from stock optionsexercised of $236,000.

 

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On April 2, 2008,our Board of Directors authorized the repurchase of up to an additional$2,000,000 of our outstanding common stock. In addition to the $2,000,000, we have approximately $300,000 availablefrom a previously announced repurchase program, making the total available torepurchase of approximately $2,300,000. As of March 31, 2008, we have repurchased and retired a total of3,372,600 shares of common stock at a cost of $4,133,000 through our repurchaseprogram.  Future repurchases are expectedto be funded from cash on hand and cash-flow from operations.

 

As shown below, at March 31,2008, our contractual cash obligations totaled approximately $954,000.

 

Contractual Obligations

 
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** |
|                                |       |                                      |       |   |   |   |   |   |   |   |
| Operating leases                    |       | $                                         | 954,000    |   | $ | 473,000 |   | $ | 481,000 |   |
|                                |       |                                      |       |   |   |   |   |
| Total  contractual cash obligations |       | $                                         | 954,000    |   | $ | 473,000 |   | $ | 481,000 |   |

 

We believe that cashgenerated from operations, our current cash balance and the funds availableunder our credit facility will be sufficient to satisfy our projected workingcapital and planned capital expenditures for the foreseeable future.

 

**NewAccounting Standards**

 

Based on our review ofnew accounting standards released during the quarter ended March 31, 2008,we did not identify any standards requiring adoption that would have asignificant impact on our consolidated financial statements.

 

# **ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

# ** **

We subcontract themanufacture of products in China and Mexico and have a joint venture inIndia.  Our results of operations couldbe negatively affected by factors such as changes in foreign currency exchangerates due to stronger economic conditions in those countries.

 

We do not expect anysignificant effect on our results of operations from inflationary or interestand currency rate fluctuations.  We donot hedge our interest rate or foreign exchange risks.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

Disclosure Controls andProcedures

 

Our chief executiveofficer and chief financial officer, after evaluating the effectiveness of ourdisclosure controls and procedures as of March 31, 2008, have concludedthat our disclosure controls and procedures were designed to ensure thatinformation required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported, within the time periods specified in the SEC’s rules andforms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by us in the reports that wefile or submit under the Act is accumulated and communicated to our management,including our chief executive and chief financial officers as appropriate toallow timely decisions regarding required disclosure.

 

Changes in InternalControl Over Financial Reporting.

 

There has been no changein our internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) that occurred during our fiscal quarterended March 31, 2008, that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II- OTHER INFORMATION**

 

**ITEM 6EXHIBITS AND REPORTS ON FORM 8-K**

 

(a) Exhibits

 

31.1 CertificationPursuant to Rule 13a-14(b) and Rule 15d-14(b) of theExchange Act, Signed by Chief Executive Officer (filed herewith)

 

31.2 CertificationPursuant to Rule 13a-14(b) and Rule 15d-14(b) of theExchange Act, Signed by Chief Financial Officer (filed herewith)

 

32.1 CertificationPursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002, Signed by Chief Executive Officer (filedherewith)

 

32.2 CertificationPursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002, Signed by Chief Financial Officer (filedherewith)

 

(b) Reportson Form 8-K

 

On January 2, 2008registrant issued a release announcing that it obtained a vendor number tobegin distribution through a large national chain of building and homeimprovement products.

 

A Form 8-K was filedduring the quarter covered by this report, reporting the issuance of a releasedated March 13, 2008 announcing that it will be reporting its financialresults for the fourth quarter and year end of 2007 after the close of themarket on Wednesday March 19, 2008 and that it will have a conference callregarding its 2007 fourth quarter and year end at 4:30pm Eastern time onWednesday March 19, 2008

 

A Form 8-K was filedduring the quarter covered by this report, reporting the issuance of a releasedated March 19, announcing registrants’ financial results for the fourthquarter and fiscal year ended December 31, 2007.

 

A Form 8-K was filedduring the quarter covered by this report, reporting the issuance of a releasedated March 19, 2008 announcing that it obtained ICC-ES approval for itshouse wrap product.

 

A Form 8-K was filedduring the quarter covered by this report, reporting the issuance of a releasedated April 2, 2008 announcing the stock buyback plan.

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Actof 1934, the Registrant has fully caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 

**ALPHA PROTECH, LTD**.
|   |                              |       |                                              |
|--------|-----------------------------------|------------|---------------------------------------------------|
| DATE:  | **  May 14, 2008** | ** ** | BY:                                               | /s/ **Sheldon  Hoffman** |
|   |                              |       |   Sheldon  Hoffman                      |
|   |                              |       |   Chief  Executive Officer and Director |
|   |                              |       |                                              |
| DATE:  | **  May 14, 2008** | ** ** | BY:                                               | /s/ **Lloyd Hoffman** |
|   |                              |       |   Lloyd  Hoffman                        |
|   |                              |       |   Chief  Financial Officer              |

 

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