** **

**SECURITIES AND EXCHANGECOMMISSION**

**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 theSecurities Exchange Act of 1934**

**For the Quarter Ended September 30, 2007**

**CommissionFile No. 01-15725**

**Alpha Pro Tech, Ltd**

(exact name of registrantas specified in its charte**r)**

| **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’s telephonenumber, including area code:  **(905) 479-0654**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.

Yes   x  Noo

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2).

Large accelerated filer o      Accelerated filer o       Non-acceleratedfiler x

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

Yes o    No x

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of November 5,2007.

26,155,953 shares ofcommon stock,    $.01 par value

 

**Alpha Pro Tech, Ltd.**

**Table of Contents**

|                                                             |                                                                                                        | Page No. |
|------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------|----------|
| PART I.  FINANCIAL INFORMATION                         |                                                                                                        |
|                                                             |                                                                                                        |
| ITEM  1  Consolidated Financial Statements (Unaudited) |                                                                                                        |
|                                                             |                                                                                                        |
| a)                                                               | Consolidated  Balance Sheets -  September 30, 2007 and December 31, 2006                                    | 2        |
|                                                             |                                                                                                        |     |
| b)                                                               | Consolidated  Income Statements  for the nine months ended September 30, 2007 and September 30, 2006        | 3        |
|                                                             |                                                                                                        |     |
| c)                                                               | Consolidated  Statement of Shareholders’ Equity  for the nine months ended September 30, 2007          | 4        |
|                                                             |                                                                                                        |     |
| d)                                                               | Consolidated  Statements of Cash Flows  for the nine months ended September 30, 2007 and September 30, 2006 | 5        |
|                                                             |                                                                                                        |     |
| e)                                                               | Notes to  Consolidated Financial Statements                                                                 | 6        |
|                                                             |                                                                                                        |
| ITEM 2                                                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 |     |
|                                                             |                                                                                                        |     |
|                                                             | Cautionary Statements Regarding Forward-Looking  Information                                                | 13       |
|                                                             |                                                                                                        |     |
|                                                             | New  Accounting Standards                                                                                   | 22       |
|                                                             |                                                                                                        |     |
| ITEM 3                                                           | Quantitative and  Qualitative Disclosures About Market Risk                                                 | 22       |
|                                                             |                                                                                                        |     |
| ITEM 4                                                           | Controls and  Procedures                                                                                    | 22       |
|                                                             |                                                                                                        |     |
| PART II.                                                         | OTHER INFORMATION                                                                                           |     |
|                                                             |                                                                                                        |     |
| ITEM 6                                                           | Exhibits and  Reports on Form 8-K                                                                           |     |
|                                                             |                                                                                                        |
| SIGNATURES                                                       | 23                                                                                                          |
|                                                             |                                                                                                        |
| EXHIBITS                                                         |                                                                                                        |
|                                                             |                                                                                                        |
| Exhibit 31.1:                                                    | Certification by CEO pursuant to Rule  13a-14(b) and Rule 15d-14(b) of the Exchange Act (filed herewith)    | 24       |
|                                                             |                                                                                                        |     |
| Exhibit 31.2:                                                    | Certification by CFO pursuant to Rule  13a-14(b) and Rule 15d-14(b) of the Exchange Act (filed herewith)    | 25       |
|                                                             |                                                                                                        |     |
| Exhibit 32.1:                                                    | Certification by CEO pursuant to Section 906  of the Sarbanes-Oxley Act (filed herewith)                    | 26       |
|                                                             |                                                                                                        |     |
| Exhibit 32.2:                                                    | Certification by CFO pursuant to Section 906  of the Sarbanes-Oxley Act (filed herewith)                    | 27       |
|                                                                  |                                                                                                             |          |  |  |  |

 

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##### ***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 of theSecurities 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-K forthe year ended December 31, 2006. The Company’s 2006 Annual Report containsinformation that may be helpful in analyzing the financial informationcontained in this report and in comparing its results of operations for thethree and nine months ended September 30, 2007 with the same period in 2006.

 

 

1

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**Alpha Pro Tech, Ltd.**

### **Consolidated Balance Sheets (Unaudited)**

 

| ** **                                                                                                                                                               | ** ** | **September 30,  2007** | ** ** | **December 31,  2006 (1)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                                                                                                                                                     |       |                    |       |                       |       |
| **Assets**                                                                                                                                                               |       |                    |       |                       |       |
| Current assets:                                                                                                                                                          |       |                    |       |                       |       |
| Cash and cash equivalents                                                                                                                                                |       | 4,187,000               |       | $                          | 1,837,000  |   |
| Accounts receivable, net of allowance for doubtful  accounts of $65,000 at September 30, 2007 and $61,000 at December 31, 2006                                           |       | 5,279,000               |       | 6,157,000                  |       |
| Inventories, net                                                                                                                                                         |       | 13,870,000              |       | 12,713,000                 |       |
| Prepaid expenses and other current assets                                                                                                                                |       | 1,063,000               |       | 1,195,000                  |       |
| Deferred income taxes                                                                                                                                                    |       | 508,000                 |       | 395,000                    |       |
| Total current assets                                                                                                                                                     |       | 24,907,000              |       | 22,297,000                 |       |
|                                                                                                                                                                     |       |                    |       |                       |       |
| Property and equipment, net                                                                                                                                              |       | 3,365,000               |       | 3,355,000                  |       |
| Goodwill, net                                                                                                                                                            |       | 55,000                  |       | 55,000                     |       |
| Intangible assets, net                                                                                                                                                   |       | 170,000                 |       | 151,000                    |       |
| Equity investments in and advances to unconsolidated  affiliates                                                                                                         |       | 1,188,000               |       | 994,000                    |       |
| Total assets                                                                                                                                                             |       | 29,685,000              |       | $                          | 26,852,000 |   |
|                                                                                                                                                                     |       |                    |       |                       |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                            | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Current liabilities:                                                                                                                                                     |       |                    |       |                       |       |
| Accounts payable                                                                                                                                                         |       | 493,000                 |       | $                          | 1,213,000  |   |
| Accrued liabilities                                                                                                                                                      |       | 1,383,000               |       | 1,466,000                  |       |
| Total current liabilities                                                                                                                                                |       | 1,876,000               |       | 2,679,000                  |       |
|                                                                                                                                                                     |       |                    |       |                       |       |
| Deferred income taxes                                                                                                                                                    |       | 758,000                 |       | 693,000                    |       |
| Total liabilities                                                                                                                                                        |       | 2,634,000               |       | 3,372,000                  |       |
|                                                                                                                                                                     |       |                    |       |                       |       |
| Shareholders’ equity                                                                                                                                                |       |                    |       |                       |       |
| Common stock, $.01 par value, 50,000,000 shares authorized,  26,015,955 and 24,509,580 issued and outstanding at September 30, 2007 and  December 31, 2006, respectively |       | 260,000                 |       | 245,000                    |       |
| Additional paid-in capital                                                                                                                                               |       | 27,370,000              |       | 25,774,000                 |       |
| Accumulated deficit                                                                                                                                                      |       | (579,000                | )          | (2,539,000                 | )          |
| Total shareholders’ equity                                                                                                                                          |       | 27,051,000              |       | 23,480,000                 |       |
| Total liabilities and shareholders’ equity                                                                                                                          |       | 29,685,000              |       | $                          | 26,852,000 |   |

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(1)                                  The condensed consolidated balance sheetas of December 31, 2006 has been prepared using information from the auditedfinancial statements at that date.

The accompanying notesare 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  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                      | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                                    |       | $                                             | 9,308,000  |                                         | $          | 8,952,000 |   | $ | 27,501,000 |   | $ | 26,802,000 |   |
|                                                         |       |                                          |       |                                         |       |   |   |   |   |
| Cost of goods sold, excluding depreciation and  amortization |       | 4,913,000                                     |       | 4,847,000                                    |       | 14,671,000 |   | 14,433,000 |   |
|                                                         |       |                                          |       |                                         |       |   |   |   |   |
| Gross margin                                                 |       | 4,395,000                                     |       | 4,105,000                                    |       | 12,830,000 |   | 12,369,000 |   |
|                                                         |       |                                          |       |                                         |       |   |   |   |   |
| Expenses:                                                    |       |                                          |       |                                         |       |   |   |   |   |
| Selling, general and administrative                          |       | 2,949,000                                     |       | 2,635,000                                    |       | 9,557,000 |   | 7,849,000 |   |
| Depreciation and amortization                                |       | 114,000                                       |       | 117,000                                      |       | 349,000 |   | 340,000 |   |
|                                                         |       |                                          |       |                                         |       |   |   |   |   |
| Income from operations                                       |       | 1,332,000                                     |       | 1,353,000                                    |       | 2,924,000 |   | 4,180,000 |   |
|                                                         |       |                                          |       |                                         |       |   |   |   |   |
| Other income                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Equity in income of unconsolidated affiliates                |       | 128,000                                       |       | 36,000                                       |       | 194,000 |   | 16,000 |   |
| Interest, net                                                |       | 28,000                                        |       | 11,000                                       |       | 58,000 |   | 22,000 |   |
|                                                         |       |                                          |       |                                         |       |   |   |   |   |
| Income before provision for income taxes                     |       | 1,488,000                                     |       | 1,400,000                                    |       | 3,176,000 |   | 4,218,000 |   |
|                                                         |       |                                          |       |                                         |       |   |   |   |   |
| Provision for income taxes                                   |       | 572,000                                       |       | 518,000                                      |       | 1,216,000 |   | 1,561,000 |   |
|                                                         |       |                                          |       |                                         |       |   |   |   |   |
| Net income                                                   |       | $                                             | 916,000    |                                         | $          | 882,000 |   | $ | 1,960,000 |   | $ | 2,657,000 |   |
|                                                         |       |                                          |       |                                         |       |   |   |   |   |
| Basic net income per share                                   |       | $                                             | 0.04       |                                         | $          | 0.04 |   | $ | 0.08 |   | $ | 0.11 |   |
|                                                         |       |                                          |       |                                         |       |   |   |   |   |
| Diluted net income per share                                 |       | $                                             | 0.04       |                                         | $          | 0.04 |   | $ | 0.08 |   | $ | 0.11 |   |
|                                                         |       |                                          |       |                                         |       |   |   |   |   |
| Basic weighted average shares outstanding                    |       | 25,626,172                                    |       | 24,117,694                                   |       | 25,240,202 |   | 24,093,373 |   |
|                                                         |       |                                          |       |                                         |       |   |   |   |   |
| Diluted weighted average shares outstanding                  |       | 25,636,151                                    |       | 25,150,523                                   |       | 25,630,223 |   | 25,058,964 |   |
|                                                              |            |                                               |            |                                              |            |  |  |  |  |  |  |  |  |  |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

3

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**Alpha Pro Tech, Ltd.**

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

| ** **                                      | ** ** | ** **       | ** ** | **Additional** | ** ** | ** **      | ** ** | ** **  | ** ** |
|-------------------------------------------------|------------|------------------|------------|----------------|------------|-----------------|------------|-------------|------------|
| ** **                                      | ** ** | **Common Stock** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                      | ** ** | **Shares**       | ** ** | **Amount**     | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at December 31, 2006                    |       | 24,509,580       |       | $              | 245,000    |            | $          | 25,774,000  |       | $ | (2,539,000 | ) | $ | 23,480,000 |   |
|                                            |       |             |       |           |       |            |       |        |       |   |   |   |   |   |   |
| Share-based compensation expense                |       | —           |       | —         |       | 104,000         |       | —      |       | 104,000 |   |
|                                            |       |             |       |           |       |            |       |        |       |   |   |
| Options exercised                               |       | 1,506,375        |       | 15,000         |       | 1,303,000       |       | —      |       | 1,318,000 |   |
|                                            |       |             |       |           |       |            |       |        |       |   |   |
| Income tax benefit from stock options exercised |       | —           |       | —         |       | 189,000         |       | —      |       | 189,000 |   |
|                                            |       |             |       |           |       |            |       |        |       |   |   |
| Net income                                      |       | —           |       | —         |       | —          |       | 1,960,000   |       | 1,960,000 |   |
|                                            |       |             |       |           |       |            |       |        |       |   |   |
| Balance at September 30, 2007                   |       | 26,015,955       |       | $              | 260,000    |            | $          | 27,370,000  |       | $ | (579,000 | ) | $ | 27,051,000 |   |
|                                                 |            |                  |            |                |            |                 |            |             |            |  |  |  |  |  |  |  |  |  |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

4

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**Alpha Pro Tech, Ltd.**

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

| ** **                                                                     | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
| **Cash Flows From Operating Activities:**                                      | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Net income                                                                     |       | $                                            | 1,960,000  |   | $ | 2,657,000 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                                         |       |   |   |
| Share-based compensation expense                                               |       | 104,000                                      |       | 12,000 |   |
| Depreciation and amortization                                                  |       | 349,000                                      |       | 340,000 |   |
| Deferred income taxes                                                          |       | (48,000                                      | )          | 97,000 |   |
| Equity in income of unconsolidated affiliates                                  |       | (194,000                                     | )          | (16,000 | ) |
| Changes in assets and liabilities:                                             |       |                                         |       |   |   |
| Accounts receivable, net                                                       |       | 878,000                                      |       | (1,712,000 | ) |
| Inventories, net                                                               |       | (1,157,000                                   | )          | (968,000 | ) |
| Prepaid expenses and other current assets                                      |       | 132,000                                      |       | (311,000 | ) |
| Accounts payable and accrued liabilities                                       |       | (803,000                                     | )          | (801,000 | ) |
|                                                                           |       |                                         |       |   |   |
| Net cash provided by (used in) operating activities:                           |       | 1,221,000                                    |       | (702,000 | ) |
|                                                                           |       |                                         |       |   |   |
| **Cash Flows From Investing Activities:**                                      | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                             |       | (341,000                                     | )          | (299,000 | ) |
| Purchase of intangible assets                                                  |       | (37,000                                      | )          | (54,000 | ) |
| Proceeds from Joint Venture                                                    |       | —                                       |       | 300,000 |   |
|                                                                           |       |                                         |       |   |   |
| Net cash used in investing activities                                          |       | (378,000                                     | )          | (53,000 | ) |
|                                                                           |       |                                         |       |   |   |
| **Cash Flows From Financing Activities:**                                      | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Income tax benefit from stock options exercised                                |       | 189,000                                      |       |   |   |
| Proceeds from the exercise of stock options                                    |       | 1,318,000                                    |       | 397,000 |   |
| Net cash provided by financing activities                                      |       | 1,507,000                                    |       | 397,000 |   |
|                                                                           |       |                                         |       |   |   |
| Increase/(decrease) in cash during the period                                  |       | 2,350,000                                    |       | (358,000 | ) |
|                                                                           |       |                                         |       |   |   |
| Cash and cash equivalents, beginning of period                                 |       | 1,837,000                                    |       | 1,163,000 |   |
| Cash and cash equivalents, end of period                                       |       | $                                            | 4,187,000  |   | $ | 805,000 |   |

 

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

 

 

5

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**Alpha Pro Tech, Ltd.**

### **Notes to Consolidated 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 constructionsupply weatherization products consists of house wrap, synthetic roofunderlayment and mold resistant framing sealant.  The Company also manufactures and distributesa line of medical bed pads and accessories as well as a line of pet beds.  The Company’s products are sold both underthe “Alpha Pro Tech” brand name as well as under private label and arepredominantly sold in the United States of America.

 

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

The interimfinancial information included herein is unaudited; however, the informationreflects all adjustments (consisting of normal recurring adjustments) that are,in the opinion of management, necessary for the fair presentation of theconsolidated financial position, results of operations and cash flows for theinterim periods. The consolidated financial statements should be read inconjunction with the consolidated financial statements for the year endedDecember 31, 2006, which are included in the Company’s Annual Report on Form10-K for the year ended December 31, 2006 (“2006 10-K”). The results ofoperations for the nine months ended September 30, 2007 are not necessarilyindicative of the results to be expected for the full year. The consolidatedbalance sheet at December 31, 2006 was extracted from the audited consolidatedfinancial statements contained in the 2006 10-K and does not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America for annual consolidated financial statements.

 

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

The Companymaintains two stock option plans under which the Company may grant incentivestock options and non-qualified stock options to employees and non-employeedirectors.  Stock options have beengranted with exercise prices at or above the fair market value on the date ofgrant.  Options vest and expire accordingto terms established at the grant date.

The Company adoptedStatement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS123R”) 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.  During2006, 490,000 stock options were granted under the option plan.  During the first nine months of 2007, therewere 435,000 stock options granted under the option plan. The Companyrecognized $104,000 in share-based compensation expense in its consolidatedfinancial statements for the nine months ended September 30, 2007 related tooptions in the current and prior periods.

Stock options to purchase1,460,000 and 2,945,000 shares of common stock were outstanding at September30, 2007 and 2006, respectively. Of these outstanding stock options, all of theoptions to purchase common stock at September 30, 2007 and 2006 were includedin the computation of diluted earnings per share because the exercise prices ofthe stock options were less than the 

 

 

 

6

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average share price ofthe Company’s common stock and, therefore, the effect would have been dilutive.

The Company used theBlack-Scholes option pricing model to value the options.  The table below presents the weighted averageexpected life in years.  In March 2005,the Securities and Exchange Commission (the “SEC”) issued Staff AccountingBulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123Rand the valuation of share-based payments for public companies. The Companyapplied the provisions of SAB 107 in its adoption of SFAS 123R.  The Company used SAB 107’s simplified methodfor estimating the expected life of the options.  The risk-free interest rate for periodswithin the contractual life of the award is based on the US Treasury yieldcurve in effect at the time of grant. The expected volatility is based onhistorical volatility of the Company’s shares over the  expected life of the option.

The following tablesummarizes stock option activity during the nine months ended September 30,2007:
| ** **                                | ** ** | ** **  | ** ** | ** **          | ** ** | **Weighted –** | ** ** | ** **    | ** ** |
|-------------------------------------------|------------|-------------|------------|---------------------|------------|---------------------|------------|---------------|------------|
| ** **                                | ** ** | ** **  | ** ** | ** **          | ** ** | **Average**         | ** ** | ** **    | ** ** |
| ** **                                | ** ** | ** **  | ** ** | **Weighted –** | ** ** | **Remaining**       | ** ** | ** **    | ** ** |
| ** **                                | ** ** | ** **  | ** ** | **Average**         | ** ** | **Contractual**     | ** ** | **Aggregate** | ** ** |
| ** **                                | ** ** | ** **  | ** ** | **Exercise**        | ** ** | **Term (in**        | ** ** | **Intrinsic** | ** ** |
| ** **                                | ** ** | **Options** | ** ** | **Price**           | ** ** | **years)**          | ** ** | **Value**     | ** ** |
| Options outstanding at December 31, 2006  |       | 2,581,000   |       | $                   | 1.21       |                | 2.77       |          | $          | 4,100,00 |   |
| Exercised                                 |       | (1,506,000  | )          | 0.87                |       |                |       |          |       |
| Granted                                   |       | 435,000     |       | 1.50                |       |                |       |          |       |
| Forfeited or expired                      |       | (50,000     | )          | 1.98                |       |                |       |          |       |
| Options outstanding at September 30, 2007 |       | 1,460,000   |       | $                   | 1.62       |                | 4.78       |          | $          | 542,000 |   |
| Options exercisable at September 30, 2007 |       | 732,000     |       | $                   | .72        |                | 3.62       |          | $          | 326,000 |   |

 

The intrinsic value isthe amount by which the market value of the underlying common stock exceeds theexercise price of the respective stock option. The intrinsic value of stockoptions exercised during the nine months ended September 30, 2007 was$2,245,000.

As of September 30, 2007,$491,000 of total unrecognized compensation cost related to stock options isexpected to be recognized over a weighted average period of 2.85 years. Cashreceived from options exercised for the nine months ended September 30, 2007was $1,318,000.

 

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

The FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”) in June 2006. The interpretationclarifies the accounting for uncertainty in income taxes recognized in theCompany’s financial statements in accordance with SFAS No. 109, “Accounting forIncome Taxes.”  On January 1, 2007, the Company adopted the provisions ofFIN 48.  The Company does not have any uncertain tax positions whichrequire recognition under the criteria established by FIN 48.  The amountof unrecognized tax benefits did not change during the nine months endedSeptember 30, 2007.

The Company andits subsidiaries file income tax returns in the U.S. federal jurisdiction, andvarious states and foreign jurisdictions.  The Company is no longersubject to U.S. federal, state 

 

 

7

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and local, incometax examination by tax authorities for years before 2002.  The Company isnot currently under examination in any of its jurisdictions in which itoperates.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements.  This statement addresseshow to calculate fair value measurements required or permitted under other accountingpronouncements.  Accordingly, thisstatement does not require any new fair value measurements.  However, for some entities, the applicationof this statement will change current practice. SFAS No. 157 is effective for the Company beginning January 1,2008.  The Company is currently evaluatingthe impact of this standard.

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial 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 tomitigate volatility 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. 159is effective as of the beginning of an entity’s first fiscal yearthat begins after November 15, 2007.  The Company does not expect SFAS No.159 to have a material impact on the Company’s consolidated financial position,results of operations or cash flows.

 

**5.       Inventories**

Inventories consist ofthe following:
| ** **                                                    | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Raw materials                                                 |       | 10,267,000              |       | $9,632,000             |       |
| Work in process                                               |       | 201,000                 |       | 182,000                |       |
| Finished goods                                                |       | 3,714,000               |       | 3,217,000              |       |
|                                                          |       | 14,182,000              |       | 13,031,000             |       |
| Less reserve for slow-moving, obsolete or unusable  inventory |       | (312,000                | )          | (318,000               | )          |
|                                                          |       | 13,870,000              |       | $12,713,000            |       |

 

 

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

 

On June 14, 2005, AlphaProTech Engineered Products, Inc. entered into a joint venture with amanufacturer 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. and58.34% by Maple Industries and Associates. Alpha ProTech Engineered Products, Inc. contributed $508,000 for sharecapital and Maple Industries and Associates contributed $708,000.

This joint venture positions Alpha ProTech EngineeredProducts to respond to current and expected increased product demand for housewrap and synthetic roofing underlayment, and future

 

 

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capacity for sales of specialty roofing component productsand custom products for industrial applications requiring high qualityextrusion coated fabrics.

The capital from the initial funding along with a bankloan, which is guaranteed exclusively by Maple Industries and Associates andthe assets of Harmony Plastics Private Limited, was utilized to purchase anexisting 33,000 square-foot manufacturing facility in India; this facilityincludes manufacturing equipment necessary to produce synthetic roofunderlayment.  Harmony has also built anew 60,000 square-foot facility for the manufacturing of house wrap and otherbuilding products.

The Company is subject to the provisions of FIN 46which defines the criteria by which the Company determines the properaccounting 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 requires the Company todetermine whether or not the Company is the primary beneficiary of the VIE, andif so, to consolidate the VIE.

The Company has determined that Harmony is not a VIEand is therefore considered to be an unconsolidated affiliate.

The Company records its investment in Harmony as “Equityinvestments in and advances to unconsolidated affiliates” on the accompanyingConsolidated Balance Sheets.  The Companyrecords its equity interest in Harmony’s results of operations as “Equity inincome of unconsolidated affiliates” on the accompanying Consolidated IncomeStatements.

The Company reviews its investment in Harmony forimpairment in accordance with APB No. 18, “The Equity Method of Accounting forInvestments in Common Stock.” APB No. 18 requires recognition of a loss whenthe decline in an investment is other-than-temporary.  In determining whether the decline isother-than-temporary, the Company considers the nature of the industry in whichHarmony operates, their historical performance, their performance in relationto their peers and the current economic environment.

Alpha ProTech Engineered Products initially invested$1,450,000 in the joint venture; $508,000 for share capital and $942,000 as along term advance.  Fifty percent of the$942,000 long term advance for materials is to be repaid over a six year termcommencing in July 2006 and the balance is to be paid in the seventh year.  During the third and fourth quarter of 2006,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 did not make any further payments inthe first three quarters of 2007. Effective April 2006, interest of 3.5% is to be paid annually in Januaryon this advance and $19,000 was paid during the first quarter of 2007.

Harmony commenced operations in August of 2005.  For the nine months ended September 30, 2007and 2006, Alpha ProTech Engineered Products purchased $2,331,000 and$4,583,000, respectively from Harmony. For the nine months ended September 30, 2007 and 2006, the Companyrecorded equity income in unconsolidated affiliates of $194,000 and $16,000,respectively.  As of September 30, 2007,the Company’s investment in Harmony is $1,188,000 which comprises its original$1,450,000 investment and cumulative equity in income of unconsolidatedaffiliates of $238,000 less $500,000 in repayments of the advance.

 

 

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** **

**7. Accrued Liabilities**
| Accrued liabilities consist of the following**:** | ** ** | ** **             | ** ** | ** **            | ** ** |
|---------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
|                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                              | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| Payroll accrual                                   |       | $                      | 108,000    |                  | $          | 199,000 |   |
| Commission and bonus accrual                      |       | 627,000                |       | 986,000               |       |
| Income tax accrual                                |       | 136,000                |       | —                |       |
| Accrued professional fees                         |       | 172,000                |       | 153,000               |       |
| Accrued rebates and other                         |       | 340,000                |       | 128,000               |       |
|                                              |       | $                      | 1,383,000  |                  | $          | 1,466,000 |   |

 

 

**8. Basic and Diluted Net Income Per Share**

The followingtable provides a reconciliation of both net income and the number of sharesused in the computation of “basic” earnings per share (EPS), which utilizes theweighted average number of shares outstanding without regard to potentialshares, and “diluted” EPS, which includes all such dilutive shares:
| ** **                                  | ** ** | ** ** | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                  | ** ** | ** ** | ** ** | **2007**                                      | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income (Numerator)                      |       | $916,000   |       | $882,000                                      |       | $1,960,000                                   |       | $2,657,000 |   |
| Shares (Denominator):                       |       |       |       |                                          |       |                                         |       |   |   |
| Basic weighted average shares outstanding   |       | 25,626,172 |       | 24,117,694                                    |       | 25,240,202                                   |       | 24,093,373 |   |
| Add: Dilutive effect of stock options       |       | 9,979      |       | 1,032,828                                     |       | 390,021                                      |       | 965,951 |   |
| Diluted weighted average shares outstanding |       | 25,636,151 |       | 25,150,523                                    |       | 25,630,223                                   |       | 25,058,964 |   |
| Net income per share:                       |       |       |       |                                          |       |                                         |       |   |   |
| Basic                                       |       | $0.04      |       | $0.04                                         |       | $0.08                                        |       | $0.11 |   |
| Diluted                                     |       | $0.04      |       | $0.04                                         |       | $0.08                                        |       | $0.11 |   |

 

**9. Activity of Business Segments**

The Companyoperates through four segments:

DisposableProtective Apparel Products: consisting of a line of disposable protectiveclothing such as shoecovers (including the Aqua Trak® and spunbond shoecovers),bouffant caps,

 

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coveralls, frocks,lab coats and hoods, for the pharmaceutical, cleanroom, industrial and medicalmarkets.

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 usingUnreal Lambskin® (synthetic lambskin). The Unreal Lambskin® is used to producemedical bed pads, which prevent decubitus ulcers or bedsores on long term carepatients.  The Unreal Lambskin® is alsoused to manufacture bedrail pads, knee and elbow protectors, as well aswheelchair accessories. The Company also manufactures a line of pet beds andpet toy accessories with this material.

Engineered Products: consisting of a line of construction supplyweatherization.  The construction supplyweatherization products consist of building wrap, synthetic roof underlaymentand antimicrobial mold resistant framing sealant.  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 accountingpolicies of the segments are the same as those described previously under “Summaryof Significant Accounting Policies” in the 2006 10-K.  Segment data excludes charges allocated tohead office and corporate sales/marketing departments and income taxes.  The Company evaluates the performance of itssegments and allocates resources to them based primarily on net sales.

 

The following table shows net sales for each segmentfor the three and nine months ended September 30, 2007 and 2006:
| ** **                    | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                      | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|                          |       |                                          |       |                                         |       |   |   |   |   |
| Disposable Protective Apparel |       | $6,163,000                                    |       | $5,210,000                                   |       | $17,377,000 |   | $14,799,000 |   |
| Infection Control             |       | 1,514,000                                     |       | 1,475,000                                    |       | 5,078,000 |   | 4,990,000 |   |
| Engineered Products           |       | 1,407,000                                     |       | 1,972,000                                    |       | 4,253,000 |   | 5,964,000 |   |
| Extended Care                 |       | 224,000                                       |       | 295,000                                      |       | 793,000 |   | 1,049,000 |   |
|                          |       |                                          |       |                                         |       |   |   |   |   |
| Consolidated total net sales  |       | $9,308,000                                    |       | $8,952,000                                   |       | $27,501,000 |   | $26,802,000 |   |

 

 

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The following table shows the reconciliation of totalsegment income to total consolidated net income for the three and nine monthsended September 30, 2007 and 2006:

 
| ** **                              | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                      | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Disposable Protective Apparel           |       | $                                             | 2,252,000  |                                        | $          | 1,969,000 |   | $ | 6,239,000 |   | $ | 5,403,000 |   |
| Infection Control                       |       | 674,000                                       |       | 596,000                                     |       | 2,185,000 |   | 2,284,000 |   |
| Engineered Products                     |       | (57,000                                       | )          | 286,000                                     |       | (490,000 | ) | 701,000 |   |
| Extended Care                           |       | (15,000                                       | )          | 3,000                                       |       | (17,000 | ) | 86,000 |   |
|                                    |       |                                          |       |                                        |       |   |   |   |   |
| Total segment income                    |       | 2,854,000                                     |       | 2,854,000                                   |       | 7,917,000 |   | 8,474,000 |   |
| Unallocated corporate overhead expenses |       | (1,366,000                                    | )          | (1,454,000                                  | )          | (4,741,000 | ) | (4,256,000 | ) |
| Provision for income taxes              |       | (572,000                                      | )          | (518,000                                    | )          | (1,216,000 | ) | (1,561,000 | ) |
|                                    |       |                                          |       |                                        |       |   |   |   |   |
| Consolidated net income                 |       | $                                             | 916,000    |                                        | $          | 882,000 |   | $ | 1,960,000 |   | $ | 2,657,000 |   |
|                                         |            |                                               |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

**10.****      ****Subsequent Events**

On September 27, 2007, the Company purchased 554,100 shares of its owncommon stock at a cost of $875,000.  Thistransaction was settled on October 2, 2007 and will be recorded in the fourthquarter of 2007.   These shares will beretired.

 

 

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** **

**AlphaPro Tech, Ltd.**

**ITEM 2        MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL   CONDITION AND RESULTS OFOPERATIONS**

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-Q contains “forward-looking statements” that aremade pursuant to the safe-harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. Forward-looking statements include statementsconcerning plans, objectives, goals, strategies, future events, future revenuesor performance, capital expenditures and other information that is nothistorical information. When used in this report, the words “estimates,” “expects,”“anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations ofsuch words or similar expressions are intended to identify forward-lookingstatements. Additional forward-looking statements may be made by us from timeto time. All such subsequent forward-looking statements, whether written ororal and whether made by or on behalf of us, are also expressly qualified bythese cautionary statements.

Ourforward-looking statements are based upon our current expectations and variousassumptions. Our expectations, beliefs and projections are expressed in goodfaith and we believe there is a reasonable basis for them, including withoutlimitation, management’s examination of historical operating trends, datacontained in our records and other data available from third parties. However,we cannot assure you that management’s expectations; beliefs and projectionswill result or be achieved or accomplished. Our forward-looking statementsapply only as of the date made. Except as required by law, we undertake noobligation to publicly update or revise forward-looking statements which may bemade to reflect events or circumstances after the date made or to reflect theoccurrence of unanticipated events.

**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 Form10-K, our most recent Quarterly Report on Form 10-Q, any current reports onForm 8-K filed since our most recent Annual Report on Form 10-K and anyamendments to such reports as soon as reasonably practicable following theelectronic filing of such report with the SEC. In addition, we provideelectronic or paper copies 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) persuasive evidence of an arrangement exists; (2) the product has beenshipped and the customer takes ownership and assumes the risk of loss; (3) theselling price 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 application method. SFAS123R requires companies to record compensation expense for the value of alloutstanding and unvested share-based payments, including employee stock optionsand similar awards. During 2006, 490,000 stock options were granted under theoption plan.  For the nine months endedSeptember 30, 2007, 435,000 options were granted.  We recognized $104,000 in share-basedcompensation expense in our consolidated financial statements for the ninemonths ended September 30, 2007 related to options issued in the current andprior periods.

The fair values of stockoption grants are determined using the Black-Scholes option pricing model andthe following assumptions: expected stock price volatility based on historicand management’s expectations of future volatility, risk-free interest ratesfrom published sources, weighted average expected option lives based onhistorical data and no dividend yield, as management currently does not intendto pay dividends in the near future. The Black-Scholes option valuation modelwas developed for use in estimating the fair value of traded options that haveno vesting restrictions and that are fully transferable. In addition, optionvaluation models require the input of highly subjective assumptions includingexpected stock price volatility.  Ourstock options have characteristics significantly different from those of tradedoptions and changes in the subjective input assumptions can materially affecttheir fair value.

 

 

**OVERVIEW**

Alpha Pro Tech is in the business ofprotecting people, products and environments. We accomplish this by developing,manufacturing and marketing a line of high-value disposable protective appareland infection control products for the cleanroom, industrial, pharmaceutical,medical and dental markets. We also manufacture a line of constructionweatherization products and a line of medical bed pads and accessories as wellas a line of pet beds.  Our products aresold both under the “Alpha Pro Tech” brand name as well as under private label.

Our products are classifiedinto six groups:  Disposable protectiveapparel, consisting of a line of shoecovers, bouffant caps, gowns, coverallsand lab coats; infection control products, consisting of a line of face masksand eye shields; extended care products, consisting of a line of medical bedpads, wheelchair covers, geriatric chair surfaces, operating room tablesurfaces and pediatric surfaces;  a lineof pet beds; and construction weatherization products, consisting of house wrapand synthetic roof underlayment.

Our products asclassified above are grouped into four business segments.  The Disposable Protective Apparel segment,consisting of disposable protective apparel; the Infection Control segment,consisting of 

 

 

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** **

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 dental distributors,pet stores and pet distributors and construction supply and roofingdistributors.

Our products are usedprimarily in cleanrooms, 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 andveterinarians.  Our products aredistributed principally in the United States through a network consisting ofpurchasing groups, national distributors, local distributors, independent salesrepresentatives and our own sales and marketing force.

 

# **RESULTS OF OPERATIONS**

## **Three andnine months ended September 30, 2007, compared to the three and nine monthsended September 30, 2006**

The following table setsforth certain operational data as a percentage of sales for the periodsindicated:
| ** **                               | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                      | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| Sales                                    |       | 100.0                                         | %          | 100.0                                        | %          | 100.0 | % | 100.0 | % |
| Gross profit                             |       | 47.2                                          | %          | 45.9                                         | %          | 46.7 | % | 46.1 | % |
| Selling, general and administrative      |       | 31.7                                          | %          | 29.4                                         | %          | 34.8 | % | 29.3 | % |
| Income from operations                   |       | 14.3                                          | %          | 15.1                                         | %          | 10.6 | % | 15.6 | % |
| Income before provision for income taxes |       | 16.0                                          | %          | 15.6                                         | %          | 11.5 | % | 15.7 | % |
| Net income                               |       | 9.8                                           | %          | 9.9                                          | %          | 7.1 | % | 9.9 | % |

 

**Sales.**  Consolidated sales for the quarter endedSeptember 30, 2007 increased to $9,308,000 from $8,952,000 for the quarterended September 30, 2006, representing an increase of $356,000 or 4.0%.  We attribute the increase to increasedDisposable Protective Apparel segment sales of $953,000 and increased InfectionControl segment sales of $39,000, partially offset by decreased EngineeredProducts segment sales of $565,000 and decreased sales from our Extended Caresegment of $71,000.

Sales for the DisposableProtective Apparel segment for the quarter ended September 30, 2007 increasedby $953,000 or 18.3% to $6,163,000 compared to $5,210,000 for the same periodof 2006.  The increase is primarilyrelated to increased sales to cleanroom and industrial distributors and to alesser extent to increased sales to our largest distributor.  In September 2006, we announced the signingof a new distribution contract with our largest distributor in which theyretained the exclusive right to sell our private label Critical Cover®products, but have also allowed us the right to sell Alpha Pro Tech brandedproducts to other distributors.  Thiswill enable us to gain additional market share as we develop

 

 

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relationships with otherindustrial and cleanroom distributors. We continue to be encouraged by the acceptance of our product line byour expanded distribution channel.

Infection Control segmentsales for the quarter ended September 30, 2007 increased slightly by $39,000 or2.6% to $1,514,000 compared to $1,475,000 for the same period of 2006.  Both mask and shield sales were up slightlyin the third quarter of 2007.

Engineered Productssegment sales for the quarter ended September 30, 2007 decreased by $565,000 or28.7% to $1,407,000 compared to $1,972,000 for the same period of 2006.  The decrease for the quarter is primarily dueto a 40.8% decrease in sales of house wrap, partially offset by a 3.3% increasein sales of roof underlayment.  Thebreakdown of the Engineered Products sales is as follows for the quarter endedSeptember 30, 2007: 55% roof underlayment and 45% house wrap.   This breakdown compares to 68% house wrapand 32% roof underlayment for the third quarter of last year.

The Engineered Productssegment decrease for the third quarter of 2007 is the result of twofactors.  Firstly, a change indistribution channel strategy in which we decided to move forward on a nonexclusive basis with our former distributor, which led the distributor tosource product from other suppliers and to ultimately discontinue purchasingfrom us.  Secondly, the downturn in thehousing market has hurt our sales, in particular our house wrap line, as fewerhouses are being built and distributors are keeping inventories low.

Our Engineered Productsmarketing efforts are primarily focused on our REX SynfeltTM roof underlaymentand we expect continued significant growth from this product line.  Our house wrap sales should start to improvein 2008 as we sign up new distributors and as our vendor agreement with ABCSupply Co. and its division, Amcraft Building Products, which has started offvery slowly due to a weak housing market is expected to start to gain tractionin early 2008 as depleted inventories will need to be replenished.

Sales from ourExtended Care segment, which includes a line of medical bed pads as well as petbeds, decreased by $71,000 or 24.1% to $224,000 for the quarter ended September30, 2007 from $295,000 for the quarter ended September 30, 2006.  The decrease in sales is primarily the resultof lower medical bed pad sales and pet bed sales.  This line of products is not expected to be agrowth segment for us.

 

Consolidatedsales for the nine months ended September 30, 2007 increased to $27,501,000from $26,802,000 for the nine months ended September 30, 2006, representing anincrease of $699,000 or 2.6%.  Weattribute the increase to increased Disposable Protective Apparel segment salesof $2,578,000 and increased Infection Control segment sales of $88,000, partiallyoffset by decreased Engineered Products segment sales of $1,711,000 anddecreased sales from our Extended Care segment of $256,000.

Sales for the DisposableProtective Apparel segment for the nine month ended September 30, 2007increased by $2,578,000 or 17.4% to $17,377,000 compared to $14,799,000 for thesame period of 2006.   The increase isprimarily related to increased sales to cleanroom and industrial distributorsand partly due to increased sales to our largest distributor.  Since sales for the Disposable ProtectiveApparel segment in the fourth quarter of 2006 was a record at $6,385,000, we donot expect the fourth quarter of this year to be as strong but, we doanticipate long-term growth from this segment.

Infection Control segmentsales for the nine months ended September 30, 2007 increased slightly by$88,000 or 1.8% to $5,078,000 compared to $4,990,000 for the same period of2006.  Shield sales in this segment wereup by $618,000 and mask sales were down by $530,000.  Shield sales were strong primarily due to alarge non-recurring order in the first quarter of 2007 and mask sales were downprimarily due to lower sales of our N-95 NIOSH approved Respirator mask asconcerns about Avian Flu have abated. Unless worldwide concerns about Avian Flu increase, we expect N-95Respirator mask sales to be weaker in 2007 than in 2006.

 

 

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Engineered Productssegment sales for the nine months ended September 30, 2007 decreased by$1,711,000 or 28.7% to $4,253,000 compared to $5,964,000 for the same period of2006.  As noted above, the decrease isthe result of a change in distribution channel strategy in which we decided tomove forward on a non exclusive basis with our former distributor, which ledthe distributor to source product from other suppliers and to ultimatelydiscontinue purchasing from us, as well as the downturn in the housingmarket.  The decrease is primarily due toa 40.1% decrease in sales of house wrap, partially offset by a 6.5% in sales ofroof underlayment.  The breakdown of theEngineered Products segment is as follows for the nine months ended September30, 2007: 61% house wrap and 39% roof underlayment.

We expect that our newdistribution channel strategy will broaden our market opportunities forsynthetic roof underlayment and house wrap. During 2007, we have increased our sales team, launched a marketingcampaign to introduce our new synthetic roof underlayment under the name of REXSynfeltTM and launched our new house wrap under the name of REX WrapTM and DeuceWrapTM.  In the short term, due to thischange in distribution channel strategy and the housing downturn, we anticipatethat our sales will likely continue to be affected as compared to 2006 but, wedo anticipate significant growth in 2008.

Sales from ourExtended Care segment, which includes a line of medical bed pads as well as petbeds, decreased by $256,000 or 24.4% to $793,000 for the nine months endedSeptember 30, 2007 from $1,049,000 for the nine months ended September 30,2006.  The decrease in sales is primarilythe result of lower medical bed pad sales of $146,000 and lower pet bed salesof $110,000.

**Gross Profit**  Gross profit increased by 7.1% to $4,395,000 for the quarter endedSeptember 30, 2007 from $4,105,000 for the same period in 2006.  Gross profit margin improved to 47.2% for thequarter ended September 30, 2007 as compared to 45.9% for the same period in2006.  Gross profit margin improved to46.7% for the nine months ended September 30, 2007 from 46.1% for the sameperiod in 2006.

Gross profit margin onthe Engineered Products segment has improved for the nine months endedSeptember 30, 2007 as compared to the same period of 2006.  Although the gross profit margin in theEngineered Products segment is lower than the overall company margin, we expectit to continue to improve.

**Selling, General andAdministrative Expenses.**  Selling, general andadministrative expenses increased by $314,000 or 11.9% to $2,949,000 for thequarter ended September 30, 2007 from $2,635,000 for the quarter endedSeptember 30, 2006.  Although expensesare up compared to the third quarter last year, expenses in this quarter arethe lowest this year.  The increase isprimarily due to increased expenses for travel to Asia of $60,000 and increasedexpenses for the Engineered Products segment of $244,000, broken down asfollows: a $111,000 increase in employee compensation, a $93,000 increase inmarketing expenses, a $34,000 increase in commission for independent sales repsand a $6,000 increase in general expenses.

As a percentage of netsales, selling, general and administrative expenses increased to 31.7% for thequarter ended September 30, 2007 from 29.4% for the same period in 2006.  We believe that we have built theinfrastructure required to substantially grow our business and as our revenuegrows in the coming year our expenses are expected to decrease as a percentageof sales.

Selling, general andadministrative expenses increased by $1,708,000 or 21.8% to $9,557,000 for thenine months ended September 30, 2007 from $7,849,000 for the nine months endedSeptember 30, 2006.  The increase inselling, general and administrative expenses primarily consists of increasedEngineered Products expenses of $967,000, a severance agreement of $320,000,increased payroll costs of $257,000, increased travel costs to Asia of $112,000and increased professional fees of $59,000. As a percentage of net sales,selling, general and administrative expenses increased to 34.8% for the ninemonths ended September 30, 2007 from 29.3% for the same period in 2006.

 

 

 

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Included in this filingare references to certain financial performance measures excluding the effectof the aforementioned severance agreement. These are noted to be non-GAAP measures which are provided in order torepresent how the Board of Directors and management analyze the operatingresults for the period when comparing it to prior periods.  These measures are not intended to be asubstitute for the corresponding GAAP measures in determining our operatingperformance in accordance with generally accepted accounting principles.  The only reconciling item noted between thesemeasures and those calculated under GAAP is the exclusion of the aforementionedseverance transaction.

Excluding the severanceagreement mentioned above, expenses for the nine months ended September 30,2007 were $9,237,000 an increase of $1,388,000 or 17.7% compared to the sameperiod of 2006.  Excluding the severanceagreement, selling, general and administrative expenses increased to 33.8%, asa percentage of net sales, for the nine months ended September 30, 2007 from29.3% for the same period in 2006.

The chiefexecutive officer and president are each entitled to a bonus equal to 5% of thepre-tax profits of the Company.  Bonusesof $165,000 were accrued for the quarter ended September 30, 2007 as comparedto $156,000 in the same period of 2006. Total bonuses of $353,000 were accruedfor the nine months ended September 30, 2007 as compared to $469,000 in thesame period of 2006.

**Income from Operations.** Income from operations decreased slightly by $21,000 or 1.6%, to$1,332,000 for the quarter ended September 30, 2007 as compared to income fromoperations of $1,353,000 for the quarter ended September 30, 2006.  The decrease in income from operations is dueprimarily to an increase in selling, general and administrative expenses of$314,000, partially offset by a increase in gross profit of $290,000.

Income from operations decreased by $1,256,000 or30.0%, to $2,924,000 for the nine months ended September 30, 2007 as comparedto income from operations of $4,180,000 for the nine months ended September 30,2006.  The decrease in income fromoperations is primarily due to an increase in selling, general andadministrative expenses of $1,708,000, partially offset by an increase in grossprofit of $461,000.

**Equity in income of unconsolidated affiliates.** Harmony commenced operations in August of 2005.  For the quarter ended September 30, 2007, werecorded equity in income of unconsolidated affiliates of $128,000 as comparedto equity in income of unconsolidated affiliates of $36,000 for the same periodof 2006.  This income is primarily due toa gain on a foreign currency exchange contract. For the nine months ended September 30, 2007, we recorded equity inincome of unconsolidated affiliates of $194,000 as compared to equity in incomeof unconsolidated affiliates of $16,000 for the same period of 2006.

**Income before Provision forIncome Taxes.**  Income before provision for income taxes forthe quarter ended September 30, 2007 was $1,488,000 compared to $1,400,000 forthe quarter ended September 30, 2006, representing a decrease of $88,000 or 6.3%.  The increase in income before provision forincome taxes is due primarily to a net change of $92,000 from ourunconsolidated affiliate (Harmony) and an increase in net interest income of$17,000, partially offset by a decrease in income from operations of $21,000.

Income before provisionfor income taxes for the nine months ended September 30, 2007 was $3,176,000compared to $4,218,000 for the nine months ended September 30, 2006,representing a decrease of $1,042,000 or 24.7%. The decrease in income before provision for income taxes is dueprimarily to a decrease in income from operations of $1,256,000, partiallyoffset by a net change of $178,000 from our unconsolidated affiliate (Harmony)and an increase in net interest income of $36,000.

Based on the analysis ofsegment income excluding corporate overhead allocations, a primary reason forthe decline in income before provision for income tax was due to a net decreaseof $1,191,000 in the Engineered Products segment.  This segment experienced a loss of $490,000for the nine months ended September 30, 2007 as compared to income of $701,000for the same period of 2006.

 

 

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**Provision for Income Taxes** The provision for income taxes for thequarter ended September 30, 2007 was $572,000 compared to $518,000 for thequarter ended September 30, 2006.  Theeffective tax rate was 38.4% for the quarter ended September 30, 2007 and was37.0% for the same quarter of 2006.

The provision for incometaxes for the nine months ended September 30, 2007 was $1,216,000 compared to$1,561,000 for the nine months ended September 30, 2006.  The effective tax rate was 38.3% for the ninemonths ended September 30, 2007 and was 37.0% for the same period of 2006.

**Net Income.** Net income for the quarter ended September 30, 2007 was $916,000compared to net income of $882,000 for the quarter ended September 30, 2006, anincrease of $34,000 or 3.9%.  The netincome increase was primarily due to a decrease in income before provision for incometaxes of $88,000, partially offset by a decrease in income taxes of$54,000.  Net income as a percentage ofsales for the quarters ended September 30, 2007 and 2006 was 9.8% and 9.9%respectively.  Basic and diluted incomeper share for the quarters ended September 30, 2007 and 2006 was $0.04.

Net income for the ninemonths ended September 30, 2007 was $1,960,000 compared to net income of$2,657,000 for the nine months ended September 30, 2006, a decrease of $697,000or 26.2%.  The  decrease was primarily due to a decrease inincome before provision for income taxes of $1,042,000, partially offset by adecrease in income taxes of $345,000. Net income as a percentage of sales for the nine months ended September 30,2007 and 2006 was 7.1% and 9.9% respectively. Basic and diluted income per share for the nine months ended September30, 2007 and 2006 was $0.08 and $0.11, respectively.

Excluding the severanceagreement, net income for the nine months ended September 30, 2007 would be$2,280,000 compared to net income of $2,657,000 for the nine months endedSeptember 30, 2006, a decrease of $519,000 or 19.5%.  Basic and diluted income per share for thenine months ended September 30, 2007 and 2006 would be $0.08 and $0.11,respectively.

 

 

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**LIQUIDITY AND CAPITAL RESOURCES**

As of September 30, 2007,we had cash and cash equivalents of $4,187,000 and working capital of$23,031,000, an increase in working capital of 17.4% or $3,413,000 sinceDecember 31, 2006.  As of September 30,2007, our current ratio was 13.3:1 as compared to 8.32:1 as of December 31,2006.  Cash increased by $2,350,000 or127.9% to $4,187,000 as of September 30, 2007 as compared to $1,837,000 as ofDecember 31, 2006.  The increase in cashis due to cash provided by operating activities of $1,221,000, by cash proceedsof $1,318,000 from the exercise of stock options and income tax benefit fromstock options exercised of $189,000, partially offset by the purchase ofproperty and equipment of $341,000 and the purchases of intangible assets of$37,000.

We have a $3,500,000credit facility with a bank, consisting of a line of credit with interest atprime plus 0.5%.  At September 30, 2007,the prime interest rate was 7.75%.  Theline of credit was renewed in May 2007 and expires in May 2009 and we intend torenew it.  Our borrowing capacity on theline of credit was $3,500,000 at September 30, 2007.  The available line of credit is based on aformula of eligible accounts receivable and inventories.  As of September 30, 2007, we had not borrowedon this line of credit.  As of September30, 2007, we did not have any debt.

Net cash provided inoperating activities was $1,221,000 for the nine months ended September 30,2007 compared to $702,000 net cash used in operating activities for the ninemonths ended September 30, 2006.  The netcash provided in operating activities of $1,221,000 for the nine months endedSeptember 30, 2007 is due to net income of $1,960,000, adjusted by thefollowing: an increase in inventory of $1,157,000, a decrease in accountsreceivable of $878,000, a decrease in prepaid expenses of $132,000, a decreasein accounts payable and accrued liabilities of $803,000, equity in income ofunconsolidated affiliates of $194,000, $104,000 in amortization of share-basedcompensation,  depreciation andamortization of $349,000 and an increase in net deferred tax asset of $48,000.

Accounts receivabledecreased by $878,000 or 14.3% to $5,279,000 as of September 30, 2007 from$6,157,000 as of December 31, 2006.  Thisdecrease is primarily due to decreased sales in third quarter of 2007 ascompared to the fourth quarter of 2006. The number of days of sales outstanding was 54 days as of September 30,2007 and December 31, 2006.

Inventory increased by$1,157,000 or 9.1% to $13,870,000 as of September 30, 2007 from $12,713,000 asof December 31, 2006.  Inventory for theEngineered Products segment has increased by $0.7 million and in order tosupport increased sales within the Disposable Protective Apparel segment,inventory in that segment has increased by $0.5 million for the nine monthsended September 30, 2007.  Inventorydecreased by $1,049,000 or 7.0% compared to June 30, 2007.  The Engineered Products segment inventory of$7,532,000 has been relatively flat since the end of the first quarter of 2007and is down marginally as compared to June 30, 2007.

Prepaid expenses andother current assets decreased by $132,000 to $1,063,000 as of September 30,2007 from $1,195,000 as of December 31, 2006. The decrease of $132,000 is due to an increase in prepaid inventory fromChina of $241,000, and increase in general prepaid expenses of $4,000,partially offset by a decrease in prepaid expenses for Engineered Products of$113,000 and a decrease in prepaid tax payments of $264,000.

Accounts payable andaccrued liabilities as of September 30, 2007 decreased by $803,000 to$1,383,000 from $2,679,000, as of December 31, 2006.  The net change in 2007 was due primarily to adecrease in accrued commission/bonus payable of $359,000, a decrease in accruedpayroll of $91,000 and a decrease in trade payables of $720,000, partiallyoffset by an increase in accrued rebates and professional fees of $231,000 andan increase in the income tax accrual of $136,000.

Net cash used ininvesting activities was $378,000 and $53,000 for the nine months endedSeptember 30, 2007 and 2006, respectively. Our investing activity in 2007 consisted primarily of expenditures forproperty and equipment of $341,000 and the purchase of intangible assets of$37,000.  This compared to expendituresfor property and equipment of $299,000 and the purchases of intangible assetsof $54,000,

 

 

 

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partially offset by theproceeds from advances to Joint Venture of $300,000 during the nine monthsended September 30, 2006.

For the nine months endedSeptember 30, 2007, net cash provided by financing activities was $1,507,000compared to cash provided by financing activities of $397,000 for the sameperiod of 2006.  Our financing activitiesin 2007 consisted of cash proceeds of $1,318,000 from the exercise of 1,506,000stock options and an income tax benefit from stock options exercised of$189,000.  Our financing activities in2006 consisted of cash proceeds of $397,000 from the exercise of 358,000 stockoptions.

In September 2007, ourBoard of Directors authorized the repurchase of up to an additional $1,500,000worth of our outstanding common stock. In addition to the $1,500,000, we have approximately $500,000 availablefrom a previously announced buyback, making the total available to repurchaseof approximately $2,000,000.  This sharerepurchase program is the seventh buyback authorized by the Board ofDirectors.  In all instances, we are retiring the shares.  For the nine months ended September 30, 2007,we did not buy back any shares of common stock. As of September 30, 2007, we have bought back a total of 2,333,800shares of common stock at a cost of $2,518,000 since the end of 1999.  On September 27, 2007 we entered into anagreement to buy back 554,100 shares of common stock at a cost of $875,000 in atransaction which was settled on October 2, 2007and is accounted for as afourth quarter transaction.

As shown below, atSeptember 30, 2007, our contractual cash obligations totaled approximately$1,328,000.

**Contractual Obligations**
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Total**                  | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 years** | ** ** |
| ** **                         | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating leases                   |       | $                          | 1,328,000  |   | $ | 175,000 |   | $ | 1,034,000 |   | $ | 119,000 |   | — |   |
|                               |       |                       |       |   |   |   |   |   |   |   |   |
| Total contractual cash obligations |       | $                          | 1,328,000  |   | $ | 175,000 |   | $ | 1,034,000 |   | $ | 119,000 |   | — |   |
|                                    |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

 

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**NewAccounting Standards**

Based on our review ofnew accounting standards released during the quarter ended September 30, 2007,we did not identify any standards requiring adoption that would have asignificant impact on our consolidated financial statements.

The Financial AccountingStandards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (“FIN 48”) in June 2006. The interpretationclarifies the accounting for uncertainty in income taxes recognized in theCompany’s financial statements in accordance with SFAS No. 109, “Accounting forIncome Taxes.”  On January 1, 2007, the Company adopted the provisions ofFIN 48.  The Company does not have any uncertain tax positions whichrequire recognition under the criteria established by FIN 48.  The amountof unrecognized tax benefits did not change during the nine months endedSeptember 30, 2007.The Company and its subsidiaries file income tax returns in the U.S. federaljurisdiction, and various states and foreign jurisdictions.  The Companyis no longer subject to U.S. federal, state and local, income tax examinationby tax authorities for years before 2002. The Company is not currently under examination in any of itsjurisdictions in which it operates.

# **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.

 

**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 September 30, 2007, 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,summarized and reported, within the time periods specified in the SEC’s rulesand forms.  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)and 15d-15(f) under the Exchange Act) that occurred during our fiscal quarterended September 30, 2007, that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

 

 

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**PART II -OTHER INFORMATION**

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

      (a) Exhibits

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

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

32.1 Certification Pursuant to 18 U.S.C Section 1350, as AdoptedPursuant to Section 906 of         theSarbanes-Oxley Act of 2002, Signed by Chief Executive Officer (filed herewith)

32.2 Certification Pursuant to 18 U.S.C Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Signed by ChiefFinancial Officer (filed herewith)

      (b) Reports on Form 8-K

On August 7, 2007registrant issued a release announcing that it would have a conference call onAugust 13, 2007 regarding its 2007 second quarter financial results at 4:30pmEastern time.

A Form 8-K was filedduring the quarter covered by this report, reporting the issuance of a releasedated August 13, 2007 announcing its financial results for the second quarterended June 30, 2007.

A Form 8-K wasfiled during the quarter covered by this report, reporting the issuance of arelease dated September 27, 2007 announcing the stock buyback plan.

 

 

**SIGNATURES**

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,the Registrant has fully caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
| ** **  | **ALPHA PRO TECH, LTD**. |   |                                 |
|-------------|--------------------------|--------|--------------------------------------|
| ** **  | ** **               |   |                                 |
|  DATE: | **November 8, 2007**     | BY:    | /s/  Sheldon Hoffman       |
|        |                     |   | Sheldon Hoffman                      |
|        |                     |   | Chief Executive Officer and Director |
|        |                     |   |                                 |
|  DATE: | **November 8, 2007**     | BY:    | /s/  Lloyd Hoffman         |
|        | ** **               |   | Lloyd Hoffman                        |
|        | ** **               |   | Chief Financial Officer              |
|        |                     |   |                                 |

 

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