**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-Q**

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**Quarterly Report pursuant to Section 13 or15(d)of the Securities Exchange Act of 1934**

**Forthe Quarter Ended March 31, 2007**

**CommissionFile No. 01-15725**

**Alpha Pro Tech, Ltd.**

(exact name of registrantas specified in its charter)

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

 

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

 

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

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.

Yes xNo o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in Rule 12b-2).

| Large accelerated filer  o |   | Accelerated  filer  o |   | Non-accelerated  filer  x |
|--------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

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

Yes o   No x

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of May 4, 2007.

25,020,953shares of common stock,     $.01 parvalue

 

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**Alpha Pro Tech,Ltd.**

**Table of Contents**
|                                | ** **                                                                                  | ** **                                                                                          | ** ** |
|--------------------------------|---------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|------------|
| PART  I. FINANCIAL INFORMATION |                                                                                        |
|                           |                                                                                        |                                                                                                |       |
| ITEM  1                        | Consolidated  Financial Statements (Unaudited)                                              |                                                                                                |
|                           |                                                                                        |                                                                                                |       |
|                           | a)                                                                                          | Consolidated Balance Sheets - March 31, 2007 and  December 31, 2006                                 |       |
|                           |                                                                                        |                                                                                                |       |
|                           | b)                                                                                          | Consolidated Income Statements for the three months  ended March 31, 2007 and March 31, 2006        |       |
|                           |                                                                                        |                                                                                                |       |
|                           | c)                                                                                          | Consolidated Statement of Shareholders’ Equity for the  three months ended March 31, 2007      |       |
|                           |                                                                                        |                                                                                                |       |
|                           | d)                                                                                          | Consolidated Statements of Cash Flows for the three  months ended March 31, 2007 and March 31, 2006 |       |
|                           |                                                                                        |                                                                                                |       |
|                           | e)                                                                                          | Notes to Consolidated Financial Statements                                                          |       |
|                           |                                                                                        |                                                                                                |       |
| ITEM 2                         | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |                                                                                                |
|                           |                                                                                        |                                                                                                |       |
|                           |                                                                                        | Cautionary Statements Regarding Forward-Looking Information                                         |       |
|                           |                                                                                        |                                                                                                |       |
|                           |                                                                                        | New  Accounting Standards                                                                           |       |
|                           |                                                                                        |                                                                                                |       |
| ITEM 3                         | Quantitative and Qualitative Disclosures About Market  Risk                                 |                                                                                                |
|                           |                                                                                        |                                                                                                |       |
| ITEM 4                         | Controls and Procedures                                                                     |                                                                                                |
|                           |                                                                                        |                                                                                                |       |
| PART  II. OTHER INFORMATION    |                                                                                        |
|                           |                                                                                        |                                                                                                |       |
| ITEM 6                         | Exhibits and Reports on Form 8-K                                                            |                                                                                                |
|                           |                                                                                        |                                                                                                |       |
| SIGNATURES                     |                                                                                        |

 

EXHIBITS
| Exhibit 31.1:  |   | Certification by CEO pursuant to Rule 13a-14(b) and  Rule 15d-14(b) of the Exchange Act (filed herewith)  |   |   |
|----------------|--------|-----------------------------------------------------------------------------------------------------------|--------|--------|
|           |   |                                                                                                      |   |   |
| Exhibit  31.2: |   | Certification  by CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Exchange Act  (filed herewith) |   |   |
|           |   |                                                                                                      |   |   |
| Exhibit 32.1:  |   | Certification by CEO pursuant to Section 906 of the  Sarbanes-Oxley Act (filed herewith)                  |   |   |
|           |   |                                                                                                      |   |   |
| Exhibit 32.2:  |   | Certification by CFO pursuant to Section 906 of the  Sarbanes-Oxley Act (filed herewith)                  |   |   |

 

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**Alpha Pro Tech,Ltd.**

**PART I.  FINANCIAL INFORMATION**

**ITEM 1.**                    FINANCIALSTATEMENTS

Alpha Pro Tech, Ltd. (Alpha Pro Tech, the Company)prepared the following unaudited interim consolidated financial statementspursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to these rules and regulations.

You should read the following unaudited interimconsolidated financial statements and the accompanying notes together with theCompany’s Annual Report on Form 10-K for the year ended December 31, 2006. TheCompany’s 2006 Annual Report contains information that may be helpful inanalyzing the financial information contained in this report and in comparingits results of operations for the three months ended March 31, 2007 with thesame period in 2006.

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**Alpha Pro Tech,Ltd.**

**ConsolidatedBalance Sheets (Unaudited)**
| ** **                                                                                                                                                           | ** ** | **March 31,  2007** | ** ** | **December 31,  2006 (1)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------------|------------|
|                                                                                                                                                                 |       |                     |       |                                 |       |
| **Assets**                                                                                                                                                           |       |                     |       |                                 |       |
| Current assets:                                                                                                                                                      |       |                     |       |                                 |       |
| Cash and cash  equivalents                                                                                                                                           |       | $                        | 1,086,000  |                                 | $          | 1,837,000 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $61,000 at March 31,  2007 and $61,000 at December 31, 2006                                     |       | 5,338,000                |       | 6,157,000                            |       |
| Inventories, net                                                                                                                                                     |       | 14,780,000               |       | 12,713,000                           |       |
| Prepaid expenses  and other current assets                                                                                                                           |       | 1,311,000                |       | 1,195,000                            |       |
| Deferred income  taxes                                                                                                                                               |       | 403,000                  |       | 395,000                              |       |
| Total current  assets                                                                                                                                                |       | 22,918,000               |       | 22,297,000                           |       |
|                                                                                                                                                                 |       |                     |       |                                 |       |
| Property and equipment,  net                                                                                                                                         |       | 3,295,000                |       | 3,355,000                            |       |
| Goodwill, net                                                                                                                                                        |       | 55,000                   |       | 55,000                               |       |
| Intangible assets, net                                                                                                                                               |       | 169,000                  |       | 151,000                              |       |
| Equity investments in  and advances to unconsolidated affiliates                                                                                                     |       | 1,019,000                |       | 994,000                              |       |
| Total assets                                                                                                                                                         |       | $                        | 27,456,000 |                                 | $          | 26,852,000 |   |
|                                                                                                                                                                 |       |                     |       |                                 |       |
| **Liabilities and Shareholders’  Equity**                                                                                                                       |       |                     |       |                                 |       |
| Current liabilities:                                                                                                                                                 |       |                     |       |                                 |       |
| Accounts payable                                                                                                                                                     |       | $                        | 1,479,000  |                                 | $          | 1,213,000 |   |
| Accrued  liabilities                                                                                                                                                 |       | 518,000                  |       | 1,466,000                            |       |
| Total current  liabilities                                                                                                                                           |       | 1,997,000                |       | 2,679,000                            |       |
|                                                                                                                                                                 |       |                     |       |                                 |       |
| Deferred income taxes                                                                                                                                                |       | 701,000                  |       | 693,000                              |       |
| Total  liabilities                                                                                                                                                   |       | 2,698,000                |       | 3,372,000                            |       |
|                                                                                                                                                                 |       |                     |       |                                 |       |
| Shareholders’ equity                                                                                                                                            |       |                     |       |                                 |       |
| Common stock,  $.01 par value, 50,000,000 shares authorized, 25,020,955 and 24,509,580  issued and outstanding at March 31, 2007 and December 31, 2006, respectively |       | 250,000                  |       | 245,000                              |       |
| Additional  paid-in capital                                                                                                                                          |       | 26,512,000               |       | 25,774,000                           |       |
| Accumulated  deficit                                                                                                                                                 |       | (2,004,000               | )          | (2,539,000                           | )          |
| Total  shareholders’ equity                                                                                                                                     |       | 24,758,000               |       | 23,480,000                           |       |
| Total liabilities and  shareholders’ equity                                                                                                                     |       | $                        | 27,456,000 |                                 | $          | 26,852,000 |   |

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(1)             Thecondensed consolidated balance sheet as of December 31, 2006 has been preparedusing information from the audited financial statements at that date.

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

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**Alpha Pro Tech,Ltd.**

**ConsolidatedIncome Statements (Unaudited)**
| ** **                                                   | ** ** | **For the Three Months** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                   | ** ** | **Ended March 31,**           | ** ** |
| ** **                                                   | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| Net sales                                                    |       | $                                       | 9,044,000  |   | $ | 7,971,000 |   |
|                                                         |       |                                    |       |   |   |
| Cost of goods sold,  excluding depreciation and amortization |       | 4,880,000                               |       | 4,330,000 |   |
|                                                         |       |                                    |       |   |   |
| Gross margin                                                 |       | 4,164,000                               |       | 3,641,000 |   |
|                                                         |       |                                    |       |   |   |
| Expenses:                                                    |       |                                    |       |   |   |
| Selling, general  and administrative                         |       | 3,223,000                               |       | 2,496,000 |   |
| Depreciation and  amortization                               |       | 115,000                                 |       | 111,000 |   |
|                                                         |       |                                    |       |   |   |
| Income from operations                                       |       | 826,000                                 |       | 1,034,000 |   |
|                                                         |       |                                    |       |   |   |
| Other income                                                 |       |                                    |       |   |   |
| Equity in income  (loss) of unconsolidated affiliates        |       | 25,000                                  |       | (9,000 | ) |
| Interest, net                                                |       | 16,000                                  |       | 5,000 |   |
|                                                         |       |                                    |       |   |   |
| Income before provision  for income taxes                    |       | 867,000                                 |       | 1,030,000 |   |
|                                                         |       |                                    |       |   |   |
| Provision for income  taxes                                  |       | 332,000                                 |       | 381,000 |   |
|                                                         |       |                                    |       |   |   |
| Net income                                                   |       | $                                       | 535,000    |   | $ | 649,000 |   |
|                                                         |       |                                    |       |   |   |
| Basic net income per  share                                  |       | $                                       | 0.02       |   | $ | 0.03 |   |
|                                                         |       |                                    |       |   |   |
| Diluted net income per  share                                |       | $                                       | 0.02       |   | $ | 0.03 |   |
|                                                         |       |                                    |       |   |   |
| Basic weighted average  shares outstanding                   |       | 24,834,005                              |       | 24,066,144 |   |
|                                                         |       |                                    |       |   |   |
| Diluted weighted average shares outstanding                  |       | 25,811,883                              |       | 25,035,255 |   |

 

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

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**Alpha Pro Tech,Ltd.**

**ConsolidatedStatement of Shareholders’ Equity (Unaudited)**
| ** **                                       | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Accumulated**          | ** ** | ** **  | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------------------|------------|-------------|------------|
| ** **                                       | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Paid-in 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               |       | —                |       | —         |       | 38,000                   |       | —      |       | 38,000 |   |
| Options exercised                                |       | 511,375               |       | 5,000          |       | 464,000                  |       | —      |       | 469,000 |   |
| Income tax benefit from  stock options exercised |       | —                |       | —         |       | 236,000                  |       | —      |       | 236,000 |   |
| Net income                                       |       | —                |       | —         |       | —                   |       | 535,000     |       | 535,000 |   |
| Balance at March 31, 2007                        |       | 25,020,955            |       | $              | 250,000    |                     | $          | 26,512,000  |       | $ | (2,004,000 | ) | $ | 24,758,000 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

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**Alpha Pro Tech,Ltd.**

**ConsolidatedStatements of Cash Flows (Unaudited)**
| ** **                                                                     | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| **Cash Flows From Operating  Activities:**                                     |       |                                                               |       |   |   |
| Net income                                                                     |       | $                                                                  | 535,000    |   | $ | 649,000 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                                               |       |   |   |
| Share-based  compensation expense                                              |       | 38,000                                                             |       | — |   |
| Depreciation and  amortization                                                 |       | 115,000                                                            |       | 111,000 |   |
| Equity in  (income) loss of unconsolidated affiliates                          |       | (25,000                                                            | )          | 9,000 |   |
| Changes in  assets and liabilities:                                            |       |                                                               |       |   |   |
| Accounts receivable,  net                                                      |       | 819,000                                                            |       | (543,000 | ) |
| Inventories, net                                                               |       | (2,067,000                                                         | )          | (458,000 | ) |
| Prepaid expenses  and other current assets                                     |       | (116,000                                                           | )          | (129,000 | ) |
| Accounts payable  and accrued liabilities                                      |       | (682,000                                                           | )          | (154,000 | ) |
|                                                                           |       |                                                               |       |   |   |
| Net cash used in  operating activities:                                        |       | (1,383,000                                                         | )          | (515,000 | ) |
|                                                                           |       |                                                               |       |   |   |
| **Cash Flows From Investing  Activities:**                                     |       |                                                               |       |   |   |
| Purchase of  property and equipment                                            |       | (50,000                                                            | )          | (86,000 | ) |
| Purchase of  intangible assets                                                 |       | (23,000                                                            | )          | (24,000 | ) |
|                                                                           |       |                                                               |       |   |   |
| Net cash used in  investing activities                                         |       | (73,000                                                            | )          | (110,000 | ) |
|                                                                           |       |                                                               |       |   |   |
| **Cash Flows From Financing  Activities:**                                     |       |                                                               |       |   |   |
| Income tax  benefit from stock options exercised                               |       | 236,000                                                            |       | — |   |
| Proceeds from  the exercise of stock options                                   |       | 469,000                                                            |       | 344,000 |   |
| Net cash provided by  financing activities                                     |       | 705,000                                                            |       | 344,000 |   |
|                                                                           |       |                                                               |       |   |   |
| Decrease in cash during  the period                                            |       | (751,000                                                           | )          | (281,000 | ) |
|                                                                           |       |                                                               |       |   |   |
| Cash and cash  equivalents, beginning of period                                |       | 1,837,000                                                          |       | 1,163,000 |   |
| Cash and cash equivalents, end of period                                       |       | $                                                                  | 1,086,000  |   | $ | 882,000 |   |

 

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

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**Alpha Pro Tech,Ltd.**

**Notes toConsolidated Financial Statements (Unaudited)**

**1.**                                      The Company

Alpha Pro Tech, Ltd. (Alpha ProTech, the Company) isin 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 disposableprotective apparel consists of a complete line of shoecovers, bouffant caps,coveralls, gowns, frocks and lab coats. The infection control line of productsincludes a line of face masks and eye shields. The line of construction supplyweatherization products consists of house wrap, synthetic roof underlayment andmold resistant framing sealant. The Company also manufactures and distributes aline of medical bed pads and accessories as well as a line of pet beds. TheCompany’s products are sold both under the “Alpha Pro Tech” brand name as wellas under private label and are predominantly sold in the United States ofAmerica.

**2.**                                      Basis ofPresentation

The interim financial information included herein isunaudited; however, the information reflects all adjustments (consisting ofnormal recurring adjustments) that are, in the opinion of management, necessaryfor the fair presentation of the consolidated financial position, results ofoperations and cash flows for the interim periods. The consolidated financialstatements should be read in conjunction with the consolidated financialstatements for the year ended December 31, 2006, which are included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2006 (“200610-K”). The results of operations for the three months ended March 31, 2007 arenot necessarily indicative of the results to be expected for the full year. Theconsolidated balance sheet at December 31, 2006 was extracted from theaudited consolidated financial statements contained in the 2006 10-K and doesnot include all disclosures required by accounting principles generallyaccepted in the United States of America for annual consolidated financialstatements.

**3.**                                      Stock BasedCompensation

The Company maintains two stock option plans underwhich the Company may grant incentive stock options and non-qualified stockoptions to employees and non-employee directors. Stock options have beengranted with exercise prices at or above the fair market value on the date ofgrant. Options vest and expire according to terms established at the grantdate.

The Company adopted Statement of Financial AccountingStandards No. 123R, Share-Based Payment (“SFAS 123R”) effective January 1,2006, using the modified prospective application method. SFAS 123R requirescompanies to record compensation expense for the value of all outstanding andunvested share-based payments, including employee stock options and similarawards. During 2006, 490,000 stock options were granted under the option plan. Duringthe first quarter of 2007, there were no stock options granted under the optionplan. The Company recognized $38,000 in share-based compensation expense in itsconsolidated financial statements for the three months ended March 31, 2007related to previously issued options.

Stock options to purchase 2,070,000 and 2,510,000shares of common stock were outstanding at March 31, 2007 and 2006,respectively. Of these outstanding stock options, all of the options topurchase common stock at March 31, 2007 and 2006 were included in thecomputation of diluted earnings per share because the exercise prices of thestock options were less than the average share price of the Company’s commonstock and, therefore, the effect would have been dilutive.

The Company used the Black-Scholes option pricingmodel to value the options. The table below presents the weighted averageexpected life in years. In March 2005, the Securities and

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Exchange Commission (the “SEC”) issued StaffAccounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation ofSFAS 123R and the valuation of share-based payments for public companies. TheCompany applied the provisions of SAB 107 in its adoption of SFAS 123R.TheCompany used SAB 107’s simplified method for estimating the expected life ofthe options. The risk-free interest rate for periods within the contractuallife of the award is based on the US Treasury yield curve in effect at the timeof grant. The expected volatility is based on historical volatility of theexpected life in years.

The following table summarizes stock option activityduring the three months ended March 31, 2007:
| ** **                                | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------|------------|-------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------|------------|
| Options  outstanding at December 31, 2006 |       | 2,581,000   |       | $                                       | 1.21       |                                                                  | 2.77       |                            | $          | 4,100,00 |   |
| Exercised                                 |       | (511,000    | )          | 0.92                                    |       |                                                                  |       |                            |       |
| Granted                                   |       | —      |       | —                                  |       |                                                                  |       |                            |       |
| Forfeited or  expired                     |       | —      |       | —                                  |       |                                                                  |       |                            |       |
| Options  outstanding at March 31, 2007    |       | 2,070,000   |       | $                                       | 1.28       |                                                                  | 3.39       |                            | $          | 3,882,000 |   |
| Options exercisable at  March 31, 2007    |       | 1,580,000   |       | $                                       | 1.07       |                                                                  | 3.00       |                            | $          | 3,304,000 |   |

 

The intrinsic value is the amount by which the marketvalue of the underlying common stock exceeds the exercise price of therespective stock option. The intrinsic value of stock options exercised duringthe three months ended March 31, 2007 was $1,030,000.

As of March 31, 2007 $367,000 of total unrecognizedcompensation cost related to stock options is expected to be recognized over aweighted average period of 2.50 years. Cash received from options exercised forthe three months ended March 31, 2007 was $469,000.

**4.**                                      New AccountingStandards

In September 2006, the SEC issued Staff AccountingBulletin No. 108, “Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements” (“SAB 108”).SAB 108 provides guidance on how prior year misstatements should be taken intoconsideration when quantifying misstatements in current year financialstatements for purposes of determining whether the current year’s financialstatements are materially misstated. SAB 108 permits registrants to record thecumulative effect of initial adoption by recording the necessary “correcting”adjustments to the carrying values of assets and liabilities as of thebeginning of that year with the offsetting adjustment recorded to the openingbalance of retained earnings only if material under the dual method. SAB 108 iseffective for fiscal years ending on or after November 15, 2006. The adoptionof SAB 108 did not have a material impact on the Company’s financial conditionor results of operations.

The Financial Accounting Standards Board (“FASB”)issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN 48”) in June 2006. The interpretation clarifies the accounting for uncertaintyin income taxes recognized in the Company’s financial statements

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in accordance with SFAS No. 109, “Accounting forIncome Taxes.” On January 1, 2007, the Company adopted the provisions of FIN48. The Company does not have any uncertain tax positions which requirerecognition under the criteria established by FIN 48. The amount ofunrecognized tax benefits did not change during the three months ended March31, 2007.

The Company and its subsidiaries file income taxreturns in the U.S. federal jurisdiction, and various states and foreignjurisdictions. The Company is no longer subject to U.S. federal, state andlocal, income tax examination by tax authorities for years before 2002. TheCompany is not currently under examination in any of its jurisdictions in whichit operates.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements.” SFAS No. 157 defines fair value, establishes a frameworkfor measuring fair value in generally accepted accounting principles, andexpands disclosures about fair value measurements. This statement addresses howto calculate fair value measurements required or permitted under otheraccounting pronouncements. Accordingly, this statement does not require any newfair value measurements. However, for some entities, the application of thisstatement will change current practice. SFAS No. 157 is effective for theCompany beginning January 1, 2008. The Company is currently evaluating theimpact of this standard.

In February 2007, the FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities—Including anamendment of FASB Statement No. 115.” SFAS No. 159 permits entities to chooseto measure many financial instruments and certain other items at fairvalue. The objective is to improve financial reporting by providingentities with the opportunity to mitigate volatility in reported earningscaused by measuring related assets and liabilities differently without havingto apply complex hedge accounting provisions. This Statement is expected toexpand the use of fair value measurement, which is consistent with the FASB’slong-term measurement objectives for accounting for financialinstruments. SFAS No. 159 is effective as of the beginning of an entity’sfirst fiscal year that begins after November 15, 2007. The Companydoes not expect SFAS No. 159 to have a material impact on the Company’sconsolidated financial position, results of operations or cash flows.

**5.**                                      Inventories

Inventoriesconsist of the following:

|                                                               | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials                                                 |       | $                        | 10,489,000 |                        | $          | 9,632,000 |   |
| Work in process                                               |       | 269,000                  |       | 182,000                     |       |
| Finished goods                                                |       | 4,320,000                |       | 3,217,000                   |       |
|                                                          |       | 15,078,000               |       | 13,031,000                  |       |
| Less reserve for  slow-moving, obsolete or unusable inventory |       | (298,000                 | )          | (318,000                    | )          |
|                                                          |       | $                        | 14,780,000 |                        | $          | 12,713,000 |   |

 

**6.**                                      Investment in andAdvances to Unconsolidated Affiliates

On June 14, 2005, Alpha ProTech Engineered Products,Inc. entered into a joint venture with a manufacturer in India for theproduction of building products. Under terms of the joint venture

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agreement, a private company, Harmony Plastics PrivateLimited (“Harmony”), was created with ownership interests of 41.66% by AlphaProTech Engineered Products, Inc. and 58.34% by Maple Industries andAssociates. Alpha ProTech Engineered Products, Inc. contributed $508,000 forshare capital 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 capacity for sales ofspecialty roofing component products and custom products for industrialapplications requiring high quality extrusion 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 a new 60,000 square-foot facility for themanufacturing of house wrap and other building 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 46requires the Company to assess whether or not related entities are variableinterest entities (VIEs), as defined. For those related entities that qualifyas variable interest entities, FIN 46 requires the Company to determine whetheror not the Company is the primary beneficiary of the VIE, and if so, toconsolidate 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 Company records its equity interest in Harmony’sresults of operations as “Equity in income (loss) of unconsolidated affiliates”on the accompanying Consolidated Income Statements.

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 whetherthe decline is other-than-temporary, the Company considers the nature of theindustry in which Harmony operates, their historical performance, theirperformance in relation to 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 formaterials is to be repaid over a six year term commencing in July 2006 and thebalance is to be paid in the seventh year. During the third and fourth quarterof 2006, Harmony repaid $39,000 in scheduled payments and $461,000 inadditional payments for a total of $500,000, leaving a balance of $442,000. Harmonydid not make any further payments in the first quarter of 2007. Effective April2006, interest of 3.5% is to be paid annually in January on this advance and$19,000 was paid during the first quarter of 2007.

Harmony commenced operations in August of 2005. Forthe three months ended March 31, 2007 and 2006, Alpha ProTech EngineeredProducts purchased $598,000 and $1,001,000, respectively from Harmony. For thethree months ended March 31, 2007, the Company recorded equity income inunconsolidated affiliates of $25,000. For the three months ended March 31,2006, the Company recorded an equity loss in unconsolidated affiliates of$9,000. As of March 31, 2007, the Company’s investment in Harmony is $1,019,000which comprises its original $1,450,000 investment and cumulative equity inincome of unconsolidated affiliates of $69,000 less $500,000 in repayments ofthe advance.

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**7.**                                      AccruedLiabilities

Accrued liabilities consist of the following:

|                               | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Payroll accrual               |       | $                        | 104,000    |                        | $          | 199,000 |   |
| Commission and bonus  accrual |       | 193,000                  |       | 986,000                     |       |
| Accrued professional  fees    |       | 104,000                  |       | 153,000                     |       |
| Accrued rebates and  other    |       | 117,000                  |       | 128,000                     |       |
|                          |       | $                        | 518,000    |                        | $          | 1,466,000 |   |

 

**8.**                                      Basic and DilutedNet Income Per Share

The following table provides a reconciliation of bothnet income and the number of shares used in the computation of “basic” earningsper share (EPS), which utilizes the weighted average number of sharesoutstanding without regard to potential shares, and “diluted” EPS, whichincludes all such dilutive shares:

|                                              | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| Net income (Numerator)                       |       | $                                                                  | 535,000    |   | $ | 649,000 |   |
|                                         |       |                                                               |       |   |   |
| Shares (Denominator):                        |       |                                                               |       |   |   |
|                                         |       |                                                               |       |   |   |
| Basic weighted  average shares outstanding   |       | 24,834,005                                                         |       | 24,066,144 |   |
|                                         |       |                                                               |       |   |   |
| Add: Dilutive  effect of stock options       |       | 977,878                                                            |       | 969,111 |   |
|                                         |       |                                                               |       |   |   |
| Diluted weighted  average shares outstanding |       | 25,811,883                                                         |       | 25,035,255 |   |
|                                         |       |                                                               |       |   |   |
| Net income per share:                        |       |                                                               |       |   |   |
|                                         |       |                                                               |       |   |   |
| Basic                                        |       | $                                                                  | 0.02       |   | $ | 0.03 |   |
|                                         |       |                                                               |       |   |   |
| Diluted                                      |       | $                                                                  | 0.02       |   | $ | 0.03 |   |

 

**9.**                                      Activity ofBusiness Segments

The Company operates through four segments:

Disposable Protective Apparel Products: consisting ofa line of disposable protective clothing such as shoecovers (including the AquaTrak® and spunbond shoecovers), bouffant caps, coveralls, frocks, lab coats andhoods, for the pharmaceutical, cleanroom, industrial and medical markets.

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Infection Control Products: consisting of a line offace masks and eye shields principally for the medical, dental and industrialmarkets.

Extended Care Products: consisting of a line ofmedical bed pads using Unreal Lambskin® (synthetic lambskin). The UnrealLambskin® is used to produce medical bed pads, which prevent decubitus ulcersor bedsores on long term care patients. The Unreal Lambskin® is also used tomanufacture bedrail pads, knee and elbow protectors, as well as wheelchairaccessories. The Company also manufactures a line of pet beds and pet toyaccessories with this material.

Engineered Products: consisting of a line ofconstruction supply weatherization. The construction supply weatherizationproducts consist of building wrap, synthetic roof underlayment andantimicrobial mold resistant framing sealant. Of note, the Company’s equity inincome (loss) of unconsolidated affiliates (Harmony) is included in the totalsegment income for Engineered Products in the table below.

The accounting policies of the segments are the sameas those described previously under “Summary of Significant AccountingPolicies.” Segment data excludes charges allocated to head office and corporatesales/marketing departments and income taxes. The Company evaluates theperformance of its segments and allocates resources to them based primarily onnet sales.

The followingtable shows net sales for each segment for the three months ended March 31,2007 and 2006:

|                                | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
|                           | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Disposable Protective  Apparel |       | $                                                                  | 5,376,000  |   | $ | 4,070,000 |   |
| Infection Control              |       | 2,011,000                                                          |       | 1,683,000 |   |
| Engineered Products            |       | 1,316,000                                                          |       | 1,782,000 |   |
| Extended Care                  |       | 341,000                                                            |       | 436,000 |   |
|                           |       |                                                               |       |   |   |
| Consolidated total net sales   |       | $                                                                  | 9,044,000  |   | $ | 7,971,000 |   |

 

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The following table shows the reconciliation of totalsegment income to total consolidated net income for the three months endedMarch 31, 2007 and 2006:

|                                          | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| Disposable Protective  Apparel           |       | $                                                                  | 1,868,000  |   | $ | 1,370,000 |   |
| Infection Control                        |       | 846,000                                                            |       | 793,000 |   |
| Engineered Products                      |       | (324,000                                                           | )          | 135,000 |   |
| Extended Care                            |       | 12,000                                                             |       | 58,000 |   |
|                                     |       |                                                               |       |   |   |
| Total segment income                     |       | 2,402,000                                                          |       | 2,356,000 |   |
| Unallocated corporate  overhead expenses |       | (1,535,000                                                         | )          | (1,326,000 | ) |
| Provision for income  taxes              |       | (332,000                                                           | )          | (381,000 | ) |
|                                     |       |                                                               |       |   |   |
| Consolidated net income                  |       | $                                                                  | 535,000    |   | $ | 649,000 |   |

 

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**ITEM 2**                       MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL   CONDITIONAND RESULTS OF OPERATIONS

You should read the following discussion and analysistogether with our consolidated financial statements and the notes to ourconsolidated financial statements, which appear elsewhere in this report.

**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING INFORMATION**

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

Our forward-looking statementsare based upon our current expectations and various assumptions. Ourexpectations, beliefs and projections are expressed in good faith and webelieve there is a reasonable basis for them, including without limitation,management’s examination of historical operating trends, data contained in ourrecords and other data available from third parties. However, we cannot assureyou that management’s expectations; beliefs and projections will result or beachieved or accomplished. Our forward-looking statements apply only as of thedate made. Except as required by law, we undertake no obligation to publiclyupdate or revise forward-looking statements which may be made to reflect eventsor circumstances after the date made or to reflect the occurrence ofunanticipated events.

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

**CriticalAccounting Policies**

The preparation of our financial statements inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the dates of the financial statements and the reportedamounts of net sales and expenses during the reported periods. We baseestimates on past experience and on various other assumptions that are believedto be reasonable under the circumstances. The application of these accountingpolicies on a consistent basis enables us to provide timely and reliablefinancial information. Our critical accounting polices include the following:

Inventories: Inventories include freight-in,materials, labor and overhead costs and are stated at the lower of cost(computed on a standard cost basis, which approximates average cost) or market.Provision is made for slow-moving, obsolete or unusable inventory. We assessour inventory for estimated obsolescence or unmarketable inventory and, ifnecessary, write down the difference between the cost of inventory and theestimated market value based upon assumptions about future sales and supplyon-hand. If actual market conditions are less favorable than those projected bymanagement, additional inventory write-downs may be required.

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Revenue Recognition: For sales transactions, we complywith the provisions of the SEC’s Staff Accounting Bulletin (“SAB”) No. 104, “RevenueRecognition,” which states that revenue should be recognized when the followingrevenue recognition criteria are met: (1) persuasive evidence of an arrangementexists; (2) the product has been shipped and the customer takes ownership andassumes the risk of loss; (3) the selling price is fixed or determinable; and(4) collection of the resulting receivable is reasonably assured. Thesecriteria are satisfied upon shipment of product and revenues are recognizedaccordingly.

Sales are reduced for any anticipated sales returns,rebates and allowances based on historical experience. Since our return policyis only 90 days and our products are not generally susceptible to externalfactors such as technological obsolescence or significant changes in demand, weare able to make a reasonable estimate for returns. We offer end-user productspecific and sales volume rebates to select distributors. Our rebates are basedon actual sales and accrued monthly.

Stock Based Compensation: We adopted Statement ofFinancial Accounting Standards No. 123R, Share-Based Payment (“SFAS 123R”)effective January 1, 2006, using the modified prospective application method.SFAS 123R requires companies to record compensation expense for the value ofall outstanding and unvested share-based payments, including employee stockoptions and similar awards. During 2006, 490,000 stock options were grantedunder the option plan. No options were granted during the three months endedMarch 31, 2007. We recognized $38,000 in share-based compensation expense inour consolidated financial statements for the three months ended March 31, 2007related to previously issued options.

The fair values of stock option grants are determinedusing the Black-Scholes option pricing model and the following assumptions:expected stock price volatility based on historic and management’s expectationsof future volatility, risk-free interest rates from published sources, weightedaverage expected option lives based on historical data and no dividend yield,as management currently does not intend to pay dividends in the near future.The Black-Scholes option valuation model was developed for use in estimatingthe fair value of traded options that have no vesting restrictions and that arefully transferable. In addition, option valuation models require the input ofhighly subjective assumptions including expected 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 inthe business of protecting people, products and environments. We accomplishthis by developing, manufacturing and marketing a line of high-value disposableprotective apparel and infection control products for the cleanroom,industrial, pharmaceutical, medical and dental markets. We also manufacture aline of construction weatherization products and a line of medical bed pads andaccessories as well as a line of pet beds. Our products are sold both under the“Alpha Pro Tech” brand name as well as under private label.

Our products are classified into six groups: Disposableprotective apparel, consisting of a line of shoecovers, bouffant caps, gowns,coveralls and lab coats; infection control products, consisting of a line offace masks and eye shields; extended care products, consisting of a line ofmedical bed pads, wheelchair covers, geriatric chair surfaces, operating roomtable surfaces and pediatric surfaces; a line of pet beds; and constructionweatherization products, consisting of house wrap and synthetic roofunderlayment.

Our products as classified above are grouped into fourbusiness segments. The Disposable Protective Apparel segment, consisting ofdisposable protective apparel; the Infection Control segment, consisting of

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face masks and eye shields; the Extended Care segment,consisting of extended care products, namely medical bed pads and pet beds; andthe Engineered Products segment, consisting of construction weatherizationproducts such as house wrap and synthetic roof underlayment.

Our target markets are pharmaceutical manufacturing,bio-pharmaceutical manufacturing and medical device manufacturing, lab animalresearch, high technology electronics manufacturing which includes thesemi-conductor market, medical and dental distributors, pet stores and petdistributors and construction supply and roofing distributors.

Our products are used primarily in cleanrooms,industrial safety manufacturing environments, health care facilities such ashospitals, laboratories and dental offices, as well as construction supplysites. Our pet beds are used by pet owners and veterinarians. 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 OFOPERATIONS**

**Three months endedMarch 31, 2007, compared to the three months ended March 31, 2006**

The followingtable sets forth certain operational data as a percentage of sales for theperiods indicated:
| ** **                                | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| Sales                                     |       | 100.0                                                              | %          | 100.0 | % |
|                                      |       |                                                               |       |   |   |
| Gross profit                              |       | 46.0                                                               |       | 45.7 |   |
|                                      |       |                                                               |       |   |   |
| Selling, general  and administrative      |       | 35.6                                                               |       | 31.3 |   |
|                                      |       |                                                               |       |   |   |
| Income from  operations                   |       | 9.1                                                                |       | 13.0 |   |
|                                      |       |                                                               |       |   |   |
| Income before  provision for income taxes |       | 9.6                                                                |       | 12.9 |   |
|                                      |       |                                                               |       |   |   |
| Net income                                |       | 5.9                                                                |       | 8.1 |   |

 

**Sales.**   Consolidated sales for the quarter endedMarch 31, 2007 increased to $9,044,000 from $7,971,000 for the quarter endedMarch 31, 2006, representing an increase of $1,073,000 or 13.5%. We attributethe increase to increased Disposable Protective Apparel segment sales of$1,306,000 and to increased Infection Control segment sales of $328,000,partially offset by decreased Engineered Products segment sales of $466,000 anddecreased sales from our Extended Care segment of $95,000.

Sales for the Disposable Protective Apparel segmentfor the quarter ended March 31, 2007 increased by $1,306,000 or 32.1% to$5,376,000 compared to $4,070,000 for the same period of 2006. Although saleswere up by 32.1% in the first quarter of 2007, sales during the first quarterof last year were lower than normal and therefore we expect growth for all of2007 to be lower than that which occurred in this past quarter. The increase isprimarily related to increased sales to cleanroom distributors and partly dueto increased sales of our largest distributor. In September 2006, we announcedthe signing of a new distribution contract with our largest distributor inwhich they retained the exclusive right to sell our private label CriticalCover® products, but have also allowed us the right to sell Alpha Pro Techbranded products

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to other distributors. This new contract furtherstrengthens our relationship with our largest distributor and as we have seenin the first quarter of 2007, it will enable us to gain additional market shareas we develop relationships with other industrial and cleanroom distributors. Wecontinue to be encouraged by the response to our ComforTech® line of productsand expect growth in the coming quarters from this product line and from anexpanded distribution channel.

Infection Control segment sales for the quarter endedMarch 31, 2007 increased by $328,000 or 19.5% to $2,011,000 compared to$1,683,000 for the same period of 2006. Shield sales in this segment were up by$585,000 and mask sales were down by $257,000. Shield sales were strongprimarily due to a large non-recurring order and mask sales were down primarilydue to lower sales of our N-95 NIOSH approved Respirator mask as concerns aboutAvian Flu have abated. Unless worldwide concerns about Avian Flu increase, weexpect N-95 Respirator mask sales to be weaker in 2007 than in 2006.

The Engineered Products segment primarily consists ofa line of construction supply weatherization products, namely house wrap andsynthetic roof underlayment. Engineered Products sales for the quarter endedMarch 31, 2007 decreased by $466,000 or 26.2% to $1,316,000 compared to$1,782,000 for the same period of 2006. The decrease is the result of a changein distribution channel strategy in which we decided to move forward on a non exclusivebasis with our distributor, which led them to source product from othersuppliers and to ultimately discontinue purchasing from us. We decided toremove exclusivity with Perma R as they had not met the minimums in 2005 and in2006 they purchased $5.1 million, meeting the $5.0 million minimum on housewrap, but did not meet the $3 million minimum for synthetic roof underlayment. Webelieve that this will significantly broaden our market opportunities forsynthetic roof underlayment and house wrap. Due to the fact that we dropshipped all of Perma R’s products, their customers know Alpha Pro Tech as themanufacturer and many wish to continue purchasing from us. We expect to retaina significant portion of the sales volume from the customers that purchasedfrom Perma R. In the short term, due to this change in distribution channelstrategy, we anticipate that our sales will likely continue to be affected, butdo anticipate growth for the full year of 2007.

During the first quarter, we increased our sales team,launched a marketing campaign to introduce our new synthetic roof underlaymentunder the name of REX SynfeltTM and launched our new house wrap under the nameof REX WrapTM. We also attended a number of trade shows, including theInternational Builders show in Orlando and the Western Roofing show in LasVegas. We are encouraged by the response to our product line and managementexpects this segment to contribute to overall consolidated revenue growth for2007.

Sales from our Extended Care segment, which includes aline of medical bed pads as well as pet beds, decreased by $95,000 or 21.8% to$341,000 for the quarter ended March 31, 2007 from $436,000 for the quarterended March 31, 2006. The decrease in sales is primarily the result of lowermedical bed pad sales. We expect that medical pad sales will be fairly flat forthe rest of 2007 as compared to the same period of 2006. This line of productsis not expected to be a growth segment for us.

**Gross Profit**   Grossprofit increased by 14.4% to $4,164,000 for the quarter ended March 31, 2007from $3,641,000 for the same period in 2006. Gross profit margin increasedslightly to 46.0% for the quarter ended March 31, 2007 as compared to 45.7% forthe same period in 2006.

Gross profit margin on the Engineered Products segmentimproved in the first quarter of 2007 as compared to the same period of 2006. Althoughthe gross profit margin in the Engineered Products segment is considerablylower than the overall company margin, we expect it to continue to improve.

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**Selling, General andAdministrative Expenses.**   Selling, general andadministrative expenses increased by $727,000 or 29.1% to $3,223,000 for thequarter ended March 31, 2007 from $2,496,000 for the quarter ended March 31,2006. Although expenses increased 29.1% compared to the first quarter of 2006,they only increased by 4.3% from the fourth quarter of 2006. Much of thisincrease is related to a marketing campaign to introduce our new line ofbuilding products.

The biggest increase in selling, general and administrativeexpenses is primarily related to increased Engineered Products expenses of$366,000. This can be broken down as follows: a $106,000 increase in marketingexpenses in relation to the launch our new line of synthetic roof underlaymentand house wrap under the names REX SynFeltTM and REX WrapTM, a $87,000 increasein tradeshow expenses, a $94,000 increase in employee compensation, a $41,000increase in travel costs primarily related to our increased sales team, a$18,000 increase in research and development expenses and a $20,000 increase inmiscellaneous expenses.

Other increases in selling, general and administrativeexpenses are primarily for employee compensation expenses of $130,000,increased amortization of share based compensation of $38,000, increasedindustrial market marketing expenses of $47,000, increased travel of $69,000,increased US foreign exchange expense of $31,000, increased sales commission of$15,000 and increased miscellaneous expenses of $31,000.

As a percentage of net sales, selling, general andadministrative expenses increased to 35.6% for the quarter ended March 31, 2007from 31.3% for the same period in 2006. We believe that we have built theinfrastructure required to substantially grow our business and as our revenuegrows this year our expenses are expected to decrease as a percentage of sales.

The chief executive officer and president are eachentitled to a bonus equal to 5% of the pre-tax profits of the Company. Bonusesof $96,000 were accrued for the quarter ended March 31, 2007 as compared to$114,000 in the same period of 2006.

**Income from Operations.**   Incomefrom operations decreased by $208,000 or 20.1%, to $826,000 for the quarterended March 31, 2007 as compared to income from operations of $1,034,000 forthe quarter ended March 31, 2006. The decrease in income from operations is dueto an increase in gross profit of $523,000, partially offset by an increase inselling, general and administrative expenses of $727,000 and an increase indepreciation and amortization of $4,000.

**Net Interest.**   Forthe quarter ended March 31, 2007, we had net interest income of $16,000compared to net interest income of $5,000 for the quarter ended March 31, 2006.Interest expense remained unchanged at $2,000 for the quarter ended March 31,2007 compared to the same period of 2006. Interest income increased to $18,000for the quarter ended March 31, 2007 as compared to $7,000 for the same periodof 2006.

**Equity in income (loss)of unconsolidated affiliates.**   On June 14, 2005Alpha ProTech Engineered Products, Inc. entered into a joint venture with amanufacturer in India for the production of building products. Under terms ofthe joint venture agreement, a private company, Harmony Plastics PrivateLimited (Harmony), was created with ownership interests of 41.66% by AlphaProTech Engineered Products, Inc. and 58.34% by Maple Industries andAssociates. Alpha ProTech Engineered Products invested $1,450,000 in the jointventure; $508,000 for share capital and $942,000 in a long term advance. EffectiveApril 2006, interest of 3.5% is paid on this advance. Contractually, half ofthis $942,000 advance is to be repaid monthly over a six year term whichcommenced in July 2006 with the balance to be paid in the seventh year. However,we expect that this advance will be paid in advance of the contractual term asHarmony paid $500,000 towards the advance in the second half of 2006.

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We are subject to the provisions of FASBInterpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities—aninterpretation of ARB No. 51,” which redefines the criteria by which wedetermine the proper accounting for our investments in related entities. Specifically,FIN 46 requires us to assess whether or not related entities are variableinterest entities (“VIE”s), as defined. For those related entities that qualifyas variable interest entities, FIN 46 requires us to determine whether or notwe are the primary beneficiary of the VIE, and if so, to consolidate the VIE. Wehave determined that Harmony is not a VIE and is therefore considered to be anunconsolidated affiliate.

Harmony commenced operations in August of 2005. Forthe quarter ended March 31, 2007, we recorded equity in income ofunconsolidated affiliates of $25,000 as compared to equity in loss ofunconsolidated affiliates of $9,000 for the same period of 2006.

**Income before Provisionfor Income Taxes.**   Income before provision forincome taxes for the quarter ended March 31, 2007 was $867,000 compared to$1,030,000 for the quarter ended March 31, 2006, representing a decrease of$163,000 or 15.8%. The decrease in income before provision for income taxes isdue to a decrease in income from operations of $208,000 and an increase in netinterest income of $11,000 and a net change of $34,000 from our unconsolidatedaffiliate (Harmony).

Based on the segment analysis, a primary reason forthe decline in income before provision for income tax was due to a net decreaseof $459,000 in income for the Engineered Products segment. This segmentexperienced a loss of $324,000 for the first quarter ended March 31, 2007 ascompared to income of $135,000 for the same quarter of 2006.

**Provision for IncomeTaxes**   The provision for income taxes for thequarter ended March 31, 2007 was $332,000 compared to $381,000 for the quarterended March 31, 2006. The decrease in income taxes is due to lower incomebefore provision for income taxes in 2007. The effective tax rate was 38.3% forthe quarter ended March 31, 2007 and was 37.0% for the same quarter of 2006.

**Net Income.**   Netincome for the quarter ended March 31, 2007 was $535,000 compared to net incomeof $649,000 for the quarter ended March 31, 2006, a decrease of $114,000 or17.6%. The net income decrease was primarily due to a decrease in income beforeprovision for income taxes of $163,000, partially offset by a decrease inincome taxes of $49,000. Net income as a percentage of sales for the quarterended March 31, 2007 and 2006 was 5.9% and 8.1% respectively. Basic and dilutedincome per share for the quarter ended March 31, 2007 and 2006 were $0.02 and$0.03, respectively.

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**LIQUIDITY ANDCAPITAL RESOURCES**

As of March 31, 2007, we had cash and cash equivalentsof $1,086,000 and working capital of $20,921,000, an increase in workingcapital of 6.6% or $1,303,000 since December 31, 2006. As of March 31, 2007,our current ratio was 11.48:1 as compared to 8.32:1 as of December 31, 2006. Cashdecreased by $751,000 to $1,086,000 as of March 31, 2007 as compared to$1,837,000 as of December 31, 2006. The decrease in cash is due to cash used inoperating activities of $1,383,000, the purchase of property and equipment of$50,000 and the purchases of intangible assets of $23,000, partially offset bycash proceeds of $469,000 from the exercise of stock options and income taxbenefit from stock options exercised of $236, 000.

We have a $3,500,000 credit facility with a bank,consisting of a line of credit with interest at prime plus 0.5%. At March 31,2007, the prime interest rate was 8.25%. The line of credit was renewed in May2005 and expires in May 2007 and we intend to renew it. Our borrowing capacityon the line of credit was $3,500,000 at March 31, 2007. The available line ofcredit is based on a formula of eligible accounts receivable and inventories. Asof March 31, 2007, we had not borrowed on this line of credit. As of March 31,2007, we did not have any debt.

Net cash used in operating activities was $1,383,000for the three months ended March 31, 2007 compared to $515,000 net cash used inoperating activities for the three months ended March 31, 2006. The net cashused in operating activities of $1,383,000 for the three months ended March 31,2007 is due to net income of $535,000, adjusted by the following: an increasein inventory of $2,067,000, a decrease in accounts receivable of $819,000, anincrease in prepaid expenses of $116,000, a decrease in accounts payable andaccrued liabilities of $682,000, equity in income of unconsolidated affiliatesof $25,000, $38,000 in amortization of share-based compensation, anddepreciation and amortization of $115,000.

Accounts receivable decreased by $819,000 or 13.3% to$5,338,000 as of March 31, 2007 from $6,157,000 as of December 31, 2006. Thisdecrease is primarily due to decreased sales in the last two months of thefirst quarter of 2007 as compared to the last two months of 2006. The number ofdays of sales outstanding was 53 days as of March 31, 2007 and 54 days as ofDecember 31, 2006.

Inventory increased by $2,067,000 or 16.3% to$14,780,000 as of March 31, 2007 from $12,713,000 as of December 31, 2006. Inorder to support increased sales within the Disposable Protective Apparelsegment, inventory in that segment increased by $1.4 million for the quarter. Asof March 31, 2007, the Engineered Products segment inventory was $7.4 million,an increase of $0.6 million since December 31, 2006.

Prepaid expenses and other current assets increased by$116,000 to $1,311,000 as of March 31, 2007 from $1,195,000 as of December 31,2005. The increase of $116,000 is primarily due to a decrease in prepaidexpenses for Engineered Products of $90,000, a decrease of $27,000 in marketingexpenses, a decrease in prepaid insurance of $6,000 and a decrease in generalprepaid expenses of $109,000, partially offset by an increase in prepaid incometaxes of $348,000.

Accounts payable and accrued liabilities as of March31, 2007 decreased by $682,000 or 25.5% to $1,997,000 from $2,679,000. The netchange in 2007 was due to a decrease in accrued commission/bonus payable of$793,000, a decrease in accrued rebates of $11,000, a decrease in accruedprofessional fees of $49,000 and a decrease in payroll accrual of $95,000,partially offset by an increase in trade payables of $266,000.

Net cash used in investing activities was $73,000 and$110,000 for the three months ended March 31, 2007 and 2006, respectively. Ourinvesting activity in 2007 consisted primarily of expenditures for property andequipment of $50,000 and the purchase of intangible assets of $23,000. Thiscompared to expenditures for property and equipment of $86,000 and thepurchases of intangible assets of $24,000 during the three months ended March31, 2006.

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For the quarter ended March 31, 2007, net cashprovided by financing activities was $705,000 compared to cash provided byfinancing activities of $344,000 for the same period of 2006. Our financing activitiesin 2007 consisted of cash proceeds of $469,000 from the exercise of 511,000stock options, income tax benefit from stock options exercised of $236,000. Ourfinancing activities in 2006 consisted of cash proceeds of $344,000 from theexercise of 303,000 stock options.

In August 2004, our Board of Directors approved thebuy-back of up to an additional $500,000 of our outstanding common stock. Thisshare repurchase program is the sixth $500,000 buyback authorized by the Boardof Directors. In all instances, we are retiring the shares. For the quarterended March 31, 2007, we did not buy back any shares of common stock. As ofMarch 31, 2007, we have bought back a total of 2,333,800 shares of commonstock at a cost of $2,518,000 since the end of 1999.

As shown below, at March 31, 2007, our contractualcash obligations totaled approximately $1,624,000.

**ContractualObligations**
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **2-3  Years** | ** ** | **4-5  Years** | ** ** | **After  5 years** | ** ** |
| Operating leases                    |       | $                                         | 1,624,000  |   | $ | 514,000 |   | $ | 993,000 |   | $ | 117,000 |   | — |   |
| Total contractual cash  obligations |       | $                                         | 1,624,000  |   | $ | 514,000 |   | $ | 993,000 |   | $ | 117,000 |   | — |   |

 

We believe that cash generated from operations, ourcurrent cash balance and the funds available under our credit facility will besufficient to satisfy our projected working capital and planned capitalexpenditures for the foreseeable future.

**New AccountingStandards**

Based on our review of new accounting standardsreleased during the quarter ended March 31, 2007, we did not identify anystandards requiring adoption that would have a significant impact on ourconsolidated financial statements.

The Financial Accounting Standards Board (“FASB”)issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN 48”) in June 2006. The interpretation clarifies the accounting foruncertainty in income taxes recognized in the Company’s financial statements inaccordance with SFAS No. 109, “Accounting for Income Taxes.” On January 1,2007, the Company adopted the provisions of FIN 48. The Company does not haveany uncertain tax positions which require recognition under the criteriaestablished by FIN 48. The amount of unrecognized tax benefits did not changeduring the three months ended March 31, 2007.

The Company and its subsidiaries file income taxreturns in the U.S. federal jurisdiction, and various states and foreignjurisdictions. The Company is no longer subject to U.S. federal, state andlocal, income tax examination by tax authorities for years before 2002. TheCompany is not currently under examination in any of its jurisdictions in whichit operates.

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**ITEM 3.**                    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We subcontract the manufacture of products in Chinaand Mexico and have a joint venture in India. 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 any significant effect on our resultsof operations from inflationary or interest and currency rate fluctuations. Wedo not hedge our interest rate or foreign exchange risks.

**ITEM 4.**                    CONTROLS ANDPROCEDURES

Disclosure Controls and Procedures

Our chief executive officer and chief financialofficer, after evaluating the effectiveness of our disclosure controls andprocedures as of March 31, 2007, have concluded that our disclosure controlsand procedures were designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported, withinthe time periods specified in the SEC’s rules and forms. Disclosure controlsand procedures 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 Internal Control Over Financial Reporting.

There has been no change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) that occurred during our fiscal quarter ended March 31, 2007,that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

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**PART II - OTHERINFORMATION**

**ITEM 6 EXHIBITSAND REPORTS ON FORM 8-K**

(a)   Exhibits

31.1 Certification Pursuant to Rule 13a-14(b) and Rule15d-14(b) of the Exchange Act, Signed by Chief Executive Officer (filedherewith)

31.2 Certification Pursuant to Rule 13a-14(b) and Rule15d-14(b) of the Exchange Act, Signed by Chief Financial Officer (filedherewith)

32.1 Certification Pursuant to 18 U.S.C Section 1350,as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Signed byChief Executive Officer (filed herewith)

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

(b)  Reports onForm 8-K

A Form 8-K was filed during the quarter covered bythis report, reporting the issuance of a release dated February 06, 2007announcing that it will make a presentation at the Roth Capital Partners 2007OC Growth Conference at the Ritz Carlton Laguna Niguel in California, onFebruary 21, 2007

A Form 8-K was filed during the quarter covered bythis report, reporting the issuance of a release dated February 15, 2007announcing preliminary results for the fourth quarter and full year of 2006.

A Form 8-K was filed during the quarter covered bythis report, reporting the issuance of a release dated March 5, 2007 announcingthat it will be reporting its financial results for the fourth quarter and yearend of 2006 after the close of the market on Thursday March 8, 2007 and that itwill have a conference call regarding its 2006 fourth quarter and year end at4:30pm Eastern time on Thursday March 8, 2007

A Form 8-K was filed during the quarter covered bythis report, reporting the issuance of a release dated March 8, announcingregistrants financial results for the fourth quarter and fiscal year endedDecember 31, 2006.

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15 (d)of the Securities Exchange Act of 1934, the Registrant has fully caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|        | **ALPHA PRO TECH, LTD.** |       |                                              |
|--------|--------------------------|------------|---------------------------------------------------|
|   | ** **               |       |                                              |
| DATE:  | **May 10,  2007**        | ** ** | BY:                                               | /s/ SHELDON HOFFMAN |   |
|   |                     |       | Sheldon Hoffman                                   |
|   |                     |       | Chief Executive Officer and Director              |
|   |                     |       |                                              |
| DATE:  | **May 10,  2007**        | ** ** | BY:                                               | /s/ LLOYD HOFFMAN |   |
|   |                     |       | Lloyd Hoffman                                     |
|   |                     |       | Chief Financial Officer and Senior Vice President |

 

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