e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended: June 30, 2008


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

For the transition period from to

Commission File Number: 0-439

American Locker Group Incorporated

(Exact name of registrant as specified in its charter)


Delaware		16-0338330
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

815 South Main Street, Grapevine, Texas		76051
(Address of principal executive offices)		(Zip code)

(817) 329-1600
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

1,568,516 shares of common stock, par value $1.00, issued and outstanding as of September 10, 2008

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain known and unknown risks and uncertainties, including, among others, those contained in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used in this Quarterly Report on Form 10-Q, the words “anticipates,” “plans,” “believes,” “estimates,” “intends,” “expects,” “projects,” “will” and similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words. Such statements, including, but not limited to, the Company’s statements regarding business strategy, potential condemnation proceedings, competition, new product development, liquidity and capital resources are based on management’s beliefs, as well as on assumptions made by, and information currently available to, management, and involve various risks and uncertainties, some of which are beyond the Company’s control. The Company’s actual results could differ materially from those expressed in any forward-looking statement made by or on the Company’s behalf. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will in fact prove to be accurate. The Company has undertaken no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

The interim financial statements included herein are unaudited but reflect, in management’s opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of financial position and the results of our operations for the interim periods presented.

The interim financial statements should be read in conjunction with the financial statements of American Locker Group Incorporated (the “Company”) and the notes thereto contained in the Company’s audited financial statements for the year ended December 31, 2007 presented in the Company’s Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (the “SEC”) on June 19, 2008.

Interim results are not necessarily indicative of results for the full fiscal year.

American Locker Group Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)


	June 30,			December 31,
	2008 (Unaudited)			2007
Liabilities and stockholders’ equity
Current liabilities:
Line of credit	$	450,804		$	—
Current portion of long-term debt		154,255			96,530
Accounts payable		1,548,228			1,236,316
Commissions, salaries, wages and taxes		230,097			285,759
Other accrued expenses		597,529			509,098

Total current liabilities		2,980,913			2,127,703

Long-term liabilities:
Long-term debt		1,927,233			2,047,235
Pension, benefits and other long-term liabilities		394,051			482,943

		2,321,284			2,530,178

Total liabilities		5,302,197			4,657,881

Commitments and contingencies

Stockholders’ equity:
Common stock, $1.00 par value:
Authorized shares - 4,000,000
Issued shares - 1,760,516 in 2008 and 1,741,516 in 2007; Outstanding shares - 1,568,516 in 2008 and 1,549,516 in 2007		1,760,516			1,741,516
Other capital		223,608			184,988
Retained earnings		6,536,185			8,018,454
Treasury stock at cost, 192,000 shares		(2,112,000	)		(2,112,000	)
Accumulated other comprehensive loss		(122,823	)		(74,797	)

Total stockholders’ equity		6,285,486			7,758,161


Total liabilities and stockholders’ equity		11,587,683		$	12,416,042

The accompanying notes are an integral part of these consolidated financial statements.

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended June 30,
	2008			2007
Operating activities
Net income (loss)		(1,482,269	)	$	(211,859	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		222,814			181,900
Loss on disposal of property, plant and equipment		(1,144	)		—
Asset impairment		228,000			—
Provision for uncollectible accounts		(17,796	)		50,000
Equity based compensation		57,620			—
Deferred income taxes		(636	)		(43,843	)
Changes in assets and liabilities:
Accounts receivable		(287,960	)		197,737
Inventories		83,062			(587,160	)
Prepaid expenses		7,961			(24,776	)
Accounts payable and accrued expenses		379,734			(180,651	)
Pension and other benefits		(92,245	)		(154,246	)
Income taxes		(12,171	)		24,532

Net cash used in operating activities		(915,030	)		(748,366	)

Investing activities
Proceeds from sale of property, plant & equipment		21,750			—
Purchase of property, plant and equipment		(228,428	)		(321,346	)

Net cash used in investing activities		(206,678	)		(321,346	)

Financing activities
Long-term debt payments		(62,277	)		(2,196,157	)
Borrowings under line of credit		450,805			—
Long-term debt borrowings		—			2,200,000

Net cash provided by financing activities		388,528			3,843
Effect of exchange rate changes on cash		(40,059	)		102,439

Net decrease in cash		(773,239	)		(963,430	)
Cash and cash equivalents at beginning of period		1,561,951			2,508,224

Cash and cash equivalents at end of period	$	788,712		$	1,544,794


Supplemental cash flow information:
Cash paid for:
Interest	$	74,268		$	67,887

Income taxes	$	3,000		$	11,350

The accompanying notes are an integral part of these consolidated financial statements.

American Locker Group Incorporated and Subsidiaries
Notes to Consolidated Financial Statements

1.		Basis of Presentation

		The accompanying unaudited consolidated financial statements of American Locker Group Incorporated (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company’s management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of such condensed financial statements, have been included. Operating results for the six-month period ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008.

		The consolidated balance sheet at December 31, 2007 has been derived from the Company’s audited financial statements at that date, but does not include all of the financial information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Company’s consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

		On May 8, 2007, the USPS notified the Company that, effective September 8, 2007, the USPS would decertify the Company’s Model E CBU. Beginning in September 2007, the Company’s revenues and profitability were and continue to be adversely affected by this decertification. Sales of the current model polycarbonate and aluminum CBUs to the private market in 2007 and 2006 accounted for 28.4%, and 35.6% of the Company’s sales, respectively.

		On November 30, 2007, the Company announced that the USPS had rejected the Company’s application to manufacture the USPS-B-1118 CBU. In rejecting the Company’s application, the USPS cited weaknesses in the Company’s financial and inventory controls that existed in 2005 and 2006. Although the Company had remedied many of these weaknesses during the 2007 fiscal year, the USPS noted that such remedies had not been in place long enough to be subjected to review as part of the Company’s annual audit. However, the USPS did advise the Company that it could resubmit its application within a reasonable period of time. Accordingly, the Company intends to evaluate the feasibility of reapplying to manufacture the USPS-B-1118 CBU at a later time.

		As a result of the decertification of the Model E CBU and the USPS rejection of the Company’s application to manufacture the USPS-B-1118 CBU, the Company has implemented a series of operational changes for the purpose of streamlining operations and lowering costs. These changes include the adoption of lean manufacturing processes and a reduction of administrative costs. These changes will be augmented by an increased focus on selling value-added niche products (which have higher margins than the USPS licensed CBUs) and improving the Company’s sales and distribution efforts.

		Additional risks and uncertainties not presently known or that the Company currently deems immaterial may also impair its business operations. Should one or more of these risks or uncertainties materialize, the Company’s business, financial condition or results of operations could be materially adversely affected.

2.		Liquidity

		For the fiscal year ended December 31, 2007, the Company incurred net losses of $1,904,117. Additionally, for the first six months of 2008, the Company incurred net losses before taxes of $1,482,269. As a result, the Company has total stockholders’ equity of $6,285,486 as of June 30, 2008. Factors contributing to these net losses included, but were not limited to: loss of business related to the USPS’s decertification of the Model E CBU, excess professional fees incurred in preparing and filing the Company’s delinquent periodic reports required under the Securities Exchange Act of 1934, severance expenses, marketing expenses, raw material cost inflation, and lower-than-expected margins on the Horizontal 4c postal lockers. These and other factors may adversely affect our ability to generate profits in the future.

		The Company is pursuing additional initiatives to increase sales and reduce costs including:

	•		Increasing trade show attendance

	•		Developing a proactive sales plan

	•		Working to regain lost international market share

	•		Redesigning the Horizontal 4c product line to reduce material, assembly, packaging and freight costs thereby increasing margins

	•		Continuing to implement LEAN (the Toyota Production System) manufacturing techniques

	•		Continuing to bring more production in-house, thereby improving asset utilization and margins

	•		Reducing professional fees related to the Company’s delinquent SEC filings

	•		Reducing marketing expenses that do not have acceptable returns on investment

		When the Company renewed its revolving line of credit on March 5, 2008, the minimum debt service coverage covenant was eliminated. Additionally, the minimum debt service coverage covenant in the term loan was waived through January 1, 2009. The revolving line of credit allows us to borrow against accounts receivable and inventory using advance rates of 80% and 50%, respectively, up to an aggregate maximum of $750,000 in borrowings. As of June 30, 2008, the Company had eligible accounts receivable and inventory that, but for the $750,000 borrowing limit, would provide approximately $2.7 million in availability under the advance rates contained in the Company’s existing credit facility.

		As of June 30, 2008 the Company had cash on hand of $788,712 plus $299,196 of availability under the existing revolving line of credit for total cash and availability of $1,087,908. The Company is currently seeking a new revolving line of credit that would allow the Company to increase its maximum borrowings to an amount more in line with the Company’s current levels of eligible accounts receivable and inventory.

		The Company expects to address its liquidity issues by 1) endeavoring to grow sales and reducing costs as discussed above, 2) entering into a new revolving line of credit agreement that allows for increased borrowings and 3) obtaining a further extension of the current waiver on the term loan covenant requiring the maintenance of a certain debt service coverage ratio. There can be no assurances that these plans will be successfully implemented in the amounts and timeframe contemplated, if at all. Failure to successfully implement these plans or otherwise address the Company’s liquidity issues would have a material adverse effect on our business, results of operations and financial position.

3.		Inventories

		Inventories are valued principally at the lower of cost or market value. Cost is determined using the first-in first-out method (FIFO).

		Inventories consist of the following:


	December 31,
	June 30, 2008		December 31, 2007
Finished products	$	265,203	$	333,653
Work-in-process		1,159,478		898,620
Raw materials		1,485,433		1,828,068

Net inventories	$	2,910,114	$	3,060,341

		On January 1, 2007, the Company changed the method of accounting for inventories from a combination of the use of FIFO and LIFO methods to the FIFO method. The change is preferable because the FIFO method better reflects the current value of inventories on the Consolidated Balance Sheet, provides uniformity across operations with the respect to the method of inventory accounting, and reduces complexity in accounting for inventories. The change in accounting method to the FIFO method was completed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154 “Accounting Changes and Error Corrections.” The Company applied this change in accounting principal by retrospectively restating prior years’ financial statements.

		During the second quarter of 2008, the Company undertook to redesign the Horizontal 4c postal lockers. As a result, certain inventory amounting to $64,000 was written off. See Note 10, Asset Impairment.

4.		Income Taxes

		Provision for income taxes is based upon the estimated annual effective tax rate. The difference in the statutory rate and the effective rate is primarily due to a change in the valuation allowance of approximately $445,000. Effective January 1, 2007, the Company adopted FIN 48, including the provisions of FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No 48.”. At the adoption date of January 1, 2007, and at June 30, 2008, there were no material unrecognized tax liabilities or benefits. Interest and penalties related to uncertain tax positions will be recognized in income tax expense. As of June 30, 2008, no interest related to uncertain tax positions had been accrued.

5.		Stockholders’ Equity

		Changes in stockholders’ equity were due to changes in comprehensive income as well as the issuance of stock as compensation to non-employee directors in 2008. Effective March 27, 2008, the Company issued 19,000 shares of common stock to non-employee directors and increased other capital by $45,600 representing compensation expense of $64,600. In addition, the Company also recorded an adjustment to estimated stock options compensation expense resulting in a benefit of $6,981 related to the forfeiture of 24,000 stock options by former employees and the current period’s stock option compensation expense. This benefit was recorded as a decrease to other capital of $6,981.

6.		Comprehensive Income (Loss)

		The following table summarizes net income (loss) plus changes in accumulated other comprehensive loss, a component of stockholders’ equity in the consolidated statement of financial position.


	Six Months Ended June 30,
	2008			2007

Net loss	$	(1,482,269	)	$	(211,859	)
Foreign currency translation adjustments		(53,057	)		127,870
Minimum pension liability adjustments, net of tax effect of $3,354 in 2008 and $4,009 in 2007		5,031			6,008

Total comprehensive loss	$	(1,530,295	)	$	(77,981	)


	Three Months Ended June 30,
	2008			2007

Net loss	$	(748,746	)	$	(67,503	)
Foreign currency translation adjustments		15,242			99,066
Minimum pension liability adjustments, net of tax effect of $(1,335) in 2008 and $(487) in 2007		(2,002	)		(729	)

Total comprehensive loss	$	(735,506	)	$	30,834

7.		Pension Benefits

		The following sets forth the components of net periodic employee benefit cost of the Company’s defined benefit pension plans for the six and three months ended June 30, 2008 and 2007:


	Six Months Ended June 30,
	Pension Benefits
	U.S. Plan						Canadian Plan
	2008			2007			2008			2007
Service cost	$	10,500		$	15,000		$	17,729		$	14,904
Interest cost		97,000			96,000			32,974			28,616
Expected return on plan assets		(98,500	)		(99,000	)		(41,764	)		(34,436	)
Net actuarial loss		0			4,500			5,016			1,543

Net periodic benefit cost	$	9,000		$	16,500		$	13,955		$	10,627


	Three Months Ended June 30,
	Pension Benefits
	U.S. Plan						Canadian Plan
	2008			2007			2008			2007

Service cost	$	5,250		$	7,500		$	8,864		$	7,690
Interest cost		48,500			48,000			16,487			14,765
Expected return on plan assets		(49,250	)		(49,500	)		(20,882	)		(17,768	)
Net actuarial loss		0			2,250			2,508			796

Net periodic benefit cost	$	4,500		$	8,250		$	6,977		$	5,483

		The Company has frozen the accrual of any additional benefits under the U.S. defined benefit pension plan effective July 15, 2005.

		For additional information on the defined benefit pension plans, please refer to Note 8 of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

8.		Earnings Per Share

		The Company reports earnings per share in accordance with the Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” The following table sets forth the computation of basic and diluted earnings per common share:


	Six Months Ended June 30,
	2008			2007

Numerator:
Net loss	$	(1,482,269	)	$	(211,859	)


Denominator:
Denominator for earnings per share (basic and diluted) — weighted average shares		1,559,434			1,549,516


Loss per common share (basic and diluted):	$	(0.95	)	$	(0.14	)


	Three Months Ended June 30,
	2008			2007

Numerator:
Net loss	$	(748,746	)	$	(67,503	)


Denominator:
Denominator for earnings per share (basic and diluted) — weighted average shares		1,568,516			1,549,516


Loss per common share (basic and diluted):	$	(0.48	)	$	(0.04	)

The Company had 40,000 stock options outstanding at June 30, 2008, which were not included in the common share computation for loss per share, as the common stock equivalents were anti-dilutive.

		As discussed in Note 5 of the Company’s consolidated financial statements included in the 2007 Annual Report on Form 10-K, on March 18, 2005, the Company received a notice of default and reservation of rights letter from M&T Bank, its previous lender, regarding its previous mortgage loan as a result of the non-renewal of the Company’s CBU contract with the USPS.

		On March 5, 2007, the Company entered into a new credit facility with The F&M Bank and Trust Company (“F&M”), which was used to repay the previous mortgage loan. The new credit facility consists of a $2,200,000 term loan and a $750,000 revolving line of credit. The loan bears interest at prime plus 75 basis points (0.75%). The revolving line of credit was renewed on March 5, 2008. The revolving line of credit matures on March 5, 2009 and the term loan matures on March 5, 2012. The term loan is payable in monthly installments of $22,493 in principal and accrued interest (subject to upward adjustment based upon the current interest rate in effect). The revolving line of credit is secured by all accounts receivable, inventory, and equipment. The term loan and the revolving line of credit are secured by a deed of trust covering the Company’s primary manufacturing and headquarters facility in Grapevine, Texas. The Company’s credit facility with F&M requires compliance with certain covenants.

		On July 24, 2008, the Company received a waiver from F&M under its credit facility with respect to, among other things, waiver of any default or event of default arising under the credit facility as a result of our failure to comply with certain reporting covenants requiring the delivery of financial statements for the first and second quarters of 2008. Additionally, the covenant requiring the maintenance of a certain debt service coverage ratio was waived through January 1, 2009.

10.		Asset Impairment

		Despite efforts to raise the selling price and reduce component costs, the Company has been unable to generate sustained profits from its current offering of Horizontal 4c postal lockers. The current model’s costs have been negatively impacted by excess weight and a two extrusion door design. In June 2008, the Company decided that it would pursue a new lower cost Horizontal 4c design to replace its current design.

		The new Horizontal 4c design will contain approximately 38 fewer pounds of aluminum than the current model. The new design will also replace the labor intensive two piece extrusion door design with a single piece extrusion. The new Horizontal 4c design must pass certain USPS tests to ensure it meets performance and design criteria before the Company can offer it for sale. The Company currently expects to be selling the new Horizontal 4c design in the first quarter of 2009.

		As a result of the redesign of the Horizontal 4c the value of tooling and inventory used in the current design will be impaired. To implement the redesign, the Company has incurred aggregate impairment charges and costs of approximately $228,000. In accordance with Financial Accounting Standards (FAS) No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets”, costs associated with an exit or disposal activity are recognized when the associated liabilities are incurred.

		The following table summarizes impairment costs incurred by the Company in the three months ended June 30, 2008:


Cost of Sales:
Equipment depreciation	$	164,000
Inventory obsolescence charge		64,000

Total asset impairment	$	228,000

11.		Commitments and Contingencies

		On April 25, 2008, the City of Grapevine, Texas (the “City”) notified the Company in writing of the City’s desire to acquire the real property that contains our manufacturing facility and corporate headquarters (the “Real Property”). Although the Company is not seeking to sell the Real Property, it would consider an offer that reflected the fair market value of the Real Property. On June 26, 2008, the City submitted a revised offer. The Company declined the City’s revised offer, but offered to negotiate a fair market value in mediation. The Company proposed that mediation would be the least costly and most expedient option for reaching a negotiated settlement.

		On September 8, 2008, the City made a formal offer to purchase the Real Property and simultaneously notified the Company that, if the City and the Company were unable to reach an agreement regarding the City’s purchase of the Real Property, the City intended to initiate condemnation proceedings using the City’s power of eminent domain. The Company intends to vigorously assert all available defenses to the pending condemnation action. Under Texas law, the City must pay fair market value, for the Real Property, as determined by the courts, based on appraisals, as well as reimburse the Company for reasonable relocation expenses.

The Company and the City do not agree on the value of the Real Property. While it is too early to predict the outcome of this matter, the Company believes that if the courts were to determine the fair market value of the Real Property, it would exceed its recorded net book value as of June 30, 2008. It is possible; however, that a court determination could set a value for the Real Property that is materially lower than what the Company believes is its fair market value. If the City is successful in its condemnation of the Real Property, the financial position of the Company could be materially impacted. No adjustments have been recorded in the accompanying consolidated financial statements for these uncertainties.

In July 2001, the Company received a letter from the New York State Department of Environmental Conservation (the “NYSDEC”) advising the Company that it is a potentially responsible party (PRP) with respect to environmental contamination at and alleged migration from property located in Gowanda, New York which was sold by the Company to Gowanda Electronics Corporation prior to 1980. In March 2001, the NYSDEC issued a Record of Decision with respect to the Gowanda site in which it set forth a remedy, including continued operation of an existing extraction well and air stripper, installation of groundwater pumping wells and a collection trench, construction of a treatment system in a separate building on the site, installation of a reactive iron wall covering 250 linear feet, which is intended to intercept any contaminates, and implementation of an on-going monitoring system. The NYSDEC has estimated that its selected remediation plan will cost approximately $688,000 for initial construction and a total of $1,997,000 with respect to expected operation and maintenance expenses over a 30-year period after completion of initial construction. The Company has not conceded to the NYSDEC that the Company is liable with respect to this matter and has not agreed with the NYSDEC that the remediation plan selected by NYSDEC is the most appropriate plan. This matter has not been litigated, and at the present time the Company has only been identified as a PRP. The Company also believes that other parties may have been identified by the NYSDEC as PRPs, and the allocation of financial responsibility of such parties has not been litigated. Based upon currently available information, the Company is unable to estimate timing with respect to the resolution of this matter. The NYSDEC has not commenced implementation of the remedial plan and has not indicated when construction will start, if ever. The Company’s primary insurance carrier has assumed the cost of the Company’s defense in this matter, subject to a reservation of rights.

Beginning in September 1998 and continuing through the date of filing of this Quarterly Report on Form 10-Q, the Company has been named as an additional defendant in approximately 165 cases pending in state court in Massachusetts. The plaintiffs in each case assert that a division of the Company manufactured and furnished components containing asbestos to a shipyard during the period from 1948 to 1972 and that injury resulted from exposure to such products. The assets of this division were sold by the Company in 1973. During the process of discovery in certain of these actions, documents from sources outside the Company have been produced which indicate that the Company appears to have been included in the chain of title for certain wall panels which contained asbestos and which were delivered to the Massachusetts shipyards. Defense of these cases has been assumed by the Company’s insurance carrier, subject to a reservation of rights. Settlement agreements have been entered in approximately 20 cases with funds authorized and provided by the Company’s insurance carrier. Further, over 100 cases have been terminated as to the Company without liability to the Company under Massachusetts procedural rules. Therefore, the balance of unresolved cases against the Company as of May 9, 2008 is approximately 45 cases.

While the Company cannot estimate potential damages or predict the ultimate resolution of these asbestos cases as the discovery proceedings on the cases are not complete, based upon the Company’s experience to date with similar cases, as well as the assumption that insurance coverage will continue to be provided with respect to these cases, at the present time, the Company does not believe that the outcome of these cases will have a significant adverse impact on the Company’s operations or financial condition.

The Company is involved in other claims and litigation from time to time in the normal course of business. The Company does not believe these matters will have a significant adverse impact on the Company’s operations or financial condition.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Effect of New Accounting Guidance

Effective January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157; “Fair Value Measurements” (“SFAS 157”), which did not have a material impact on the Company’s consolidated financial statements. SFAS 157 establishes a common definition for fair value, a framework for measuring fair value under generally accepted accounting principles in the United States, and enhances disclosures about fair value measurements. In February 2008 the Financial Accounting Standards Board (“FASB”) issued Staff Position No. 157-2, which delays the effective date of SFAS 157 for all nonrecurring fair value measurements of non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. The Company is evaluating the expected impact of SFAS 157 for non-financial assets and non-financial liabilities on its consolidated financial position and results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. Most of the provisions in SFAS 159 are elective. This statement is effective for fiscal years beginning after November 15, 2007, and it may be applied prospectively. Early adoption is permitted, provided the Company also elects to apply the provisions of SFAS 157. The Company adopted SFAS No. 159 as of January 1, 2008. Adoption of SFAS No. 159 did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) changes the requirements for an acquiring entity’s recognition and measurement of the assets acquired and liabilities assumed in a business combination. This statement is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact that adoption of SFAS No. 141(R) may have on its financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the impact that adoption of SFAS No. 160 may have on its financial statements.

In May 2008 FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. Prior to the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SAS 69 has been criticized because it is directed to the auditor rather than the entity. SFAS 162 addresses these issues by establishing that GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. It is only effective for nongovernmental entities; therefore, GAAP hierarchy will remain in SAS 69 for state and local governmental entities and federal governmental entities. The Company is currently evaluating the impact adoption of SFAS 162 may have on the consolidated financial statements.

Results of Operations — the Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007

Overall Results and Outlook

Consolidated net sales for the first six months of 2008 decreased $3,438,335 to $7,433,512 when compared to net sales of $10,871,847 for the same period of 2007, representing a 31.6% decline. This decrease was attributable primarily to the USPS decertification of the Model E CBU, which is discussed in more detail below. Net sales excluding CBUs for the first six months of 2008 reflect an increase of $615,215 to $7,404,582 when compared to net sales of $6,789,367 for the same period of 2007, representing a 9.1% increase. Pre-tax operating results decreased to a pre-tax loss of $1,536,710 for the first six months of 2008 from a reported pre-tax loss of $308,423 for the first six months of 2007. After tax operating results decreased to a net loss of $1,482,269 for the first six months of 2008 compared to a net loss of $211,859 for the first six months of 2007. Net loss per share (basic and diluted) was $0.95 for the first six months of 2008, down from a net loss per share (basic and diluted) of $0.14 for the same period in 2007.

Non-Renewal of USPS Contract and Other Events

On May 8, 2007, the USPS notified the Company that the Technical Data Package for the USPS’s new generation USPS-B-1118 CBU was available, and by prior agreement, the Company would be permitted to manufacture and sell the current CBU version for only four more months terminating on September 8, 2007. Sales of the current model aluminum CBUs to the private market accounted for an additional 28.4% and 35.6% of the Company’s sales in 2007 and 2006, respectively. The Company continued to sell existing inventories of the Model E CBU through September 2007. After September 2007, the Company’s revenues have been adversely affected by this decertification.

The Company submitted financial and other data as part of its application for the new CBU license program in September 2007 as step one in a multi-stage application process required by the USPS. The Company was notified by the USPS in November 2007 that its application to manufacture the USPS-B-1118 CBU had been rejected. In rejecting the Company’s application, the USPS cited weaknesses in the Company’s financial and inventory controls that existed in 2005 and 2006. Although the Company remedied many

of these weaknesses during the 2007 fiscal year, the USPS noted the remedies had not been in place long enough to be subjected to review as part of the Company’s annual audit. However, the USPS did advise the Company that it could resubmit its application within a reasonable period of time. Accordingly, the Company intends to evaluate the feasibility of reapplying to manufacture the USPS-B-1118 CBU at a later time. The Company is implementing a series of operational changes to compensate for the loss of revenues from the aluminum CBU, which plan includes reducing administrative expenses, adopting lean manufacturing processes and expanding the Company’s sales efforts and product offerings in its private postal and non-postal markets.

Net Sales

Consolidated net sales for the six months ended June 30, 2008 were $7,433,512, a decrease of $3,438,335, or 31.6% compared to net sales of $10,871,847for the same period of 2007. The reported decrease is due primarily to reduced volume of the model E CBU as a result of its decertification by the USPS. Net sales excluding CBUs for the first six months of 2008 reflect an increase of $615,215 to $7,404,582 when compared to net sales of $6,789,367 for the same period of 2007, representing a 9.1% increase. Sales of postal lockers were $2,686,759 for the six months ended June 30, 2008, a decrease of $22,261, or 0.8% compared to sales of $2,709,020 for the same period of 2007 due primarily to the lower sales of the Company’s Horizontal 4b+ mailboxes. The Horizontal 4b+ mailbox was replaced by the new Horizontal 4c standard for use in new construction of apartment and commercial buildings after October 5, 2006. The Company did not obtain approval for a Horizontal 4c mailbox until the second half of 2007 and the Company is working to replace lost Horizontal 4b+ sales with the replacement Horizontal 4c. Sales of non-postal lockers for the six months ended June 30, 2008 were $4,717,823, an increase of $637,476, or 15.6% compared to sales of $4,080,347 for the same period of 2007. The increase is due primarily to increased sales at the Company’s Canadian Locker subsidiary in the local currency coupled with favorable Canadian exchange rates. Additionally, non-postal locker sales increases were also due to increased sales of the Mini-Check and laptop locker sales.


	Six Months Ended June 30,				Percentage
	2008		2007		Increase/(Decrease)
Postal Lockers, excluding CBUs		2,686,759		2,709,020		(0.8	%)
Non-Postal Lockers		4,717,823		4,080,347		15.6	%

Total Non-CBU		7,404,582		6,789,367		9.1	%

CBUs		28,930		4,082,480		(99.3	%)

Total Net Sales		7,433,512		10,871,847		(31.6	%)

Cost of Products Sold

Cost of products sold for the six months ended June 30, 2008 was $5,549,345 or 74.7% of net sales compared to $7,428,006, or 64.4% of net sales for the same period of 2007, a decrease of $1,878,661, or 25.3%. The increase in the cost of sales as a percentage of sales was primarily due to the underutilization of the Company’s Grapevine, Texas manufacturing plant as a result of the Model E CBU’s decertification. This resulted in fixed overhead being under-absorbed and increasing period costs. Additionally, the Company recorded a provision for excess obsolete inventory of $112,179 for the six month period ended June 30, 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six months ended June 30, 2008 were $3,111,782 or 41.9% of net sales, compared to $3,647,696 or 33.6% of net sales for the same period of 2007, a decrease of $535,914, or 14.7%. This decrease was due to freight expenses decreasing approximately $217,000 for the six month period ended June 30, 2008, as compared to the same period in 2007, as a result of the decreased net sales. Marketing expenses decreased approximately $141,000 from 2007 to 2008.

Asset Impairment

Due to the inadequate profitability of the current Horizontal 4c design, management decided during the second quarter of 2008 to redesign the Horizontal 4c to reduce manufacturing costs. Management has determined that the decision to redesign the Horizontal 4c has impaired the Company’s investment in tooling and inventory related to the current Horizontal 4c design. Therefore, the Company, in accordance with the provisions of Financial Accounting Standards Board Statement 144,”Accounting for the Impairment or Disposal of Long Lived Assets” recorded an impairment charge against 2008 second quarter operating results in the amount of $228,000.

Interest Expense

Interest expense for the six months ended June 30, 2008 was $74,356, a decrease of $22,260, or 23% compared to interest expense of $96,616 for the same period of 2007.

Income Taxes

For the six months ended June 30, 2008, the Company recorded an income tax benefit of $54,441, compared to an income tax benefit of $96,564 for the same period of 2007. The Company’s effective tax rate on earnings was approximately 4% for the first six months of 2008 and 31% in the first six months of 2007. The effective tax rate for the first six months of 2008 was lower than the U.S. Federal statutory tax rate due to a change in the valuation allowance of approximately $445,000 due to the Company’s inability to record a tax benefit for losses from its U.S. subsidiaries.

Results of Operations — Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007

Overall Results and Outlook

Consolidated net sales for the second quarter of 2008 reflect a decline in net sales of $1,864,433 to $3,911,964 when compared to net sales of $5,776,397 for the same period of 2007, representing a 32.3% decline. This decrease was attributable primarily to the USPS decertification of the Model E CBU, which was discussed in the results of operations for the six months ended June 30, 2008. Net sales excluding CBUs for the three months ended June 30, 2008 reflect an increase of $223,756 to $3,891,111 when compared to net sales of $3,667,355 for the same period of 2007, representing a 6.1% increase. Pre-tax operating results decreased to a pre-tax loss of $789,968 for the second quarter of 2008 from a pre-tax loss of $99,518 for the second quarter of 2007. After tax operating results decreased to a net loss of $748,746 for the second quarter of 2007 from a net loss of $67,503 for the second quarter of 2007. Net loss per share (basic and diluted) was $0.48 in the second quarter of 2008, down from a net loss per share (basic and diluted) of $0.04 for the second quarter of 2007.

Net Sales

Consolidated net sales for the three month period ended June 30, 2008 were $3,911,964, a decrease of $1,864,433, or 32.3%, compared to net sales of $5,776,397 for the same period of 2007. The reported decrease is due primarily to reduced volume of the model E CBU as a result of its decertification by the USPS. Net sales excluding CBUs for the three months ended June 30, 2008 reflect an increase of $223,756 to $3,891,111 when compared to net sales of $3,667,355 for the same period of 2007, representing a 6.1% increase. Sales of postal lockers were $1,459,689 for the three month period ended June 30, 2008, an increase of $100,359, or 7.4%, compared to sales of $1,359,330 for the same period of 2007 due primarily to increased sales of the Company’s Horizontal 4c mailboxes more than offsetting decreases of Horizontal 4b+ mailboxes. The Horizontal 4b+ mailbox was replaced by the new Horizontal 4c standard for use in new construction of apartment and commercial buildings after October 5, 2006. The Company did not obtain approval for a Horizontal 4c mailbox until the second half of 2007 and the Company is working to replace lost Horizontal 4b+ sales with the replacement Horizontal 4c. Sales of non-postal lockers for the three months ended June 30, 2008 were $2,431,422, an increase of $123,397, or 5.3%, compared to sales of $2,308,025 for the same period of 2007. The increase is due primarily to increased sales at the Company’s Canadian Locker subsidiary in the local currency coupled with favorable Canadian exchange rates.


	Three Months Ended June 30,				Percentage
	2008		2007		Increase/(Decrease)
Postal Lockers, excluding CBUs		1,459,689		1,359,330		7.4	%
Non-Postal Lockers		2,431,422		2,308,025		5.3	%

Total Non-CBU		3,891,111		3,667,355		6.1	%

CBUs		20,853		2,109,042		-99.0	%

Total Net Sales		3,911,964		5,776,397		-32.3	%

Cost of Products Sold

Cost of products sold for the second quarter of 2008 was $2,847,463, or 72.8% of net sales, compared to $4,155,447, or 72.0% of net sales, for the same period of 2007, a decrease of $1,307,984, or 31.5%. The decrease in cost of product sold is primarily due to the decrease in net sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses during the second quarter of 2008 totaled $1,582,017 or 40.4% of net sales, compared to $1,677,366 or 29.0% during the same period of 2007, a decrease of $95,349, or 5.7%. This decrease was due to freight expenses decreasing approximately $130,000 for the three month period ended June 30, 2008, as compared to the same period in 2007, as a result of the decreased net sales. Marketing expenses decreased approximately $74,000 from 2007 to 2008. The decreases in freight

and marketing costs were partially offset by increased professional fees related to the filing of the Company’s 2007 annual report on
form 10-K.

Asset Impairment

Interest Expense

Interest expense for the second quarter of 2008 was $35,812 compared to $49,230 for the same period of 2007.

Income Taxes

For the second quarter of 2008, the Company recorded an income tax benefit of $41,222 compared to an income tax benefit of $32,015 for the same period of 2007. The Company’s effective tax rate on earnings was approximately 5% and 30% in the second quarter of 2008 and 2007, respectively. The lower effective tax rate in 2007 was primarily due to a change in the Company’s effective state and foreign income tax rates. The effective tax rate for the first six months of 2008 was lower than the U.S. Federal statutory tax rate due to a change in the valuation allowance of approximately $222,000 due to the Company’s inability to record a tax benefit for losses from its U.S. subsidiaries.

Liquidity and Sources of Capital

The Company’s liquidity is reflected by its current ratio, which is the ratio of current assets to current liabilities, and its working capital, which the excess of current assets over current liabilities. These measures of liquidity were as follows:


	As of June 30,		As of December 31,
	2008		2007
Current Ratio		2.27 to 1		3.5 to 1
Working Capital	$	3,790,936	$	5,318,126

The decrease in working capital of $1,527,190 relates primarily to the net loss for the first six months of 2008 of $1,482,269.

Prior to March 5, 2007, the Company was in technical default of its long-term debt agreement with its then primary lender, rendering the entire outstanding principal balance due upon demand. On March 5, 2007, the Company entered into a new long-term debt agreement with The F&M Bank and Trust Company. The new credit facility consists of a $2,200,000 term loan and a $750,000 revolving line of credit. The loan bears interest at prime plus 75 basis points (0.75%). The revolving line of credit was renewed on March 5, 2008 and matures on March 5, 2009 and the term loan matures on March 5, 2012. The term loan is payable in monthly installments of $22,493 in principal and accrued interest (subject to upward adjustment based upon the current interest rate in effect). The revolving line of credit is secured by all accounts receivable, inventory and equipment. The term loan is secured by a deed of trust covering the Company’s primary manufacturing and headquarters facility in Grapevine, Texas. The Company’s credit facility with F&M requires compliance with certain covenants.

As a result of securing the new credit facility in March 2007, the Company used the proceeds of the term loan to repay the then existing mortgage. On July 24, 2008, the Company received a waiver from F&M under its credit facility with respect to, among other things, waiver of any default or event of default arising under the credit facility as a result of our failure to comply with certain reporting covenants requiring the delivery of financial statements for the first and second quarters of 2008. Additionally, the covenant requiring the maintenance of a certain debt service coverage ratio was waived through January 1, 2009.

On April 25, 2008, the City of Grapevine, Texas (the “City”) notified the Company in writing of the City’s desire to acquire the real property that contains our manufacturing facility and corporate headquarters in Grapevine, Texas (the “Real Property”). Although the Company is not seeking to sell the Real Property, it would consider an offer that reflected the fair market value of the Real Property. On June 26, 2008, the City submitted a revised offer. The Company declined the City’s revised offer, but offered to negotiate a fair market value in mediation. The Company proposed that mediation would be the least costly and most expedient option for reaching a negotiated settlement.

On September 8, 2008, the City made a formal offer to purchase the Real Property and simultaneously notified the Company that, if the City and the Company were unable to reach an agreement regarding the City’s purchase of the Real Property, the City intended to initiate condemnation proceedings using the City’s power of eminent domain. The Company intends to vigorously assert all available defenses to the pending condemnation action. Under Texas law, the City must pay fair market value, for the Real Property, as determined by the courts, based on appraisals, as well as reimburse the Company for reasonable relocation expenses.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Raw Materials

The Company does not have any long-term commitments for the purchase of raw materials. With respect to its products that use steel and aluminum, the Company expects that any raw material price changes would be reflected in adjusted sales prices. The Company believes that the risk of supply interruptions due to such matters as strikes at the source of supply or to logistics systems is limited. Present sources of supplies and raw materials incorporated into the Company’s products are generally considered to be adequate and are currently available in the marketplace.

Foreign Currency

The Company’s Canadian operation subjects the Company to foreign currency risk, though it is not considered a significant risk since the Canadian operation’s net assets represented only 15.2% of the Company’s aggregate net assets at June 30, 2008. Presently, management does not hedge its foreign currency risk.

Interest Rate Risks

On March 5, 2007, the Company entered into a new credit agreement providing for a $2,200,000 term loan, the proceeds of which were used to repay the then outstanding mortgage balance, and a $750,000 line of credit. These loans bear interest at the lender’s prime rate plus 0.75%.

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and principal accounting officer, of the effectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of June 30, 2008. These disclosure controls and procedures are designed to provide reasonable assurance to the Company’s management and board of directors that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to its management, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, including consideration of the existence of the material weaknesses discussed below, the principal executive officer and principal accounting officer of the Company have concluded that the Company’s disclosure controls and procedures as of June 30, 2008 were not effective, at the reasonable assurance level, to ensure that (a) material information relating to the Company is accumulated and made known to the Company’s management, including its principal executive officer and principal accounting officer, to allow timely decisions regarding required disclosure and (b) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

In connection with the preparation of the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2007, which was filed late with the SEC on June 19, 2008, a number of material weaknesses were identified in Item 9A(T) of that Form 10-K. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Taking into account the communication dated June 19, 2008 by the Company’s independent registered public accounting firm to the Audit Committee of the Board of Directors, management has identified the following material weaknesses in the Company’s internal control over financial reporting:

Material weaknesses previously identified as of December 31, 2006 that continue to exist as of December 31, 2007:

	•		Perpetual Inventory System — The Company’s 2006 Annual Report on Form 10-K reported a material weakness due to the Company’s failure to routinely maintain the Company’s perpetual inventory system. As a result of this failure, the Company’s independent registered public accounting firm proposed numerous material adjustments in the Company’s financial statements as of and for the year ended December 31, 2006. Although the Company’s independent registered public accounting firm did not propose any material adjustments in 2007 related to this weakness, the Company was required to record adjustments as part of their annual closing process to adjust the perpetual inventory to the amounts determined by the Company’s physical count. Effective controls were not maintained to ensure that the Company’s inventory systems completely and accurately processed and accounted for inventory movements on an interim basis within the Company’s manufacturing facilities and adjustments were necessary to adjust interim financial statements. If not remediated, it is reasonably possible that our consolidated financial statements will contain a material misstatement or that we will miss a filing deadline in the future.

	•		Entity Level Controls — The Company’s 2006 Annual Report on Form 10-K identified a material weakness due to the Company’s insufficient entity level controls, as defined by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), to ensure that the Company meets it disclosure and reporting obligations. Specifically, certain key financial accounting and reporting personnel had an expansive scope of duties without the oversight of the board of directors or audit committee that allowed for the creation, review, approval and processing of financial data and authorization for the preparation of consolidation schedules and resulting financial statements without independent review. Certain documents lacked physical documentation of management review and approval where such review and approval was required. Additionally, due to the dynamic and evolving nature of our business, the Company lacked sufficiently documented policies and procedures reflecting management’s expectations. While this control deficiency did not result in audit adjustments in 2007, if not remediated, it is reasonably possible that our consolidated financial statements will contain a material misstatement or that we will miss a filing deadline in the future.

Material weakness initially identified as of December 31, 2007:

	•		Information Technology — The Company did not maintain effective controls over the segregation of duties and access to financial reporting systems. Specifically, key financial reporting systems were not appropriately configured to ensure that certain transactions were properly processed with segregated duties amongst personnel and to ensure that unauthorized individuals did not have access to add or change key financial data. Additionally, the Company lacked adequate personnel with relevant expertise to maintain effective controls over information technology. Although the Company did not find any instances of unauthorized transactions in fiscal 2007, it is reasonably possible that our consolidated financial statements will contain a material misstatement if this deficiency is not remediated.

	•		Timeliness of Financial Reporting — The Company did not maintain adequate staffing levels throughout 2007 to rebuild its accounting function and file in a timely manner the large number of delinquent interim and annual reports that existed during that time. Additionally, the Company did not maintain effective written policies, procedures and documentation to ensure the timely filing of required interim and annual financial reports with the SEC. The Company relocated its headquarters from Jamestown, New York to Grapevine, Texas in mid-2005. As a result of this relocation, the Company experienced the turnover of its’ entire accounting department. The rebuilding of the accounting function has taken longer than anticipated due to the lack of sufficient written policies and procedures and inadequate staffing levels that existed during 2007 as noted above. As a consequence of the foregoing, the Company has been unable to file its required interim and annual reports with the SEC in a timely manner.

Based on management’s assessment, and because of the material weaknesses described above, we have concluded that our internal control over financial reporting was not effective as of December 31, 2007.

Changes in Internal Control over Financial Reporting

We have developed and are implementing remediation plans to address our material weaknesses. We have taken the following actions to improve our internal control over financial reporting:

Actions implemented or initiated in 2008 to address the material weaknesses described above that existed as of December 31, 2007:

•

Actions to strengthen controls over the Company’s perpetual inventory include: (i) appointing a Manager of Supply Chain with responsibility for day-to-day oversight of inventory control; (ii) reorganizing and restructuring the inventory control function;

			(iii) implementing new policies and procedures related to cycle counting, including performing root cause analysis of discrepancies; (iv) implementing new policies and procedures to ensure inventory movements are completely and accurately processed in a timely manner; and (v) detailed reviewing of bills of materials by personnel possessing relevant expertise to ensure the accuracy of information contained therein.

	•		Actions to strengthen the Company’s entity level controls include: (i) reducing the scope of duties of key accounting and financial personnel so that the person creating and processing financial data is separate from the person performing the review and approval of the same financial data; (ii) requiring the physical sign-off of accounting and financial personnel on review and approval of documents where such review and approval is required; (iii) developing written documentation of policies and procedures to document management’s expectations; and (iv) requiring key employees to periodically certify their compliance with the Company’s code of conduct.

	•		Actions to strengthen controls over the Company’s information technologies include: (i) the Company has replaced its information technology personnel with persons possessing relevant expertise to maintain control over information technology; (ii) information technology systems will be configured to ensure appropriate access controls; and (iii) key financial reporting systems will be configured to ensure unauthorized individuals do not have access to add or change key financial data.

	•		Actions to strengthen controls over financial reporting to ensure the timely filing of required interim and annual financial reporting with the SEC include; (i) effective written policies and procedures to ensure the timely close of the financial reporting process are being developed; (ii) the change in accounting principles from LIFO to FIFO will eliminate the time required to calculate the LIFO reserve; (iii) the reduction of outsourced manufacturing activities will reduce the time and complexity of the procedures performed to ensure that purchase and sales transactions are recorded in the appropriate accounting period; and (iv) the filing of late interim and annual financial reports with the SEC will reduce time spent by accounting and finance personnel on these matters.


	June 30,			December 31,
	2008 (Unaudited)			2007
Assets
Current assets:
Cash and cash equivalents	$	788,712		$	1,561,951
Accounts receivable, less allowance for doubtful accounts of approximately $232,000 in 2008 and $233,000 in 2007		1,840,781			1,568,464
Inventories, net		2,910,114			3,060,341
Prepaid expenses		214,824			223,068
Prepaid income taxes		53,496			44,467
Deferred income taxes		963,922			987,538

Total current assets		6,771,849			7,445,829

Property, plant and equipment:
Land		500,500			500,500
Buildings		3,509,891			3,509,891
Machinery and equipment		7,885,070			8,045,859

		11,895,461			12,056,250
Less allowance for depreciation and amortization		(7,562,441	)		(7,543,465	)

		4,333,020			4,512,785

Deferred income taxes		482,814			457,428


Total assets	$	11,587,683		$	12,416,042


Exhibit
Number		Description

31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.

32.1		Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	AMERICAN LOCKER GROUP INCORPORATED

September 12, 2008	By:	/s/ Allen D. Tilley

	Allen D. Tilley Chief Executive Officer

September 12, 2008	By:	/s/ Paul M. Zaidins

	Paul M. Zaidins
	President, Chief Operating Officer and Chief Financial Officer

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	Page No.
FORWARD-LOOKING INFORMATION		3

PART I — FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Consolidated Balance Sheets (Unaudited) as of June 30, 2008 and December 31, 2007		4
Consolidated Statements of Operations (Unaudited) for the Six Months Ended June 30, 2008 and June 30, 2007		6
Consolidated Statements of Operations (Unaudited) for the Three Months Ended June 30, 2008 and June 30, 2007		7
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2008 and June 30, 2007		8
Notes to Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3. Quantitative and Qualitative Disclosures About Market Risk		19
Item 4. Controls and Procedures		19

PART II — OTHER INFORMATION		22
Item 6. Exhibits		22

SIGNATURES		23
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Certifications of Principal Executive Officer and Principal Financial Officer