**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-K**




x
            Annual
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934


For
      the
      fiscal year ended March 31, 2006.




o
            Transition
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934


For
      the
      transition period from _______________________ to
      _______________________.




**Commission
      File Number 0-16106**




**APA
      ENTERPRISES, INC.**


*(Exact
      Name of Registrant as Specified in its Charter)*





**Minnesota**
            
            **41-1347235***(State
                or other jurisdiction of incorporation or
                organization)*
            
            *(I.R.S.
                Employer Identification No.)*





**2950
      N.E. 84** **th** **Lane**


**Blaine,
      Minnesota 55449**


**(763)
      784-4995**


*(Address,
      including ZIP code and telephone number, including area code, of
      registrant’s*


*principal
      executive office)*




Securities
      registered pursuant to Section 12(b) of the Act:


**NONE**




Securities
      registered pursuant to Section 12(g) of the Act:




**Common
      Stock, par value $.01 per share**


**(Title
      of class)**




**Series
      B Preferred Share Purchase Rights**


**(Title
      of class)**




Indicate
      by check mark if the registrant is a well-seasoned issuer, as defined in Rule
      405 of the Securities Act.




o YES  x NO




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or section 15(d) of the Exchange Act.




o YES  x NO




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
      and (2) has been subject to the filing requirements for the past 90 days.




x YES  o NO







1


Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.




x YES o NO




Indicate
      by check mark whether the registrant is a large accelerated filer, and
      accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
      the
      Exchange Act).




Large
                accelerated filero
            Accelerated
                filero
            Non-accelerated
                filerx





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




o YES  x NO




The
      aggregate market value of the voting and non-voting equity held by
      non-affiliates of the registrant, as of the last business day of the
      registrant’s most recently completed second fiscal quarter computed by reference
      to the price at which the common equity was last sold was approximately
      $15,196,584.




The
      number of shares of common stock outstanding as of June 17, 2006 was
      11,872,331.




**Documents
      Incorporated by Reference:**




Portions
      of our proxy statement for the annual shareholders meeting to be held in August
      2006 are incorporated by reference into Part III.




2


**APA
      ENTERPRISES, INC.**


**ANNUAL
      REPORT ON FORM 10-K**


**TABLE
      OF CONTENTS**





**PART
                I**
            
            **4**ITEM
                1.
            BUSINESS
            **4**ITEM
                1A.
            RISK
                FACTORS
            **10**ITEM
                1B.
            UNRESOLVED
                STAFF COMMENTS
            **18**ITEM
                2.
            PROPERTIES
            **18**ITEM
                3.
            LEGAL
                PROCEEDINGS
            **18**ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
            **19****PART
                II**
            
            **19**ITEM
                5.
            MARKET
                FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS
            **19**ITEM
                6.
            SELECTED
                FINANCIAL DATA
            **20**ITEM
                7.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS
            **20**ITEM
                7A.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK
            **29**ITEM
                8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA
            **29**ITEM
                9.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE
            **48**ITEM
                9A.
            CONTROLS
                AND PROCEDURES
            **48**ITEM
                9B.
            OTHER
                INFORMATION
            **48****PART
                III**
            
            **48**ITEM
                10.
            DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT
            **48**ITEM
                11.
            EXECUTIVE
                COMPENSATION
            **48**ITEM
                12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                AND RELATED STOCKHOLDER MATTERS
            **48**ITEM
                13.
            CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS
            **49**ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            **49****PART
                IV**
            
            **50**ITEM
                15.
            EXHIBITS
                AND FINANCIAL STATEMENT SCHEDULES
            **50****SIGNATURES**
            **51****SCHEDULE
                II - VALUATION AND QUALIFYING
                ACCOUNTS**
            **52****REPORT
                OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
                FIRM ON SCHEDULE**
            **53****EXHIBIT
                INDEX**
            **54**




3
 *Table
          of Contents*


**PART
      I**




**ITEM
                1.**
            **BUSINESS.**




***General
      Development of Business.***




APA
      Enterprises, Inc. (“APA” or the “Company”), formerly APA Optics, Inc., is a
      Minnesota corporation which was founded in 1979. Our corporate headquarters
      is
      located at 2950 84 th Lane
      N.E., Blaine, MN and our corporate website is www.apaenterprises.com .
      The
      information available on our website is not part of this Report.




Since
      the
      founding of the Company, we have focused on leading edge research in gallium
      nitride (GaN), sophisticated optoelectronics, and optical systems, with the
      primary goal of developing advanced products for subsequent fabrication and
      marketing. Based on this research we have developed multiple products including
      fiber optic components for metro and access communications networks, a range
      of
      GaN based devices, and precision optical products. We believe that gallium
      nitride based devices have significant potential markets and we have developed
      specific expertise and/or patent positions relevant to them. During fiscal
      year
      2004 we ceased the design and manufacturing of precision optical components
      due
      to intense competition from Asian manufacturers primarily based on lower labor
      rates and sold this product line in April 2004 (see Note C to the Consolidated
      Financial Statements included in Item 8 of this Report). The Company acquired
      the assets of two companies in calendar 2004 and has deployed them in a wholly
      owned subsidiary of the Company known as APA Cables and Networks, Inc.
      (“APACN”). APACN is a manufacturer and seller of telecommunications equipment.




In
      fiscal
      year 2005 we formed a wholly-owned subsidiary in India, APA Optronics (India)
      Private Limited (“APA India”), to take advantage of lower manufacturing costs in
      India. While the prime focus of the subsidiary will be support of manufacturing
      activities across the Company’s products, it will also support other business
      activities, including software development. The Company has already started
      the
      supporting activities in most of these areas. The Company plans to significantly
      increase its manufacturing activities once the construction of a larger facility
      in India is completed and manufacturing operations are located in the new
      facility some time during the calendar year 2006.




In
      fiscal
      year 2006 we sold certain equipment and intellectual property related to our
      research and development work surrounding gallium nitride based heterojunction
      field effect transistors. The sale to an unrelated third party for consideration
      including $1.9 million in cash enables us to focus our R&D efforts on power
      amplifiers built using GaN technology by using commercially available parts,
      rather than building our own transistors. This is expected to decrease our
      operating costs and shorten our time to market for power amplifiers.




In
      fiscal
      year 2006, the Company also terminated its manufacturing operations, mostly
      related to fiber optic communication components, in Aberdeen, South Dakota.
      The
      associated assets were designated as not being utilized in manufacturing. Most
      of the assets, if not utilized within the company, will potentially be sold
      in
      future.




The
      Company reports its operations activities in two segments, Optronics (comprising
      the activities in Blaine, Minnesota, Aberdeen, South Dakota and India) and
      APACN
      (comprising the activities in Plymouth, Minnesota).




4
 *Table
          of Contents*


APACN
      focuses on custom-engineered products for telecommunications customers,
      primarily related to cabling management requirements of the Fiber-to-the-Home
      (“FTTH”) marketplace and in designing and terminating custom cable assemblies
      for commercial and industrial original equipment manufacturers (“OEM’s”). In
      June 2003, APACN purchased the assets of Americable, Inc. The Americable
      acquisition allowed APACN to add its own brand of fiber distribution equipment
      to its full-line of standard and custom copper and fiber optic cable assemblies
      for broadband service providers and OEM’s. The Americable acquisition
      diversified our product offerings, expanded our opportunities for cross-selling
      our products to former Computer System Products (CSP) and Americable customers,
      and enabled us to offer a more complete technology solution to all of our
      customers. To date, APACN has been able to successfully establish itself as
      a
      value-added supplier to its target market of independent telephone companies
      and
      cable television operators as well as OEM’s who value a high level of
      engineering services as part of their procurement process. APACN has expanded
      its product offerings and broadened its customer base since its inception two
      years ago.




APACN
      also invested in expanding its sales and engineering expenditures by 32% during
      fiscal 2006 to increase its potential revenues during fiscal year 2007 and
      beyond. APACN is already realizing the impact of these efforts in terms of
      increased sales, particularly during the last two quarters of the fiscal year
      2006. The increase in revenues is due to additional customers and product
      acceptance, mainly in the Fiber-to-the-Premise market, as well as an increase
      in
      revenue generated from a new supply agreement to an existing customer serving
      the test equipment market.





Optronics
      continues to focus upon Gallium Nitride (GaN) related activities.




Additional
      information regarding operations in the segments is set forth in Note Q in
      the
      Notes to the Consolidated Financial Statements under Item 8 herein.




***Description
      of Business -Optronics Segment***




Optronics
      develops manufactures
      and markets advanced products for UV (ultraviolet) detection, nitride epitaxial
      layers and wide band-gap transistors. These operations began with the inception
      of the Company in 1979 and are located principally in our facility in Blaine,
      Minnesota. Certain products are purchased from contract
      manufacturers.




*Products*




Our
      current products are described below.




·
            Ultraviolet
                (UV) Detector-Based ProductsWe
                currently manufacture value-added products built around UV detectors
                fabricated by Optronics and procured externally. These products
                are:




·
              SunUV®Personal UV MonitorThe SunUV®Personal UV Monitor (formerly, SunUVWatch®)
                  is a personal ultraviolet (UV) radiation monitor that also incorporates
                  a
                  time/day/date function. It detects UV radiation that is hazardous
                  to human
                  health. It keeps track of the total UV exposure of the user and
                  estimates
                  a maximum exposure time according to government guidelines based
                  on skin
                  type and widely-accepted research on UV exposure limits. The product
                  has
                  been introduced and is being sold through retail channels, catalogs
                  and
                  Internet sites in the USA and Europe.


In
      fiscal
      year 2006, we developed and introduced an attractive new PUVM plastic/metal
      model that offers two key advantages for the product line. This model,
      manufactured in-house by our off-shore supplier, potentially eliminates most
      of
      the manufacturing issue of some of the earlier models. The new model
      also can be color-matched to the *SunUVStation* *TM* described below, which allows us to market the two products together in a
      pairing that retailers and other channels find attractive.




5
 *Table
          of Contents*


The
      new
      SunUVStation consumer product complements the Personal UV Monitor, and together
      they give Optronics a product line in the sun protection area. The SunUVStation
      offers a larger display that indicates the UV Index on a colorful 7” diameter
      analog face for backyard, pool, patio, campground, or other locations where
      groups of people are exposed to the sun. This product, complementing the small
      format personalized UV monitor, will be manufactured at the new APA Optronics
      India facility and marketed in FY2007 through selected channels.




Industrial
      Products: Profiler M UV Meter Optronics’ *Profiler
      M* radiometer was created for the printing and coating industries that use UV
      curing. The instrument measures the intensity and distribution of four UV bands
      inside curing chambers. Data from the instrument can be transferred to a
      computer for analysis using proprietary *CureControl* software
      supplied as part of the purchase. Periodic upgrades of the software will be
      offered, providing the potential for increased utility for the user and an
      ongoing revenue stream for Optronics. Marketing and sales activities for the
      Profiler M are now focused on expanding our group of domestic and international
      distributors. Currently, there are four companies distributing the product
      - 2
      general UV industries suppliers, a UV equipment manufacturer, and a UV coatings
      and adhesives manufacturer and we are seeking additional representatives in
      all
      these areas. Supporting marketing activities include exhibiting at trade shows
      for the industry and participation in technical conferences and journals that
      can showcase the advantages of the *Profiler
      M* .




Research
      and development efforts at Optronics are described below.




·
            In
                the 4thquarter of fiscal year 2006 we completed the sale of our epitaxial
                foundry
                to an unrelated, third party for total consideration of $1.9 million
                in
                cash and a license back of the technology within a specified field
                of use.
                The transaction included sale of APA’s multi-wafer metal organic chemical
                vapor deposition system, the technical know-how associated with the
                growth
                of state-of-the-art epitaxial layers, two heterojunction field effect
                transistor patents (United States patent 5,192,987 and United States
                patent 5,296,395), an additional pending patent (now allowed, United
                States patent application claiming priority of United States provisional
                application No. 60/428,856), and associated intellectual property.
                Terms
                of the transaction allow APA to market and sell products for applications
                greater than 1 GHz and provide revenue sharing based on future licensing
                agreements regarding these patents. The transaction allowed APA to
                terminate the lease of an off-site facility utilized by the epi foundry
                and resulted in termination of three employees associated with the
                development and growth of epi-layers.




·
            The
                sale described in the immediately preceding paragraph should decrease
                operating costs while enabling early entry into power amplifier markets
                utilizing GaN power transistors procured from outside sources. Such
                transistors have demonstrated impressive performance while maintaining
                excellent reliability. Our goal is to manufacture amplifiers that
                utilize
                these transistors - simplifying amplifier architecture, improving
                amplifier efficiency and increasing bandwidth and power. Such amplifiers
                will initially target test and measurement and later cellular base
                station
                applications.




6
 *Table
          of Contents*


·
            Opportunities
                to team with companies offering complementary capabilities to our
                own are
                being evaluated based on relevance to our long term strategic interests.




*Marketing
      and Distribution*




We
      do not
      maintain a large internal sales force. We have one sales person dedicated to
      the
      SunUV (C) Personal
      UV Monitor and we also maintain product information on our website. Additionally
      we use manufacturer’s representative and distributors domestically.




*Competition*




The
      optoelectronics and compound semiconductor electronic device markets are
      evolving rapidly and, therefore, the competitive landscape changes continually.
      The opportunities presented by these markets have fostered a highly competitive
      environment. This competition has resulted in price reductions and lower profit
      margins for the companies serving this market. Many of the companies engaged
      in
      these businesses are well financed and have significantly greater research,
      development, production, and marketing resources than we do. Some of these
      companies have long operating histories, well-established distribution channels,
      broad product offerings and extensive customer bases. Our ability to compete
      with these companies across our product lines will depend largely on the
      performance of our devices, our ability to innovate and develop competitive
      solutions for our customers, our intellectual property, our ability to convince
      customers to adopt our technology early in their design cycle, and our ability
      to control costs.




We
      are
      not aware of any companies currently marketing a personal UV monitor with a
      combination of features, style and packaging equivalent to ours, although there
      are other manufacturers of this type of product in the United States, Japan
      and
      Korea. Our SunUVStation product is unique to the best of our
      knowledge.




Electronic
      Instrumentation and Technology, Inc. (“EIT”), Apprise Technologies, UV Process
      Supply and International Light offer UV curing control instruments that perform
      similar functions to the Profiler M, although we believe that our product offers
      a very competitive combination of features and price.




There
      are
      no currently available GaN/AlGaN power amplifiers; however, we anticipate that
      there will be several US, Japanese and European firms announcing products in
      the
      next calendar year.




***Description
      of Business - APACN***




APACN
      offers a broad range of telecommunications equipment and products developed
      from
      over 20 years of product expertise acquired in each of the CSP and Americable
      acquisitions. Its broad range of product offerings include the design and
      manufacture of standard and custom connectivity products such as fiber
      distribution systems, optical components, Outside Plant (OSP) cabinets, and
      fiber and copper cable assemblies that serve the communication service provider
      including FTTH, large enterprise, and OEM markets. APACN maintains a range
      of
      engineering and technical knowledge in-house that works closely with customers
      to develop, customize and enhance products from design through production.
      Most
      products are produced at APACN’s plant in Plymouth, Minnesota with support from
      a corporate network of global manufacturing partners. APACN produces these
      products on both a quick-turn and scheduled delivery basis.


7
 *Table
          of Contents*


*Products*





·
            Fiber
                Distribution Central Office Frame SystemsAPACN Fiber Distribution Systems (“FDS”) are high density, easy access
                fiber distribution panels and cable management systems that are designed
                to reduce installation time, guarantee bend radius protection and
                improve
                traceability. In the 144-port count configuration, APACN is the industry
                leader for density, saving the customer expensive real estate in
                the
                central office. The product line fully supports a wide range of panel
                configurations, densities, connectors, and adapters that can be utilized
                on a stand-alone basis or integrated into the panel system. The unique
                interchangeable building block design delivers feature rich solutions
                which are able to meet the needs of a broad range of network deployments.





·
            Fiber
                Distribution Outside Plant CabinetsAPACN’s
                Fiber Scalability Center (“FSC”) is a modular and scalable fiber
                distribution platform designed for “grow-as-you-go cost containment” as
                fiber goes beyond the control of a central office and closer to the
                user.
                This allows rollout of FTTH services by communication service providers
                without a large initial expense. Each outside plant cabinet stores
                feeder
                and distribution splices, splitters, connectors and slack cable neatly
                and
                compactly, utilizing field-tested designs to maximize bend radius
                protection, connector access, ease of cable routing and physical
                protection, thereby minimizing the risk of fiber damage. The FSC
                product
                has been designed to scale with the application environment as demand
                requires and to reduce service turn-up time for the
                end-user.





·
            Optical
                ComponentsAPACN packages optical components for signal coupling, splitting,
                termination, multiplexing, demultiplexing and attenuation to seamlessly
                integrate with the APACN FDS. This value-added packaging allows the
                customer to source from a single supplier and reduce space requirements.
                The products are built and tested to meet the strictest industry
                standards
                ensuring customers trouble-free performance in extreme outside plant
                environments.





·
            Cable
                AssembliesAPACN manufactures high quality fiber and copper assemblies with
                an
                industry-standard or customer-specified configuration. Industry-standard
                assemblies built include but are not limited to: single mode fiber,
                multimode fiber, multi-fiber, CATV node assembly, DS1 Telco, DS 3
                (734/735) coax, Category 5e and 6, SCSI, Token Ring, and V.35. In
                addition, APACN’s engineering services team works alongside the
                engineering design departments of our OEM customers to design and
                manufacturer custom solutions for both in-the-box as well as network
                connectivity assemblies specific to that customer’s product line.





*Marketing
      and Distribution*





APACN
      markets its products in the United States through a direct sales team with
      limited support from a network of manufacturer representative organizations.
      In
      addition, during fiscal 2006, the company significantly expanded its use of
      a
      two-tier distribution channel allowing the product line to penetrate a broader
      field of broadband service providers. APACN works closely with its target
      customers to adapt the company’s product platform to the client’s unique
      requirements. APACN offers a high level of customer service and principally
      brings new products to markets based upon the specific requests of its
      customers.





*Competition*





Competitors
      for the APACN FDS and FSC include but are not limited to ADC Telecommunications,
      Inc., Corning Cabling Systems, Inc., OFS (Furukawa Electric North America,
      Inc.), Telect Inc., Fiber Optic Network Solutions (FONS) Corporation (acquired
      by ADC Telecommunications during fiscal 2006), Alcatel, Inc., and Tyco
      Electronics, Inc. Nearly all of these firms are substantially larger than APACN
      and as a result may be able to procure pricing for necessary components and
      labor at much lower prices. Competition for the custom fiber and copper
      termination services for cable assemblies is intense. Competitors range from
      small, family-run businesses to very large contract manufacturing
      facilities.


8
 *Table
          of Contents*


**Sources
      of Materials and Outsourced Labor**


Numerous
      purchased materials, components, and labor, are used in the manufacturing of
      the
      Company’s products. Most of these are readily available from multiple suppliers.
      However, some critical components and outsourced labor are purchased from a
      single or a limited number of suppliers. The loss of access to some components
      and outsourced labor would have a material adverse effect on our ability to
      deliver products on a timely basis and on our financial
      performance.




**Patents
      and Intellectual Property**




As
      of
      March 31, 2006, we had 14 patents issued in the United States and two pending
      patent applications inside and outside the United States. During the last fiscal
      year the following 2 patents and a patent in process were sold:


US
      Patent
      5,192,987 “High electron mobility transistor with GaN/AlGaN
      heterojunction”;


US
      Patent
      5,2196,395 “ Method of making a high electron mobility transistor”;


US
      Patent
      application from provisional No. 60/428,856 (since allowed).


Terms
      of
      the sale of these patents allow APA to market and sell products for applications
      greater than 1 GHz


All
      of
      our patents relate to the business of our Optronics segment. We believe our
      success heavily depends upon technology we develop internally and we anticipate
      additional patent application filings this year. We have made significant
      progress toward improving the active, strategic management of our intellectual
      property portfolio. The markets for our products are characterized by rapid
      change and continual innovation that could render our technology and patents
      obsolete before their statutory protection expires. Several of the companies
      we
      compete with have greater research and development resources than we do and
      could develop technologies and products that are similar or even superior to
      ours without infringing on our intellectual property. It is possible that sale
      or license of part of our patent portfolio could be helpful to our business
      plans.




**Environmental
      Compliance**




Because
      we handle a number of chemicals in our operations, we must comply with federal,
      state and local laws and regulations regarding the handling and disposal of
      such
      chemicals. To date the cost of such compliance has not been material.




**Major
      Customers**




No
      single
      customer accounted for more than 10% of the Company’s sales in fiscal 2006,
      2005, or 2004.


9
 *Table
          of Contents*


**Backlog**





Backlog
      reflects purchase order commitments for our products received from customers
      that have yet to be fulfilled. Backlog orders are generally shipped within
      three
      months. Optronics had no backlog as of March 31, 2006, a backlog of $7,200
      as of
      March 31, 2005 and a backlog of $6,490 as of March 31, 2004. APACN had backlogs
      of $1,383,206 as of
      March 31, 2006, $429,180 as of March 31, 2005, and $856,700 as of March 31,
      2004.




**Research
      and Development**




During
      the fiscal years ended March 31, 2006, 2005, and 2004, Optronics spent
      approximately $1,409,000, $1,104,000, and $949,000, respectively, on research
      and development, mainly for the development of compound semiconductor electronic
      devices. This segment had no research activities sponsored by customers in
      fiscal years 2006, 2005 or 2004. We operate in highly competitive and rapidly
      evolving markets and plan to commit significant resources for research and
      development for the foreseeable future. We could locate research and development
      facilities in locations other than our current facilities in Minnesota based
      on
      several factors, including accessibility to qualified personnel and facility
      costs. APACN has made no significant expenditures for research and development
      from its inception through March 31, 2006.




**Employees**





As
      of
      March 31, 2006, Optronics had 36 full-time employees in the combined locations
      of Blaine, MN, Aberdeen, SD, and India. As of March 31, 2006, APACN had 92
      full-time employees, mainly in Plymouth, MN. Our future performance is dependent
      on our ability to attract, train, and retain highly qualified personnel. We
      have
      no employment agreements with our employees. The loss of one or more key
      employees could negatively impact the Company.




**ITEM
                1A.**
            **RISK
                FACTORS.**




***Factors
      That May Affect Future Results***




The
      statements contained in this Report on Form 10-K that are not purely historical
      are “forward-looking statements” within the meaning of the Private Securities
      Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
      Section 21E of the Securities Exchange Act of 1934, including, without
      limitations, statements regarding the Company’s expectations, hopes, beliefs,
      anticipations, commitments, intentions and strategies regarding the future.
      Forward-looking statements include, but are not limited to, statements contained
      in “Item 1. Business” and “Item 7. Management's Discussion and Analysis of
      Financial Condition and Results of Operations.” Actual results could differ from
      those projected in any forward-looking statements for the reasons, among others,
      detailed below. We believe that many of the risks detailed here are part of
      doing business in the industry in which we compete and will likely be present
      in
      all periods reported. The fact that certain risks are characteristic to the
      industry does not lessen the significance of the risk. The forward-looking
      statements are made as of the date of this Report as Form 10-K and we assume
      no
      obligation to update the forward-looking statements or to update the reasons
      why
      actual results could differ from those projected in the forward-looking
      statements.




10
 *Table
          of Contents*


**Our
      Results of Operations**




*Unless
      we generate significant revenue growth, our expenses and negative cash flow
      will
      significantly harm our financial position.*




We
      have
      not been profitable since fiscal 1990. As of March 31, 2006, we had an
      accumulated deficit of $36.5 million. We may incur operating losses for the
      foreseeable future, and these losses may be substantial. Further, we may
      continue to incur negative operating cash flow in the future. We have funded
      our
      operations primarily through the sale of equity securities and borrowings.
      We
      have significant fixed expenses and we expect to continue to incur significant
      and increasing manufacturing, sales and marketing, product development and
      administrative expenses. As a result, we will need to generate significantly
      higher revenues while containing costs and operating expenses if we are to
      achieve profitability.




*Acquisitions
      or investments could have an adverse affect on our business.*




We
      acquired the assets of Americable in June 2003 and integrated them with the
      assets of APACN. We acquired assets in India in March 2005 as part of a strategy
      to take advantage of lower manufacturing costs in India. We intend to continue
      reviewing acquisition and investment prospects. There are inherent risks
      associated with making acquisitions and investments including but not limited
      to:




·
            Challenges
                associated with integrating the operations, personnel, etc., of an
                acquired company;


·
            Potentially
                dilutive issuances of equity
                securities;


·
            Reduced
                cash balances and or increased debt and debt service
                costs;


·
            Large
                one-time write-offs of intangible
                assets;


·
            Risks
                associated with geographic or business markets different than those
                we are
                familiar with; and


·
            Diversion
                of management attention from current
                responsibilities.




**Our
      Products and Introduction of New Products**




*We
      must introduce new products and product enhancements to increase
      revenue.*




The
      successful operation of our business depends on our ability to anticipate market
      needs and develop and introduce new products and product enhancements that
      respond to technological changes or evolving industry standards on a timely
      and
      cost-effective basis. Our products are complex, and new products may take longer
      to develop than originally anticipated. These products may contain defects
      or
      have unacceptable manufacturing yields when first introduced or as new versions
      are released. Our products could quickly become obsolete as new technologies
      are
      introduced or as other firms introduce lower cost alternatives. We must continue
      to develop leading-edge products and introduce them to the commercial market
      quickly in order to be successful. Our failure to produce technologically
      competitive products in a cost-effective manner and on a timely basis will
      seriously harm our business, financial condition and results of
      operations.




*Our
      products may infringe on the intellectual property rights of
      others.*




Our
      products are sophisticated and rely on complicated manufacturing processes.
      We
      have received multiple patents on aspects of our design and manufacturing
      processes and we have applied for several more. Third parties may still assert
      claims that our products or processes infringe upon their intellectual property.
      Defending our interests against these claims, even if they lack merit, may
      be
      time consuming, result in expensive litigation and divert management attention
      from operational matters. If such a claim were successful, we could be prevented
      from manufacturing or selling our current products, be forced to redesign our
      products, or be forced to license the relevant intellectual property at a
      significant cost. Any of these actions could harm our business, financial
      condition or results of operations.




11
 *Table
          of Contents*


*We
      may make additional strategic changes in our product portfolio, but our
      strategic changes and restructuring programs may not yield the benefits that
      we
      expect.*




In
      connection with the downturn in the communications industry we have divested
      or
      closed product lines and businesses that either were not profitable or did
      not
      match our new strategic focus. As necessary, we may make further divestitures
      or
      closures of product lines and businesses. We may also make strategic
      acquisitions.




The
      impact of potential changes to our product portfolio and the effect of such
      changes on our business, operating results and financial condition, are unknown
      at this time. If we acquire other businesses in our areas of strategic focus,
      we
      may have difficulty assimilating these businesses and their products, services,
      technologies and personnel into our operations. These difficulties could disrupt
      our ongoing business, distract our management and workforce, increase our
      expenses and adversely affect our operating results and financial condition.
      In
      addition to these integration risks, if we acquire new businesses, we may not
      realize all of the anticipated benefits of these acquisitions, and we may not
      be
      able to retain key management, technical and sales personnel after an
      acquisition. Divestitures or elimination of existing businesses or product
      lines
      could also have disruptive effects and may cause us to incur material
      expenses.




**Manufacturing
      and Operations**




*Our
      dependence on outside manufacturers may result in product delivery
      delays* .




We
      purchase components and labor that are incorporated into our products from
      outside vendors. In the case of the SunUV® Personal
      UV Monitor, we supply components to an outside assembler who delivers the
      completed product. If these vendors fail to supply us with components or
      completed assemblies on a timely basis, or if the quality of the supplied
      components or completed assemblies is not acceptable, we could experience
      significant delays in shipping our products. Any significant interruption in
      the
      supply or support of any components or completed assemblies could seriously
      harm
      our sales and our relationships with our customers. In addition, we have
      increased our reliance on the use of contract manufacturers to make our
      products. If these contract manufacturers do not fulfill their obligations
      or if
      we do not properly manage these relationships, our existing customer
      relationships may suffer.




*We
      may be required to rapidly increase our manufacturing capacity to deliver our
      products to our customers in a timely manner.*




Manufacturing
      of our products is a complex and precise process. We have limited experience
      in
      rapidly increasing our manufacturing capacity or in manufacturing products
      at
      high volumes. If demand for our products increases, we will be required to
      hire,
      train and manage additional manufacturing personnel and improve our production
      processes in order to increase our production capacity. There are numerous
      risks
      associated with rapidly increasing capacity, including:




·
            Difficulties
                in achieving adequate yields from new manufacturing
                lines,




·
            Difficulty
                maintaining the precise manufacturing processes required by our products
                while increasing capacity,




12
 *Table
          of Contents*


·
            The
                inability to timely procure and install the necessary equipment,
                and




·
            Lack
                of availability of qualified manufacturing
                personnel.




If
      we
      apply our capital resources to expanding our manufacturing capacity in
      anticipation of increased customer orders, we run the risk that the projected
      increase in orders will not be realized. If anticipated levels of customer
      orders are not received, we will not be able to generate positive gross margins
      and profitability.




*We
      are dependent upon skilled employees; if we lose the services of our key
      personnel our ability to execute our operating plan, and our operating results,
      may suffer.*




Our
      future performance depends in part upon the continued service and contributions
      of key management, engineering, sales and marketing personnel, many of whom
      would be difficult to replace quickly. If we lose any of these key personnel,
      our business, operating results and financial condition could be materially
      adversely affected or delay the development or marketing of existing or future
      products. Competition for these personnel is intense and we may not be able
      to
      retain or attract such personnel. Our success will depend in part upon our
      ability to attract and retain additional personnel with the highly specialized
      expertise necessary to generate revenue and to engineer, design and support
      our
      products and services.




**Markets
      and Market Conditions**




*Demand
      for our products is subject to significant fluctuation. Adverse market
      conditions in the communications equipment industry and any slowdown in the
      United States economy may harm our financial condition.*




Demand
      for our products is dependent on several factors, including capital expenditures
      in the communications industry. Capital expenditures can be cyclical in nature
      and result in protracted periods of reduced demand for component parts.
      Similarly, periods of slow economic expansion or recession can result in periods
      of reduced demand for our products. Such periods of reduced demand will harm
      our
      business, financial condition and results of operations. Changes to the
      regulatory requirements of the telecommunications industry could also affect
      market conditions, which could also reduce demand for our products.




*Our
      industry is highly competitive and subject to pricing pressure.*




Competition
      in the communications equipment market is intense. We have experienced and
      anticipate experiencing increasing pricing pressures from current and future
      competitors as well as general pricing pressure from our customers as part
      of
      their cost containment efforts. Many of our competitors have more extensive
      engineering, manufacturing, marketing, financial and personnel resources than
      we
      do. As a result, these competitors may be able to respond more quickly to new
      or
      emerging technologies and changes.




*Declining
      average selling prices for our fiber optic products will require us to reduce
      production costs to effectively compete and market these
      products.*




13
 *Table
          of Contents*


Since
      the
      time we first introduced our fiber optic components to the marketplace we have
      seen the average selling price of fiber optic components decline. We expect
      this
      trend to continue. To achieve profitability in this environment we must
      continually decrease our costs of production. In order to reduce our production
      costs, we will continue to pursue one or more of the following:




·
            Seek
                lower cost suppliers of raw materials or
                components.




·
            Work
                to further automate our assembly
                process.




·
            Develop
                value-added components based on integrated
                optics.




·
            Seek
                offshore sources for manufacturing and assembly
                services.




We
      will
      also seek to form strategic alliances with companies that can supply these
      services. Decreases in average selling prices also require that we increase
      unit
      sales to maintain or increase our revenue. There can be no guarantee that we
      will achieve these objectives. Our inability to decrease production costs or
      increase our unit sales could seriously harm our business, financial condition
      and results of operations.




*Our
      markets are characterized by rapid technological changes and evolving
      standards.*




The
      markets we serve are characterized by rapid technological change, frequent
      new
      product introductions, changes in customer requirements and evolving industry
      standards. In developing our products, we have made, and will continue to make,
      assumptions with respect to which standards will be adopted within our industry.
      If the standards that are actually adopted are different from those that we
      have
      chosen to support, our products may not achieve significant market
      acceptance.




*Conditions
      in global markets could affect our operations.*




We
      have
      acquired facilities in India which will support design and production of our
      products. We also source products and labor from off shore suppliers. We expect
      that our foreign operations and reliance on off shore sourcing will increase
      in
      the future. As such we are subject to the risks of conducting business
      internationally. Those risks include but are not limited to:




·
            local
                economic and market conditions;




·
            political
                and economic instability;




·
            fluctuations
                in foreign currency exchange rates;




·
            tariffs
                and other barriers and
                restrictions;




·
            geopolitical
                and environmental risks; and




·
            changes
                in diplomatic or trade relationships and natural
                disasters.




We
      cannot
      predict whether our business operations and reliance in these markets will
      be
      affected adversely by these conditions.


14
 *Table
            of Contents*




**Our
      Customers**




*Our
      sales could be negatively impacted if one or more of our key customers
      substantially reduce orders for our products.*


If
      we
      lose a significant customer, our sales and gross margins would be negatively
      impacted. In addition, the loss of sales may require us to record impairment,
      restructuring charges or exit a particular business or product
      line.




*Consolidation
      among our customers could result in our losing a customer or experiencing a
      slowdown as integration takes place.*




It
      is
      likely that there will be increased consolidation among our customers in order
      for them to increase market share and achieve greater economies of scale.
      Consolidation is likely to impact our business as our customers focus on
      integrating their operations and choosing their equipment vendors. After a
      consolidation occurs, there can be no assurance that we will continue to supply
      the surviving entity.




*Customer
      payment defaults could have an adverse effect on our financial condition and
      results of operations.*




As
      a
      result of competitive conditions in the telecommunications market, some of
      our
      customers may experience financial difficulties. It is possible that customers
      from whom we expect to derive substantial revenue will default or that the
      level
      of defaults will increase. Any material payment defaults by our customers would
      have an adverse effect on our results of operations and financial
      condition.




**Performance
      Requirements and Performance of our Products**




*Our
      products may have defects that are not detected before delivery to our
      customers.*




Some
      of
      the Company’s products are designed to be deployed in large and complex networks
      and must be compatible with other components of the system, both current and
      future. Our customers may discover errors or defects in our products only after
      they have been fully deployed. In addition, our products may not operate as
      expected over long periods of time. In the case of the SunUV® Personal
      UV Monitor, a consumer product, customers could encounter a latent defect not
      detected in the quality inspection. If we are unable to fix errors or other
      problems, we could lose customers, lose revenues, suffer damage to our brand
      and
      reputation, and lose our ability to attract new customers or achieve market
      acceptance. Each of these factors would negatively impact cash flow and would
      seriously harm our business, financial condition and results of
      operations.




*Product
      defects could cause us to lose customers and revenue or to incur unexpected
      expenses.*




If
      our
      products do not meet our customers’ performance requirements, our customer
      relationships may suffer. Also, our products may contain defects. Any failure
      or
      poor performance of our products could result in:




·
            delayed
                market acceptance of our products;




·
            delays
                in product shipments;




·
            unexpected
                expenses and diversion of resources to replace defective products
                or
                identify the source of errors and correct
                them;




·
            damage
                to our reputation and our customer
                relationships;




15
 *Table
          of Contents*


·
            delayed
                recognition of sales or reduced sales;
                and




·
            product
                liability claims or other claims for damages that may be caused by
                any
                product defects or performance
                failures.




**Intellectual
      Property**




*If
      we
      are unable to adequately protect our intellectual property, third parties may
      be
      able to use our technology, which could adversely affect our ability to compete
      in the market.*




Our
      success will depend in part on our ability to obtain patents and maintain
      adequate protection of the intellectual property related to our technologies
      and
      products. The patent positions of technology companies, including our patent
      position, are generally uncertain and involve complex legal and factual
      questions. We will be able to protect our intellectual property rights from
      unauthorized use by **** third
      parties only to the extent that our technologies are covered by valid and
      enforceable patents or are effectively maintained as trade secrets. The laws
      of
      some foreign countries do not protect intellectual property rights to the same
      extent as the laws of the U.S., and many companies have encountered significant
      problems in protecting and defending such rights in foreign jurisdictions.
      We
      will apply for patents covering our technologies and products as and when we
      deem appropriate. However, these applications may be challenged or may fail
      to
      result in issued patents. Our existing patents and any future patents we obtain
      may not be sufficiently broad to prevent others from practicing our technologies
      or from developing competing products. Furthermore, others may independently
      develop similar or alternative technologies or design around our patents. In
      addition, our patents may be challenged, invalidated or fail to provide us
      with
      any competitive advantages.




We
      rely
      on trade secret protection for our confidential and proprietary information.
      We
      have taken security measures to protect our proprietary information and trade
      secrets, but these measures may not provide adequate protection. While we seek
      to protect our proprietary information by entering into confidentiality
      agreements with employees, collaborators and consultants, we cannot assure
      you
      that our proprietary information will not be disclosed, or that we can
      meaningfully protect our trade secrets. In addition, our competitors may
      independently develop substantially equivalent proprietary information or may
      otherwise gain access to our trade secrets.




*Our
      business will suffer if we are unable to protect our patents or our proprietary
      rights.*




Our
      success depends to a significant degree upon our ability to develop proprietary
      products. However, patents may not be granted on any of our pending patent
      applications in the United States or in other countries. In addition, the scope
      of any of our issued patents may not be sufficiently broad to offer meaningful
      protection. Furthermore, our issued patents or patents licensed to us could
      potentially be successfully challenged, invalidated or circumvented so that
      our
      patent rights would not create an effective competitive barrier.




*Intellectual
      property litigation could harm our business.*




It
      is
      possible that we may have to defend our intellectual property rights in the
      future. In the event of an intellectual property dispute, we may be forced
      to
      litigate or otherwise defend our intellectual property assets. Disputes could
      involve litigation or proceedings declared by the United States Patent and
      Trademark Office or the International Trade Commission. Intellectual property
      litigation can be extremely expensive, and this expense, as well as the
      consequences should we not prevail, could seriously harm our
      business.




16
 *Table
          of Contents*


If
      a
      third party claimed an intellectual property right to technology we use, we
      might be forced to discontinue an important product or product line, alter
      our
      products and processes, pay license fees or cease certain activities. We may
      not
      be able to obtain a license to such intellectual property on favorable terms,
      if
      at all.




*Litigation
      or third party claims of intellectual property infringement could require us
      to
      spend substantial time and money and adversely affect our ability to develop
      and
      commercialize products.*




Our
      commercial success depends in part on our ability to avoid infringing patents
      and proprietary rights of third parties, and not breaching any licenses that
      we
      have entered into with regard to our technologies. Other parties have filed,
      and
      in the future are likely to file, patent applications covering genes and gene
      fragments, techniques and methodologies relating to model systems, and products
      and technologies that we have developed or intend to develop. If patents
      covering technologies required by our operations are issued to others, we may
      have to rely on licenses from third parties, which may not be available on
      commercially reasonable terms, or at all.




Third
      parties may accuse us of employing their proprietary technology without
      authorization. In addition, third parties may obtain patents that relate to
      our
      technologies and claim that use of such technologies infringes these patents.
      Regardless of their merit, such claims could require us to incur substantial
      costs, including the diversion of management and technical personnel, in
      defending ourselves against any such claims or enforcing our patents. In the
      event that a successful claim of infringement is brought against us, we may
      be
      required to pay damages and obtain one or more licenses from third parties.
      We
      may not be able to obtain these licenses at a reasonable cost, or at all.
      Defense of any lawsuit or failure to obtain any of these licenses could
      adversely affect our ability to develop and commercialize products.




**Executive
      Officers**




The
      following is a list of our executive officers, their ages, positions and offices
      as of March 31, 2006.




***Name***
            ***Age***
            ***Position***Dr.
                Anil K. Jain
            60
            Chief
                Executive Officer/President/Chief Financial Officer of APA Enterprises,
                Inc.Cheri
                Beranek Podzimek
            43
            President,
                APACN




***Dr.
      Anil K. Jain*** has been
      a Director, Chief Executive Officer and President since March 1979. He also
      currently serves as Chief Financial Officer. From 1973 until October 15, 1983,
      when Dr. Jain commenced full time employment with the Company, he was employed
      at the Systems and Research Center at Honeywell Inc. as a Senior Research
      Fellow, coordinating optics-related development.




***Cheri
      Beranek Podzimek*** joined
      APACN in July 2003 as President. Ms. Podzimek was previously President of
      Americable, which was acquired by APACN in June 2003. She served as President
      of
      Americable from 2002 to 2003. From 2001 to 2002 Ms. Podzimek was Chief Operating
      Officer of Americable. Previously, Ms. Podzimek held a variety of lead marketing
      positions with emerging high-growth technology companies. She served as Vice
      President of Marketing from 1996-2001 at Transition Networks, a manufacturer
      of
      network connectivity products, Director of Marketing from 1992 to 1996 at
      Tricord Systems, an early stage multi-processor based super server manufacturer,
      and Director of Marketing from 1988 to 1992 at Digi International, a designer
      and manufacturer of connectivity products. Earlier in her career Ms. Podzimek
      held marketing positions for non-profit organizations, including the City of
      Fargo, the Metropolitan Planning Commission of Fargo/Moorhead and North Dakota
      State University.




17
 *Table
          of Contents*


**ITEM
                1B.**
            **UNRESOLVED
                STAFF COMMENTS.**




None




**ITEM
                2.**
            **PROPERTIES.**




We
      have
      corporate offices, manufacturing facilities, and laboratories located in an
      industrial building at 2950 N.E. 84 th Lane,
      Blaine, Minnesota. We currently lease 23,500 square feet of space under a lease
      from Jain-Olsen Properties, a partnership consisting of Anil K. Jain and Kenneth
      A. Olsen, the former being officer and director of the Company. See Note O
      of
      Notes to the Consolidated Financial Statements included under Item 8 of this
      Report. We own land directly west of the Blaine facility that may be used for
      future expansion.




We
      own a
      24,000 square foot production facility in Aberdeen, South Dakota, which was
      used
      mainly for assembly of products for APACN customers and to a lesser extent
      for
      assembly of our DWDM components and UV detectors. During the fiscal year 2006
      the Company terminated all the manufacturing activities at this facility and
      put
      the facility for potential lease or sale. The land upon which this facility
      is
      located (approximately 12 acres) was granted to us as part of a financing
      package from the city of Aberdeen. See Note I of Notes to the Consolidated
      Financial Statements included under Item 8 in this Report for further
      information regarding the financing of this facility. This land was sub-divided
      into two parcels of approximately 10 and 2 acres, and the latter was sold to
      Aberdeen Development Corporation. The Company contemplates further sub-dividing
      the balance 10 acre land in to two parts of approximately 5 acres each with
      the
      intention of selling or leasing the building along with 5 acre land and
      retaining the other 5 acre parcel for future use.




APA
      signed a lease agreement in June of 2004 with Veeco Compound Semiconductor,
      Inc.
      to locate APA’s multi-wafer MOCVD unit, purchased in fiscal 2004, in Veeco’s
      facilities in White Bear Lake, Minnesota, which is near APA’s Blaine facility.
      The lease term commenced on December 1, 2004 and was terminated March 10, 2006
      coinciding with the sale of the epi foundry operation to an unrelated third
      party.




APA
      India
      currently leases, on a month to month basis, a 500 square meter facility in
      a
      special export zone near New Delhi, India. The Company is planning to relocate
      in to its own 1,000 square meter facility, under construction at present in
      the
      same general location, some time in calendar year 2006.




APACN
      subleases a 37,000 square foot facility in Plymouth, Minnesota consisting of
      office, manufacturing and warehouse space. This lease runs through June, 2006.
      Subsequent to year end, the company has renewed the lease of this facility
      through November 2013 on 30,000 square feet.




**ITEM
                3.**
            **LEGAL
                PROCEEDINGS.**




On
      May
      23, 2005 APA Enterprises, Inc. ("APA") was served with a complaint filed in
      U.S.
      District Court, District of Virginia by Electronic Instrumentation and
      Technology, Inc. ("EIT"). EIT alleged that APA obtained certain confidential
      information from EIT and used such information for unauthorized purposes. 
EIT requested money damages of unspecified amount and equitable relief. 
This matter was tried to a jury in December 2005.  APA defeated EIT's
      claims of fraud and misappropriation of trade secrets.  APA was ordered to
      pay EIT $35,000 for breach of contract.  EIT filed certain post-trial
      motions, all of which were denied by the court. EIT did not appeal the verdict
      and this matter is concluded.




18
 *Table
          of Contents*


**ITEM
                4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS.**




No
      matter
      was submitted to a vote of security holders during the fourth quarter of the
      fiscal year covered by this Report.




**PART
      II**


**ITEM5.**
              **MARKET
                  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS.**


Our
      common stock is traded on The NASDAQ National Market under the symbol “APAT.”
The following table sets forth the quarterly high and low sales prices for
      our
      common stock for each quarter of the past two fiscal years as reported by
      NASDAQ.




**Fiscal
                2006**
            
            **High**
            
            **Low**Quarter
                ended June 30, 2005
            
            $
            1.62
            
            $
            1.20Quarter
                ended September 30, 2005
            
            
            1.48
            
            
            1.18Quarter
                ended December 31, 2005
            
            
            1.35
            
            
            1.10Quarter
                ended March 31, 2006
            
            
            2.01
            
            
            1.17




**Fiscal
                2005**
            
            
            **High**
            
            
            **Low**Quarter
                ended June 30, 2004
            
            $
            3.75
            
            $
            2.22Quarter
                ended September 30, 2004
            
            
            2.28
            
            
            1.37Quarter
                ended December 31, 2004
            
            
            2.48
            
            
            1.37Quarter
                ended March 31, 2005
            
            
            2.21
            
            
            1.36




There
      were approximately 329 holders of record of our common stock as of March 31,
      2006.




We
      have
      never paid cash dividends on our common stock. The loan agreement relating
      to
      certain bonds issued by the South Dakota Economic Development Finance Authority
      restricts our ability to pay dividends.




19
 *Table
          of Contents*


**ITEM
                6.**
            **SELECTED
                FINANCIAL DATA.**




**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**Statements
                of Operations Data:Revenues
            
            $
            15,717,837
            
            $
            13,886,486
            
            $
            11,909,465
            
            $
            436,157
            
            $
            595,955Net
                loss
            
            
            (3,348,848
            )
            
            (3,420,038
            )
            
            (6,535,147
            )
            
            (5,009,434
            )
            
            (4,738,199
            )Net
                loss per share, basic and diluted
            
            
            (.28
            )
            
            (.29
            )
            
            (.55
            )
            
            (.42
            )
            
            (.40
            )Weighted
                average number of shares, basic and diluted
            
            
            11,872,331
            
            
            11,872,331
            
            
            11,872,331
            
            
            11,873,914
            
            
            11,896,976Balance
                Sheet Data:Total
                assets
            
            $
            19,593,571
            
            $
            22,074,014
            
            $
            26,083,516
            
            $
            31,884,526
            
            $
            36,396,410Long-term
                obligations, including current portion
            
            
            1,360,961
            
            
            1,578,836
            
            
            1,811,759
            
            
            2,173,682
            
            
            2,461,363Shareholders’
                equity
            
            
            15,579,442
            
            
            18,922,161
            
            
            22,363,061
            
            
            28,918,943
            
            
            33,504,917




The
      above
      selected financial data should be read in conjunction with the financial
      statements and related notes included under Item 8 of this Report and
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” appearing in Item 7 of this Report.




**ITEM
                7.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**




***General***




Optronics
      is, at present, engaged in designing, manufacturing, and marketing of various
      optoelectronic products, ultraviolet (“UV”) detectors and related products. For
      the last several years our goal has been to manufacture and market
      products/components based on our technology developments. Previously, we focused
      on DWDM components for fiber optic communications and GaN based UV detectors
      (both components and integrated detector/electronic/display packages) because
      we
      believe that these two product areas have significant potential markets and
      because we have expertise and/or patent positions related to them. Optronics
      terminated the fiber optic communication activities at the end of fiscal year
      2006.




APACN,
      which is a wholly owned subsidiary of APA Enterprises, is engaged in the design,
      manufacture, distribution, and marketing of a variety of fiber optics and copper
      components to the data communication and telecommunication industries. APACN’s
      primary manufactured products include standard and custom fiber optic cable
      assemblies, copper cable assemblies, Outside Plant (OSP) cabinets, value-added
      fiber optics frames, panels and modules. APACN acquired certain assets of
      Americable on June 27, 2003. Several items discussed under the “Results of
      Operations” show significant changes from the comparable periods in the
      preceding fiscal year as a result of the acquisitions of Americable.




***Application
      of Critical Accounting Policies***





In
      preparing our consolidated financial statements, we make estimates, assumptions
      and judgments that can have a significant impact on our revenues, loss from
      operations and net loss, as well as on the value of certain assets and
      liabilities on our consolidated balance sheet. We believe that there are several
      accounting policies that are critical to an understanding of our historical
      and
      future performance, as these policies affect the reported amounts of revenues,
      expenses and significant estimates and judgments applied by management. While
      there are a number of accounting policies, methods and estimates affecting
      our
      consolidated financial statements, areas that are particularly significant
      include:




20
 *Table
          of Contents*


·
            Accounting
                for income taxes; and




·
            Valuation
                and evaluating impairment of long-lived assets and
                goodwill.




Accounting
      for Income Taxes




As
      part
      of the process of preparing our consolidated financial statements, we are
      required to estimate our income tax liability in each of the jurisdictions
      in
      which we do business. This process involves estimating our actual current tax
      expense together with assessing temporary differences resulting from differing
      treatment of items for tax and accounting purposes. These differences result
      in
      deferred tax assets and liabilities. We must then assess the likelihood that
      these deferred tax assets will be recovered from future taxable income and,
      to
      the extent we believe that recovery is not more likely than not or unknown,
      we
      must establish a valuation allowance.




Significant
      management judgment is required in determining our provision for income taxes,
      our deferred tax assets and liabilities and any valuation allowance recorded
      against our deferred tax assets. At March 31, 2006, we have recorded a full
      valuation allowance of $13,390,433 against our deferred tax assets, due to
      uncertainties related to our ability to utilize our deferred tax assets,
      consisting principally of certain net operating losses carried forward. The
      valuation allowance is based on our estimates of taxable income by jurisdiction
      and the period over which our deferred tax assets will be recoverable. The
      Company had U.S. federal and state net operating loss (NOL) carry
      forwards of approximately $33,782,000 which expire in fiscal years 2007 to
      2026.
      To date the Company has not completed a section 382 analysis. If certain
      ownership changes occurred under section 382, there may be further limitations
      on the usage of the net operating loss carry forwards.




During
      the fourth quarter of fiscal year 2006, the Company recorded a deferred income
      tax liability of $272,000 for the book and income tax basis difference in
      goodwill on acquisitions.




Realization
      of the NOL carry forwards and other deferred tax temporary differences are
      contingent on future taxable earnings. The deferred tax asset was reviewed
      for
      expected utilization using a “more likely than not” approach as required by
      SFAS No. 109, “Accounting for Income Taxes,” by assessing the
      available positive and negative evidence surrounding its recoverability.




We
      will
      continue to assess and evaluate strategies that will enable the deferred tax
      asset, or portion thereof, to be utilized, and will reduce the valuation
      allowance appropriately at such time when it is determined that the “more likely
      than not” approach is satisfied.




Valuation
      and evaluating impairment of long-lived assets and goodwill




Goodwill
      represents the excess of the purchase price over the fair value of net assets
      acquired. Goodwill is not amortized, but reviewed for impairment annually or
      whenever conditions exist that indicate an impairment could exist. The Company
      performed the annual impairment test in fiscal years 2006, 2005 and 2004 and
      concluded that no impairment had occurred.




The
      Company evaluates the recoverability of its long-lived assets in accordance
      with
      SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
SFAS 144 requires recognition of impairment of long-lived assets in the
      event that events or circumstances indicate an impairment may have occurred
      and
      when the net book value of such assets exceeds the future undiscounted cash
      flows attributed to such assets. We assess the impairment of long-lived assets
      whenever events or changes in circumstances indicate that the carrying value
      may
      not be recoverable. No impairment of long-lived assets has occurred through
      the
      year ended March 31, 2006.




21
 *Table
          of Contents*


New
      Accounting Pronouncement




In
      December 2004, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 123 (revised 2004)(SFAS 123R), *Share-Based
      Payment* .
      This
      statement requires the compensation cost relating to share-based payment
      transactions to be recognized in a company’s financial statements. That cost
      will be measured based on the fair value of the equity or liability instruments
      issued. Statement 123(R) covers a wide range of share-based compensation
      arrangements including share options, restricted share plans, performance-based
      awards, share appreciation rights, and employee share purchase plans. The
      Company will be required to apply Statement 123(R) effective April 1, 2006.
      For
      fiscal year 2007, management estimates the expense to be approximately
      $103,000.


22
 *Table
          of Contents*


***Contractual
      Obligations***





Our
      contractual obligations and commitments are summarized in the table below (in
      000’s):




Total
            
            Less
                than 1 Year
            
            1-3
                years
            
            4-5
                years
            
            After
                5 yearsLong-term
                debt (1)
            
            $
            1,361
            
            $
            1,343
            
            $
            18
            
            $
            0
            
            $
            0Operating
                leases
            
            
            568
            
            
            193
            
            
            261
            
            
            89
            
            
            25Total
                Contractual CashObligations
            
            $
            1,929
            
            $
            1,536
            
            $
            279
            
            $
            89
            
            $
            25




(1)
            Includes
                fixed interest ranging from 0.62 to
                10.00%.




***Results
      of Operations***




**2006
      Compared to 2005**




**REVENUES**




Consolidated
      revenues for the fiscal year ended 2006 increased 13% to $15,718,000 from sales
      of $13,886,000 in 2005. Consolidated cost of sales decreased from 81% in 2005
      to
      78% in 2006 resulting in improved gross margin of $3,517,000 in 2006 as compared
      to $2,688,000 in 2005, an increase of 31%. Consolidated operating losses,
      however increased to $4,655,000 in 2006 compared to $3,795,000 in 2005.
      Consolidated net losses, however, decreased somewhat to $3,349,000 in 2006
      or
      $.28 per diluted share compared to $3,420,000 or $.29 in 2005. The losses
      in fiscal 2006 were impacted by significantly increased legal expenses and
      non-operating activities related to the sale of Metal Organic Chemical Vapor
      Deposition (MOCVD) operations and a non-cash deferred tax liability related
      to
      goodwill on acquisitions. Increased legal expenses related to the defense of
      a
      lawsuit brought by EIT, a Virginia corporation, and a non-cash tax expense
      accrual related to goodwill were offset by a gain on the sale of Metal Organic
      Chemical Vapor Deposition (MOCVD) operations.





APACN’s
      revenues for the year ended 2006 were $15,641,000 versus $13,801,000 in the
      year
      ended 2005, an increase of 13%. The increase is primarily attributable to an
      increased acceptance of the Company’s products within the FTTH market resulting
      from increased sales and marketing activities during the fiscal year 2006.
      Sales
      to broadband service providers and commercial data networks, which include
      APACN
      custom fiber distribution systems, associated cable assemblies and optical
      components, were $10,488,000 or 67% of revenue. Sales to OEM’s, consisting
      primarily of fiber optic and copper cable assemblies produced to customer design
      specifications, were $5,152,000, or 33% of revenue. This compares to 69% for
      broadband and commercial data networks and 31% for OEM’s in the prior year.
      APACN’s revenue growth is dependent upon capital expenditures in the
      communications equipment industry, our ability to develop and introduce new
      products, and our ability to acquire and retain business in a competitive
      industry. We expect sales at APACN in fiscal 2007 to continue to increase as
      a
      result of our investment in market development activities and the acceptance
      of
      the product line within our target customers.




Gross
      revenues at Optronics for the year ended 2006 were $400,000, compared to
      $489,000 in 2005, a decrease of 24%.  Gross revenues reflect approximately
      $323,000 of sales to APACN for fiber optics products and subcontracted labor
      versus $404,000 last year. These sales are eliminated as intercompany sales
      in
      the consolidated financial statements. Sales of UV monitors were $39,000 versus
      $29,000 in the prior year period, and sales of foundry services were $60,000
      in
      2006 versus $41,000 in 2005. Optronics’ revenue growth is dependent upon our
      ability to successfully establish manufacturing reliability for our GaN products
      and successful selling into our targeted market segments.




23
 *Table
          of Contents*


**COST
      OF SALES AND GROSS PROFIT**




APACN’s
      gross profit for the year ended in 2006 was $4,195,000 as compared to $3,821,000
      in 2005. Gross profit percent for APACN for the year ended March 31, 2006 was
      27% versus 28% in the prior year. The decrease in margin percentage reflects
      continued downward price pressure. The company expects to experience continued
      downward price pressure throughout fiscal 2007 and is continuing on its ongoing
      program to reduce the cost of its products through a combination of product
      re-design, process improvement and global sourcing of components and outside
      manufacturing. We expect gross margin percentage for APACN in fiscal 2007 to
      be
      about the same as in fiscal 2006.




Optronic’s
      net cost of sales for the year ended 2006 were $755,000 as compared to
      $1,218,000 in 2005. Personnel related expenses decreased approximately $250,000
      due to staff reductions in our GaN product line and the termination of our
      Aberdeen manufacturing facility.




**RESEARCH
      AND DEVELOPMENT EXPENSES**




Research
      and development (“R&D”) expenses consist solely of the research and
      development expense at Optronics. There have been no research and development
      expenses at APACN. R&D expenses increased by approximately $305,000, to
      $1,409,000 for the year ended March 31, 2006 as compared to $1,104,000 for
      the
      year ended March 31, 2005. This represents an increase of 28% from 2005. The
      majority of the increase reflects additional rental and depreciation costs
      associated with operating a semiconductor machine for the entire year fiscal
      year of 2006 as compared to only the last two quarters in fiscal 2005. We expect
      these R&D expenses to reduce significantly during fiscal 2007 due mainly to
      the sale of the operations of the semiconductor machine.




**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**




Consolidated
      selling, general and administration (“S, G & A”) expenses increased
      approximately $1,384,000, or 26%, to $6,763,000 in 2006 from $5,379,000 in
      2005.




S,
      G
& A expenses at APACN were $4,248,000 for the year ending March 31, 2006 as
      compared to $3,487,000 in 2005, an increase of $761,000 or 22% mainly due to
      increased sales and marketing activities. As a percentage of revenue, we expect
      S, G & A expenses to be comparable in fiscal year 2007 to fiscal year
      2006.




S,
      G
& A expenses at Optronics increased $626,000 to $2,519,000 for the year
      ending March 31, 2006, from $1,893,000 in the prior period. The increase is
      mainly due to $443,000 increased legal costs primarily associated with the
      defense of a law suit from Electronic Instrumentation and Technology, Inc.
      (EIT), a Virginia corporation. We expect S, G, & A in fiscal 2007 to
      decrease significantly as compared to S, G & A in fiscal 2006.




**GAIN
      ON DISPOSAL OF ASSETS (net)**




Gains
      on
      disposal of assets at APACN were $4,000 in fiscal year ending March 31, 2006.
      There were no gains in the prior fiscal year.




24
 *Table
          of Contents*


Gains
      on
      disposal of assets at Optronics were $1,195,000 in fiscal year ended March
      31,
      2006 as compared to $209,000 in fiscal year ended March 31, 2005. A gain of
      approximately $1,163,000 was recognized on the sale of the MOCVD equipment
      and
      licensing of two patents during March 2006. In the prior fiscal year, the
      company realized a gain of approximately $196,000 on the sale of the optics
      product line in April 2004




**OTHER
      INCOME AND EXPENSE**




Other
      income at APACN increased approximately $114,000 to $122,000 in fiscal 2006
      as
      compared to $8,000 in fiscal 2005. The difference is due mainly to significant
      contingent goodwill earn out of approximately $119,000, during fiscal year
      2006,
      from Crescent Electric during the 3 rd and
      final year of agreement acquired as a direct result of CSP acquisition. Other
      expense at APACN increased $83,000 to $386,000 for the year ending March 31,
      2006 versus $303,000 in the prior year period. Interest expense increased
      $83,000 due to a higher debt balance outstanding and increasing interest rates
      over the year.




Other
      income at Optronics increased approximately $251,000 to $808,000 in fiscal
      2006
      from $557,000 in 2005. Interest income increased approximately $183,000 due
      mainly to higher interest income earned on cash equivalents. Other expenses
      increased approximately $69,000 to $160,000 from $91,000 in 2005, due mainly
      to
      the expenses related to the EIT judgment and write-down of fiber optic assets
      during the fiscal year 2006.




**NET
      LOSS**




Consolidated
      net loss decreased $71,000 to $3,349,000, or $.28 cents per share in fiscal
      2006, as compared to a net loss of $3,420,000, or $.29 cents per share, in
      fiscal 2005.




Net
      loss
      for APACN for the year ending 2006 was $588,000 versus a profit of $36,000
      in
      fiscal 2005. The increased losses during the fiscal 2006 were mainly due to
      the
      expansion of its sales and marketing activities and an accrual for taxes on
      goodwill.




Net
      loss
      for Optronics for the year ending 2006 was $2,760,000, a decrease of $696,000,
      or 20%, from $3,456,000 in 2005. The decreased losses are primarily the result
      of sale of its MOCVD operations and licensing of two patents.




**2005
      Compared to 2004**




**REVENUES**




Consolidated
      revenues for the fiscal year ended 2005 increased 17% to $13,886,000 from sales
      of $11,909,000 in 2004. Consolidated cost of sales decreased to $11,198,000
      in
      2005 from $11,914,000 in 2004.  Consolidated operating losses decreased to
      $3,795,000 in 2005 compared to $6,558,000 in 2004. Consolidated net losses
      decreased to $3,420,000 in 2005 or $.29 per diluted share compared to $6,535,000
      or $.55 in 2004.


25
 *Table
          of Contents*


APACN’s
      revenues for the year ended 2005 were $13,801,000 versus $11,691,000 in the
      year
      ended 2004, an increase of 18%. The increase is primarily attributable to higher
      revenues in the first quarter of fiscal 2005 generated by the acquisition of
      Americable, Inc., which occurred at the end of the first quarter of fiscal
      2004.
      The Americable assets contributed no corresponding revenues for the first
      quarter of fiscal 2004. Sales to broadband service providers and commercial
      data
      networks, which include APACN custom fiber distribution systems, associated
      cable assemblies and optical components, were $9,483,000 or 69% of revenue.
      Sales to OEM’s, consisting primarily of fiber optic and copper cable assemblies
      produced to customer design specifications, were $4,317,000, or 31% of revenue.
      This compares to 60% for broadband and commercial data networks and 40% for
      OEM’s in the prior year. The change in mix is partially a result of an increased
      acceptance of the Company’s products within the FTTH market, offset by lower
      demand from some OEM customers. APACN’s revenue growth is dependent upon capital
      expenditures in the communications equipment industry, our ability to develop
      and introduce new products, and our ability to acquire and retain business
      in a
      competitive industry.





Gross
      revenues at Optronics for the year ended 2005 were $490,000, compared to
      $409,000 in 2004, an increase of 20%.  Gross revenues reflect approximately
      $404,000 of sales to APACN for fiber optics products and subcontracted labor
      versus $191,000 last year. These sales are eliminated as intercompany sales
      in
      the consolidated financial statements. The Company had no sales of its optics
      products in 2005 versus $92,000 in the prior year due to the sale of that
      product line in April 2004. Sales of UV monitors were $28,000 versus $23,000
      in
      the prior year period, and sales of foundry services were $41,000 in 2005.
      Optronics’ revenue growth is dependent upon our ability to successfully
      establish manufacturing reliability for our GaN products and successful selling
      into our targeted market segments.




**COST
      OF SALES AND GROSS PROFIT**




APACN’s
      gross profit for the year ended in 2005 was $3,821,000 as compared to $2,660,000
      in 2004. The increase is due mainly to higher margins generated in the first
      quarter of fiscal 2005 generated by the acquisition of Americable assets. Gross
      profit percent for APACN for the year ended March 31, 2005 was 28% versus 23%
      in
      the prior year. The increase in margin percentage reflects reduced production
      costs, resulting from consolidating multiple facilities, and a focus on selling
      higher margin products.




Optronic’s
      net cost of sales for the year ended 2005 were $1,218,000 as compared to
      $2,883,000 in 2004. Personnel related costs decreased approximately $780,000
      due
      to staff reductions in response to demand and the sale of the optics product
      line in April 2004. In addition, inventory writeoffs decreased approximately
      $125,000 and other production expenses decreased approximately $140,000 due
      to
      cost reductions implemented in fiscal 2004 and 2005 in the optics and GaN
      product lines.




**RESEARCH
      AND DEVELOPMENT EXPENSES**




Research
      and development (“R&D”) expenses consist solely of the research and
      development expense at Optronics. There have been no research and development
      expenses at APACN. R&D expenses increased by approximately $155,000, to
      $1,104,000 for the year ended March 31, 2005 as compared to $949,000 for the
      year ended March 31, 2004. This represents an increase of 16% from 2004. The
      majority of the increase reflects additional rental and depreciation costs
      associated with operating a semiconductor machine, beginning in the third
      quarter of fiscal 2005, as well as personnel costs associated with this start
      up
      and HFET development.




**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**




Consolidated
      selling, general and administration (“S, G & A”) expenses decreased
      approximately $226,000, or 4%, to $5,379,000 in 2005 from $5,605,000 in 2004.




S,
      G & A expenses at APACN were $3,487,000 for
      the year ending March 31, 2005 as compared to $3,615,000 in 2004. The majority
      of the difference is attributable to expenses generated by the assets acquired
      from Americable which occurred at the end of the first quarter of fiscal 2004.
      Consolidation of facilities beginning in fiscal 2004 also contributed to lower
      costs in fiscal 2005.




26
 *Table
          of Contents*




S,
      G
& A expenses at Optronics decreased $97,000 to $1,893,000 for the year
      ending March 31, 2005, from $1,990,000 in the prior period. The decrease is
      attributable to a reduction in personnel expense of $260,000 in 2005, which
      was
      offset in part by higher outside services in 2005 related to India development
      expenses, along with higher facility expenses in 2005 (which consists of
      facility expenses included in cost of sales in 2004 but reclassified as S,
      G,
& A in 2005) as this portion of the facility is no longer used for
      manufacturing operations.




**GAIN
      ON DISPOSAL OF ASSETS (net)**




Gains
      on
      disposal of assets were only recognized at Optronics. These gains were $209,000
      in fiscal year ended March 31, 2005. There were no gains recognized in the
      prior
      fiscal year. The company realized a gain of approximately $196,000 on the sale
      of the optics product line in April 2004.




**OTHER
      INCOME AND EXPENSE**




Other
      income at APACN decreased approximately $15,000 to $8,000 in fiscal 2005 as
      compared to $23,000 in fiscal 2004. The difference is due mainly to higher
      income for management fees earned in fiscal 2004 related to the CSP acquisition.
      Other expense at APACN decreased $9,000 to $303,000 for the year ending March
      31, 2005 versus $312,000 in the prior year period. Interest expense increased
      $64,000 due to a higher debt balance outstanding over the year. That was offset
      by a reduction of $77,000 in asset disposal charges absorbed in the prior year.




Other
      income at Optronics increased approximately $127,000 to $557,000 in fiscal
      2005
      from $430,000 in 2004. Interest income increased approximately $100,000 due
      mainly to higher interest income earned on cash equivalents. In addition $39,000
      in facility related rental was also generated due to the sale of the fiber
      optics product line in April 2004. Other expenses decreased approximately
      $24,000 to $91,000 from $115,000 in 2004, due mainly to the absence of expenses
      related to assets disposed of in the prior year.




**NET
      LOSS**




Consolidated
      net loss decreased $3,115,000 to $3,420,000, or $.29 cents per share, as
      compared to a net loss of $6,535,000, or $.55 cents per share, in fiscal 2004.




Net
      income for APACN for the year ending 2005 was $36,000 versus a loss of
      $1,245,000 in fiscal 2004. The income is due mainly to increased revenue,
      reduced duplicate and one time expenses, lower personnel costs and more
      efficient operations achieved in the consolidation of the CSP and Americable
      assets.




Net
      loss
      for Optronics for the year ending 2005 was $3,456,000, a decrease of $1,834,000,
      or 35%, from $5,290,000 in 2004. The decreased losses are primarily the result
      of lower personnel and production expenses from cost reduction efforts
      implemented in fiscal 2004 and 2005, combined with the gain on sale of the
      optics business and the related savings of expense related to that product
      line.




***Liquidity
      and Capital Resources***




As
      of
      March 31, 2006, our principal source of liquidity was our cash, cash equivalents
      and short-term investments, which totaled $8,948,000 compared to $10,813,000
      at
      March 31, 2005.




27
 *Table
          of Contents*


We
      used
      $3,276,000 to fund operating activities during fiscal 2006 compared to
      $2,247,000 in fiscal 2005, and $5,596,000 in fiscal 2004. In all three years
      the
      largest use of cash in operating activities was the funding of the net losses.
      The net loss for fiscal 2006 decreased to $3,349,000 from $3,420,000 in fiscal
      2005. The primary factor contributing to the decreased loss from fiscal 2005
      to
      2006 was the sale of the MOCVD equipment and licensing of two patents which
      was
      mostly negated by increased S, G&A costs. The primary factors contributing
      to the decreased loss from fiscal 2004 to 2005 were the profitable operations
      at
      APACN and reduced expenses at Optronics.




In
      fiscal
      2006 we netted approximately $1,629,000 in positive cash flows from investing
      activities after accounting for the purchase of property and equipment of
      $428,000 and $2,057,000 proceeds from the sale of assets, including proceed
      of
      $1,900,000 of MOCVD equipment and licensing of two patents. In fiscal 2005
      we
      used $249,000 in investing activities, including $49,000 used to purchase assets
      through APA Optronics (India) Private Limited (See Note B of Notes to the
      Consolidated Financial Statements included under Item 8 of this Report). We
      also
      invested $429,000 to purchase property and equipment, mainly for production
      equipment at Optronics. In fiscal 2004 we used $2,753,000 in investing
      activities including $1,960,000 used to purchase the assets of Americable.
      We
      also invested $786,000 to purchase property and equipment, mainly for the
      purchase of the MOCVD system




In
      fiscal
      2006, we used $219,000 in financing activities, primarily to pay down long-term
      debt relating to our facility in Aberdeen, South Dakota. In fiscal 2005, we
      used
      $235,000 in financing activities, primarily to pay down long-term debt relating
      to our facility in Aberdeen, South Dakota. In fiscal 2004, we used $342,000
      in
      financing activities primarily to pay down long-term debt relating to our
      facility in Aberdeen, South Dakota.




Construction
      of our manufacturing facility in Aberdeen utilized certain economic incentive
      programs offered by the State of South Dakota and the City of Aberdeen. At
      March
      31, 2006, the total principal outstanding under bonds issued by the State of
      South Dakota was $1,320,000. Interest on the bonds ranges from 5.8% to 6.75%,
      and the bonds are due in various installments between 2005 and 2016. These
      bonds
      require compliance with certain financial covenants. We were out of compliance
      with these covenants during all of fiscal 2004, 2005 and 2006. For further
      information regarding these bonds, see Note I of Notes to the Consolidated
      Financial Statements included under Item 8 of this Report. On April 14, 2004
      the
      Company sold its optics manufacturing operations, as discussed in Note C to
      the
      Consolidated Financial Statements included under Item 8 of this Report, to
      PNE,
      Inc. dba IRD. The terms of the sale required the Company to prepay $89,000
      of a
      loan with the Aberdeen Development Corporation (“ADC”) in South Dakota and to
      accelerate the loan payment schedule to maturity in fiscal 2011 from 2016.
      In
      June 2005, the Company sold a portion of the land in Aberdeen acquired from
      ADC
      back to ADC in consideration of cancellation of the remaining $120,000 due
      on
      the loan. Accordingly, the loan from ADC is fully satisfied. See Note D to
      the
      Consolidated Financial Statements included under Item 8 of this
      Report.




Our
      capital requirements are dependent upon several factors, including market
      acceptance of our products, the timing and extent of new product introductions
      and delivery, and the costs of marketing and supporting our products on a
      worldwide basis. See “Item 1. Business.” Although we believe that our current
      cash, cash equivalents, and short-term investments will be sufficient to fund
      our operations for more than the next 12 months, we cannot assure you that
      we
      will not seek additional funds through public or private equity or debt
      financing or from other sources within this time frame, or that additional
      funding, if needed, will be available on terms acceptable to us, or at all. We
      may
      also consider the acquisition of, or evaluate investments in, products and
      businesses complementary to our business. Any acquisition or investment may
      require additional capital.




28
 *Table
          of Contents*


**ITEM
                7A.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK.**




Our
      exposure to market risk for changes in interest rates relates primarily to
      our
      cash equivalents. The portfolio includes only marketable securities with active
      secondary or resale markets to ensure liquidity. We have no investments
      denominated in foreign country currencies and, therefore, our investments are
      not subject to foreign exchange risk. See “Cash and Equivalents” under Note A of
      the Consolidated Financial Statements.




**ITEM8.**
            **FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATA.**




Quarterly
      Results of Operations. The following tables present our unaudited quarterly
      operating results for the eight quarters ended March 31, 2006:




Quarter
                EndedJune
                30,2004(1)
            
            September
                30,2004
            
            December
                31,2004
            
            March
                31,2005Statement
                of Operations DataNet
                revenue
            
            $
            3,687,718
            
            $
            3,668,068
            
            $
            3,305,299
            
            $
            3,225,401Gross
                profit
            
            
            600,875
            
            
            782,264
            
            
            601,140
            
            
            704,031Net
                loss
            
            
            (702,836
            )
            
            (883,047
            )
            
            (928,510
            )
            
            (905,645
            )Net
                loss per share, basic and diluted
            
            $
            (0.06
            )
            $
            (0.07
            )
            $
            (0.08
            )
            $
            (0.08
            )





Quarter
                EndedJune
                30,2005
            
            September
                30,2005
            
            December
                31,2005
            
            March
                31,2006(2)Statement
                of Operations DataNet
                revenue
            
            $
            3,512,563
            
            $
            4,069,367
            
            $
            4,379,192
            
            $
            3,756,715Gross
                profit
            
            
            725,110
            
            
            904,070
            
            
            1,024,333
            
            
            863,591Net
                loss
            
            
            (891,006
            )
            
            (1,063,628
            )
            
            (1,275,786
            )
            
            (118,428
            )Net
                loss per share, basic and diluted
            
            $
            (0.08
            )
            $
            (0.09
            )
            $
            (0.11
            )
            $
            (0.01
            )





(1)
            In
                January, 2004 the Company announced the discontinuance of optics
                manufacturing at its Blaine, Minnesota facility. The closure was
                the
                result of aggressive off-shore pricing and continued lower demand
                for this
                product line. The Company sold its optics manufacturing operations
                on
                April 14, 2004 for $220,000.





(2)
            During
                the fourth quarter of fiscal year 2006, the Company recorded a deferred
                income tax liability of $272,000 related to goodwill from
                acquisitions.


29
 *Table
          of Contents*


REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board
      of
      Directors and Shareholders


APA
      Enterprises, Inc.





We
      have
      audited the accompanying consolidated balance sheets of APA Enterprises, Inc.
      and subsidiaries as of March 31, 2006 and 2005, and the related
      consolidated statements of operations, shareholders’ equity, and cash flows for
      each of the three years in the period ended March 31, 2006. These consolidated
      financial state-ments are the responsibility of the Com-pany’s management. Our
      responsibility is to express an opinion on these consolidated financial
      state-ments based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assur-ance about whether the
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform, an audit of its internal
      controls over financial reporting. Our audit included consideration of internal
      controls over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion of the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above pre-sent
      fairly, in all material respects, the consolidated financial position of APA
      Enterprises, Inc. and subsidiaries as of March 31, 2006 and 2005 and the
      consolidated results of their operations and their consolidated cash flows
      for
      each of the three years in the period ended March 31, 2006, in con-formity
      with
      accounting principles generally accepted in the United States of
      America.








/s/
      Grant
      Thornton LLP





Minneapolis,
      Minnesota


May
      12,
      2006


30
 *Table
          of Contents*


**APA
      Enterprises, Inc.**





**CONSOLIDATED
      BALANCE SHEETS**





**March
      31,**





ASSETS
            
            2006
            
            2005CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            8,947,777
            
            $
            10,813,492Accounts
                receivable, net of allowance for uncollectible accounts of $77,831
                and
                $57,107 at March 31, 2006 and 2005
            
            
            1,892,483
            
            
            1,446,248Inventories
            
            
            1,836,843
            
            
            1,270,653Prepaid
                expenses
            
            
            173,040
            
            
            264,372Bond
                reserve funds
            
            
            126,385
            
            
            131,548Total
                current assets
            
            
            12,976,528
            
            
            13,926,313PROPERTY,
                PLANT AND EQUIPMENT, net
            
            
            2,623,412
            
            
            3,946,998OTHER
                ASSETSBond
                reserve funds
            
            
            343,241
            
            
            337,091Goodwill
            
            
            3,422,511
            
            
            3,422,511Other
            
            
            227,879
            
            
            441,1013,993,631
            
            
            4,200,703$
            19,593,571
            
            $
            22,074,014




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




31
 *Table
          of Contents*


**APA
      Enterprises, Inc.**





**CONSOLIDATED
      BALANCE SHEETS** ** **-
      Continued**





**March
      31,**





LIABILITIES
                AND SHAREHOLDERS’ EQUITY
            
            2006
            
            2005CURRENT
                LIABILITIESCurrent
                maturities of long-term debt
            
            $
            1,342,481
            
            $
            1,471,036Accounts
                payable
            
            
            1,353,828
            
            
            814,005Accrued
                compensation
            
            
            815,046
            
            
            568,950Accrued
                expenses
            
            
            211,840
            
            
            190,062Total
                current liabilities
            
            
            3,723,195
            
            
            3,044,053LONG-TERM
                DEBT, net of current maturities
            
            
            18,480
            
            
            107,800DEFERRED
                INCOME TAXES
            
            
            272,454
            
            
            -Total
                liabilities
            
            
            4,014,129
            
            
            3,151,853COMMITMENTS
                AND CONTINGENCIES
            
            
            -
            
            
            -SHAREHOLDERS’
                EQUITYUndesignated
                shares, 4,999,500 authorized shares; no shares issued and
                outstanding
            
            
            -
            
            
            -Preferred
                stock, $.01 par value; 500 authorized shares; no shares issued and
                outstanding
            
            
            -
            
            
            -Common
                stock, $.01 par value; 50,000,000 authorized shares; 11,872,331 shares
                issued and outstanding at March 31, 2006 and 2005
            
            
            118,723
            
            
            118,723Additional
                paid-in capital
            
            
            51,966,213
            
            
            51,960,084Accumulated
                deficit
            
            
            (36,505,494
            )
            
            (33,156,646
            )Total
                shareholders equity
            
            
            15,579,442
            
            
            18,922,161$
            19,593,571
            
            $
            22,074,014




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


32
 *Table
          of Contents*


**APA
      Enterprises, Inc.**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Years
      ended March 31,**





2006
            
            2005
            
            2004Revenues
            
            $
            15,717,837
            
            $
            13,886,486
            
            $
            11,909,465Cost
                of sales
            
            
            12,200,733
            
            
            11,198,176
            
            
            11,914,050Gross
                profit (loss)
            
            
            3,517,104
            
            
            2,688,310
            
            
            (4,585
            )Operating
                expensesResearch
                and development
            
            
            1,408,778
            
            
            1,103,972
            
            
            948,737Selling,
                general and administrative
            
            
            6,763,068
            
            
            5,379,483
            
            
            5,605,177Gain
                on sale of assets (net)
            
            
            (1,198,295
            )
            
            (208,837
            )
            
            -6,973,551
            
            
            6,274,618
            
            
            6,553,914Loss
                from operations
            
            
            (3,456,447
            )
            
            (3,586,308
            )
            
            (6,558,499
            )Other
                income
            
            
            547,878
            
            
            275,661
            
            
            225,719Other
                expense
            
            
            (164,708
            )
            
            (105,253
            )
            
            (200,314
            )383,170
            
            
            170,408
            
            
            25,405Loss
                before income taxes
            
            
            (3,073,277
            )
            
            (3,415,900
            )
            
            (6,533,094
            )Income
                taxes
            
            
            275,571
            
            
            4,138
            
            
            2,053Net
                loss
            
            $
            (3,348,848
            )
            $
            (3,420,038
            )
            $
            (6,535,147
            )Net
                loss per shareBasic
                and diluted
            
            $
            (0.28
            )
            $
            (0.29
            )
            $
            (0.55
            )Weighted
                average shares outstandingBasic
                and diluted
            
            
            11,872,331
            
            
            11,872,331
            
            
            11,872,331




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




33
 *Table
          of Contents*


**APA
      Enterprises, Inc.**





**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**





**Years
      ended March 31,**




Undesignated
              
              
              
              
              
              Additional
              
              
              
              Totalshares
              
              Preferred
                  stock
              
              Common
                  stock
              
              paid-in
              
              Accumulated
              
              shareholders’Shares
              
              Amount
              
              Shares
              
              Amount
              
              capital
              
              deficit
              
              equityBalance
                  at March 31, 2003
              
              
              -
              
              
              -
              
              $
              -
              
              
              11,872,331
              
              $
              118,723
              
              $
              52,001,681
              
              $
              (23,201,461
              )
              $
              28,918,943Options
                  issued as compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (20,735
              )
              
              -
              
              
              (20,735
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (6,535,147
              )
              
              (6,535,147
              )Balance
                  at March 31, 2004
              
              
              -
              
              
              -
              
              
              -
              
              
              11,872,331
              
              
              118,723
              
              
              51,980,946
              
              
              (29,736,608
              )
              
              22,363,061Options
                  issued as compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (20,862
              )
              
              -
              
              
              (20,862
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,420,038
              )
              
              (3,420,038
              )Balance
                  at March 31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              11,872,331
              
              $
              118,723
              
              $
              51,960,084
              
              $
              (33,156,646
              )
              $
              18,922,161Change
                  in options issued as compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,129
              
              
              -
              
              
              6,129Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,348,848
              )
              
              (3,348,848
              )Balance
                  at March 31, 2006
              
              
              -
              
              
              -
              
              $
              -
              
              
              11,872,331
              
              $
              118,723
              
              $
              51,966,213
              
              $
              (36,505,494
              )
              $
              15,579,442




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




34
 *Table
          of Contents*


**APA
      Enterprises, Inc.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Years
      ended March 31,**




2006
              
              2005
              
              2004Cash
                  flows from operating activities:Net
                  loss
              
              $
              (3,348,848
              )
              $
              (3,420,038
              )
              $
              (6,535,147
              )Adjustments
                  to reconcile net loss to net cash provided by (used in) operating
                  activities, net of acquisitions:Depreciation
                  and amortization
              
              
              1,061,199
              
              
              1,003,573
              
              
              971,194Deferred
                  tax liability
              
              
              272,454
              
              
              -
              
              
              -Gain
                  on sale of assets
              
              
              (1,198,295
              )
              
              (208,837
              )
              
              -Compensation
                  expense
              
              
              6,129
              
              
              (20,862
              )
              
              (20,735
              )Changes
                  in operating assets and liabilities, net of acquisitions:Accounts
                  receivable, net
              
              
              (446,235
              )
              
              341,293
              
              
              (678,686
              )Inventories
              
              
              (566,190
              )
              
              303,535
              
              
              (179,293
              )Prepaid
                  expenses and other assets
              
              
              136,111
              
              
              (134,910
              )
              
              (44,909
              )Accounts
                  payable and accrued expenses
              
              
              807,697
              
              
              (110,679
              )
              
              891,795Net
                  cash used in operating activities
              
              
              (3,275,978
              )
              
              (2,246,925
              )
              
              (5,595,781
              )Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (427,631
              )
              
              (429,457
              )
              
              (785,870
              )Proceeds
                  from sale of assets
              
              
              1,936,756
              
              
              229,000
              
              
              -Cash
                  paid for business acquisitions
              
              
              -
              
              
              (48,772
              )
              
              (1,960,000
              )Other
              
              
              -
              
              
              -
              
              
              (7,376
              )Net
                  cash provided by (used in) investing activities
              
              
              1,509,125
              
              
              (249,229
              )
              
              (2,753,246
              )Cash
                  flows from financing activities:Payment
                  of long-term debt
              
              
              (97,875
              )
              
              (232,923
              )
              
              (361,923
              )Bond
                  reserve funds
              
              
              (987
              )
              
              (2,341
              )
              
              20,174Net
                  cash used in financing activities
              
              
              (98,862
              )
              
              (235,264
              )
              
              (341,749
              )Decrease
                  in cash and cash equivalents
              
              
              (1,865,715
              )
              
              (2,731,418
              )
              
              (8,690,776
              )Cash
                  and cash equivalents at beginning of year
              
              
              10,813,492
              
              
              13,544,910
              
              
              22,235,686Cash
                  and cash equivalents at end of year
              
              $
              8,947,777
              
              $
              10,813,492
              
              $
              13,544,910Supplemental
                  cash flow information:Cash
                  paid during the year for:Interest
              
              $
              90,816
              
              $
              99,337
              
              $
              109,251Income
                  taxes
              
              
              3,117
              
              
              4,138
              
              
              2,053Noncash
                  investing and financing transactions:Debt
                  relieved in exchange for land
              
              $
              120,000
              
              $
              -
              
              $
              -Capital
                  expenditure included in accounts payable
              
              $
              -
              
              $
              -
              
              $
              225,000





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




35
 *Table
          of Contents*


**APA
      Enterprises, Inc.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**March
      31, 2006, 2005 and 2004**





**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




Nature
      of Business





APA
      Enterprises, Inc., formerly APA Optics, Inc., (the Company) is a manufacturer
      of
      custom cable assemblies and supplier of premise cabling components and
      networking products to customers throughout the United States with a
      concentration in Minnesota. The Company also manufactures and markets a range
      of
      gallium nitride-based devices.





Principles
      of Consolidation





The
      consolidated financial statements include the accounts of APA Enterprises,
      Inc.
      and its wholly-owned subsidiaries. All significant inter-company accounts and
      transac-tions have been eliminated in consolidation.





Foreign
      Currency Translation





The
      Company uses the United States dollar as its functional currency for its
      subsidiary in India. India’s financial statements were translated into U.S.
      Dollars at the year end exchange rate, while income and expenses are translated
      at the average exchange rates during the year. There was no significant foreign
      exchange translation gain or losses during fiscal years ended March 31, 2006
      and
      2005. There were no foreign currency operations during fiscal year ended March
      31, 2004.





Revenue
      Recognition





Revenue
      is recognized when persuasive evidence of an arrangement exists, the product
      has
      been delivered, the fee is fixed, acceptance by the customer is reasonably
      certain and collection is probable.





Cash
      and Cash Equivalents





The
      Company considers all highly liquid investments with original maturities of
      three months or less to be cash equivalents. Investments classified as cash
      equivalents at March 31, 2006 and 2005 consist entirely of short-term money
      market accounts. Cash equivalents are stated at cost, which approximates fair
      value.





Cash
      of
      approximately $104,000 and $145,000 was on deposit in foreign financial
      institutions at March 31, 2006 and 2005. The Company maintains cash balances
      at
      several financial institutions, and at times, such balances exceed insured
      limits. The Company has not experienced any losses in such accounts and believes
      it is not exposed to any significant credit risk on cash.


36
 *Table
          of Contents*


**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**





Accounts
      Receivable





Credit
      is
      extended based on the evaluation of a customer’s financial condition and,
      generally, collateral is not required. Accounts outstanding longer than the
      contractual payment terms are considered past due. The Company determines its
      allowance by considering a number of factors, including the length of time
      trade receivables
      are past due, the Company’s previous loss history, the customer’s current
      ability to pay its obligation to the Company, and the condition of the general
      economy and the industry as whole. The Company writes off accounts receivable
      when they become uncollectible; payments subsequently received on such
      receivables are credited to the allowance for doubtful accounts.





Inventories





Inventories
      consist of finished goods, raw materials and work in process and are stated
      at
      the lower of average cost (which approximates the first-in, first-out method)
      or
      market. Cost is determined using material costs, labor charges, and allocated
      factory overhead charges.





Property,
      Plant and Equipment





Property,
      plant and equipment are stated at cost, less accumulated depreciation and
      amortiza-tion. Depreciation and amortization are provided on the straight-line
      method for book and tax purposes over the follow-ing estimated useful lives
      of
      the assets:





YearsBuilding
            
            
            20Equipment
            
            
            3
                - 7Leasehold
                improvements
            
            
            7
                - 10 or life of lease





Goodwill





Goodwill
      represents the excess of the purchase price over net assets
      acquired. ** Goodwill
      is not amortized. Goodwill is tested for impairment annually or whenever
      conditions exist that indicate an impairment could exist. The Company performed
      the annual impairment test in fiscal years 2006 and 2005 and concluded that
      no
      impairment had occurred.




Stock-Based
      Compensation




The
      Company has various incentive and non-qualified stock option plans which are
      used as an incentive for directors, officers, and other employees, as described
      more fully in Note N. The Company uses the intrinsic value method to value
      stock
      options issued to employees. Under this method, compensation expense is
      recognized for the amount by which the market price of the common stock on
      the
      date of grant exceeds the exercise price. The Company’s stock based compensation
      income also reflects the benefit of the cancellation of previously unvested
      expensed options. The Company rec-ognized compensation expense of $6,129 for
      the
      year ended March 31, 2006 and compensation income of $20,862 and $20,735 for
      the
      years ended March 31, 2005 and 2004. For those stock options granted where
      the exercise price was equal to the market value of the underlying common stock
      on the date of grant, no stock-based employee compensation cost is reflected
      in
      the net loss. Had the fair value method been applied, our compensation expense
      would have been different. The following table illustrates the effect on net
      loss and net loss per share if the Company had applied the fair value
      method *,* to
      stock-based employee compensation for the following fiscal years:




37
 *Table
          of Contents*




**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**




March
                  31,2006
              
              March
                  31,2005
              
              March
                  31,2004Net
                  loss to common shareholders - as reported
              
              $
              (3,348,848
              )
              $
              (3,420,038
              )
              $
              (6,535,147
              )Less:
                  Total stock-based employee compensation expense determined under
                  fair
                  value method for all awards, net of related tax effects
              
              
              108,472
              
              
              129,914
              
              
              158,936Net
                  loss - pro forma
              
              $
              (3,457,320
              )
              $
              (3,549,952
              )
              $
              (6,694,083
              )Basic
                  and diluted net loss per common share - as reported
              
              $
              (.28
              )
              $
              (.29
              )
              $
              (.55
              )Basic
                  and diluted net loss per common share - pro forma
              
              $
              (.29
              )
              $
              (.30
              )
              $
              (.56
              )





The
      weighted average fair value of options granted in 2006, 2005 and 2004 was $1.39,
      $1.79, and $2.62. The fair value of each option grant is estimated on the date
      of grant using the Black-Scholes option pricing model with the following
      weighted average assumptions used for grants in 2006, 2005 and 2004; zero
      dividend yield, risk-free interest rate of 3.9%, 3.4% and 3.3%; volatility
      of
      75%, 75% and 75%, and a weighted-average expected term of the options of five
      years. No adjustment was made to the Black Scholes calculation to reflect that
      the options are not freely traded.




Fair
      Value of Financial Instruments





Due
      to
      their short-term nature, the carrying value of current financial assets and
      liabilities approximates their fair values. The fair value of long-term
      obligations, if recalculated based on current interest rates, would not
      significantly differ from the recorded amounts.





Net
      Loss Per Share





Basic
      net
      loss per share is computed by dividing net loss by the weighted average number
      of common shares outstanding. Diluted net loss per share is computed by dividing
      net loss by the weighted average number of common shares outstanding and common
      share equivalents related to stock options and warrants, when
      dilutive.





Common
      stock options and warrants to purchase 633,780, 683,361 and 975,937 shares
      of
      com-mon stock with a weighted average exercise price of $2.96, $4.99 and $6.35
      were out-standing during the years ended March 31, 2006, 2005 and 2004, but
      were excluded from the calculation of net loss per share because they were
      antidilutive. Had we not incurred net losses during the fiscal years ended
      March
      31, 2006, 2005 and 2004, we would not have assumed any conversion of stock
      options in fiscal 2006 and 2005, and we would have assumed conversion of stock
      options into 18,031 common shares in fiscal 2004.


38
 *Table
          of Contents*


**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**





Use
      of
      Estimates





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assump-tions that affect the reported amounts
      of assets and liabilities, related revenues and expenses and disclo-sure about
      contingent assets and liabilities at the date of the financial statements.
      Actual results may differ from those estimates used by management.





Impairment
      of Long-Lived Assets





The
      Company evaluates the recoverability of its long-lived assets and requires
      recognition of impairment of long-lived assets if events or circumstances
      indicate an impairment may have occurred and when the net book value of such
      assets exceeds the future undiscounted cash flows attributed to such assets.
      The
      Company assesses the impairment of long-lived assets whenever events or changes
      in circumstances indicate that the carrying value may not be recoverable. No
      impairment of long-lived assets has occurred through the year ended March 31,
      2006.





Income
      Taxes





The
      Company records income taxes in accordance with the liability method of
      accounting. Deferred taxes are recognized for the estimated taxes ultimately
      payable or recoverable based on enacted tax law. The Company establishes a
      valuation allowance to reduce the deferred tax asset to an amount that is more
      likely than not to be realizable. Changes in tax rates are reflected in the
      tax
      provision as they occur.





Reclassifications





Certain
      reclassifications have been made to the 2005 financial statements to conform
      with the presentation used in 2006. These reclassifications had no effect on
      net
      loss or shareholders’ equity as previously reported.





Newly
      Adopted Accounting Standards





In
      December 2004, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 123 (revised 2004) (SFAS 123R), *Share-Based
      Payment* .
      This
      statement requires the compensation cost relating to share-based payment
      transactions to be recognized in a company’s financial statements. That cost
      will be measured based on the fair value of the equity or liability instruments
      issued. Statement 123(R) covers a wide range of share-based compensation
      arrangements including share options, restricted share plans, performance-based
      awards, share appreciation rights, and employee share purchase plans. The
      Company will be required to apply Statement 123(R) effective April 1, 2006.
      For
      fiscal year 2007, management estimates the expense to be approximately
      $103,000.




**NOTE
      B - ACQUISITIONS**





Americable,
      Inc.




On
      June
      27, 2003, the Company acquired certain assets of Americable, Inc. The
      acquisition was accounted for as a purchase and, accordingly, results of
      operations relating to the purchased assets have been included in the statement
      of operations from the date of acquisition. There are no contingent payments
      related to the acquisition.




39
 *Table
          of Contents*




NOTE B - ACQUISITIONS -
      Continued




In
      accordance with SFAS 141, the Company reclassified certain balances from the
      original Americable purchase price allocation as part of an asset valuation
      adjustment. The adjustment was made after determining the fair value of the
      assets purchased. The result of the change was a decrease in inventory and
      property, an increase in accounts receivable, and an increase in goodwill
      recorded. This did not change the purchase price of the transaction. The
      purchase price and assets acquired with purchase price adjustments are as
      follows:




Original
                Purchase Price Allocation
            
            Purchase
                Price Adjustment
            
            Net
                Purchase Price AllocationAccounts
                receivable
            
            $
            594,000
            
            $
            46,279
            
            $
            640,279Inventory
            
            
            638,000
            
            
            (13,944
            )
            
            624,056Property,
                plant and equipment
            
            
            450,000
            
            
            (49,186
            )
            
            400,814Assets
                purchased
            
            
            1,682,000
            
            
            (16,851
            )
            
            1,665,149Goodwill
            
            
            278,000
            
            
            16,851
            
            
            294,851Purchase
                price
            
            $
            1,960,000
            
            $
            -
            
            $
            1,960,000





Goodwill
      is expected to be fully deductible for tax purposes.





**NOTE
      C - SALE OF OPTICS MANUFACTURING OPERATIONS**




In
      January, 2004 the Company announced the discontinuance of optics manufacturing
      at its Blaine, Minnesota facility. The closure was the result of aggressive
      off-shore pricing and continued lower demand for this product line. This
      resulted in a charge of $171,000 taken in the 4 th quarter
      ended March 31, 2004. The Company sold its optics manufacturing operations
      on
      April 14, 2004 for $220,000. The terms of the sale required the Company to
      restructure a loan with the City of Aberdeen, South Dakota, which included
      an
      upfront loan payment of $89,305 and payment of the remaining $140,000 loan
      amount in seven annual installments of $20,000 each beginning June 30, 2004.
      The
      Company recorded a gain of approximately $208,000 on the sale in the first
      quarter of fiscal 2005.





**NOTE
      D - SALE OF LAND**




In
      June
      2005 the Company sold approximately 2 acres of its land in Aberdeen, South
      Dakota to the Aberdeen Development Corporation (ADC) in exchange for the
      retirement of its remaining $120,000 debt on its loan with ADC. The land was
      granted to APA in conjunction with building a facility in Aberdeen and is part
      of a single parcel of approximately 12 acres on which the Company has
      constructed and operates its manufacturing facility. The Company recognized
      a
      gain of approximately $109,000 on the sale of the land in the first quarter
      of
      fiscal 2006.





**NOTE
      E - CLOSING OF THE ABERDEEN FACILITY**




The
      Company ceased all of its operations during the later part of fiscal year 2006
      as a part of its consolidation of manufacturing operations. The Company owned
      facility, located approximately on a 10-acre parcel, is designated for lease
      or
      sale after sub-division of the land in approximately two 5-acre parcels. The
      Company does not have a formal plan for leasing or selling the facility and
      thus
      the building remains classified as property, plant and equipment as of March
      31,
      2006. The company plans to retain the 5-acre vacant land for potential future
      use. The facility, built using proceeds from a South Dakota assisted bond,
      currently has a long-term debt balance of approximately $1.0 Million, after
      adjusting the proceeds from the reserve funds. Note I provides more detailed
      financial information about the long-term debt and reserve
      funds.


40
 *Table
          of Contents*


**NOTE
      F - SALE OF METAL ORGANIC CHEMICAL VAPOR DEPOSITION (MOCVD)
      OPERATIONS**





In
      March,
      2006 the Company sold certain equipment and related intellectual property
      related to its MOCVD operations to an unrelated party for a total consideration
      of $1.9 million in cash and a license back of the technology within a specified
      field of use. The asset purchase agreement includes an additional consulting
      agreement for up to $100,000 over the course of one year. The company recorded
      a
      gain of approximately $1.2 million on the sale in the fourth quarter of fiscal
      2006. The company does not track discrete financial information, therefore
      this
      has not been presented as a discontinued operation.





**NOTE
      G - INVENTORIES**





Inventories
      consist of the following at March 31:




2006
            
            2005Raw
                materials
            
            $
            429,954
            
            $
            266,051Work-in-process
            
            
            48,474
            
            
            9,661Finished
                goods
            
            
            1,358,415
            
            
            994,941$
            1,836,843
            
            $
            1,270,653





**NOTE
      H - PROPERTY, PLANT AND EQUIPMENT**





Property,
      plant and equipment consist of the following at March 31:




2006
            
            2005Land
            
            $
            116,195
            
            $
            127,760Buildings
            
            
            1,809,881
            
            
            1,682,205Manufacturing
                equipment
            
            
            4,802,514
            
            
            5,895,170Office
                equipment
            
            
            863,131
            
            
            699,839Vehicles
            
            
            10,648
            
            
            -Leasehold
                improvements
            
            
            1,135,728
            
            
            1,132,6518,738,097
            
            
            9,537,625Less
                accumulated depreciation and amortization
            
            
            6,114,685
            
            
            5,590,627$
            2,623,412
            
            $
            3,946,998




41
 *Table
          of Contents*


**NOTE
      I - LONG-TERM DEBT**





The
      following is a summary of the outstanding debt at March 31:





2006
            
            2005South
                Dakota Governor’s Office of Economic Development and the Aberdeen
                Development Corporation Bond, 5.8% to 6.75%, due in various installments
                through 2016
            
            $
            1,320,000
            
            $
            1,405,000Low
                interest economic development loans, 0%, due in various installments
                through fiscal 2011
            
            
            -
            
            
            120,000Other
            
            
            40,961
            
            
            53,8361,360,961
            
            
            1,578,836Less
                current maturities
            
            
            1,342,481
            
            
            1,471,036$
            18,480
            
            $
            107,800





At
      March 31, 2006 and 2005, the Company had on deposit with trustees $469,626
      and $468,639 in reserve funds for bond maturities, of which $126,385 and
      $131,548 are for current bond maturities. These funds are included in bond
      reserve funds in the accompanying balance sheets.





The
      loan
      agreement requires the Company to maintain compliance with certain cove-nants.
      The Company was out of compliance with certain of these covenants in fiscal
      2006. All debt, except for other long term debt, has been classified as current
      due to the Company’s covenant violation.




All
          of
          the above debt is secured by land, buildings, and certain equipment of
          the
          Company.




Scheduled
      maturities of the Company’s long-term debt are as follows:




Years
                ending March 31,2007
            
            $
            1,342,4812008
            
            
            14,7732009
            
            
            3,707$
            1,360,961





**NOTE
      J - EMPLOYEE BENEFIT PLAN**




The
      Company maintains a contributory 401(k) profit sharing benefit plan covering
      all
      employ-ees. The Company matches 50% of the first 6% of the employee’s salary
      that was contributed by the employee to the plan. The Company’s contributions
      under this plan were $114,000, $97,000, and $72,000 for the years ended
      March 31, 2006, 2005 and 2004.


42
 *Table
          of Contents*


**NOTE
      K - INCOME TAXES**





Deferred
      taxes recognize the impact of temporary differences between the amounts of
      the
      assets and liabilities recorded for financial statement purposes and such amount
      measured in accordance with tax laws. Realization of net operating loss carry
      forward and other deferred tax temporary differences are contingent upon future
      taxable earnings. The Company’s deferred tax asset was reviewed for expected
      utilization using a “more likely than not” approach as required by SFAS 109 by
      assessing the available positive and negative factors surrounding its
      recoverability. Accordingly, the Company has recorded a full valuation allowance
      at March 31, 2006 and 2005.





Significant
      components of deferred income tax assets and liabilities are as follows at
      March
      31:





2006
            
            2005Current
                deferred income tax assets:Inventories
            
            $
            160,129
            
            $
            116,156Accrued
                expenses
            
            
            194,841
            
            
            163,338354,970
            
            
            279,494Long-term
                deferred income tax asset:Intangibles
            
            
            12,766
            
            
            33,130Net
                operating loss carryforward
            
            
            13,173,801
            
            
            12,296,91813,186,567
            
            
            12,330,048Total
                deferred income tax assets
            
            
            13,541,537
            
            
            12,609,542Long-term
                deferred income tax liabilities:Property
                and equipment depreciation
            
            
            151,104
            
            
            288,639Goodwill
            
            
            272,454
            
            
            153,696423,558
            
            
            442,335Total
                net deferred income taxes
            
            
            13,117,979
            
            
            12,167,207Valuation
                allowance
            
            
            (13,390,433
            )
            
            (12,167,207
            )Total
            
            $
            (272,454
            )
            $
            -





As
      of
      March 31, 2006, the Company has net operating loss carry forwards for federal
      and state income tax purposes of approximately $33,782,000 which expire in
      fiscal years 2007 to 2026. To date the Company has not completed a Section
      382
      analysis. If certain ownership changes occurred under Section 382, there may
      be
      further limitations on the usage of the net operating loss carry
      forwards.





The
      following is a reconciliation of the federal statutory income tax rate to the
      consolidated effective tax rate for March 31:





Percent
                of Pre-tax Income2006
            
            2005
            
            2004Federal
                statutory rate
            
            
            (34
            %)
            
            (34
            %)
            
            (34
            %)State
                income taxes
            
            
            (5
            %)
            
            (5
            %)
            
            (5
            %)Permanent
                differences
            
            
            7
            %
            
            1
            %
            
            0
            %Other
            
            
            1
            %
            
            0
            %
            
            0
            %Change
                in valuation allowance
            
            
            40
            %
            
            38
            %
            
            39
            %Tax
                Rate
            
            
            9
            %
            
            0
            %
            
            0
            %




43
 *Table
          of Contents*


**NOTE
      K - INCOME TAXES** -
      **Continued**




Components
      of the (benefit) provision for income taxes are as follows for the years ended
      March 31:





2006
            
            2005
            
            2004Current:Federal
            
            $
            272,454
            
            $
            -
            
            $
            -State
            
            
            3,117
            
            
            4,138
            
            
            2,053Deferred:Federal
            
            
            1,064,207
            
            
            869,866
            
            
            2,106,637State
            
            
            159,019
            
            
            127,921
            
            
            309,799Valuation
                allowance
            
            
            (1,223,226
            )
            
            (997,787
            )
            
            (2,416,436
            )Income
                tax expense
            
            $
            275,571
            
            $
            4,138
            
            $
            2,053





During
      the fourth quarter of fiscal year 2006, the Company recorded a $272,000 deferred
      income tax liability for the book and income tax basis difference in goodwill.
      Income tax expense consists primarily of state taxes in 2005 and
      2004.





On
      June
      1, 2006, the Treasury issued final regulations concerning the deduction for
      income attributable to domestic production activities under Section 199. Section
      199 was enacted as part of the American Jobs Creation Act of 2004. The company
      examined the effect of these regulations and concluded the impact to be
      immaterial until all net operating losses have been fully utilized.





**NOTE
      L - SHAREHOLDERS’ EQUITY**




The
      Board
      of Directors may, by resolution, establish from the undesignated shares
      different classes or series of shares and may fix the relative rights and
      preferences of shares in any class or series. The Company is authorized to
      issue
      500 shares of preferred stock and 50,000,000 shares of common stock at $.01
      par
      value. The Company has not issued any shares of preferred stock.




**NOTE
      M - SHAREHOLDER RIGHTS PLAN**




Pursuant
      to the Shareholder Rights Plan each share of com-mon stock has attached to
      it a
      right, and each share of common stock issued in the future will have a right
      attached until the rights expire or are redeemed. Upon the occurrence of certain
      change in control events, each right entitles the holder to purchase one
      one-hundredth of a share of Series B Junior Preferred Participating Share,
      at an
      exercise price of $80 per share, subject to adjustment. The rights expire on
      November 10, 2010 and may be redeemed by the Company at a price of $.001
      per right prior to the time they become exercisable.


44
 *Table
          of Contents*


**NOTE
      N - STOCK OPTIONS AND WARRANTS**





Stock
      Options





The
      Company has various incentive and non-qualified stock option plans which are
      used as an incentive for directors, officers, and other employees. Options
      are
      generally granted at fair market values determined on the date of grant and
      vesting normally occurs over a six-year period. The plans had 673,530 shares
      of
      common stock available for issue at March 31, 2006.





Option
      transactions under these plans during the three years ended March 31, 2006
      are summa-rized as follows:





Number  of
                shares
            
            Weighted
                averageexercise priceOutstanding
                at March 31, 2003
            
            
            408,375
            
            
            $4.27Granted
            
            
            140,000
            
            
            2.62Canceled
            
            
            (163,260
            )
            
            5.65Outstanding
                at March 31, 2004
            
            
            385,115
            
            
            3.74Granted
            
            
            72,000
            
            
            1.79Canceled
            
            
            (220,485
            )
            
            3.60Outstanding
                at March 31, 2005
            
            
            236,630
            
            
            3.28Granted
            
            
            65,000
            
            
            1.39Cancelled
            
            
            (25,160
            )
            
            3.75Outstanding
                at March 31, 2006
            
            
            276,470
            
            
            2.80





The
      number of shares exercisable at March 31, 2006, 2005 and 2004 was 113,510,
      72,255, and 176,815, respectively, at a weighted average exercise price of
      $3.83, $4.47, and $4.21 per share, respectively.





The
      following table summarizes information concerning currently outstanding and
      exercisable stock options at March 31, 2006:





**Options
                outstanding**
            
            **Options
                exercisable**Range
                ofexercise
                prices
            
            Numberoutstanding
            
            Weighted
                average remainingcontractual
                life
            
            Weighted
                averageexercise
                price
            
            Numberoutstanding
            
            Weighted
                averageexercise
                price$1.30-$2.91
            
            
            236,470
            
            
            3.93
                years
            
            $
            1.99
            
            
            78,510
            
            $
            2.235.53-8.90
            
            
            40,000
            
            
            0.94
                years
            
            
            7.55
            
            
            35,000
            
            
            6.49276,470
            
            
            3.50
                years
            
            
            2.80
            
            
            113,510
            
            
            3.83




45
 *Table
          of Contents*


**NOTE
      N - STOCK OPTIONS AND WARRANTS** -
      **Continued**




Stock
      Warrants





The
      following is a table of the warrants to purchase shares of the Company’s common
      stock:





Warrantsoutstanding
            
            Exercise
                priceper
                share
            
            ExpirationdateBalance
                at March 31, 2003
            
            
            590,822
            
            $
            3.00
                - 17.84
            
            
            2005
                - 2008Issued
            
            
            -
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -
            
            
            -Balance
                at March 31, 2004
            
            
            590,822
            
            
            3.00
                -17.84
            
            
            2005
                - 2008Issued
            
            
            -
            
            
            -
            
            
            -Expired
            
            
            (144,091
            )
            
            14.72
            
            
            2005Balance
                at March 31, 2005
            
            
            446,731
            
            
            3.00
                - 17.84
            
            
            2006
                - 2008Issued
            
            
            -
            
            
            -
            
            
            -Expired
            
            
            (89,421
            )
            $
            6.00-17.84
            
            
            2006Balance
                at March 31, 2006
            
            
            357,310
            
            
            3.00-7.00
            
            
            2007-2008





All
      warrants are exercisable upon date of grant.





**NOTE
      O - COMMITMENTS**





The
      Company leases office and manufacturing facilities from a partnership whose
      two
      partners are major shareholders, officers and directors of the Company. The
      Company has determined FIN 46 (R), *Consolidation
      of Variable Interest Entities* (VIE’s),
      does not require the consolidation of the partnership with APA’s financial
      statements. The lease agreement, classified as an operating lease, expires
      November 30, 2009 and provides for periodic increases of the rental rate
      based on increases in the consumer price index. Rental expense was $585,000,
      $478,000 and $485,000 for the years ended March 31, 2006, 2005 and 2004, of
      which $160,000, $155,000 and $149,000 was paid to the partnership, respectively.





The
      following is a schedule of approximate minimum payments required under the
      capital and operating leases:





Year
                ending March 31
            
            Operatingleases2007
            
            $
            193,3542008
            
            
            133,4022009
            
            
            128,0222010
            
            
            86,1902011
            
            
            2,526Thereafter
            
            
            25,260Total
                minimum lease payments
            
            $
            568,754




46
 *Table
          of Contents*


**NOTE
      P - CONCENTRATIONS**





Suppliers




The
          Company purchases raw materials, component parts and outsourced labor from
          many
          suppliers. Although many of these items are single-sourced, the Company
          has
          experienced no significant difficulties to date in obtaining adequate
          quantities. These circumstances could change, however, and the Company
          cannot
          guarantee that sufficient quantities or quality of raw materials, component
          parts and outsourced labor will be as readily available in the future or,
          if
          available, that we will be able to obtain them at favorable prices.





**NOTE
      Q - SEGMENTS OF BUSINESS**





The
      Company has identified two reportable segments based on its internal
      organizational structure, management of operations, and performance evaluation.
      These segments are Optronics and Cables and Networks (APACN). Optronic’s revenue
      is generated in the design, manufacture and marketing of ultraviolet (UV)
      detection and measurement devices. APACN’s revenue is derived primarily from
      standard and custom fiber optic cable assemblies, copper cable assemblies,
      value
      added fiber optics frames, panels and modules. Expenses are allocated between
      the companies based on detailed information contained in invoices. In addition,
      corporate overhead costs for management’s time and other expenses are allocated
      to each segment. Segment detail is summarized as follows (unaudited, in
      thousands):





Optronics
            
            Cables
                & Networks
            
            Eliminations
            
            Consolidated**Year
                ended March 31, 2006**External
                sales
            
            $
            400
            
            $
            15,641
            
            $
            (323
            )
            $
            15,718Gross
                profit (loss)
            
            
            (674
            )
            
            4,195
            
            
            (4
            )
            
            3,517Operating
                loss
            
            
            (3,407
            )
            
            (49
            )
            
            -
            
            
            (3,456
            )Depreciation
                and amortization
            
            
            798
            
            
            263
            
            
            -
            
            
            1,061Capital
                expenditures
            
            
            289
            
            
            138
            
            
            -
            
            
            427Assets
            
            
            19,333
            
            
            7,879
            
            
            (7,618
            )
            
            19,594**Year
                ended March 31, 2005**External
                sales
            
            $
            489
            
            $
            13,801
            
            $
            (404
            )
            $
            13,886Gross
                profit (loss)
            
            
            (1,133
            )
            
            3,821
            
            
            -
            
            
            2,688Operating
                profit (loss)
            
            
            (3,920
            )
            
            334
            
            
            -
            
            
            (3,586
            )Depreciation
                and amortization
            
            
            774
            
            
            230
            
            
            -
            
            
            1,004Capital
                expenditures
            
            
            397
            
            
            79
            
            
            -
            
            
            476Assets
            
            
            22,253
            
            
            7,188
            
            
            (7,367
            )
            
            22,074**Year
                ended March 31, 2004**External
                sales
            
            $
            409
            
            $
            11,691
            
            $
            (191
            )
            $
            11,909Gross
                profit (loss)
            
            
            (2,665
            )
            
            2,660
            
            
            -
            
            
            (5
            )Operating
                loss
            
            
            (5,604
            )
            
            (955
            )
            
            -
            
            
            (6,559
            )Depreciation
                and amortization
            
            
            797
            
            
            174
            
            
            -
            
            
            971Capital
                expenditures
            
            
            695
            
            
            91
            
            
            -
            
            
            786Assets
            
            
            26,187
            
            
            7,310
            
            
            (7,413
            )
            
            26,084




47
 *Table
          of Contents*


**ITEM
                9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE.**





None.




**ITEM
                9A.**
            **CONTROLS
                AND PROCEDURES.**




The
      Company’s chief executive officer and chief financial officer (the same person)
      has evaluated the Company’s disclosure controls and procedures (as defined in
      Exchange Act Rule 13a-15(e) as of the end of the period covered by this report,
      and based on such evaluation has concluded that they are effective.




During
      the fiscal quarter ended March 31, 2006, there was no change in the Company’s
      internal controls over financial reporting that materially affected, or is
      reasonably likely to materially affect, the Company’s controls over financial
      reporting.




**ITEM
                9B.**
            **OTHER
                INFORMATION**




There
      were no events during the quarter ended **** March
      31,
      2006 required to be disclosed on Form 8-K which were not so
      disclosed.





**PART
      III**





**ITEM
                10.**
            **DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT.**




Information
      regarding executive officers is included in Part I of this Report and is
      incorporated in this Item 10 by reference.




Information
      regarding directors and the information required by Items 11, and 13, below,
      is
      incorporated in this Report by reference to the proxy statement for our annual
      meeting of shareholders to be held in August 2006.




**ITEM
                11.**
            **EXECUTIVE
                COMPENSATION.**




Information
      required by Item 11 is incorporated in this Report by reference to the proxy
      statement for our annual meeting of shareholders to be held in August
      2006.




**ITEM
                12.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS.**




Certain
      information required by Item 12 is incorporated in this Report by reference
      to
      the proxy statement for annual meeting of shareholders to be held in August
      2006.




48
 *Table
          of Contents*


The
      following table provides information about the Company’s equity compensation
      plans (including individual compensation arrangements) as of March 31,
      2006.




(a)
              (b)
              (c)Plan
                  category
              Number
                  of securities to be issued upon exercise of options, warrants or
                  rights
              Weighted-average
                  exercise price of outstanding options, warrants and rights
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))Equity
                  compensation plans approved by security holders
              276,470
              $2.80
              673,530Equity
                  compensation plans not approved by security holders
              357,310
              $3.08
              Not
                  applicable*Total
              633,780
              $2.96
              673,530




*
      These
      securities are comprised solely of warrants that were not issued pursuant to
      any
      formal plan with an authorized number of securities available for issuance.




**ITEM
                13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS.**




Information
      required by Item 13 is incorporated in this Report by reference to the proxy
      statement for our annual meeting of shareholders to be held in August
      2006.




**ITEM
                14.**
            **PRINCIPAL
                ACCOUNTANT FEES AND
                SERVICES**




Information
      required by Item 14 is incorporated in this Report by reference to the proxy
      statement for our annual meeting of shareholders to be held in August
      2006.




49
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          of Contents*


**PART
      IV**




**ITEM
                15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT
                SCHEDULES.**




(a)
              (1) The
                  following financial statements are filed herewith under Item
                  8.




Page(i)
              Report
                  of Independent Registered Public Accounting Firm for the years
                  ended March
                  31, 2006, 2005 and 2004
              F1(ii)
              Consolidated
                  Balance Sheets as of March 31, 2006 and 2005
              F2(iii)
              Consolidated
                  Statements of Operations for the years ended March 31, 2006, 2005
                  and
                  2004
              F3(iv)
              Consolidated
                  Statement of Shareholders’ Equity for the years ended March 31, 2006, 2005
                  and 2004
              F4(v)
              Consolidated
                  Statements of Cash Flows for the years ended March 31, 2006, 2005
                  and
                  2004
              F6(vi)
              Notes
                  to the Consolidated Financial Statements for the years ended March
                  31,
                  2006, 2005 and 2004
              F7




(2)
            Financial
                Statement Schedules: See Schedule II on page following
                signatures.




(b)
            Exhibits.
                See Exhibit Index.




50
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          of Contents*


**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




APA
                Enterprises, Inc.Date:
                June 28, 2006
            By
            /s/
                Anil K. JainAnil
                K. Jain*President
                and Chief Executive Officer*




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.




**Signature**
            
            **Title**
            
            **Date**/s/
                Anil K. Jain
            
            President,
                Chief Executive Officer,
            
            June
              28 , 2006Anil
                K. Jain
            
            Chief
                Financial Officer and Director (principal executive officer and principal
                financial officer)/s/
                Chris M. Goettl
            
            Controller
            
            June
                28 , 2006Chris
                M. Goettl/s/
                John G. Reddan
            
            Director
            
            June
              28 , 2006John
                G. Reddan/s/
                Ronald G. Roth
            
            Director
            
            June
                28, 2006Ronald
                G. Roth/s/
                Stephen L. Zuckerman MD
            
            Director
            
            June
                28, 2006Stephen
                L. Zuckerman




51
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          of Contents*


**SCHEDULE
      II - VALUATION AND QUALIFYING ACCOUNTS**




AdditionsDescription
            
            Balance
                at Beginningof
                Period
            
            Charged
                to: Cost andExpenses
            
            Charged
                to: OtherAccounts
            
            Deductions
            
            Balance
                atEnd
                of PeriodAllowance
                for doubtful accountsMarch
                31, 2006
            
            $
            57,107
            
            $
            18,000
            
            $
            6,121
                (1
            )
            $
            3,397
                (2
            )
            $
            77,831March
                31, 2005
            
            
            49,038
            
            
            33,000
            
            
            10,692
                (1
            )
            
            35,623
                (2
            )
            
            57,107March
                31, 2004
            
            
            20,644
            
            
            31,500
            
            
            2,562
                (1
            )
            
            5,668
                (2
            )
            
            49,038





(1)
      Represents recovery of bad debt and other adjustments


(2)
      Represents writeoffs of bad debt


52
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          of Contents*




REPORT
      OF INDEPENDENT REGISTERED CERTIFIED




PUBLIC
      ACCOUNTING FIRM ON SCHEDULE




To
      the
      Board of Directors and Shareholders




APA
      Enterprises, Inc.




We
      have
      audited in accordance with the standards of the Public Company Accounting
      Oversight Board (United States) the consolidated financial statements of APA
      Enterprises, Inc. and subsidiaries referred to in our report dated May 12,
      2006,
      which is included in the annual report to security holders.  Our audit was
      conducted for the purpose of forming an opinion on the basic financial
      statements taken as a whole.  The accompanying Schedule II is presented for
      purposes of complying with the rules of the Securities and Exchange Commission
      and is not a required part of the basic financial statements.  This
      schedule has been subjected to the auditing procedures applied in the audit
      of
      the basic financial statements and, in our opinion, fairly states in all
      material respects the financial data required to be set forth therein, in
      relation to the basic financial statements taken as a whole.






/s/
      GRANT
      THORNTON LLP




Minneapolis,
      Minnesota




May
      12,
      2006


53
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          of Contents*


**EXHIBIT
                  INDEX****Number**
              
              **Description**
              
              **Page
                  Number or Incorporated by Reference to**2.1
              
              Asset
                  Purchase Agreement between APACN and CSP, Inc.
              
              Exhibit
                  2.1 to Form 8-K filed March 31, 20032.1
              
              Asset
                  Purchase Agreement between APACN and Americable, Inc.
              
              Exhibit
                  2.1 to Form 8-K filed July 2, 20032.2
              
              Agreement
                  Not to Compete with Peter Lee as part of CSP asset
                  purchase
              
              Exhibit
                  2.2 to Form 8-K filed March 31, 20032.3
              
              Asset
                  Purchase Agreement between APA Enterprises, Inc. and Software Moguls
                  India
                  Private Limited and S M Infoexpert Private Limited
              
              Exhibit
                  2.3 to Registrant’s Report on Form 10-K for the fiscal year ended March
                  31, 20053.1
              
              Restated
                  Articles of Incorporation, as amended to date
              
              Exhibit
                  3.1 to Registrant’s Report on Form 10-Q for the quarter ended September
                  30, 20003.1
                  (a)
              
              Restated
                  Articles of Incorporation, as amended to date thru August 25,
                  2004
              
              Exhibit
                  3.1 to Registrant’s Report on Form 10-Q for the quarter ended September
                  30, 20043.2
              
              Bylaws,
                  as amended and restated to date
              
              Exhibit
                  3.2 to Registrant’s Report on Form 10-KSB for the fiscal year ended March
                  31, 19994.1(a)
              
              State
                  of South Dakota Board of Economic Development $300,000 Promissory
                  Note,
                  REDI Loan: 95-13-A
              
              Exhibit
                  4.1(a) to the Report on 10-QSB for the quarter ended June 30, 1996
                  (the
                  “June 1996 10-QSB”)4.1(b)
              
              State
                  of South Dakota Board of Economic Development Security Agreement
                  REDI Loan
                  No: 95-13-A dated May 28, 1996
              
              Exhibit
                  4.1(b) to the June 1996 10-QSB4.2(a)
              
              $700,000
                  Loan Agreement dated June 24, 1996 by and between Aberdeen Development
                  Corporation and APA Enterprises, Inc.
              
              Exhibit
                  4.2(a) to the June 1996 10-QSB4.2(b)
              
              $300,000
                  Loan Agreement dated June 24, 1996 between Aberdeen Development
                  Corporation and APA Enterprises, Inc.
              
              Exhibit
                  4.2(b) to the June 1996 10-QSB4.2(c)
              
              $250,000
                  Loan Agreement dated June 24, 1996 by and between Aberdeen Development
                  Corporation and APA Enterprises, Inc.
              
              Exhibit
                  4.2(c) to the June 1996 10-QSB
  54
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            of Contents*
 
 **Number**
              
              **Description**
              
              **Page
                  Number or Incorporated by Reference to**4.2(d)
              
              $300,000
                  Loan Agreement dated June 24, 1996 by and between Aberdeen Development
                  Corporation and APA Enterprises, Inc.
              
              Exhibit
                  4.2(d) to the June 1996 10-QSB4.2(e)
              
              Amended
                  Loan Agreement with Aberdeen Development Corporation and APA Enterprises,
                  Inc.
              
              Exhibit
                  4.2(e) to Registrants Report on Form 10-K for fiscal year ended
                  March 31,
                  20044.2(f)
              
              Purchase
                  Agreement for land with Aberdeen Development Corporation and APA
                  Enterprises, Inc.
              
              Exhibit
                  4.2(f) to Registrant’s Report on Form 10-K for the fiscal year ended March
                  31, 20054.3(a)
              
              Loan
                  Agreement between South Dakota Economic Development Finance and
                  APA
                  Enterprises, Inc.
              
              Exhibit
                  4.3(a) to the June 1996 10-QSB4.3(b)
              
              Mortgage
                  and Security Agreement - One Hundred Day Redemption from APA Enterprises,
                  Inc. to South Dakota Economic Development Finance Authority dated
                  as of
                  June 24, 1996
              
              Exhibit
                  4.3(b) to the June 1996 10-QSB4.4(a)
              
              Subscription
                  and Investment Representation Agreement of NE Venture,
                  Inc.
              
              Exhibit
                  4.4(a) to the June 1996 10-QSB4.4(b)
              
              Form
                  of Common Stock Purchase Warrant for NE Venture, Inc.
              
              Exhibit
                  4.4(b) to the June 1996 10-QSB4.5(a)
              
              Certificate
                  of Designation for 2% Series A Convertible Preferred Stock
              
              Exhibit
                  4.5(a) filed as a part of Registration Statement on Form S-3 (Commission
                  File No. 333-33968)4.5(b)
              
              Form
                  of common stock warrant issued in connection with 2% Series A Convertible
                  Preferred Stock
              
              Exhibit
                  4.5(b) filed as a part of Registration Statement on Form S-3 (Commission
                  File No. 333-33968)4.6
              
              Common
                  Stock Purchase Warrant issued to Ladenburg Thalmann & Co. Inc. to
                  purchase 84,083 shares
              
              Exhibit
                  4.6 to Registrant’s Report on Form 10-K for fiscal year ended March 31,
                  2000 (“2000 10-K”)4.7
              
              Share
                  Rights Agreement dated October 23, 2000 by and between the Registrant
                  and
                  Wells Fargo Bank Minnesota NA as Rights Agent
              
              Exhibit
                  1 to the Registration Statement on Form 8-A filed November 8,
                  20004.8
              
              Common
                  Stock Warrant Purchase Agreement with Peter Lee as part of CSP
                  asset
                  purchase
              
              Exhibit
                  4.8 to Form 8-K filed March 31, 200310.1(a)
              
              Sublease
                  Agreement between the Registrant and Jain-Olsen Properties and
                  Sublease
                  Agreement and Option Agreement between the Registrant and Jain-Olsen
                  Properties
              
              Exhibit
                  10.1 to the Registration Statement on Form S-18 filed with the
                  Chicago
                  Regional Office of the Securities and Exchange Commission on June
                  26, 1986
  55
 *Table
            of Contents*
 
 **Number**
              
              **Description**
              
              **Page
                  Number or Incorporated by Reference to**10.1(b)
              
              Amendment
                  and Extension of Sublease Agreement dated August 31, 1999
              
              Exhibit
                  10.1(b) to 2000 10-K10.1(c)
              
              Lease
                  Agreement between Registrant and Jain-Olsen Properties
              
              Exhibit
                  10.1(c) to Registrant’s Form 10Q-SB for quarter ended September 30,
                  2004*10.2(a)
              
              Stock
                  Option Plan for Nonemployee Directors
              
              Exhibit
                  10.3a to Registrant’s Report on Form 10-KSB for the fiscal year ended
                  March 31, 1994 (the “1994 10-KSB”)*10.2(b)
              
              Form
                  of option agreement issued under the Nonemployee Directors
                  Plan
              
              Exhibit
                  10.3b to 1994 10-KSB*10.3
              
              1997
                  Stock Compensation Plan
              
              Exhibit
                  10.3 to Registrant’s Report on Form 10-KSB for the fiscal year ended
                  March 31, 1997*10.4
              
              Insurance
                  agreement by and between the Registrant and Anil K. Jain
              
              Exhibit
                  10.5 to Registrant’s Report on Form 10-K for the fiscal year ended March
                  31, 1990*10.5
              
              Form
                  of Agreement regarding Repurchase of Stock upon Change in Control
                  Event
                  with Anil K. Jain and Kenneth A. Olsen
              
              Exhibit
                  10.1 to Registrant’s Report on Form 10-QSB for the quarter ended September
                  30, 1997 (“September 1997 10-QSB”)*10.6
              
              Form
                  of Agreement regarding Employment/Compensation upon Change in Control
                  with
                  Messrs. Jain and Olsen
              
              Exhibit
                  10.2 to the September 1997 10-QSB*10.7
              
              Form
                  of Agreement regarding Indemnification of Directors and Officers
                  with
                  Messrs. Jain, Olsen, Ringstad, Roth, Von Wald and
                  Zuckerman
              
              Exhibit
                  10.7 to Registrant’s Report on From 10-K for the fiscal year ended March
                  31, 2002.10.8
              
              Sublease
                  agreement between Newport and APACN
              
              Exhibit
                  10.8 to Registrant’s Report of Form 10-QSB for the quarter ended June 30,
                  200310.9
              
              Sublease
                  agreement between Veeco Compound Semiconductor and APA Enterprises,
                  Inc.
              
              Exhibit
                  10.9 to Registrant’s Report of Form 10-K for the fiscal year ended March
                  31, 200410.9(b)
              
              Amendment
                  to sublease between Veeco Compound Semiconductor and APA Enterprises,
                  Inc.
              
              Exhibit
                  10.9 (b) to Registrant’s Report on Form 10-QSB for the quarter ended
                  September 30, 2004*10.10
              
              Ken
                  Olsen Separation Agreement
              
              Exhibit
                  10.10 to Registrant’s Report on Form 10-K for the fiscal year ended March
                  31, 2004*10.11
              
              Stock
                  option agreement with Cheri Podzimek, President of APACN
              
              Exhibit
                  10.11 to Registrant’s Report on Form 10-K for the fiscal year ended March
                  31, 2005
  56
 *Table
            of Contents*
 
 **Number**
              
              **Description**
              
              **Page
                  Number or Incorporated by Reference to**10.12
              
              Agreements
                  on sale of MOCVD Assets
              
              Exhibit
                  10.12 to Registrant’s Report on for 8-K filed March 10,
                  200610.13
              
              Patent
                  and Technology and Revenue Sharing License Agreement
              
              Exhibit
                  10.13 to Registrant’s Report on for 8-K filed March 10,
                  200610.14
              
              Lease
                  agreement between Bass Lake Realty, LLC and APACN
              
              **14
              
              Code
                  of Ethics
              
              Exhibit
                  14 to Registrant’s Report on Form 10-K for the fiscal year ended March 31,
                  200421
              
              List
                  of Subsidiaries
              
              **23.1
              
              Consent
                  of Grant Thornton LLP
              
              **31.1
              
              Certification
                  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002
              
              **32.1
              
              Certification
                  of Chief Executive Officer and Principal Financial Officer Pursuant
                  to
                  Section 906 of the Sarbanes-Oxley Act of 2002
              
              **




*Indicates
      management contract or compensation plan or arrangements required to be filed
      as
      an exhibit to this form.




**
      Filed
      with this Report.




57