**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934


SECURITIES
      EXCHANGE ACT OF 1934


For
      the
      quarterly period ended December 31, 2005





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




Commission
      File Number 0-16106







**APA
      Enterprises, Inc.**


(Exact
      name of Registrant as specified in its charter)





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





**2950
      N.E. 84** **th** **Lane, Blaine, Minnesota 55449**


(Address
      of principal executive offices and zip code)





**(763)
      784-4995**


(Registrant’s
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to the filing requirement for
      the past 90 days.








Yes
            x
            
            No
            o





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 filer
            o
            Accelerated
                filer
            o
            Non-acclerated
                filer
            x





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





Yes
            o
            
            No
            x





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





Class:
            Outstanding
                at February 2, 2006Common
                stock, par value $.01
            11,872,331










**APA
        ENTERPRISES, INC.**
 **FORM
        10-Q**
 **TABLE
        OF CONTENTS**
 
 
 
 **PART
                  I. FINANCIAL INFORMATION**
              **3**ITEM
                  1. FINANCIAL STATEMENTS
              **3**CONSOLIDATED
                  CONDENSED BALANCE SHEETS
              **3**CONSOLIDATED
                  CONDENSED STATEMENTS OF OPERATIONS
              **4**CONSOLIDATED
                  CONDENSED STATEMENTS OF CASH FLOWS
              **5**ITEM
                  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                  OF OPERATIONS
              **9**ITEM
                  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK.
              **22**ITEM
                  4. CONTROLS AND PROCEDURES.
              **22****PART
                  II**
              **23**ITEM
                  1. LEGAL PROCEEDINGS
              **23**ITEMS
                  2 THROUGH 5. NOT APPLICABLE
              **23**ITEM
                  6. EXHIBITS.
              **23**


2
 *Table
            of Contents*





**PART
      I. FINANCIAL INFORMATION**





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




**APA
      ENTERPRISES, INC.**


**CONSOLIDATED
      CONDENSED BALANCE SHEETS**


**(Unaudited)**




December
                31,
              2005
            
            March
                31,
              2005**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            7,928,759
            
            $
            10,813,492Accounts
                receivable, net of allowance for uncollectible accounts of $89,266
                at
                December 31, 2005 and $57,107 at March 31, 2005
            
            
            1,686,945
            
            
            1,446,248Inventories
            
            
            1,662,518
            
            
            1,270,653Prepaid
                expenses and other
            
            
            320,377
            
            
            395,920Total
                current assets
            
            
            11,598,599
            
            
            13,926,313Property,
                plant and equipment, net
            
            
            3,418,366
            
            
            3,946,998Other
                assets:Bond
                reserve funds
            
            
            341,396
            
            
            337,091Goodwill
            
            
            3,422,511
            
            
            3,422,511Other
            
            
            324,327
            
            
            441,1014,088,234
            
            
            4,200,703Total
                assets
            
            $
            19,105,199
            
            $
            22,074,014**Liabilities
                and shareholders’ equity**Current
                liabilities:Current
                portion of long-term debt
            
            $
            1,352,704
            
            $
            1,471,036Accounts
                payable
            
            
            953,116
            
            
            814,005Accrued
                compensation
            
            
            652,393
            
            
            568,950Accrued
                expenses
            
            
            419,500
            
            
            190,062Total
                current liabilities
            
            
            3,377,713
            
            
            3,044,053Long-term
                debt, net of current maturities
            
            
            22,160
            
            
            107,800Shareholders’
                equity:Undesignated
                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 December 31, 2005 and March 31,
                2005
            
            
            118,723
            
            
            118,723Additional
                paid-in capital
            
            
            51,973,669
            
            
            51,960,084Accumulated
                deficit
            
            
            (36,387,066
            )
            
            (33,156,646
            )Total
                shareholders’ equity
            
            
            15,705,326
            
            
            18,922,161Total
                liabilities and shareholders’ equity
            
            $
            19,105,199
            
            $
            22,074,014





SEE
      ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS





3
 *Table
            of Contents*





**APA
      ENTERPRISES, INC**.


**CONSOLIDATED
      CONDENSED STATEMENTS OF OPERATIONS**


**(Unaudited)**





Three
                Months Ended
              December
                31,
            
            Nine
                Months Ended
              December
                31,2005
            
            2004
            
            2005
            
            2004Revenues
            
            $
            4,379,192
            
            $
            3,305,299
            
            $
            11,961,122
            
            $
            10,661,085Cost
                of sales
            
            
            3,354,859
            
            
            2,704,159
            
            
            9,307,609
            
            
            8,676,806Gross
                profit
            
            
            1,024,333
            
            
            601,140
            
            
            2,653,513
            
            
            1,984,279Operating
                expensesResearch
                and development
            
            
            313,127
            
            
            314,151
            
            
            980,097
            
            
            725,954Selling,
                general and administrative
            
            
            2,035,215
            
            
            1,268,958
            
            
            5,185,989
            
            
            4,094,0732,348,342
            
            
            1,583,109
            
            
            6,166,086
            
            
            4,820,027Loss
                from operations
            
            
            (1,324,009
            )
            
            (981,969
            )
            
            (3,512,573
            )
            
            (2,835,748
            )Other
                income
            
            
            106,302
            
            
            84,952
            
            
            387,461
            
            
            405,779Other
                expense
            
            
            (57,329
            )
            
            (30,612
            )
            
            (102,858
            )
            
            (80,843
            )48,973
            
            
            54,340
            
            
            284,603
            
            
            324,936Loss
                before income taxes
            
            
            (1,275,036
            )
            
            (927,629
            )
            
            (3,227,970
            )
            
            (2,510,812
            )Income
                taxes
            
            
            750
            
            
            881
            
            
            2,450
            
            
            3,581Net
                loss
            
            $
            (1,275,786
            )
            $
            (928,510
            )
            $
            (3,230,420
            )
            $
            (2,514,393
            )Net
                loss per share:Basic
                and diluted
            
            
            ($0.11
            )
            
            ($0.08
            )
            
            ($0.27
            )
            
            ($0.
                21
            )Weighted
                average shares outstanding:Basic
                and diluted
            
            
            11,872,331
            
            
            11,872,331
            
            
            11,872,331
            
            
            11,872,331




SEE
      ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS




4
 *Table
            of Contents*





**APA
      ENTERPRISES, INC.**


**CONSOLIDATED
      CONDENSED STATEMENTS OF CASH FLOWS**


**(Unaudited)**








Nine
                Months Ended
              December
                31,2005
            
            2004**Cash
                Flow from operating activities**Net
                loss
            
            $
            (3,230,420
            )
            $
            (2,514,393
            )Adjustments
                to reconcile net loss to net cash used in operating activities, net
                of
                acquisition:Depreciation
                and amortization
            
            
            806,266
            
            
            734,563Gain
                on sale of assets
            
            
            (93,126
            )
            
            (208,314
            )Other
            
            
            13,585
            
            
            (21,409
            )Changes
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            (240,697
            )
            
            557,343Inventories
            
            
            (391,865
            )
            
            234,176Prepaid
                expenses and other
            
            
            35,444
            
            
            (14,437
            )Accounts
                payable and accrued expenses
            
            
            451,992
            
            
            (284,205
            )Net
                cash used in operating activities
            
            
            (2,648,821
            )
            
            (1,516,676
            )**Cash
                flow from investing activities**Purchases
                of property and equipment
            
            
            (307,009
            )
            
            (299,373
            )Proceeds
                from sale of assets
            
            
            111,680
            
            
            220,000Net
                cash used in investing activities
            
            
            (195,329
            )
            
            (79,373
            )**Cash
                flow from financing activities**Repayment
                of long-term debt
            
            
            (128,085
            )
            
            (219,632
            )Proceeds
                from long term debt
            
            
            44,113
            
            
            -Decrease
                in bond reserve funds
            
            
            43,389
            
            
            43,620Net
                cash used in financing activities
            
            
            (40,583
            )
            
            (176,012
            )Decrease
                in cash and cash equivalents
            
            
            (2,884,733
            )
            
            (1,772,061
            )Cash
                and cash equivalents at beginning of period
            
            
            10,813,492
            
            
            13,544,910Cash
                and cash equivalents at end of period
            
            $
            7,928,759
            
            $
            11,772,849Noncash
                investing and financing activitiesCapital
                expenditure included in accounts payable
            
            $
            -
            
            $
            (225,000
            )





SEE
      ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS





5
 *Table
            of Contents*





**NOTES
      TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**




**Note
                1.**
            **Basis
                of Presentation**




The
      accompanying consolidated condensed financial statements have been prepared
      pursuant to the rules and regulations of the Securities and Exchange Commission.
      Accordingly, they do not include all of the information and footnotes required
      by accounting principles generally accepted in the United States of America
      for
      complete financial statements. For further information, refer to the financial
      statements and footnotes thereto included in the Company’s annual report on Form
      10-K for the year ended March 31, 2005.




In
      the
      opinion of management, all adjustments (consisting of normal recurring accruals)
      considered necessary for a fair presentation have been included. Certain
      reclassifications of previously reported amounts have been made to conform
      that
      presentation to the current period presentation.




**Note
                2.**
            **Net
                Loss Per Share**




The
      following table sets forth the computation of basic and diluted net loss per
      share:







Three
                Months Ended
              December
                31,
            
            Nine
                Months Ended
              December
                31,2005
            
            2004
            
            2005
            
            2004Numerator
                for basic and diluted net loss per share
            
            $
            (1,275,786
            )
            $
            (928,510
            )
            $
            (3,230,420
            )
            $
            (2,514,393
            )Denominator
                for basic and diluted net loss per share - weighted average shares
                outstanding
            
            
            11,872,331
            
            
            11,872,331
            
            
            11,872,331
            
            
            11,872,331Basic
                and diluted net loss per share
            
            
            ($0.11
            )
            
            ($0.08
            )
            
            ($0.27
            )
            
            ($0.21
            )








Common
      stock options and warrants to purchase 642,195 and 879,327 shares of common
      stock with a weighted average exercise price of $2.94 and $6.62 were outstanding
      at December 31, 2005 and 2004, respectively, but were excluded from calculating
      diluted net loss per share because they were antidilutive.




**Note
                3.**
            **Segment
                Reporting**




The
      Company has identified two reportable segments based on its internal
      organizational structure, management of operations, and performance evaluation.
      These segments are (1) Optronics and (2) Cables and Networks
      (APACN).  Optronics’
      revenue is generated in the design, manufacture and marketing of ultraviolet
      (UV) detection and measurement devices and optical components. Cables &
Network’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 two segments based on
      detailed information contained in invoices. In addition, overhead costs,
      including management’s time and other expenses, are allocated to each segment as
      appropriate.




6
 *Table
            of Contents*





Segment
      detail is summarized as follows (unaudited, in thousands):







Optronics
            
            Cables
                &
              Networks
            
            Eliminations
            
            Consolidated**Three
                months ended December 31, 2005**External
                sales
            
            $
            124
            
            $
            4,342
            
            $
            (87
            )
            $
            4,379Gross
                profit (loss)
            
            
            (152
            )
            
            1,178
            
            
            (2
            )
            
            1,024Operating
                income (loss)
            
            
            (1,346
            )
            
            22
            
            
            -
            
            
            (1,324
            )Depreciation
                and amortization
            
            
            195
            
            
            68
            
            
            -
            
            
            263Capital
                expenditures
            
            
            62
            
            
            11
            
            
            -
            
            
            73Assets
            
            
            19,270
            
            
            7,470
            
            
            (7,635
            )
            
            19,105**Three
                months ended December 31, 2004**External
                sales
            
            $
            97
            
            $
            3,301
            
            $
            (93
            )
            $
            3,305Gross
                profit (loss)
            
            
            (242
            )
            
            843
            
            
            -
            
            
            601Operating
                income (loss)
            
            
            (996
            )
            
            14
            
            
            -
            
            
            (982
            )Depreciation
                and amortization
            
            
            198
            
            
            60
            
            
            -
            
            
            258Capital
                expenditures
            
            
            5
            
            
            -
            
            
            -
            
            
            5Assets
            
            
            23,092
            
            
            7,106
            
            
            (7,379
            )
            
            22,819**Nine
                months ended December 31, 2005**External
                sales
            
            $
            336
            
            $
            11,908
            
            $
            (283
            )
            $
            11,961Gross
                profit (loss)
            
            
            (529
            )
            
            3,188
            
            
            (5
            )
            
            2,654Operating
                loss
            
            
            (3,474
            )
            
            (39
            )
            
            -
            
            
            (3,513
            )Depreciation
                and amortization
            
            
            612
            
            
            194
            
            
            -
            
            
            806Capital
                expenditures
            
            
            191
            
            
            116
            
            
            -
            
            
            307Assets
            
            
            19,270
            
            
            7,470
            
            
            (7,635
            )
            
            19,105**Nine
                months ended December 31, 2004**External
                sales
            
            $
            389
            
            $
            10,595
            
            $
            (323
            )
            $
            10,661Gross
                profit (loss)
            
            
            (911
            )
            
            2,895
            
            
            -
            
            
            1,984Operating
                income (loss)
            
            
            (3,058
            )
            
            222
            
            
            -
            
            
            (2,836
            )Depreciation
                and amortization
            
            
            563
            
            
            172
            
            
            -
            
            
            735Capital
                expenditures
            
            
            241
            
            
            58
            
            
            -
            
            
            299Assets
            
            
            23,092
            
            
            7,106
            
            
            (7,379
            )
            
            22,819








**Note
                4.**
            **Sale
                of Optics Manufacturing
                Operations**




In
      January 2004 the Company announced the cessation 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 fourth 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 Aberdeen
      Development Corporation, 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. This loan was prepaid in full in June
      2005. See Note 5, below. The Company recorded a gain of approximately $208,000
      on the sale in the first quarter of fiscal 2005.




**Note
                5.**
            **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 was
      part
      of a single parcel of approximately 12 acres on which the Company 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.




7
 *Table
            of Contents*





**Note
                6.**
            **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. 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 expense also reflects the benefit
      of the cancellation of previously unvested expensed options. The Company
      rec-ognized compensation income of $10,895 and expense of $13,585 for the three
      and nine months ended December 31, 2005, respectively, versus recognizing
      compensation expense of $6,843 and income of $22,065 for the three and nine
      months ended December 31, 2004, respectively. For those stock options where
      the
      exercise price is 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. If we had applied the fair value method, 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 three and nine month periods set
      forth
      below:







Three
                Months Ended
              December
                31,
            
            Nine
                Months Ended
              December
                31,2005
            
            2004
            
            2005
            
            2004Net
                loss to common shareholders - as reported
            
            $
            (1,275,786
            )
            $
            (928,510
            )
            $
            (3,230,420
            )
            $
            (2,514,393
            )Less:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of no related tax
                effects
            
            
            (27,861
            )
            
            (38,539
            )
            
            (89,387
            )
            
            (124,861
            )Net
                loss - pro forma
            
            $
            (1,303,647
            )
            $
            (967,049
            )
            $
            (3,319,807
            )
            $
            (2,639,254
            )Basic
                and diluted net loss per common share - as reported
            
            
            ($0.11
            )
            
            ($0.08
            )
            
            ($0.27
            )
            
            ($0.21
            )Basic
                and diluted net loss per common share - pro forma
            
            
            ($0.11
            )
            
            ($0.08
            )
            
            ($0.28
            )
            
            ($0.22
            )








**Note
                7.**
            **Adoption
                of New Accounting
                Pronouncements**




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 is required to apply Statement 123(R) effective April 1, 2006.
      Management has not yet determined the impact of this adoption.




8
 *Table
            of Contents*





In
      November 2004, the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS 151”). The
      provisions of this statement become effective for the Company  April
      1,
      2006. SFAS 151 amends the existing guidance on the recognition of inventory
      costs to clarify the accounting for abnormal amounts of idle expense, freight,
      handling costs, and wasted material (spoilage). Existing rules indicate that
      under some circumstances, items such as idle facility expense, excessive
      spoilage, double freight, and rehandling costs may be so abnormal as to require
      treatment as current period charges. SFAS 151 requires that those items be
      recognized as current period charges regardless of whether they meet the
      criterion of “so abnormal.”  In addition, SFAS 151 requires that allocation
      of fixed production overheads to the costs of conversion be based on the normal
      capacity of the production facilities. The adoption of this Statement is not
      expected to have a material impact on the valuation of inventory or operating
      results.




**Note
                8.**
            **Major
                Customer Concentration**




As
      of
      December 31, 2005, one customer comprised approximately 14% of total sales
      for
      the third quarter ended December 31, 2005 and 24% of accounts receivable as
      of
      the quarter end. No one customer provided greater than 10% of sales for all
      other periods presented.




**Note
                9.**
            **Commitments
                and Contingencies**




Electronic
      Instrumentation and Technology, Inc. ("EIT") filed suit against APA on May
      25,
      2005 (see information in Part II, Item I of this Report.) The suit alleged
      that
      APA had committed various fraudulent acts in conjunction with preliminary
      business discussions between EIT and APA which preceded APA's introduction
      of
      its Profiler M product.  APA denied EIT's claims of wrongful conduct and
      the case went to trial in December 2005. The jury found in favor of EIT on
      one
      claim and awarded EIT $35,000. EIT has filed a post-trial motion for an
      injunction or, alternatively, for judgment as a matter of law, which motion
      APA
      will oppose. It is unknown whether EIT will appeal the verdict.






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




Statements
      in this Report about future sales prospects and other matters to occur in the
      future are forward looking statements and are subject to uncertainties due
      to
      many factors, many of which are beyond our control. These factors include,
      but
      are not limited to, the continued development of our products, acceptance of
      those products by potential customers, our ability to sell such products at
      a
      profitable price, and our ability to fund our operations. For further discussion
      regarding these factors, see “Factors That May Influence Future
      Results.”




**OVERVIEW**




APA
      Enterprises, Inc., (formerly known as APA Optics, Inc.) consists of the
      Optronics group and the Cables & Networks group (APACN or Cables &
Networks). Optronics is active in the development, design, manufacture and
      marketing of ultraviolet (UV) measurement instruments for consumers and
      industrial customers, and gallium nitride (GaN) based transistors for power
      amplifiers and other commercial applications. APACN designs, manufactures and
      markets a variety of fiber optic and copper components for the data
      communication and telecommunication industries. Both groups also source
      components and devices from third parties for direct and value-added sales
      to
      our customers in all these technology areas.




APACN
      provides broadband service providers a complete line of high-performance
      components and connectivity solutions that enable customers to implement
      reliable networks that extend from the central office through the outside plant
      including the APACN Fiber Scalability Center (FSC), a modular line of outside
      plant cabinets, for the Fiber to the Premise (FTTP) market. The Company began
      shipping FSCs in fiscal 2005.




9
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In
      addition, APACN supplies custom products and value-added services to Original
      Equipment Manufacturers (OEMs) and commercial data networks.




In
      January 2004 Optronics terminated its optics manufacturing in Blaine, Minnesota
      as described in Note 4 . Additionally in January 2004 Optronics consolidated its fiber optics product
      line operations within Blaine. Optronics plans to continue to market and sell
      fiber optic products using mainly APACN’s sales team and channels. We outsource
      several components from third parties including passive optical splitters,
      arrayed waveguides (AWGs) and wavelength division multiplexers (WDMs) based
      on
      Thin Film Filter (TFF) technology, which we combine with our internally
      manufactured products to create value added components for our customers. The
      majority of our outsourced product providers are located offshore.




Plastic
      and metal models of the consumer Personal UV Monitor (PUVM) offered by Optronics
      continue in production, and the focus remains on sales for the spring/summer
      2006 season. We have developed an attractive new clip-on hybrid plastic/metal
      model that can be manufactured to our quality standards by the supplier and
      have
      received the first group of production units for sampling and initial sales.
      We
      have also developed a new product called the *SunUVStation* TM and plan
      to provide samples to retail channels in the fourth quarter of fiscal 2006.
      Final assembly and packaging of this product will be performed in our APA
      facility in India and the production line there is now being qualified. This
      product, which is similar in size to an outdoor temperature gauge, measures
      the
      UV Index and is targeted to consumers and institutions for use in backyards,
      patios, swimming pool areas, and other public places where people need to be
      reminded about UV intensity. The SunUVStation TM complements the PUVM and retailers are interested in offering both.




Optronics’
      4-band *Profiler
      M* radiometer, which serves the printing and coating industries that use UV curing,
      is in production. This instrument measures the intensity and distribution of
      four UV bands to help set up and monitor the curing process. Two domestic
      distributors offer the product, and discussions and evaluation tests with
      additional domestic and international distributors are underway. We plan to
      sell
      the instrument through equipment and supplies manufacturers in addition to
      general distributors. Optronics will be exhibiting the *Profiler
      M* at a
      major trade show for UV curing technology in April 2006.




Optronics
      continues to offer epitaxial foundry services for GaN/AlGaN transistors to
      third
      parties. We also use our foundry for internal research and development, to
      advance our development of power amplifiers used primarily for cellular
      infrastructure applications. Manufacturing reliable transistors is difficult
      and
      costly due to the challenge of developing long-lived, stable transistors and
      the
      necessary large investment in capital equipment. While the Optronics R&D
      division routinely processes epitaxial layers to ensure suitability for power
      transistors, we have, in the past, relied on contractual services and support
      from other sources to process, package, and test the transistors needed to
      develop these power amplifiers. As others in the industry work to demonstrate
      and manufacture reliable transistors, the Optronics R&D group will now
      procure such transistors while concentrating on the development and manufacture
      of power amplifiers. If we are successful in establishing procurement of such
      transistors from outside parties, our reliance on our foundry services will
      decrease. We continue to seek licensing of our intellectual property and
      establish strategic business alignments.




Our
      wholly owned subsidiary, APA Optronics, Pvt. Ltd, India, established in fiscal
      year 2005, is now operational. The subsidiary, with its prime focus on low
      cost
      manufacturing of our products and components, has already started supplying
      samples for our Gallium Nitride and fiber optic products with expectations
      for
      products to be sold in the near future. Additionally, APA India recently
      completed the manufacture of first batch of components for APA Cable &
Networks. The subsidiary is also providing software development for our Profiler
      M product. Phase II of the software for the Profiler has now been completed,
      with the exception of few minor fixes, and will be incorporated into the
      Profiler. The subsidiary provides marketing and sales support for our products
      both in the U.S. and India. In particular, they have now started the marketing
      of patch cords and associated equipment for fiber optic communications. The
      subsidiary, currently located in a leased facility, is in the process of
      constructing a larger facility in India to accommodate its future requirements.
      The new facility is expected to be completed in the 4 th quarter
      of fiscal 2006 or in the first quarter of fiscal year 2007.







**RESULTS
      OF OPERATIONS**




10
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**THREE
      MONTHS ENDED DECEMBER 31, 2005 VS. THREE MONTHS ENDED DECEMBER 31,
      2004**




Consolidated
      revenues for the three months ended December 31, 2005 increased $1,073,893,
      or
      32%, to $4,379,192 from $3,305,299 in 2004.




Revenues
      at Cables & Networks were $4,342,415, compared to $3,300,965 reported in the
      same quarter a year ago, an increase of 32%. The overall increase in revenue
      reflects continued growth in new customers and product acceptance in both the
      broadband and OEM markets. Sales for the current quarter to broadband service
      providers and commercial data networks were approximately $2,690,000 versus
      $2,186,000 in the prior year quarter. The increase was primarily due to higher
      revenues from customers in the Fiber-to-the-Premise market. Sales to OEM’s were
      approximately $1,652,000 versus $1,115,000 in the year ago period. The increase
      is due to additional orders provided under a new supply contract to a customer
      serving the test equipment market. We expect that future sales of Cables &
Networks products will continue to account for a substantial portion of our
      revenue. Historically, Cables & Networks has experienced a downturn in sales
      during the fourth quarter of the fiscal year due to the seasonal nature of
      some
      of the industries it serves. However, with the introduction of a broader product
      offering in both segments, coupled with the expansion of the sales team into
      additional markets, we anticipate that fourth quarter revenues at Cables &
Networks will be comparable with the revenue of the third quarter of fiscal
      2006.




Gross
      revenues at Optronics increased 27% to $123,645 from $97,031 in the same quarter
      a year ago. Gross revenues for the third quarter ended December 31, 2005 reflect
      $86,868 of sales to Cables & Networks for fiber optics products and
      subcontracted labor versus $92,697 in the comparable period last year. These
      sales are eliminated as intercompany sales in the consolidated financials.




**GROSS
      PROFIT AND COST OF SALES**




Cables
      & Network’s gross profit increased $335,443, or 40%, to $1,178,636 from
      $843,193. The increase in gross profit was mainly from higher sales in the
      current quarter. The Company has successfully lowered product costs over the
      past year and continues to pursue component and labor cost reductions to respond
      to ongoing market pressures in order to maintain its gross margins.




Gross
      cost of sales at Optronics decreased $63,523, or 19%, to $275,561 from $339,084.
      Gross cost of sales reflects $84,481 related to cost of sales to Cables &
Networks for fiber optics products and subcontracted labor versus $92,697 in
      the
      last year period. These costs are eliminated as intercompany cost of sales
      in
      the consolidated financials in each quarter. Cost of sales expenses for the
      current period for all Optronics product lines consists of approximately
      $137,000 in personnel costs, $54,000 in depreciation and $85,000 in materials,
      overhead and other product expenses. This compares to prior year personnel
      expenses of approximately $126,000, depreciation of $68,000, and materials,
      allocated overhead and other expenses of $145,000. The overall decrease of
      $63,523 in cost of sales expenses is due to lower product development expenses
      between years within the GaN area.




We
      anticipate comparable gross margins for Cables & Networks and cost of sales
      for Optronics for the fourth quarter.




**RESEARCH
      AND DEVELOPMENT EXPENSES**




Research
      and development expenses consist of the research and development expense at
      Optronics. There have been no significant research and development expenses
      at
      Cables & Networks. Expenses decreased $1,024 to $313,127, from $314,151 in
      the prior year period. The change reflects an increase in personnel costs and
      depreciation expenses of $28,884, offset by decreases in materials and outside
      services associated with the semiconductor operations over the prior year.




**SELLING,
      GENERAL, AND ADMINISTRATIVE**




Consolidated
      selling, general, and administrative (S, G, & A) expenses increased
      $766,257, or 60%, to $2,035,215 from $1,268,958 in 2004.




11
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S,
      G,
& A expenses at Cables & Networks increased $328,150, or 40%, to
      $1,156,959 from $828,809. The majority of the increase is attributable to
      additional sales personnel and related selling costs as a part of our plan
      to
      grow our revenue and customer base. We expect fourth quarter expenses to remain
      at levels seen in the third quarter.




S,
      G,
& A expenses at Optronics increased $440,494, or 100%, to $880,643 from
      $440,149. The increase is due mainly to higher legal expenses for defense of
      the
      lawsuit by EIT as mentioned in Item 1 of Part II of this report, and
      approximately $71,000 in costs associated with operations in India. We expect
      fourth quarter expenses to decrease significantly, mainly due to reduced legal
      fees with the completion of the EIT trial in the 3 rd quarter
      of fiscal 2006.




**INCOME
      (LOSS) FROM OPERATIONS**




Consolidated
      losses from operations increased $342,040, or 35%, to $1,324,009 from $981,969
      in 2004.




The
      income from operations at Cables & Networks was $21,677 versus income of
      $14,384 in the fiscal 2004 quarter.  The
      increased income in the quarter was mainly due to increased revenues, offset
      by
      higher selling expenses absorbed as part of Cables & Networks planned
      investment in revenue growth. We expect fourth quarter operating income to
      not
      vary significantly from the third quarter level.




The
      loss
      from operations at Optronics increased $349,333, or 35%, to $1,345,686, from
      a
      loss of $996,353 in the year ago period. The increase in the loss is related
      to
      additional legal expenses and expenses related to the start up of the India
      operations. We expect to incur losses at Optronics until we realize significant
      revenues from the sales of our PUVM and GaN related products.




**OTHER
      INCOME AND EXPENSE**




Consolidated
      other income and expense decreased $5,367 to $48,973 from $54,340 in 2004.




Other
      expense at Cables & Networks increased $21,328 due to an increase in
      interest expense, primarily due to a higher interest rate in the current period.




Other
      income at Optronics increased $49,729 to $205,785. This resulted from an
      increase in interest income due to a higher rate of interest earned on
      investments over the quarter ending December 31, 2004. Other expense increased
      $33,768 to $56,598, from $22,830 in the period ending December 31, 2004,
      primarily due to a small adverse judgment in the EIT lawsuit.




**NET
      LOSS**




Consolidated
      net loss for the quarter increased $347,276, or 37%, to $1,275,786, or $.11
      cents per share, from $928,510, or $.08 cents per share in the year ago
      period.




Cables
      & Networks had a net loss of $79,037 in the quarter, compared to a loss of
      $65,133 in the year ago quarter. The decrease was due to increased interest
      expense incurred as a result of higher interest rates in fiscal year 2006 versus
      the prior year period, and a slightly larger outstanding debt balance. S, G,
      & A expenses of $328,150 and higher interest expense of $21,328, offset by
      an increase of $335,443 in gross margin associated with higher revenue.




Optronics
      recorded a net loss of $1,196,749, an increase of $333,372 from a loss of
      $863,377 from the same period of fiscal 2005. The increased loss was mainly
      due
      to legal fees for defense of the EIT lawsuit that went to trial in December
      2005, resulting in a $35,000 adverse judgment. The fiscal 2006 quarter also
      reflects reduced cost of sales from the prior year period due to cost reductions
      implemented, offset by increased expenses related to the start up of India
      operations. Achieving profitability in the future will strongly depend upon
      Optronic’s ability to successfully manufacture and market gallium-nitride
      products.




**NINE
      MONTHS ENDED DECEMBER 31, 2005 VS. NINE MONTHS ENDED DECEMBER 31,
      2004**





12
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Consolidated
      revenues for the nine months ended December 31, 2005 increased $1,300,037,
      or
      12%, to $11,961,122 from $10,661,085 in 2004.





Revenues
      at Cables & Networks increased $1,313,031, or 12% to $11,908,543 from
      $10,595,512. Sales to broadband service providers and commercial data networks
      were $8,122,000 or 68% of revenue, compared to sales of $7,147,000, or 67%
      of
      revenue, in the period ending December 31, 2004. Sales to OEM’s were $3,786,000,
      or 32% of revenue, compared to sales of $3,449,000, or 33% of revenue, in the
      year ago period. The increase in the broadband segment is due to additional
      customers and product acceptance, mainly in the Fiber-to-the-Premise market,
      while the increase in the OEM market is due to an increase in third quarter
      revenue generated from a new supply agreement to an existing customer serving
      the test equipment market.





Gross
      revenues at Optronics decreased $52,299, or 13%, to $336,420 from $388,719
      in
      the same period a year ago. Gross revenues reflect $283,841 of sales to Cables
      & Networks for fiber optics products and subcontracted labor versus $323,146
      last year. These sales are eliminated as intercompany sales in the consolidated
      financials.




**COST
      OF SALES AND GROSS PROFIT**





Cables
      & Network’s gross profit increased $293,005, or 10%, to $3,187,821 from
      $2,894,816. The increase is due mainly to increased revenue for the period.
      Gross margins as a percent of revenues were 27%, unchanged between periods.





Gross
      cost of sales at Optronics decreased $433,183, or 33%, to $866,073 from
      $1,299,256. Gross cost of sales reflects $279,186 related to cost of sales
      to
      Cables & Networks for fiber optics products and subcontracted labor versus
      $323,146 last year. These costs are eliminated as intercompany cost of sales
      in
      the consolidated financials. Cost of sales expenses for the nine month period
      for all Optronics product lines consists of approximately $420,000 in personnel
      costs, $202,000 in depreciation and amortization, and $244,000 in materials
      and
      overhead. This compares to prior year personnel expenses of approximately
      $669,000, depreciation and amortization of $229,000 and materials and overhead
      of $401,000. The overall net decrease in cost of sales is due mainly to lower
      personnel and material costs associated with production outsourcing efforts
      in
      the GaN area implemented in the prior year.





**RESEARCH
      AND DEVELOPMENT EXPENSES**





Research
      and development expenses consist of the research and development expense at
      Optronics. There have been no research and development expenses at Cables &
Networks. Expenses increased $254,143 to $980,097 from $725,954 in the prior
      period. The increase in the expense is due mainly to increased personnel and
      operating costs associated with the semiconductor machine which was installed
      and placed in operation in November 2004.




**SELLING,
      GENERAL AND ADMINISTRATIVE**





Consolidated
      S, G & A expenses increased $1,091,916, or 27%, to $5,185,989 from
      $4,094,073 in 2004.





S,
      G
& A expenses at Cables & Networks increased $553,595, or 21%, to
      $3,226,691 from $2,673,096. The majority of the increase is attributable to
      increased personnel expenses within the sales area generated as a part of the
      plan to expand sales presence and grow revenue.





S,
      G,
& A expenses at Optronics increased $542,976, or 38%, to $1,963,953 from
      $1,420,977. The increase is due to additional expense related to the India
      operations which were acquired in March, 2005, along with higher legal fees
      for
      defense of the EIT lawsuit.





**INCOME
      (LOSS) FROM OPERATIONS**





Consolidated
      losses from operations increased $676,825, or 24%, to $3,512,573 from $2,835,748
      in 2004.





13
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            of Contents*





The
      loss
      from operations at Cables & Networks was $38,870 versus income of $221,720
      in the year ago period.  The
      loss
      was mainly the result of higher selling and personnel expenses related to Cables
      & Networks’ planned investment in revenue growth.





The
      loss
      from operations at Optronics increased $416,235, or 14%, to $3,473,703, from
      $3,057,468. The increase is mainly due to the expenses related to the start
      up
      of the India operations and higher legal fees for defense of the EIT
      lawsuit.





**OTHER
      INCOME AND EXPENSE**





Consolidated
      other income and expense decreased $40,333 to $284,603 from $324,936 in fiscal
      2005.





Other
      expense increased at Cables & Networks by $57,537 to $279,457 for the nine
      month period ended December 31, 2005, versus an expense of $221,920 in the
      year
      ago period, due to a higher rate of interest paid in the current nine month
      period.





Other
      income at Optronics increased $54,284, or 9%, to $661,375 from $607,091. The
      sale of land at our Aberdeen facility and loss on disposal of other assets
      resulted in a gain of $93,126 in fiscal 2006. Additionally, interest income
      increased $151,655 in the current period due to a higher outstanding receivable
      due from Cables & Networks and a higher rate of interest earned on
      investments versus last year. Rental income for part of our Blaine facility
      which is leased to the buyer of our optics operations increased approximately
      $13,000 in fiscal 2006 over the prior year. The sale of the optics manufacturing
      operations in April 2004 accounted for approximately $208,000 in other income
      in
      fiscal 2005. Other expense increased $31,303, or 46%, to $99,795 from $68,492.
      The increase is due mainly to a $35,000 adverse judgment in the EIT lawsuit
      which occurred in the third quarter of fiscal 2006.





**NET
      INCOME (LOSS)**





Consolidated
      net loss increased $716,027, or 28%, to $3,230,420, or $.27 cents per share,
      from $2,514,393, or $.21 cents per share in the year ago period.





Cables
      & Networks had a net loss of $317,547 versus net income of $5,226 in the
      year ago period. The loss reflects increased margins generated from higher
      sales, offset by increased S, G, & A expenses attributable to revenue growth
      plans.





Optronics
      recorded a net loss of $2,912,873, an increase of $393,254, or 16%, from the
      loss of $2,519,619 reported in the same period of fiscal 2005. The increase
      is
      due mainly to start up costs of the India operations and higher legal
      fees.







**LIQUIDITY
      AND CAPITAL RESOURCES**




The
      Company’s cash and cash equivalents consist primarily of money market funds,
      U.S. Government instruments and other government instruments with original
      maturities of less than three months.




Cash
      used
      in operating activities was $2,648,821 for the nine month period ended December
      31, 2005 compared to $1,516,676 used in the same period in fiscal 2005. The
      increase in the cash used in the current period reflects the impact of working
      capital changes from the prior year in the amount of $638,003. This is primarily
      attributable to growth in APACN’s accounts receivable and inventory associated
      with its revenue expansion, and an overall increase in loss from operations.
      Loss from operations includes $253,773 in start up expenses related to our
      India
      operations in fiscal 2006.




We
      used
      net cash of $195,329 in investing activities for the nine months ended December
      31, 2005 compared to $79,373 used in the same period of the preceding fiscal
      year. The higher net use of cash in the current year includes capital
      expenditures in the amount of $307,009, an increase in the amount of $7,636
      from
      $299,373 in the prior period. Proceeds from the sale of assets decreased
      $108,320 to $111,680 in the current period, versus $220,000 in the prior period.
      We anticipate approximately $300,000 to $500,000 in capital expenditures in
      fiscal 2006, including the building of a new facility in India.




14
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            of Contents*





Net
      cash
      used in financing activities for the nine months ended December 31, 2005 totaled
      $40,583. We used $83,972 for reduction of debt and generated $43,389 from the
      reduction of bond reserve funds. During the same period in fiscal 2005 we used
      $176,012 in financing activities, of which $219,632 was used for the scheduled
      reduction of debt and $43,620 was generated from the reduction of bond reserve
      funds.




We
      believe we have sufficient funds for operations for at least the next twelve
      months.




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)
            
            $
            1,376
            
            $
            1,354
            
            $
            22
            
            $
            -
            
            $
            -Leases
            
            
            859
            
            
            359
            
            
            359
            
            
            116
            
            
            25Total
                Contractual Cash Obligations
            
            $
            2,235
            
            $
            1,713
            
            $
            381
            
            $
            116
            
            $
            25


(1)
              Includes
                  fixed interest from 0.62 to 10.62%


**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:




·
            Accounting
                for income taxes; and


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


·
            Revenue
                recognition




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, 2005, we recorded a full
      valuation allowance of $12,167,207 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 has U.S. net operating loss (NOL) carryforwards of approximately
      $31,531,000 which expire in fiscal years 2006 to 2025.




15
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Realization
      of the NOL carryforwards 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 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.




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 at the fiscal
      year end or whenever conditions exist that indicate an impairment could exist.




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 in fiscal
      2006 through the nine months ended December 31, 2005.




Revenue
      Recognition





Revenue
      is recognized when persuasive evidence of an arrangement exists, the product
      has
      been delivered, the fee is fixed and determinable, acceptance by the customer
      is
      reasonably certain and collection is probable. Our warranties exist for all
      products sold to all customers and are generally covered for a period of one
      year. We record provisions against our revenue for estimated product returns
      in
      the period the related revenue is recorded. We estimate the costs to service
      our
      warranty obligations and record them within cost of sales. These estimates
      are
      based on historical sales returns, repair activity, and expectation of future
      market conditions. If our actual product returns and allowances exceed our
      estimates, additional reductions to our recorded revenue would result.




**FACTORS
      THAT MAY INFLUENCE FUTURE RESULTS**




The
      statements contained in this Report on Form 10-Q 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” in our Report on Form 10-K for
      the year ended March 31, 2005. 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-Q 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.




**Our
      Results of Operations**




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




16
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            of Contents*




We
      have
      not been profitable since fiscal 1990. As of December 31, 2005, we had an
      accumulated deficit of $36.4 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.*




In
      March
      2003, we completed the acquisition of the assets of Computer System Products
      (CSP) as part of our strategy to expand our product offerings, develop internal
      sources of components and materials, and acquire new technologies. We acquired
      the assets of Americable in June 2003 and integrated them with the assets of
      CSP. 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.




*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.*




17
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            of Contents*





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,




·
            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.




18
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            of Contents*





**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.*




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.*




19
 *Table
            of Contents*





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.






**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. As of
      December 31, 2005, one customer comprised approximately 14% of total sales
      for
      the third quarter ended December 31, 2005 and 24% of accounts receivable as
      of
      the quarter end. No one customer provided greater than 10% of sales for all
      other periods presented.




*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.




20
 *Table
            of Contents*





*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;




·
            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.*




21
 *Table
            of Contents*





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.




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 techniques and
      methodologies relating to model systems, 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.






**ITEM
                3.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK.**




Our
      exposure to market risk for changes in interest rates relates primarily to
      our
      investment portfolio. We invest in short-term securities of high credit issuers
      with maturities ranging from overnight up to 24 months. The average maturity
      of
      the portfolio does not exceed 12 months. 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.






**ITEM
                4.**
            **CONTROLS
                AND PROCEDURES.**




(a)
            *Evaluation
                of disclosure controls and procedures*.
                The Company’s chief executive officer and chief financial officer have
                concluded that as of the end of the fiscal period covered by this
                report
                the Company’s disclosure controls and procedures (as defined in Exchange
                Act Rule 13a-14(c)) were effective to ensure that the information
                required
                to be disclosed by the Company in the report was gathered, analyzed
                and
                disclosed with adequate timeliness, accuracy and
                completeness.




22
 *Table
            of Contents*





(b)
            *Changes
                in internal controls*.
                There were no changes in the Company’s internal controls over financial
                reporting during the fiscal period covered by this report that materially
                affected, or are likely to materially affect, the Company’s control over
                financial reporting.






**PART
      II**





**ITEM
                1.**
            **LEGAL
                PROCEEDINGS**






Electronic
      Instrumentation and Technology, Inc. ("EIT") filed suit against APA on May
      25,
      2005 in the U.S. District Court for the Eastern District of Virginia, Case
      Number 1:05 CV 571 (the "EIT litigation"), alleging that APA had committed
      fraud
      by knowing concealment, fraud in making contract, fraud by intentional
      misrepresentation, misappropriation of trade secrets, tortious interference
      with
      prospective economic advantage, negligent misrepresentation, breach of contract,
      unfair competition, and inequitable conduct in conjunction with preliminary
      business discussions between EIT and APA which preceded APA's introduction
      of
      the Profiler M.  APA filed an Answer on July 28, 2005, which denied EIT's
      claims of wrongful conduct.




The
      EIT
      litigation was tried to a jury on December 28, 2005.  The District Court
      dismissed, as a matter of law, six of EIT's nine causes of action either before
      or during the trial.  Three of EIT's causes of action were submitted to the
      jury for determination.  The jury found in favor of APA on EIT's claim for
      fraud in making contract and misappropriation of trade secrets. The jury found
      in favor of EIT on its breach of contract claim and awarded EIT $35,000. EIT
      has
      filed a post-trial motion for an injunction or, alternatively, for judgment
      as a
      matter of law, which motion APA will oppose. It is unknown whether EIT will
      appeal the verdict.






**ITEMS
      2 THROUGH 5. NOT APPLICABLE**






**ITEM
                6.**
            **EXHIBITS**






Exhibit
                  31.1 - Certification of Chief Executive Officer and Chief Financial
                  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002Exhibit
                  32.1- Certification required of Chief Executive Officer and Chief
                  Financial Officer by Section 906 of the Sarbanes Oxley Act of
                  2002





Signatures





Pursuant
      to the requirements 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.2/14/06
            /s/
                Anil K. JainDate
            Anil
                K. JainPresident,Chief
                Executive Officer and Chief Financial Officer(Principal
                Executive and Principal Financial and Accounting
                Officer)






23