**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 September 30, 2006





 ̈
            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 of
              incorporation
                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
             ̈





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





Large
                accelerated filer
             ̈
            Accelerated
                filer
             ̈
            Non-accelerated
                filer
            x





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





Yes
             ̈
            
            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 November 2, 2006Common
                stock, par value $.01
            11,872,331





**APA
      ENTERPRISES, INC.**


**FORM
      10-Q**


**TABLEOF
      CONTENTS**





**PART
                I. FINANCIAL INFORMATION**
            **3**ITEM
                1. FINANCIAL STATEMENTS
            3CONSOLIDATED
                CONDENSED BALANCE SHEETS
            3CONSOLIDATED
                CONDENSED STATEMENTS OF
                OPERATIONS
            3CONSOLIDATED
                CONDENSED STATEMENTS OF CASH
                FLOWS
            3ITEM
                2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS
            3ITEM
                3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                MARKET RISK.
            3ITEM
                4. CONTROLS AND PROCEDURES.
            3**PART
                II**
            **3**ITEM
                1. LEGAL PROCEEDINGS
            3ITEM
                1A. RISK FACTORS
            3ITEM
                2. UNREGISTERED SALES OF EQUITY SECURITY AND USE OF
                PROCEEDS
            3ITEM
                3. DEFAULT UPON SENIOR SECURITIES
            3ITEM
                4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
            3ITEM
                5. OTHER INFORMATION
            3ITEM
                6. EXHIBITS
            3


2
 *Table
          of Contents*


**PARTI.
      FINANCIAL INFORMATION**




**ITEM
      1. FINANCIAL STATEMENTS**




**APA
      ENTERPRISES, INC.**


**CONSOLIDATED
      CONDENSED BALANCE SHEETS**


**(Unaudited)**


September
                30,
              2006
            
            March
                31,
              2006**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            6,804,335
            
            $
            8,947,777Accounts
                receivable, net of allowance for uncollectible accounts of $75,345
                at
                September 30, 2006 and $77,831 at March 31, 2006
            
            
            2,371,600
            
            
            1,892,483Inventories
            
            
            1,975,204
            
            
            1,836,843Bond
                reserve fund
            
            
            1,285,646
            
            
            126,385Prepaid
                expenses and other
            
            
            115,038
            
            
            173,040Total
                current assets
            
            
            12,551,823
            
            
            12,976,528Property,
                plant and equipment, net
            
            
            2,566,259
            
            
            2,623,412Other
                assets:Bond
                reserve funds
            
            
            -
            
            
            343,241Goodwill
            
            
            3,422,511
            
            
            3,422,511Other
            
            
            396,692
            
            
            227,8793,819,203
            
            
            3,993,631Total
                assets
            
            $
            18,937,285
            
            $
            19,593,571**Liabilities
                and shareholders’ equity**Current
                liabilities:Current
                portion of long-term debt
            
            $
            1,254,727
            
            $
            1,342,481Accounts
                payable
            
            
            1,241,770
            
            
            1,353,828Accrued
                compensation
            
            
            834,962
            
            
            815,046Accrued
                expenses
            
            
            144,547
            
            
            211,840Total
                current liabilities
            
            
            3,476,006
            
            
            3,723,195Long-term
                debt, net of current maturities
            
            
            11,105
            
            
            18,480Deferred
                rent
            
            
            54,249
            
            
            -Deferred
                income taxes
            
            
            312,904
            
            
            272,454Total
                liabilities
            
            
            3,854,264
            
            
            4,014,129Shareholders’
                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 September 30, 2006 and March 31,
                2006
            
            
            118,723
            
            
            118,723Additional
                paid-in capital
            
            
            51,999,234
            
            
            51,968,366Accumulated
                foreign currency translation
            
            
            (16,991
            )
            
            (2,153
            )Accumulated
                deficit
            
            
            (37,017,945
            )
            
            (36,505,494
            )Total
                shareholders’ equity
            
            
            15,083,021
            
            
            15,579,442Total
                liabilities and shareholders’ equity
            
            $
            18,937,285
            
            $
            19,593,571





SEE
      ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL
      STATEMENTS


3
 *Table
          of Contents*


**APA
      ENTERPRISES, INC** .


**CONSOLIDATED
      CONDENSED STATEMENTS OF
      OPERATIONS**


**(Unaudited)**





Three
                  Months Ended
              September
                30,
            
            Six
                  Months Ended
              September
                30,2006
            
            2005
            
            2006
            
            2005Revenues
            
            $
            4,817,813
            
            $
            4,069,367
            
            $
            9,843,730
            
            $
            7,581,930Cost
                of sales
            
            
            3,458,236
            
            
            3,165,297
            
            
            7,154,166
            
            
            5,952,750Gross
                profit
            
            
            1,359,577
            
            
            904,070
            
            
            2,689,564
            
            
            1,629,180Operating
                expensesResearch
                and development
            
            
            135,205
            
            
            343,372
            
            
            288,992
            
            
            666,970Selling,
                general and administrative
            
            
            1,696,482
            
            
            1,680,366
            
            
            3,409,485
            
            
            3,150,774Loss
                (gain) on disposal of assets
            
            
            (6,498
            )
            
            16,809
            
            
            (351,498
            )
            
            (93,126
            )1,825,189
            
            
            2,040,547
            
            
            3,346,979
            
            
            3,724,618Loss
                from operations
            
            
            (465,612
            )
            
            (1,136,477
            )
            
            (657,415
            )
            
            (2,095,438
            )Other
                income
            
            
            110,182
            
            
            96,246
            
            
            229,561
            
            
            188,033Other
                expense
            
            
            (20,733
            )
            
            (22,647
            )
            
            (41,347
            )
            
            (45,529
            )89,449
            
            
            73,599
            
            
            188,214
            
            
            142,504Loss
                before income taxes
            
            
            (376,163
            )
            
            (1,062,878
            )
            
            (469,201
            )
            
            (1,952,934
            )Income
                taxes
            
            
            24,270
            
            
            750
            
            
            43,250
            
            
            1,700Net
                loss
            
            $
            (400,433
            )
            $
            (1,063,628
            )
            $
            (512,451
            )
            $
            (1,954,634
            )Net
                loss per share:Basic
                and diluted
            
            
            ($0.03
            )
            
            ($0.09
            )
            
            ($0.04
            )
            
            ($0.16
            )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)**




Six
                Months Ended
              September
                30,2006
            
            2005**Cash
                Flow from operating activities**Net
                loss
            
            $
            (512,451
            )
            $
            (1,954,634
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            296,796
            
            
            543,722Deferred
                taxes
            
            
            40,450
            
            
            -Gain
                on sale of assets
            
            
            (351,498
            )
            
            (93,126
            )Stock
                based compensation
            
            
            30,868
            
            
            5,183Foreign
                currency translation
            
            
            (14,838
            )
            
            (2,493
            )Changes
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            (479,117
            )
            
            (270,549
            )Inventories
            
            
            (138,361
            )
            
            (380,341
            )Prepaid
                expenses and other
            
            
            (110,811
            )
            
            (51,775
            )Accounts
                payable and accrued expenses
            
            
            (105,186
            )
            
            416,025Net
                cash used in operating activities
            
            
            (1,344,148
            )
            
            (1,787,988
            )**Cash
                flow from investing activities**Purchases
                of property and equipment
            
            
            (274,737
            )
            
            (233,942
            )Proceeds
                from sale of assets
            
            
            386,592
            
            
            111,680Net
                cash provided by (used in) investing activities
            
            
            111,855
            
            
            (122,262
            )**Cash
                flow from financing activities**Repayment
                of long-term debt
            
            
            (95,129
            )
            
            (68,083
            )Decrease
                (increase) in bond reserve funds
            
            
            (816,020
            )
            
            45,648Net
                cash used in financing activities
            
            
            (911,149
            )
            
            (22,435
            )Decrease
                in cash and cash equivalents
            
            
            (2,143,442
            )
            
            (1,932,685
            )Cash
                and cash equivalents at beginning of period
            
            
            8,947,777
            
            
            10,813,492Cash
                and cash equivalents at end of period
            
            $
            6,804,335
            
            $
            8,880,807





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, 2006.




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.




In
      preparation of the Company’s consolidated financial statements, management is
      required to make estimates and assumptions that affect reported amounts of
      assets and liabilities and related revenues and expenses during the reporting
      periods. Actual results could differ from the estimates used by
      management.




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




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




Three
                Months Ended
              September
                30,
            
            Six
                Months Ended
              September
                30,2006
            
            2005
            
            2006
            
            2005Numerator
                for basic and diluted net loss per share
            
            $
            (400,433
            )
            $
            1,063,628
            )
            $
            (512,451
            )
            $
            (1,954,634
            )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
            
            
            ($0.03
            )
            
            ($0.09
            )
            
            ($0.04
            )
            
            ($0.16
            )




Common
      stock options and warrants to purchase 618,565 and 647,195 shares of common
      stock with a weighted average exercise price of $2.77 and $2.96 were outstanding
      at September 30, 2006 and 2005, 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. Cables & Networks’ 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 September 30, 2006**External
                sales
            
            $
            33
            
            $
            4,785
            
            $
            -
            
            $
            4,818Gross
                profit (loss)
            
            
            (116
            )
            
            1,476
            
            
            -
            
            
            1,360Income
                (loss) from operations
            
            
            (655
            )
            
            189
            
            
            -
            
            
            (466
            )Depreciation
                and amortization
            
            
            84
            
            
            58
            
            
            -
            
            
            142Capital
                expenditures
            
            
            94
            
            
            5
            
            
            -
            
            
            99Assets
            
            
            18,406
            
            
            8,222
            
            
            (7,691
            )
            
            18,937**Three
                months ended September 30, 2005**External
                sales
            
            $
            109
            
            $
            4,058
            
            $
            (98
            )
            $
            4,069Gross
                profit (loss)
            
            
            (192
            )
            
            1,097
            
            
            (1
            )
            
            904Income
                (loss) from operations
            
            
            (1,143
            )
            
            7
            
            
            -
            
            
            (1,136
            )Depreciation
                and amortization
            
            
            207
            
            
            67
            
            
            -
            
            
            274Capital
                expenditures
            
            
            42
            
            
            71
            
            
            -
            
            
            113Assets
            
            
            20,257
            
            
            7,440
            
            
            (7,347
            )
            
            20,350**Six
                months ended September 30, 2006**External
                sales
            
            $
            84
            
            $
            9,760
            
            $
            -
            
            $
            9,844Gross
                profit (loss)
            
            
            (218
            )
            
            2,908
            
            
            -
            
            
            2,690Income
                (loss) from operations
            
            
            (1,016
            )
            
            359
            
            
            -
            
            
            (657
            )Depreciation
                and amortization
            
            
            172
            
            
            125
            
            
            -
            
            
            297Capital
                expenditures
            
            
            270
            
            
            5
            
            
            -
            
            
            275Assets
            
            
            18,406
            
            
            8,222
            
            
            (7,691
            )
            
            18,937**Six
                months ended September 30, 2005**External
                sales
            
            $
            213
            
            $
            7,566
            
            $
            (197
            )
            $
            7,582Gross
                profit (loss)
            
            
            (378
            )
            
            2,009
            
            
            (2
            )
            
            1,629Loss
                from operations
            
            
            (2,035
            )
            
            (60
            )
            
            -
            
            
            (2,095
            )Depreciation
                and amortization
            
            
            417
            
            
            127
            
            
            -
            
            
            544Capital
                expenditures
            
            
            129
            
            
            105
            
            
            -
            
            
            234Assets
            
            
            20,257
            
            
            7,440
            
            
            (7,347
            )
            
            20,350


**Note
                  4.**
              **Sale
                  of Land**




In
      June
      2005 the Company sold approximately two 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.




**Note
                  5.**
              **Closing
                  of Aberdeen Facility**




The
      Company ceased all of its operations in Aberdeen during the later part of fiscal
      year 2006 as a part of its consolidation of manufacturing operations. The
      Company owned facility, located approximately on a 10-acre parcel, is designated
      for lease or sale after sub-division of the land in approximately two 5-acre
      parcels. The Company does not have a formal plan for leasing or selling the
      facility and thus the building remains classified as property, plant and
      equipment as of September 30, 2006. The company plans to retain the 5-acre
      vacant land for potential future use. The facility was built using proceeds
      from
      bonds issued by the South Dakota Economic Development and Finance Authority.
      In
      August 2006, the Company paid $871,911 into an escrow account to retire the
      bonds. These funds, reflected as Bond Reserve Funds, will be used to make final
      payment on the bonds on October 1, 2006, the next bond redemption date. The
      payment was made pursuant to a Notice of Default and Acceleration received
      by
      the Company. The primary reason for the notice was related to the Company
      ceasing all of its South Dakota operations in the latter part of fiscal year
      2006 as part of its consolidation of manufacturing operations. The Company
      has
      made timely interest and principal payments, and the reason for the notice
      was
      not related to the payments.




7
 *Table
          of Contents*


**Note
                  6.**
              **Sale
                  of Metal Organic Chemical Vapor Deposition (MOCVD)
                  Operation**




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


**Note
                  7.**
              **Stock
                  Based Compensation**


Effective
      April 1, 2006, the Company adopted FASB Statement No. 123(R), “Share-Based
      Payment, *”* (SFAS
      123(R)) which requires an entity to reflect on its income statement, instead
      of
      pro forma disclosures in its financial footnotes, the cost of employee services
      received in exchange for an award of equity instruments based on the grant-date
      fair value of the award. Statement 123(R) supersedes the Company’s previous
      accounting under Accounting Principles Board Opinion No. 25, “Accounting for
      Stock Issued to Employees.”




The
      Company adopted SFAS 123(R) using the modified prospective transition method,
      which provides that the Company’s consolidated financial statements for prior
      periods have not been restated to reflect, and do not include, the impact of
      SFAS 123(R). As required by SFAS 123(R), the following pro forma table
      illustrates the effect on net loss as if the fair-value-based approach of SFAS
      No.123 (R) had been applied during the three and six months ended September
      30,
      2005:




Three
                Months Ended
              September
                30, 2005
            
            Six
                Months Ended
              September
                30, 2005Net
                loss to common shareholders - as reported
            
            $
            (1,063,628
            )
            $
            (1,954,634
            )Less:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                effects
            
            
            (29,961
            )
            
            (61,526
            )Net
                loss - pro forma
            
            $
            (1,093,589
            )
            $
            (2,016,160
            )Basic
                and diluted net loss per common share - as reported
            
            
            ($0.09
            )
            
            ($0.16
            )Basic
                and diluted net loss per common share - pro forma
            
            
            ($0.09
            )
            
            ($0.17
            )




SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service periods in the Company’s Consolidated
      Statements of Operations. The Company recorded $11,243 and $30,868 of related
      compensation expense for the three and six month periods ended September 30,
      2006, respectively. This expense is included in selling, general and
      administrative expense. There was no tax benefit from recording this non-cash
      expense. The impact of this compensation expense on both basic and diluted
      loss
      per share was less than $0.01 for the three and six months ended September
      30,
      2006. As of September 30, 2006, $106,152 of total unrecognized compensation
      expense related to non-vested awards is expected to be recognized over a
      weighted average period of approximately 3.36years.




The
      Company uses the Black-Scholes-Merton (“Black-Scholes”) option-pricing model as
      a method for determining the estimated fair value for employee stock awards.
      This is the same option-pricing model used in prior years to calculate pro
      forma
      compensation expense under SFAS 123 footnote disclosures. Compensation expense
      for employee stock awards is recognized on a straight-line basis over the
      vesting period of the award. The adoption of SFAS 123(R) also requires certain
      changes to the accounting for income taxes and the method used in determining
      diluted shares, as well as additional disclosure related to the cash flow
      effects resulting from share-based compensation. The relevant interpretive
      guidance of Staff Accounting Bulletin 107 was applied in connection with its
      implementation and adoption of SFAS 123(R).




8
 *Table
          of Contents*


The
      Company estimates the fair value of stock option awards based on the following
      assumptions:




**Six
                Months**
              **Ended**
              **September
                30, 2006**Expected
                volatility
            64%Expected
                life (in years)
            5
                yearsExpected
                dividends
            0%Risk-free
                interest rate
            4.78%





The
      weighted average fair value of options granted during the six months ended
      September 30, 2006 was $0.77. The Company’s approach to estimating expected
      volatility on its stock awards granted during the quarter considers both the
      historical volatility in the trading market for its common stock and a look
      back
      period equal to the expected life of the grants. Expected volatility is one
      of
      several assumptions in the Black-Scholes model used by the Company to make
      an
      estimate of the fair value of options granted under the Company’s stock plans.
      The Company believes this approach results in a better estimate of expected
      volatility.




In
      estimating the expected term, both exercise behavior and post-vesting
      termination behavior were included in the analysis, as well as consideration
      of
      outstanding options. The risk-free interest rate used in the Black-Scholes
      option valuation model is the historical yield on U.S. Treasury zero-coupon
      issues with equivalent remaining terms. The Company does not pay any cash
      dividends on the Company’s common stock and does not anticipate paying any cash
      dividends in the foreseeable future. Consequently, an expected dividend yield
      of
      zero is used in the Black-Scholes option valuation model.




Stock
      Option Plans




We
      have
      adopted a 1997 Stock Compensation Plan, a Stock Option Plan for Nonemployee
      Directors, and a 2007 Stock Compensation Plan (the Plans), pursuant to which
      we
      may grant stock options, stock appreciation rights, restricted stock,
      performance shares, and other stock and cash awards to eligible participants.
      We
      have also granted stock options outside of the Plans in limited situations.
      Under the Plans, an aggregate of approximately 681,485 shares of our Company’s
      common stock remained available for issuance at September 30, 2006. In general,
      the stock options we have issued under the Plans vest over a period of five
      years and expire six years from the date of grant. New shares are issued under
      existing registration statements upon exercise. The 1997 Stock Compensation
      Plan
      expired with the adoption of the 2007 Stock Compensation Plan. All outstanding
      incentives, granted under the 1997 Plan will remain in effect until satisfied
      or
      terminated.




Options
      transaction under these plans during the three and six months ended September
      30, 2006 are summarized as follows:




Numberof
                shares
            
            Weighted
                average
              exercisepriceOutstanding
                at March31, 2006
            
            
            276,470
            
            $
            2.80Granted
            
            
            25,000
            
            
            1.33Canceled
            
            
            (37,490
            )
            
            2.87Outstanding
                at June 30, 2006
            
            
            263,980
            
            
            2.65Granted
            
            
            15,000
            
            
            1.28Canceled
            
            
            (10,415
            )
            
            5.39Outstanding
                at September 30, 2006
            
            
            268,565
            
            
            2.46


9
 *Table
          of Contents*


The
      following table summarizes information concerning outstanding and exercisable
      stock options at September 30, 2006:




**Options
                outstanding**Range
                of
              exercise
                prices
            
            Number
              outstanding
            
            Weighted
                average
              remaining
              contractual
                life
            
            Weighted
              average
              exercise
                price
            
            Aggregate
              Intrinsic
              value$
            0.00-$1.29
            
            
            15,000
            
            
            5.92
                years
            
            $
            1.28
            
            $
            19,2001.30-2.91
            
            
            228,565
            
            
            3.83
                years
            
            
            1.87
            
            
            427,4175.53-8.90
            
            
            25,000
            
            
            0.23
                years
            
            
            8.56
            
            
            214,000268,565
            
            
            3.61
                years
            
            $
            2.46
            
            $
            660,617







**Options
                exercisable**Range
                of
              exercise
                prices
            
            Number
              outstanding
            
            Weighted
                average
              remaining
              contractual
                life
            
            Weighted
              average
              exercise
                price
            
            Aggregate
              intrinsic
              value$
            0.00-$1.29
            
            
            -
            
            
            0
                years
            
            $
            -
            
            $
            -1.30-2.91
            
            
            82,405
            
            
            3.15
                years
            
            
            2.06
            
            
            169,7545.53-8.90
            
            
            25,000
            
            
            0.23
                years
            
            
            8.56
            
            
            214,000107,405
            
            
            2.47
                years
            
            
            3.57
            
            $
            383,754


**Note
                  8.**
              **Inventories**


Inventories
      consist of the following as of:




September
                30, 2006
            
            March
                31, 2006Raw
                Materials
            
            $
            1,654,448
            
            $
            1,588,816Work-in-progress
            
            
            36,682
            
            
            48,474Finished
                Goods
            
            
            284,074
            
            
            199,553$
            1,975,204
            
            $
            1,836,843




**Note
                  9.**
              **Major
                  Customer
                  Concentration**




As
      of
      September 30, 2006, two customers comprised approximately 22% of total sales
      for
      the six months ended September 30, 2006 and one customer accounted for 13%
      of
      accounts receivable as of the quarter end. No one customer provided greater
      than
      10% of sales for the same period of the prior fiscal year.


**Note
                  10.**
              **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 filed certain post-trial motions, all of which were
      denied by the court. EIT did not appeal the verdict and this matter is
      concluded.


**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.”




10
 *Table
          of Contents*


**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
      focuses on custom-engineered products for telecommunications customers,
      primarily related to cabling management requirements of the Fiber-to-the-Home
      (“FTTH”) marketplace and in designing and terminating custom cable assemblies
      for commercial and industrial original equipment manufacturers (“OEM’s”). To
      date, APACN has been able to successfully establish itself as a value-added
      supplier to its target market of independent telephone companies and cable
      television operators as well as OEM’s who value a high level of engineering
      services as part of their procurement process. APACN has expanded its product
      offerings and broadened its customer base since its inception three years
      ago.




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




Optronics
      discontinued the fiber optic product line in March 2006.




In
      fiscal
      year 2006 Optronics sold its MOCVD facility, certain equipment and intellectual
      property related to research and development work surrounding gallium nitride
      based heterojunction field effect transistors. The sale to an unrelated third
      party for consideration including $1.9 million in cash enables the Company
      to
      focus its R&D efforts on power amplifiers built using GaN technology by
      using commercially available parts, rather than building its own transistors.
      This is expected to decrease operating costs and shorten the time to market
      for
      power amplifiers. The Company also sold certain intellectual capitalized assets
      for $345,000 during the first quarter of fiscal year 2007. In August 2006,
      the
      Company paid approximately $872,000 into an escrow account to retire the bonds
      issued by the South Dakota Economic Development and Finance Authority. These
      funds will be used to make final payment on the bonds on October 1, 2006, the
      next redemption date.




Plastic
      and metal models of the consumer Personal UV Monitor (PUVM) offered by Optronics
      continue in production, and the focus remains on marketing and sales. We have
      also introduced samples of a new product called the *SunUVStation* TM to
      several catalog and retail distributors for their evaluation. 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. Final assembly and packaging of this product is being
      performed in our APA facility in India. 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 are in
      the
      process of establishing sales channels through equipment and supplies
      manufacturers in addition to general distributors. Optronics is exhibiting
      the *Profiler
      M* in
      selected trade shows with encouraging results. In recent months, the Company
      held numerous discussions with potential customers of the Profiler M while
      attending trade shows in Atlanta and Chicago.




Our
      wholly owned subsidiary, APA Optronics, Pvt. Ltd, India (APA India), established
      in fiscal year 2005, is now operational. The subsidiary, with its prime focus
      on
      low cost manufacturing of APA’s products and components, has already started
      supplying samples of Gallium Nitride and fiber optic products which are expected
      to be delivered for sale in the near future. The subsidiary is also providing
      software development for our *Profiler
      M* product.
      Phase II of the software for the Profiler has now been completed. The subsidiary
      provides marketing and sales support for our products both in the U.S. and
      India. In particular, it has started the marketing of patch cords and associated
      equipment for fiber optic communications, and during the second quarter began
      generating revenue from the sale of patch cords and other components to several
      customers. 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 fiscal year
      2007.




11
 *Table
          of Contents*


**RESULTS
      OF OPERATIONS**




**THREE
      MONTHS ENDED SEPTEMBER 30, 2006 VS. THREE MONTHS ENDED SEPTEMBER 30,
      2005**




Consolidated
      revenues for the three months ended September 30, 2006 increased $748,446,
      or
      18%, to $4,817,813 from $4,069,367 in 2005 mainly due to increased revenues
      at
      Cables & Networks.




Revenues
      at Cables & Networks were $4,784,737, compared to $4,057,740 reported in the
      same quarter a year ago, an increase of 18%. 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 $3,731,000 versus
      $2,847,000 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 $1,054,000 versus $1,210,000 in the year ago period. The decrease
      was due to price pressures that resulted in the loss of a major customer,
      however, this loss was partially off-set due to additional orders provided
      under
      a 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. 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 revenues at Cables & Networks during
      the third and fourth quarters of fiscal year 2007 will be comparable with the
      revenue of the first and second quarters of fiscal 2007.




Gross
      revenues at Optronics decreased 70% to $33,076 from $109,877 in the same quarter
      a year ago mainly due to the termination of manufacturing activities in
      Aberdeen, South Dakota. Gross revenues for the quarter ended September 30,
      2005
      reflect $98,250 of sales to Cables & Networks for subcontracted labor.
      Optronics did not provide any subcontract labor to Cables & Networks in the
      quarter ended September 30, 2006.




**GROSS
      PROFIT AND COST OF SALES**




Cables
      & Networks’ gross profit increased $378,768, or 35%, to $1,476,013 from
      $1,097,245. Specifically, gross profit as a percent of revenue was 31% in the
      current quarter as compared to 27% in the same quarter last year. The increase
      in gross profit was mainly due to an increase in revenue without an increase
      in
      the corresponding fixed costs, as well as component and labor cost reductions.




Gross
      cost of sales (before inter-company eliminations) at Optronics decreased
      $152,615, or 50%, to $149,512 from $302,127. Gross cost of sales for second
      quarter of fiscal year 2006 reflects $97,325 related to cost of sales to Cables
      & Networks for subcontracted labor. Optronics did not provide any
      subcontract labor to Cables & Networks in the quarter ended September 30,
      2006. These costs are eliminated as inter-company 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 $45,000 in
      personnel costs, $30,000 in depreciation and $75,000 in materials, overhead
      and
      other product expenses. This compares to prior year personnel expenses of
      approximately $146,000, depreciation of $64,000, and materials, allocated
      overhead and other expenses of $92,000.




We
      anticipate comparable gross margins for Cables & Networks and cost of sales
      for Optronics for the upcoming 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 $208,167 to $135,205, from $343,372 in
      the prior year period. The change reflects a decrease in personnel, facility
      and
      depreciation costs due to the sale of its MOCVD operations.




12
 *Table
          of Contents*


**SELLING,
      GENERAL, AND ADMINISTRATIVE**




Consolidated
      selling, general, and administrative (S, G, & A) expenses during the three
      months ended September 30, 2006 increased $16,116, or 1%, to $1,696,482 from
      $1,680,366 in the same period in 2005.




S,
      G,
& A expenses at Cables & Networks during the three months ended
      September 30, 2006 increased $197,983, or 18%, to $1,288,167 from $1,090,184
      in
      2005. 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 upcoming quarter expenses to remain at levels seen in the second
      quarter.




S,
      G,
& A expenses at Optronics during the three months ended September 30, 2006
      decreased $182,792, or 31%, to $408,315 from $591,107 in the same period in
      2005. The decrease is due largely to the expensing of warrants in the prior
      quarter which were fully amortized as of March 31, 2006.




**GAIN
      ON DISPOSAL OF ASSETS**




Consolidated
      gain on disposal of assets in the three months ended September 30, 2006 was
      $6,498 versus a loss of $16,809 in 2005. The majority of the activity is at
      the
      Optronics division.




**INCOME
      (LOSS) FROM OPERATIONS**




Consolidated
      losses from operations decreased $670,865, or 59% during the three months ended
      September 30, 2006, to $465,612 from $1,136,477 in the same period in
      2005.




The
      income from operations at Cables & Networks in the three months ended
      September 30, 2006 was $188,975 compared to $7,061 in the same period in 2005.  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.




The
      loss
      from operations at Optronics decreased $488,951 in the three months ended
      September 30, 2006, or 43%, to $654,587, from a loss of $1,143,538 in the year
      ago period. The decrease in the loss is mainly due to consolidation and
      discontinuation of MOCVD and Aberdeen operations.




**OTHER
      INCOME AND EXPENSE**




Consolidated
      other income and expense increased $15,850 to $89,449 in the three months ended
      September 30, 2006 from $73,599 in 2005.




Other
      expense at Cables & Networks increased $29,009 in the three months ended
      September 30, 2006 due to an increase in interest expense, primarily due to
      a
      higher interest rate in the current period.




Other
      income at Optronics increased $43,772 to $228,865 in the three months ended
      September 30, 2006. This resulted from an increase in interest income due to
      a
      higher rate of interest earned on investments over the quarter ending September
      30, 2005. Other expense decreased $1,087 to $20,512 in the three months ended
      September 30, 2006, from $21,599 in the period ending September 30,
      2005.




**NET
      LOSS**




Consolidated
      net loss for the quarter decreased $663,195, or 62%, to $400,433, or $.03 cents
      per share, from $1,063,628, or $.09 cents per share in the year ago
      period.




Cables
      & Networks had a net profit of $45,801 in the quarter, compared to a loss of
      $83,334 in the year ago quarter. The increased profitability was due mainly
      to
      increased revenues.




Optronics
      recorded a net loss of $446,234 in the three months ended September 30, 2006,
      a
      decrease of $534,060 from a loss of $980,294 from the same period of 2005.
      The
      decrease in the loss is mainly due to the consolidation and termination of
      MOCVD
      and Aberdeen operations. Achieving profitability in the future will strongly
      depend upon Optronics’ ability to successfully manufacture and market
      gallium-nitride products.




13
 *Table
          of Contents*


**SIX
      MONTHS ENDED SEPTEMBER 30, 2006 VS. SIX MONTHS ENDED SEPTEMBER 30,
      2005**




Consolidated
      revenues for the six months ended September 30, 2006 increased $2,261,800,
      or
      30%, to $9,843,730 from $7,581,930 in 2005.




Revenues
      at Cables & Networks were $9,759,811, compared to $7,566,128 reported in the
      same period a year ago, an increase of 29%. 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 two quarters to broadband
      service providers and commercial data networks were approximately $7,440,000
      versus $5,432,000 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 $2,320,000 versus $2,134,000 in the year ago period.
      The increase is due to additional orders provided under a 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. 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 revenues at Cables & Networks during the third
      and fourth quarters of fiscal year 2007 will be comparable with the revenue
      of
      the first and second quarters of fiscal 2007.




Gross
      revenues at Optronics decreased 61% to $83,919 from $212,775 in the same period
      a year ago mainly due to the termination of manufacturing activities in
      Aberdeen, South Dakota. Gross revenues for the quarter ended September 30,
      2005
      reflect $196,973 of sales to Cables & Networks for subcontracted labor.
      Optronics did not provide any subcontract labor to Cables & Networks in the
      two quarters ended September 30, 2006.




**GROSS
      PROFIT AND COST OF SALES**




Cables
      & Networks’ gross profit increased $899,037, or 45%, to $2,908,222 from
      $2,009,185. Specifically, gross profit as a percent of revenue was 30% in the
      first six months of fiscal year 2007 as compared to 27% in the same period
      last
      year. The increase in gross profit was mainly due to an increase in revenue
      without an increase in the corresponding fixed costs, as well as component
      and
      labor cost reductions.




Gross
      cost of sales (before inter-company eliminations) at Optronics decreased
      $287,935, or 49%, to $302,577 from $590,512. Gross cost of sales for the first
      six months of fiscal year 2006 reflects $194,705 related to cost of sales to
      Cables & Networks for subcontracted labor. Optronics did not provide any
      subcontract labor to Cables & Networks in the quarter ended September 30,
      2006. 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 $95,000 in
      personnel costs, $64,000 in depreciation and $144,000 in materials, overhead
      and
      other product expenses. This compares to prior year personnel expenses of
      approximately $283,000, depreciation of $131,000, and materials, allocated
      overhead and other expenses of $177,000. The reduced product development
      expenses within the GaN area also contributed to the decreased cost of sales.




We
      anticipate comparable gross margins for Cables & Networks and cost of sales
      for Optronics for the upcoming 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 $377,978 to $288,992 during the six
      months ended September 30, 2006, from $666,970 in the prior year period. The
      change reflects a decrease in personnel, facility and depreciation costs due
      to
      the sale of its MOCVD operations.




**SELLING,
      GENERAL, AND ADMINISTRATIVE**




Consolidated
      selling, general, and administrative (S, G, & A) expenses increased $258,711
      during the six months ended September 30, 2006, or 8%, to $3,409,485 from
      $3,150,774 in 2005.




14
 *Table
          of Contents*


S,
      G,
& A expenses at Cables & Networks increased $480,327 during the six
      months ended September 30, 2006, or 23%, to $2,550,059 from $2,069,732 in the
      same period in 2005. 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 upcoming quarter expenses to remain at
      levels seen in the first and second quarters.




S,
      G,
& A expenses at Optronics decreased $223,884, or 21%, to $859,426 from
      $1,083,310 in 2005. The decrease is due largely to the expensing of warrants
      in
      the prior quarter which were fully amortized as of March 31, 2006.




**GAIN
      ON DISPOSAL OF ASSETS**




Gain
      on
      disposal of assets were entirely within the Optronics division. Gain on disposal
      of assets increased $258,372 to $351,498 in the six months ended September
      30,
      2006 from $93,126 in the prior year. Gains for fiscal year 2007 represent the
      sale of patents. Gains for fiscal year 2006 were primarily from the exchange
      of
      land for the forgiveness of debt.




**INCOME
      (LOSS) FROM OPERATIONS**




Consolidated
      losses from operations decreased $1,438,023, or 69%, to $657,415 in the six
      months ended September 30, 2006 from $2,095,438 in 2005.




The
      income from operations at Cables & Networks was $359,292 in the six months
      ended September 30, 2006 versus loss of $60,547 in the fiscal 2006 period.  The
      increased income in the period was mainly due to increased revenues, offset
      by
      higher selling expenses absorbed as part of Cables & Networks’ planned
      investment in revenue growth.




The
      loss
      from operations at Optronics decreased $1,018,184, or 50%, to $1,016,707 in
      the
      six months ended September 30, 2006, from a loss of $2,034,891 in the year
      ago
      period. The decrease in the loss is mainly due to the gain of $345,000 realized
      due to the sale of two patents and the termination of MOCVD related activities.
      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 increased $45,710 to $188,214 from $142,504 in 2005.




Other
      expense at Cables & Networks increased $53,782 due to an increase in
      interest expense, primarily due to a higher interest rate in the current period.




Other
      income at Optronics increased $97,225 to $459,689. This resulted from an
      increase in interest income due to a higher rate of interest earned on
      investments over the six months ended September 30, 2005. Other expense
      decreased $2,267 to $40,930, from $43,197 in the period ended September 30,
      2005.




**NET
      LOSS**




Consolidated
      net loss for the six months ended September 30, 2006 decreased $1,442,183,
      or
      74%, to $512,451, or $.04 cents per share, from $1,954,634, or $.16 cents per
      share in the year ago period.




Cables
      & Networks had a net profit of $86,497 year to date, compared to a loss of
      $238,510 in 2005. The increased profitability was due mainly to increased
      revenues.




Optronics
      recorded a net loss of $598,948 in the six months ended September 30, 2006,
      a
      decrease of $1,117,176 from a loss of $1,716,124 for the same period in 2005.
      The decrease in the loss is mainly due to the consolidation of operations
      resulting in a $859,105 decrease in operating expenses during the six months
      ended September 30, 2006 as compared to the same period of last year. Achieving
      profitability in the future will strongly depend upon Optronics’ ability to
      successfully manufacture and market gallium-nitride products.




15
 *Table
          of Contents*


**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 $1,344,148 for the six month period ended September
      30, 2006 compared to $1,787,988 used in the same period in 2005. The cash used
      in the current period decreased $443,840 despite an increase of $546,835 in
      the
      working capital from the prior year. This is primarily attributable to increase
      in APACN’s accounts receivable and inventory associated with its growth in
      revenues.




We
      realized net cash increase of $111,855 in investing activities for the six
      months ended September 30, 2006 compared to $122,262 used in the same period
      of
      the preceding fiscal year. The net realized cash due to investing activities
      in
      the current period includes proceeds from sale of capital assets in the amount
      of $386,592 offsetting capital expenditures in the amount of $274,737. The
      Company sold $111,680 worth of capital assets and had capital expenditures
      of
      $233,942 in the comparable period of the previous year. We anticipate
      approximately $400,000 to $500,000 in capital expenditures in fiscal 2007,
      including the completion of building of a new facility in India.




Net
      cash
      used in financing activities for the six months ended September 30, 2006 totaled
      $911,149. We used $95,129 for reduction of debt and deposited $816,020 in an
      escrow account to redeem bonds. During the same period in fiscal 2006 we used
      $22,435 in financing activities, of which $68,083 was used for the scheduled
      reduction of debt and $45,648 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) as of September 30, 2006:




Total
            
            Less
                than
              1
                Year
            
            1-3
                years
            
            4-5
                years
            
            After
              5
                yearsLong-term
                debt (1)
            
            $
            1,266
            
            $
            1,255
            
            $
            11
            
            $
            -
            
            $
            -Leases
            
            
            1,997
            
            
            325
            
            
            690
            
            
            487
            
            
            495Total
                Contractual CashObligations
            
            $
            3,263
            
            $
            1,580
            
            $
            701
            
            $
            487
            
            $
            495





(1)
      Includes fixed interest from 0.62 to 10.60%





**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:




·
            Stock
                Option Accounting;


·
            Accounting
                for income taxes; and


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


16
 *Table
          of Contents*


Stock
      Option Accounting




In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      No.
      123—revised 2004 (“SFAS 123R”), “Share-Based Payment,” which replaces Statement
      of Financial Accounting Standards No. 123 (“SFAS 123”) and supersedes APB
      Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires
      the measurement of all share-based payments to employees, including grants
      of
      employee stock options, using a fair-value based method and the recording of
      such expense in our Consolidated Statements of Operations. In March 2005, the
      SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), “Share-Based Payment,”
which provides interpretive guidance related to the interaction between SFAS
      123R and certain SEC rules and regulations, as well as provides the SEC staff’s
      views regarding the valuation of share-based payment arrangements.




We
      adopted SFAS 123R using the modified prospective transition method, which
      requires the application of the accounting standard as of April 1, 2006, the
      first day of our fiscal year 2007. Our unaudited condensed consolidated
      financial statements as of and for the three and six months ended September
      30,
      2006 reflect the impact of SFAS 123R. The compensation expense had impacted
      both
      basic and diluted loss per share by less than $0.01 for the three and six months
      ended September 30, 2006. The Company recorded $11,243 and $30,868 of related
      compensation expense for the three and six month periods ended September 30,
      2006. In accordance with the modified prospective transition method, our
      unaudited condensed consolidated financial statements for prior periods have
      not
      been restated, and do not include, the impact of compensation expense calculated
      under SFAS 123R.




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 March31, 2006, we recorded a full valuation
      allowance of $13,390,433 against our deferred tax assets, due to uncertainties
      related to our ability to utilize our deferred tax assets, consisting
      principally of certain net operating losses carried forward. The valuation
      allowance is based on our estimates of taxable income by jurisdiction and the
      period over which our deferred tax assets will be recoverable. The Company
      has
      U.S. net operating loss (NOL)carryforwards of approximately $33,782,000 which
      expire in fiscal years 2007 to 2026. To
      date
      the Company has not completed a section 382 analysis. If certain ownership
      changes occurred under Section 382 of the Internal Revenue Code, there may
      be
      further limitations on the usage of the net operating loss carry
      forwards.




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.




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
      SFAS144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
SFAS144 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
      2007 through the six months ended September 30, 2006.




17
 *Table
          of Contents*




**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.




(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
      certain post-trial motions, all of which were denied by the court. EIT did
      not
      appeal the verdict and this matter is concluded.




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




**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 Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations. Actual results could differ from those projected in any
      forward-looking statements for the reasons, among others, detailed below. We
      believe that many of the risks detailed here are part of doing business in
      the
      industry in which we compete and will likely be present in all periods reported.
      The fact that certain risks are characteristic to the industry does not lessen
      the significance of the risk. The forward-looking statements are made as of
      the
      date of this Report as Form 10-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. Readers of this
      Report and prospective investors should also review the Risk Factors set forth
      in our Report on Form 10-K for the fiscal year ended March 31,
      2006.




18
 *Table
          of Contents*


**Manufacturing
      and Operations**




*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. We have recently lost two management level advanced
      degree employees. Currently, these responsibilities have been absorbed by
      existing employees.




**Markets
      and Market Conditions**




*Our
      profitability can be adversely affected due to increased raw material
      costs*




Our
      manufacturing costs may be impacted by unanticipated increases in raw material
      costs during the time span between the cost quotes and actual procurement of
      raw
      materials. The impact can be significant for purchase orders requiring multiple
      scheduled deliveries. Whereas we may be able to approach some of the customers
      for costs adjustments, there is no assurance that we would be successful in
      obtaining these adjustments. Failure to obtain price adjustments would result
      in
      decreased profitability and/or losses.




*Our
      inventory of raw material and supplies may incur significant obsolescence*




Our
      market demands rapid turn around from receipt of purchase orders to shipping
      of
      the products. We maintain significant inventory of raw materials and supplies
      to
      meet this demand resulting in risk of inventory obsolescence. Whereas we
      anticipate and make provisions for a reasonable fraction of inventory
      obsolescence, a significant higher level of obsolescence can adversely impact
      our profitability.




**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
      September 30, 2006, two customers comprised approximately 22% of total sales
      for
      the first two quarters ended September 30, 2006 and one customer accounted
      for
      13% of accounts receivable as of the quarter end. No one customer provided
      greater than 10% of sales for the same period of the prior fiscal
      year.




**ITEM
                  2.**
              **UNREGISTERED SALES OF EQUITY SECURITY
                AND USE OF
                PROCEEDS**


None.




19
 *Table
          of Contents*




**ITEM
                3.**
            **DEFAULT
                UPON SENIOR SECURITIES**




On
      August
      30, 2006, the Company paid $871,911 into an escrow account to retire the debt
      from the South Dakota Economic Development and Finance Authority. These funds
      will be used to make final payment on the Company’s dept to the State of South
      Dakota on October 1, 2006, the next bond redemption date.




During
      1996-97 the Company built its new production facility in Aberdeen, South Dakota.
      This facility was partially funded by using proceeds of a $1.895 million bond
      from the State of South Dakota Governor’s Office of Economic Development. The
      bonds required the Company to maintain operations in the state of South Dakota
      and compliance with certain financial covenants. The repayment will be made
      pursuant to a Notice of Default and Acceleration received by the Company. The
      primary reason for the notice was related to the Company ceasing all of its
      South Dakota operations in the later part of fiscal year 2006 as part of its
      consolidation of manufacturing operations. The Company has made timely interest
      and principal payments, and the reason for the notice was not related to the
      payments


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




On
      August
      17, 2006, the Company held its Annual Meeting of Shareholders. At the meeting,
      the shareholders elected as directors Anil K. Jain (with 10,494,183 shares
      voting for and 268,605 withheld), John G. Reddan (with 10,592,872 shares voting
      for and 169,916 withheld), Ronald G. Roth (with 10,594,172 shares voting for
      and
      168,616 withheld), and Stephen A. Zuckerman (with 10,327,298 shares voting
      for
      and 435,490 withheld).




The
      shareholders also approved the adoption of the Company’s 2007 Stock Compensation
      Plan (with 5,382,527 shares voting for, 415,204 against, 52,031 abstaining,
      and
      4,913,026 broker-non votes)




**ITEM
                  5.**
              **OTHER
                  INFORMATION******




None.




**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
      2002




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


20
 *Table
          of Contents*


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.November
                9, 2006
            /s/
                Anil K. JainDate
            Anil
                K. JainPresident,Chief
                Executive Officer and Chief
                Financial Officer (Principal
                Executive and Principal Financial and
                Accounting
                Officer)