**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, 2006





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 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
              o





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
            o
            Accelerated
                filer
            o
            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
              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, 2007Common
                stock, par value $.01
            11,872,331










1





**APA
      ENTERPRISES, INC.**


**FORM
      10-Q**


**TABLE
      OF CONTENTS**





**PART
                I. FINANCIAL INFORMATION**
            3ITEM
                1. FINANCIAL STATEMENTS
            3CONSOLIDATED
                CONDENSED BALANCE SHEETS
            3CONSOLIDATED
                CONDENSED STATEMENTS OF
                OPERATIONS
            4CONSOLIDATED
                CONDENSED STATEMENTS OF CASH
                FLOWS
            5ITEM
                2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS
            11ITEM
                3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                MARKET RISK.
            19ITEM
                4. CONTROLS AND PROCEDURES.
            19**PART
                II. OTHER INFORMATION**
            20ITEM
                1. LEGAL PROCEEDINGS
            20ITEM
                1A. RISK FACTORS
            20ITEM
                2. UNREGISTERED SALES OF EQUITY SECURITY AND USE OF
                PROCEEDS
            21ITEM
                3. DEFAULTS UPON SENIOR
                SECURITIES
            21ITEM
                4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
            21ITEM
                5. OTHER INFORMATION
            21ITEM
                6. EXHIBITS
            22





2
 ***Table
            of
            Contents***





**PART
      I. FINANCIAL INFORMATION**


**ITEM
      1. FINANCIAL STATEMENTS**


**APA
      ENTERPRISES, INC.**


**CONSOLIDATED
      CONDENSED BALANCE SHEETS**


**(Unaudited)**


December
                31,
              2006
            
            March
                31,
              2006**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            7,014,017
            
            $
            8,947,777Accounts
                receivable, net of allowance for uncollectible accounts of $75,560
                at
                December 31, 2006 and $77,831 at March 31, 2006
            
            
            1,716,333
            
            
            1,892,483Inventories
            
            
            1,743,723
            
            
            1,836,843Bond
                reserve fund
            
            
            -
            
            
            126,385Prepaid
                expenses and other
            
            
            140,900
            
            
            173,040Total
                current assets
            
            
            10,614,973
            
            
            12,976,528Property,
                plant and equipment, net
            
            
            2,421,545
            
            
            2,623,412Other
                assets:Bond
                reserve funds
            
            
            -
            
            
            343,241Goodwill
            
            
            3,422,511
            
            
            3,422,511Other
            
            
            401,877
            
            
            227,8793,824,388
            
            
            3,993,631Total
                assets
            
            $
            16,860,906
            
            $
            19,593,571**Liabilities
                and shareholders’ equity**Current
                liabilities:Current
                portion of long-term debt
            
            $
            14,750
            
            $
            1,342,481Accounts
                payable
            
            
            860,649
            
            
            1,353,828Accrued
                compensation
            
            
            745,729
            
            
            815,046Accrued
                expenses
            
            
            140,183
            
            
            211,840Total
                current liabilities
            
            
            1,761,311
            
            
            3,723,195Long-term
                debt, net of current maturities
            
            
            7,410
            
            
            18,480Deferred
                rent
            
            
            74,646
            
            
            -Deferred
                income taxes
            
            
            337,174
            
            
            272,454Total
                liabilities
            
            
            2,180,541
            
            
            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 December 31, 2006 and March 31,
                2006
            
            
            118,723
            
            
            118,723Additional
                paid-in capital
            
            
            52,009,185
            
            
            51,968,366Accumulated
                foreign currency translation
            
            
            (230
            )
            
            (2,153
            )Accumulated
                deficit
            
            
            (37,447,313
            )
            
            (36,505,494
            )Total
                shareholders’ equity
            
            
            14,680,365
            
            
            15,579,442Total
                liabilities and shareholders’ equity
            
            $
            16,860,906
            
            $
            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
              December
                31,
            
            Nine
                Months Ended
              December
                31,2006
            
            2005
            
            2006
            
            2005Revenues
            
            $
            4,429,117
            
            $
            4,379,192
            
            $
            14,272,847
            
            $
            11,961,122Cost
                of revenues
            
            
            3,204,504
            
            
            3,354,859
            
            
            10,358,670
            
            
            9,307,609Gross
                profit
            
            
            1,224,613
            
            
            1,024,333
            
            
            3,914,177
            
            
            2,653,513Operating
                expensesResearch
                and development
            
            
            105,624
            
            
            313,127
            
            
            394,616
            
            
            980,097Selling,
                general and administrative
            
            
            1,624,576
            
            
            2,035,215
            
            
            5,030,770
            
            
            5,185,989Loss
                (gain) on disposal of assets
            
            
            (4,059
            )
            
            -
            
            
            (352,266
            )
            
            (93,126
            )1,726,141
            
            
            2,348,342
            
            
            5,073,120
            
            
            6,072,960Loss
                from operations
            
            
            (501,528
            )
            
            (1,324,009
            )
            
            (1,158,943
            )
            
            (3,419,447
            )Interest
                income
            
            
            117,558
            
            
            91,063
            
            
            325,832
            
            
            245,219Interest
                expense
            
            
            (19,067
            )
            
            (22,329
            )
            
            (60,414
            )
            
            (67,857
            )Other
                income (expense), net
            
            
            189
            
            
            (19,761
            )
            
            21,476
            
            
            14,11598,680
            
            
            48,973
            
            
            286,894
            
            
            191,477Loss
                before income taxes
            
            
            (402,848
            )
            
            (1,275,036
            )
            
            (872,049
            )
            
            (3,227,970
            )Income
                taxes
            
            
            26,520
            
            
            750
            
            
            69,770
            
            
            2,450Net
                loss
            
            $
            (429,368
            )
            $
            (1,275,786
            )
            $
            (941,819
            )
            $
            (3,230,420
            )Net
                loss per share:Basic
                and diluted
            
            
            ($0.04
            )
            
            ($0.11
            )
            
            ($0.08
            )
            
            (0.27
            )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
                31,2006
            
            2005**Cash
                Flow from operating activities**Net
                loss
            
            $
            (941,819
            )
            $
            (3,230,420
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            434,448
            
            
            806,266Deferred
                taxes
            
            
            64,720
            
            
            -Gain
                on sale of assets
            
            
            (352,266
            )
            
            (93,126
            )Stock
                based compensation
            
            
            40,819
            
            
            7,167Changes
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            176,150
            
            
            (240,697
            )Inventories
            
            
            93,120
            
            
            (391,865
            )Prepaid
                expenses and other
            
            
            (141,858
            )
            
            35,444Accounts
                payable and accrued expenses
            
            
            (559,507
            )
            
            451,992Net
                cash used in operating activities
            
            
            (1,186,193
            )
            
            (2,655,239
            )**Cash
                flow from investing activities**Purchases
                of property and equipment
            
            
            (324,672
            )
            
            (307,009
            )Proceeds
                from sale of assets
            
            
            444,357
            
            
            111,680Net
                cash provided by (used in) investing activities
            
            
            119,685
            
            
            (195,329
            )**Cash
                flow from financing activities**Repayment
                of long-term debt
            
            
            (1,338,801
            )
            
            (83,972
            )Withdrawal
                of bond reserve funds, net
            
            
            469,626
            
            
            43,389Net
                cash used in financing activities
            
            
            (869,175
            )
            
            (40,583
            )Foreign
                currency translation
            
            
            1,923
            
            
            6,418Decrease
                in cash and cash equivalents
            
            
            (1,933,760
            )
            
            (2,884,733
            )Cash
                and cash equivalents at beginning of period
            
            
            8,947,777
            
            
            10,813,492Cash
                and cash equivalents at end of period
            
            $
            7,014,017
            
            $
            7,928,759





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
              December
                31,
            
            Nine
                Months Ended
              December
                31,2006
            
            2005
            
            2006
            
            2005Numerator
                for basic and diluted net loss per share
            
            $
            (429,368
            )
            $
            (1,275,786
            )
            $
            (941,819
            )
            $
            (3,230,420
            )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
            
            
            ($0.04
            )
            
            ($0.11
            )
            
            ($0.08
            )
            
            ($0.27
            )








Common
      stock options and warrants to purchase 588,565 and 642,195 shares of common
      stock with a weighted average exercise price of $3.61 and $2.94 were outstanding
      at December 31, 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. APACN’s revenue is derived primarily
      from standard and custom fiber optic cable assemblies, copper cable assemblies,
      value added fiber optics frames, panels and modules. Expenses are allocated
      between the 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
            
            APACN
            
            Eliminations
            
            Consolidated**Three
                months ended December 31, 2006**Revenues
            
            $
            16
            
            $
            4,415
            
            $
            (2
            )
            $
            4,429Gross
                profit (loss)
            
            
            (128
            )
            
            1,353
            
            
            -
            
            
            1,225Income
                (loss) from operations
            
            
            (612
            )
            
            110
            
            
            -
            
            
            (502
            )Depreciation
                and amortization
            
            
            84
            
            
            54
            
            
            -
            
            
            138Capital
                expenditures
            
            
            12
            
            
            21
            
            
            -
            
            
            33Assets
            
            
            16,712
            
            
            7,829
            
            
            (7,680
            )
            
            16,861**Three
                months ended December 31, 2005**Revenues
            
            $
            124
            
            $
            4,342
            
            $
            (87
            )
            $
            4,379Gross
                profit (loss)
            
            
            (152
            )
            
            1,178
            
            
            (2
            )
            
            1,024Income
                (loss) from operations
            
            
            (1,346
            )
            
            22
            
            
            -
            
            
            (1,324
            )Depreciation
                and amortization
            
            
            195
            
            
            68
            
            
            -
            
            
            263Capital
                expenditures
            
            
            62
            
            
            11
            
            
            -
            
            
            73Assets
            
            
            19,270
            
            
            7,470
            
            
            (7,635
            )
            
            19,105**Nine
                months ended December 31, 2006**Revenues
            
            $
            101
            
            $
            14,175
            
            $
            (3
            )
            $
            14,273Gross
                profit (loss)
            
            
            (347
            )
            
            4,261
            
            
            -
            
            
            3,914Income
                (loss) from operations
            
            
            (1,629
            )
            
            470
            
            
            -
            
            
            (1,159
            )Depreciation
                and amortization
            
            
            256
            
            
            179
            
            
            -
            
            
            435Capital
                expenditures
            
            
            282
            
            
            43
            
            
            -
            
            
            325Assets
            
            
            16,712
            
            
            7,829
            
            
            (7,680
            )
            
            16,861**Nine
                months ended December 31, 2005**Revenues
            
            $
            336
            
            $
            11,908
            
            $
            (283
            )
            $
            11,961Gross
                profit (loss)
            
            
            (529
            )
            
            3,188
            
            
            (5
            )
            
            2,654Loss
                from operations
            
            
            (3,380
            )
            
            (39
            )
            
            -
            
            
            (3,419
            )Depreciation
                and amortization
            
            
            612
            
            
            194
            
            
            -
            
            
            806Capital
                expenditures
            
            
            191
            
            
            116
            
            
            -
            
            
            307Assets
            
            
            19,270
            
            
            7,470
            
            
            (7,635
            )
            
            19,105





**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 operated 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 on an approximately 10-acre parcel, is
      designated for lease or sale after sub-division of the land in two approximately
      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 December 31, 2006. The Company plans to retain about 5 acres
      of
      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, were 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 Company recorded a gain of approximately $1.2 million on
      the
      sale in the fourth quarter of fiscal 2006. The asset purchase agreement includes
      an additional consulting agreement for up to $100,000 over the course of one
      year. The Company realized $38,600 from this consulting agreement in fiscal
      year
      2007; the agreement was terminated prior to expiration of its term due to the
      loss of key Company personnel. 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 an expense, 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 123(R) had been applied during the three and nine months ended
      December 31, 2005:





Three
                Months Ended
              December
                31, 2005
            
            Nine
                Months Ended
              December
                31, 2005Net
                loss to common shareholders - as reported
            
            $
            (1,275,786
            )
            $
            (3,230,420
            )Less:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                effects
            
            
            (27,861
            )
            
            (89,387
            )Net
                loss - pro forma
            
            $
            (1,303,647
            )
            $
            (3,319,807
            )Basic
                and diluted net loss per common share - as reported
            
            
            ($0.11
            )
            
            ($0.27
            )Basic
                and diluted net loss per common share - pro forma
            
            
            ($0.11
            )
            
            ($0.28
            )








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. The Company recorded $9,951 and
      $40,819 of related compensation expense for the three and nine month periods
      ended December 31, 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 nine months ended
      December 31, 2006. As of December 31, 2006, $96,202 of total unrecognized
      compensation expense related to non-vested awards is expected to be recognized
      over a weighted average period of approximately 2.47 years.




8
 *Table
          of Contents*






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).




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





**Nine
                Months**
              **Ended**
              **December,
                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 nine months ended
      December 31, 2006 was $0.75. 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 711,435 shares of our Company’s
      common stock remained available for issuance at December 31, 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. Shares are issued under
      existing registration statements upon exercise. The 1997 Stock Compensation
      Plan
      expired with the adoption of the 2007 Stock Compensation Plan and, accordingly,
      no new awards can be made under the 1997 Plan. However, all outstanding
      incentives granted under the 1997 Plan remain in effect until satisfied or
      terminated.





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Options
      transaction under these plans during the three and nine months ended December
      31, 2006 are summarized as follows:





Number  of
                shares
            
            Weighted
                averageexercise priceOutstanding
                at March 31, 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
            
            
            2.46Granted
            
            
            -
            
            
            1.28Canceled
            
            
            (30,000
            )
            
            5.39Outstanding
                at December 31, 2006
            
            
            238,565
            
            
            2.46





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




**Options
                        outstanding**Range
                        of
                      exercise
                        prices
                    
                    Number
                      outstanding
                    
                    Weighted
                        average remainingcontractual
                        life
                    
                    Weightedaverage
                      exercise
                        price
                    
                    Aggregate
                      intrinsicvalue$
                    0.00-$1.29
                    
                    
                    15,000
                    
                    
                    5.67
                        years
                    
                    $
                    1.28
                    
                    $
                    19,2001.30-2.91
                    
                    
                    213,565
                    
                    
                    3.84
                        years
                    
                    
                    1.81
                    
                    
                    387,8345.53-8.90
                    
                    
                    10,000
                    
                    
                    0.08
                        years
                    
                    
                    8.06
                    
                    
                    80,600238,565
                    
                    
                    3.79
                        years
                    
                    $
                    2.04
                    
                    $
                    487,634





**Options
                exercisable**Range
                of
              exercise
                prices
            
            Number
              outstanding
            
            Weighted
                average remainingcontractual
                life
            
            Weightedaverage
              exercise
                price
            
            Aggregate
              intrinsicvalue$
            0.00-$1.29
            
            
            -
            
            
            -
            
            $
            -
            
            $
            -1.30-2.91
            
            
            85,365
            
            
            3.06
                years
            
            
            2.06
            
            
            176,3985.53-8.90
            
            
            10,000
            
            
            0.08
                years
            
            
            8.06
            
            
            80,60095,365
            
            
            2.75
                years
            
            $
            3.57
            
            $
            256,998





**Note
      8. Inventories**




Inventories
      consist of the following as of:





December
                31, 2006
            
            March
                31, 2006Raw
                Materials
            
            $
            1,447,312
            
            $
            1,588,816Work-in-progress
            
            
            47,034
            
            
            48,474Finished
                Goods
            
            
            249,377
            
            
            199,553$
            1,743,723
            
            $
            1,836,843





**Note
      9. Major Customer Concentration**





Two
      customers comprised approximately 22% of total sales for the nine months ended
      December 31, 2006. No one customer provided greater than 10% of sales for the
      same period of the prior fiscal year. One customer accounted for 17% of accounts
      receivable as of December 31, 2006 and one different customer accounted for
      24%
      of accounts receivable as of December 31, 2005.





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**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
      was concluded in June 2006.





**Note
      11 - Recently Issued Accounting Pronouncements**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes” - an interpretation of FASB
      Statement No. 109, “Accounting for Income Taxes” (“FIN 48”), which clarifies the
      accounting for uncertainty in income taxes. FIN 48 prescribes a recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax return.
      The
      interpretation requires that the Company recognize in the financial statements
      the impact of a tax position. Recognition is allowed if the tax position is
      more
      likely than not to be sustained on audit, based on the technical merits of
      the
      position. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods and disclosure. The
      provisions of FIN 48 are effective for fiscal years beginning after December
      15,
      2006 with the cumulative effect of the change in accounting principle recorded
      as an adjustment to opening retained earnings. The adoption of this statement
      is
      not expected to have a material impact on the Company's consolidated financial
      position or results of operations.





In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.”  SAB 108 was issued to
      provide consistency between how registrants quantify financial statement
      misstatements and is effective for fiscal years ending after November 15,
      2006.





SAB
      108
      established an approach that requires quantification of financial statement
      misstatements based on the effects of the misstatement on each of the company’s
      financial statements and the related financial statement disclosures.  This
      approach is commonly referred to as the “dual approach” because it requires
      quantification of errors under both the roll-over and iron curtain methods.
      The
      initial application of SAB 108 is not expected to have a material impact on
      the
      Company's consolidated financial position or results of operations.





**Note
      12 - Subsequent Event**





In
      January 2007, the Board of Directors approved a plan to consolidate certain
      Optronics activities to reduce investments and operating expenses. In
      particular, the construction of the Company’s new 27,500 square foot
      (approximately) facility in India with a carrying value at December 31, 2006
      of
      approximately $225,000 has been suspended, pending further determination. Future
      actions may include potential sale of the partially completed facility. In
      addition, the consolidation impacted GaN activities in Blaine, Minnesota: GaN
      Power Amplifier activities were suspended; GaN consumer products sales will
      be
      made solely through the Internet, resulting in the termination of three
      employees; and working hours of some GaN industrial product employees were
      reduced to half-time until at least March 31, 2007. The company is currently
      evaluating the overall financial impact of these actions.





**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.”





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**OVERVIEW**





APA
      Enterprises, Inc., (formerly known as APA Optics, Inc.) consists of the
      Optronics group and the APACN group, which is a wholly-owned subsidiary named
      APA Cables & Networks, Inc. (APACN). 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 highly configurable 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 OEMs 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 its 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 enabled 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
      to
      decrease operating costs and shorten the time to market. 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 were 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. Another product called the *SunUVStation* TM was
      introduced to several catalog and retail distributors for their evaluation
      during the 2 nd quarter
      of fiscal year 2007. 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. Due to lower than
      expected sales through retail and distribution channels, the focus is on
      marketing and sales for both of these products solely through the Internet.
      The
      Company has established the e-commerce site www.SunUVProducts.com and has
      selected Yahoo Shopping to facilitate these sales.





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. In particular, Optronics
      is
      in preliminary discussions with a customer, an equipment manufacturing company,
      to customize the profiler for the customer’s specific applications to
      continuously monitor the UV radiation during the operation of the customer’s
      machines. Optronics continues to exhibit the *Profiler
      M* in
      selected trade shows. In recent months, the Company held numerous discussions
      with potential customers of the Profiler M while attending trade shows in
      Atlanta and Chicago. So far, the sales of the Profiler have been below
      expectations. In order to reduce operating costs for the Profiler activity,
      in
      January 2007 the Company has reduced the working hours of some employees to
      half-time until at least March 31, 2007.





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Our
      wholly owned subsidiary, APA Optronics, Pvt. Ltd, India (APA India), established
      in fiscal year 2005, became operational in the first quarter of fiscal year
      2007. The subsidiary, with its prime focus on low cost manufacturing of APA’s
      products and components, has started manufacturing Gallium Nitride and fiber
      optic products. The subsidiary is also providing software development for our *Profiler
      M* product.
      In addition, the subsidiary is marketing the patch cords and associated
      equipment for fiber optic communications in India and Asia, and during the
      second quarter began generating revenue from the sale of patch cords and other
      components to several customers. The subsidiary is currently located in a leased
      facility in a free trade zone designated for companies primarily involved in
      exporting products. The subsidiary was in the process of constructing a larger
      facility in India within the free trade zone to accommodate its future
      requirements. However, in January 2007 the Company has suspended the
      construction of this facility.





**RESULTS
      OF OPERATIONS**





**THREE
      MONTHS ENDED DECEMBER 31, 2006 VS. THREE MONTHS ENDED DECEMBER 31,
      2005**





Consolidated
      revenues for the three months ended December 31, 2006 were comparable to the
      same period in 2005, showing an increase of $49,925, or 1%, to $4,429,117 from
      $4,379,192 in 2005, mainly due to increased revenues at APACN.





Revenues
      at APACN were $4,415,034, compared to $4,342,415 reported in the same quarter
      a
      year ago, an increase of 2%. The overall increase in revenue reflects continued
      growth in new customers and product acceptance principally in the broadband
      market. Revenue from broadband service providers and commercial data networks
      rose 30%, with sales for the quarter rising to approximately $3,510,000 versus
      $2,690,000 in the prior year quarter. The increase was primarily due to higher
      revenues from customers in the Fiber-to-the-Premise market. Sales to OEMs were
      approximately $905,000 versus $1,652,000 in the year ago period. The decrease
      was due to global price pressures that resulted in the loss of a major customer,
      however, this loss was partially off-set by additional orders provided under
      a
      supply contract to a customer serving the test equipment market. We expect
      that
      future sales of APACN products will continue to account for a substantial
      portion of our revenue. With the introduction of a broader product offering
      in
      the broadband segment, coupled with the expansion of the sales team into
      additional markets, we anticipate that revenues at APACN during the fourth
      quarter of fiscal year 2007 will be comparable with the revenue of the third
      quarter of fiscal 2007.





Gross
      revenues at Optronics decreased 87% to $14,083 from $123,645 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 December 31, 2005
      reflect $86,868 of sales to APACN for subcontracted labor. Optronics did not
      provide any subcontract labor to APACN in the quarter ended December 31, 2006.





**GROSS
      PROFIT AND COST OF SALES**





APACN’s
      gross profit increased $174,497, or 15%, to $1,353,133 from $1,178,636.
      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 component and labor cost reductions of 1%, increased
      manufacturing efficiency of 2% and increased revenues.





Gross
      cost of sales (before inter-company eliminations) at Optronics decreased
      $132,958, or 48%, to $142,603 from $275,561. Gross cost of sales for third
      quarter of fiscal year 2006 reflects $84,481 related to cost of sales to APACN
      for subcontracted labor. Optronics did not provide any subcontract labor to
      APACN in the quarter ended December 31, 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 $48,000 in personnel costs, $30,000 in depreciation
      and $55,000 in materials, overhead and other product expenses. This compares
      to
      prior year personnel expenses of approximately $137,000, depreciation of
      $54,000, and materials, allocated overhead and other expenses of $85,000.





We
      anticipate comparable gross margins for APACN and cost of sales for Optronics
      for the upcoming quarter.





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**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
      APACN. Expenses decreased $207,503 to $105,624, from $313,127 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 during the three
      months ended December 31, 2006 decreased $410,639, or 20%, to $1,624,576 from
      $2,035,215 in the same period in 2005.





S,
      G,
& A expenses at APACN during the three months ended December 31, 2006
      increased $86,221, or 7%, to $1,243,180 from $1,156,959 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 third
      quarter.





S,
      G,
& A expenses at Optronics during the three months ended December 31, 2006
      decreased $499,247, or 57%, to $381,396 from $880,643 in the same period in
      2005. The decrease is due largely to the significantly decreased legal costs
      relative to those the Company experienced last year in connection with the
      EIT
      lawsuit.





**GAIN
      ON DISPOSAL OF ASSETS**





Consolidated
      gain on disposal of assets in the three months ended December 31, 2006 was
      $4,059. There was no gain on disposal during the same period in 2005. The
      majority of this activity is at the Optronics division.





**INCOME
      (LOSS) FROM OPERATIONS**





Consolidated
      losses from operations decreased $822,481, or 62% during the three months ended
      December 31, 2006, to $501,528 from $1,324,009 in the same period in
      2005.





The
      income from operations at APACN in the three months ended December 31, 2006
      was
      $110,680 compared to $21,677 in the same period in 2005.  The
      increased income in the quarter was mainly due to improved gross margins, offset
      by higher selling expenses absorbed as part of APACN’s planned investment in
      revenue growth.





The
      loss
      from operations at Optronics decreased $733,478 in the three months ended
      December 31, 2006, or 55%, to $612,208, from a loss of $1,345,686 in the year
      ago period. The decrease in the loss is mainly due to consolidation and
      discontinuation of MOCVD and Aberdeen operations as well as decreased legal
      costs.





**OTHER
      INCOME AND EXPENSE**




Consolidated
      other income and expense increased $49,707 to $98,680 in the three months ended
      December 31, 2006 from $48,973 in 2005.





Other
      expense at APACN increased $18,330 in the three months ended December 31, 2006
      due to an increase in interest expense, primarily due to a higher interest
      rate
      in the current period.





Other
      income at Optronics increased $11,445 to $217,230 in the three months ended
      December 31, 2006. This resulted from an increase in interest income due to
      a
      higher rate of interest earned on investments over the quarter ending December
      31, 2005. Other expense decreased $56,592 to $6 in the three months ended
      December 31, 2006, from $56,598 in the period ending December 31, 2005. Other
      expenses in the prior year consisted mainly of a judgment from the EIT lawsuit
      and interest expense related to the bonds.





**NET
      LOSS**




Consolidated
      net loss for the quarter decreased $846,418, or 66%, to $429,368, or $0.04
      per
      share, from $1,275,786, or $0.11 per share in the year ago period.





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APACN
      had
      a net loss of $33,634 in the quarter, compared to a loss of $79,037 in the
      year
      ago quarter. The improvement was due mainly to improved gross
      profit.





Optronics
      recorded a net loss of $395,734 in the three months ended December 31, 2006,
      a
      decrease of $801,015 from a loss of $1,196,759 from the same period of 2005.
      The
      decrease in the loss is mainly due to the consolidation and termination of
      MOCVD
      and Aberdeen operations and reduced legal expenses. Achieving profitability
      in
      the future will strongly depend upon Optronics’ ability to successfully
      manufacture and market gallium-nitride products or termination of activities
      not
      providing material revenues.





**NINE
      MONTHS ENDED DECEMBER 31, 2006 VS. NINE MONTHS ENDED DECEMBER 31,
      2005**





Consolidated
      revenues for the nine months ended December 31, 2006 increased $2,311,725,
      or
      19%, to $14,272,847 from $11,961,122 in 2005.





Revenues
      at APACN were $14,174,845, compared to $11,908,543 reported in the same period
      a
      year ago, an increase of 19%. 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 three quarters to broadband service providers
      and
      commercial data networks were approximately $10,950,000 versus $8,123,000 in
      the
      prior year quarter, an increase of 35%. The increase was primarily due to higher
      revenues from customers in the Fiber-to-the-Premise market. Sales to OEM’s were
      approximately $3,225,000 versus $3,786,000 in the year ago period. The decrease
      is the result of the loss of a major customer due to global price pressures.
      We
      expect that future sales of APACN products will continue to account for a
      substantial portion of our revenue. With the introduction of a broader product
      offering in the broadband segment, coupled with the expansion of the sales
      team
      into additional markets, we anticipate that revenues at APACN during the fourth
      quarter of fiscal year 2007 will be comparable with the revenue of the third
      quarter of fiscal 2007.





Gross
      revenues at Optronics decreased 70% to $98,002 from $336,420 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 December 31, 2005
      reflect $283,841 of sales to APACN for subcontracted labor. Optronics did not
      provide any subcontract labor to APACN in the three quarters ended December
      31,
      2006.





**GROSS
      PROFIT AND COST OF SALES**





APACN’s
      gross profit increased $1,260,664, or 48%, to $3,914,177 from $2,653,513.
      Specifically, gross profit as a percent of revenue was 30% in the first nine
      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, each contributing 1% towards the gross profit percentage
      improvement.





Gross
      cost of sales (before inter-company eliminations) at Optronics decreased
      $420,893, or 49%, to $445,180 from $866,073. Gross cost of sales for the first
      nine months of fiscal year 2006 reflects $279,186 related to cost of sales
      to
      APACN for subcontracted labor. Optronics did not provide any subcontract labor
      to APACN in the quarter ended December 31, 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 $143,000 in personnel costs, $93,000 in depreciation
      and $219,000 in materials, overhead and other product expenses. This compares
      to
      prior year personnel expenses of approximately $420,000, depreciation and
      amortization of $229,000, and materials, allocated overhead and other expenses
      of $244,000. The reduced product development expenses within the GaN area also
      contributed to the decreased cost of sales.





We
      anticipate comparable gross margins for APACN and decreased 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
      APACN. Expenses decreased $585,481 to $394,616 during the nine months ended
      December 31, 2006, from $980,097 in the prior year period. The change reflects
      a
      decrease in personnel, facility and depreciation costs due to the sale of its
      MOCVD operations.





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**SELLING,
      GENERAL, AND ADMINISTRATIVE**





Consolidated
      selling, general, and administrative (S, G, & A) expenses decreased $155,219
      during the nine months ended December 31, 2006, or 3%, to $5,030,770 from
      $5,185,989 in 2005.





S,
      G,
& A expenses at APACN increased $563,257 during the nine months ended
      December 31, 2006, or 17%, to $3,789,948 from $3,226,691 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
      three quarters.





S,
      G,
& A expenses at Optronics decreased $723,131, or 37%, to $1,240,822 from
      $1,963,953 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 and
      significantly decreased legal costs as compared to those the Company experienced
      last year in connection with the EIT lawsuit.





**GAIN
      ON DISPOSAL OF ASSETS**





A
      majority of the gain on disposal of assets was within the Optronics division.
      Gain on disposal of assets increased $259,140 to $352,266 in the nine months
      ended December 31, 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 $2,260,504, or 66%, to $1,158,943 in the nine
      months ended December 31, 2006 from $3,419,447 in 2005.





The
      income from operations at APACN was $469,972 in the nine months ended December
      31, 2006 versus a loss of $38,870 in the fiscal 2006 period.  The
      increased income in the period was mainly due to increased revenues and gross
      profit, offset by higher selling expenses absorbed as part of APACN’s planned
      investment in revenue growth.





The
      loss
      from operations at Optronics decreased $1,751,662, or 52%, to $1,628,915 in
      the
      nine months ended December 31, 2006, from a loss of $3,380,577 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
      and reduced legal costs.





**OTHER
      INCOME AND EXPENSE**





Consolidated
      other income and expense increased $95,417 to $286,894 from $191,477 in 2005.





Other
      expense at APACN increased $69,632 due to an increase in interest expense,
      primarily due to a higher interest rate in the current period.





Other
      income at Optronics increased $108,670 to $676,919. This resulted from an
      increase in interest income due to a higher rate of interest earned on
      investments over the nine months ended December 31, 2005. Other expense
      decreased $58,859 to $40,936, from $99,795 in the period ended December 31,
      2005.





**NET
      LOSS**





Consolidated
      net loss for the nine months ended December 31, 2006 decreased $2,288,601,
      or
      71%, to $941,819, or $0.08 per share, from $3,230,420, or $0.27 per share in
      the
      year ago period.





APACN
      had
      a net profit of $52,863 year to date, compared to a loss of $317,547 in 2005.
      The increased profitability was due mainly to increased revenues and gross
      profit margins.





Optronics
      recorded a net loss of $994,682 in the nine months ended December 31, 2006,
      a
      decrease of $1,918,191 from a loss of $2,912,873 for the same period in 2005.
      The decrease in the loss is mainly due to the consolidation of operations
      resulting in a $1,569,187 decrease in operating expenses during the nine months
      ended December 31, 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 and/or termination
      of activities not providing material revenues.





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**LIQUIDITY
      AND CAPITAL RESOURCES**





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





Cash
      used
      in operating activities was $1,186,193 for the nine month period ended December
      31, 2006 compared to $2,655,239 used in the same period in 2005, due largely
      to
      decreased losses during the current year as compared to the prior
      year.





We
      realized a net cash increase of $119,685 in investing activities for the nine
      months ended December 31, 2006 compared to $195,329 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 $444,357 offsetting capital expenditures in the amount of $324,671. The
      Company sold $111,680 worth of capital assets and had capital expenditures
      of
      $307,009 in the comparable period of the previous year. The Company has
      purchased approximately $325,000 in property and equipment so far in fiscal
      year
      2007. We anticipate approximately an additional $300,000 to $400,000 in capital
      expenditures during the balance of fiscal 2007, mainly due to the implementation
      of a new IT infrastructure at APACN.





Net
      cash
      used in financing activities for the nine months ended December 31, 2006 totaled
      $869,175, including the redemption of the bonds in October 2006. During the
      same
      period in fiscal 2006 we used $40,583 in financing activities, of which $83,972
      was used for the scheduled reduction of debt and $43,389 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 December 31, 2006:




Total
              
              Less
                  than
                1
                  Year
              
              1-3
                  years
              
              4-5
                  years
              
              After
                5
                  yearsLong-term
                  debt (1)
              
              $
              26
              
              $
              15
              
              $
              11
              
              $
              -
              
              $
              -Leases
              
              
              1,944
              
              
              346
              
              
              689
              
              
              474
              
              
              435Total
                  Contractual CashObligations
              
              $
              1,970
              
              $
              361
              
              $
              700
              
              $
              474
              
              $
              435





(1)
      Includes fixed interest of 0.62%





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**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


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


·
            Accounting
                for uncertainty in income taxes





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 nine months ended December
      31,
      2006 reflect the impact of SFAS 123R. The compensation expense impacted both
      basic and diluted loss per share by less than $0.01 for the three and nine
      months ended December 31, 2006. The Company recorded $9,951 and $40,819 of
      related compensation expense for the three and nine month periods ended December
      31, 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 March 31, 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.





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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, entirely attributed to APACN, 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
      2007 through the nine months ended December 31, 2006.





Accounting
      for Uncertainty in Income Taxes





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes” - an interpretation of FASB
      Statement No. 109, “Accounting for Income Taxes” (“FIN 48”), which clarifies the
      accounting for uncertainty in income taxes. FIN 48 prescribes a recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax return.
      The
      interpretation requires that the Company recognize in the financial statements
      the impact of a tax position. Recognition is allowed if the tax position is
      more
      likely than not to be sustained on audit, based on the technical merits of
      the
      position. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods and disclosure. The
      provisions of FIN 48 are effective for fiscal years beginning after December
      15,
      2006 with the cumulative effect of the change in accounting principle recorded
      as an adjustment to opening retained earnings. The adoption of this statement
      is
      not expected to have a material impact on the Company's consolidated financial
      position or results of operations.





In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.”  SAB 108 was issued to
      provide consistency between how registrants quantify financial statement
      misstatements and is effective for fiscal years ending after November 15,
      2006.





SAB
      108
      established an approach that requires quantification of financial statement
      misstatements based on the effects of the misstatement on each of the company’s
      financial statements and the related financial statement disclosures.  This
      approach is commonly referred to as the “dual approach” because it requires
      quantification of errors under both the roll-over and iron curtain methods.
      The
      initial application of SAB 108 is not expected to have a material impact on
      the
      Company's consolidated financial position or results of operations.





**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.





**ITEM4.
      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.





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(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.








**PARTII** **.
      OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





None.





**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.





**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. Recently implemented cost-cutting measures for Profiler
      related activities may prompt certain key employees to seek employment
      elsewhere. Loss of one or more key personnel may affect our ability to, at
      least
      in the short-term, respond to market demands for these products.





**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.





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*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. Two
      customers comprised approximately 22% of total sales for the nine months ended
      December 31, 2006. No one customer provided greater than 10% of sales for the
      same period of the prior fiscal year. One customer accounted for 17% of accounts
      receivable as of December 31, 2006 and one different customer accounted for
      24%
      of accounts receivable as of December 31, 2005.





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




None.


**ITEM
      3. DEFAULTS 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
      were used to make final payment on the Company’s debt to the State of South
      Dakota on October 1, 2006, the next bond redemption date.





During
      1996-97 the Company built a 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 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**





None.





**ITEM5.
      OTHER INFORMATION**




None.





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**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





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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.February
                  13, 2007
              
              
              /s/
                  Anil K. JainDate
              
              Anil
                  K. JainPresident,Chief
                  Executive Officer and Chief Financial Officer (Principal Executive
                  and
                  Principal Financial and Accounting
                  Officer)






22