**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





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


SECURITIES
      EXCHANGE ACT OF 1934


For
      the
      quarterly period ended September 30, 2005





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




Commission
      File Number 0-16106





**APA
      Enterprises, Inc.**


(Exact
      name of Registrant as specified in its charter)





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





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


(Address
      of principal executive offices and zip code)





**(763)
      784-4995**


(Registrant’s
      telephone number, including area code)







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




Yes x No  ̈





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




Yes  ̈ No x





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





Yes  ̈ No x





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





Class:
            Outstanding
                at November 4, 2005Common
                stock, par value $.01
            11,872,331










**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
              9ITEM
                  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK.
              22ITEM
                  4. CONTROLS AND
                  PROCEDURES.
              22**PART
                  II**
              22ITEM
                  1. LEGAL PROCEEDINGS
              22ITEMS
                  2 THROUGH 5. NOT APPLICABLE
              22ITEM
                  6. EXHIBITS AND REPORTS ON FORM 8-K.
              22
 2
 Table
              of Contents
  **PART
        I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**


**APA
      ENTERPRISES, INC.**


**CONSOLIDATED
      CONDENSED BALANCE SHEETS**


**(Unaudited)**


September
                30,
            
            March
                31,2005
            
            2005**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            8,880,807
            
            $
            10,813,492Accounts
                receivable, net of allowance for uncollectible accounts of $76,677
                at
                September 30, 2005 and $57,107 at March 31, 2005
            
            
            1,716,797
            
            
            1,446,248Inventories
            
            
            1,650,994
            
            
            1,270,653Prepaid
                expenses and other
            
            
            398,120
            
            
            395,920Total
                current assets
            
            
            12,646,718
            
            
            13,926,313Property,
                plant and equipment, net
            
            
            3,571,453
            
            
            3,946,998Other
                assets:Bond
                reserve funds
            
            
            338,140
            
            
            337,091Goodwill
            
            
            3,422,511
            
            
            3,422,511Other
            
            
            371,190
            
            
            441,1014,131,841
            
            
            4,200,703Total
                assets
            
            $
            20,350,012
            
            $
            22,074,014**Liabilities
                and shareholders’ equity**Current
                liabilities:Current
                portion of long-term debt
            
            $
            1,364,920
            
            $
            1,471,036Accounts
                payable
            
            
            1,079,043
            
            
            814,005Accrued
                compensation
            
            
            762,377
            
            
            568,950Accrued
                expenses
            
            
            147,622
            
            
            190,062Total
                current liabilities
            
            
            3,353,962
            
            
            3,044,053Long-term
                debt, net of current maturities
            
            
            25,833
            
            
            107,800Shareholders’
                equity:Undesignated
                shares, 4,999,500 authorized shares; no shares issued and
                outstanding
            
            
            -
            
            
            -Preferred
                stock, $.01 par value; 500 authorized shares; no shares issued and
                outstanding
            
            
            -
            
            
            -Common
                stock, $.01 par value; 50,000,000 authorized shares; 11,872,331 shares
                issued and outstanding at September 30, 2005 and March 31,
                2005
            
            
            118,723
            
            
            118,723Additional
                paid-in capital
            
            
            51,962,774
            
            
            51,960,084Accumulated
                deficit
            
            
            (35,111,280
            )
            
            (33,156,646
            )Total
                shareholders’ equity
            
            
            16,970,217
            
            
            18,922,161Total
                liabilities and shareholders’ equity
            
            $
            20,350,012
            
            $
            22,074,014





SEE
      ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL
      STATEMENTS


3
 Table
          of Contents





**APA
      ENTERPRISES, INC** .


**CONSOLIDATED
      CONDENSED STATEMENTS OF
      OPERATIONS**


**(Unaudited)**





Three
                Months Ended
            
            Six
                Months EndedSeptember
                30,
            
            September
                30,2005
            
            2004
            
            2005
            
            2004Revenues
            
            $
            4,069,367
            
            $
            3,668,068
            
            $
            7,581,930
            
            $
            7,355,786Cost
                of sales
            
            
            3,165,297
            
            
            2,885,804
            
            
            5,952,750
            
            
            5,972,647Gross
                profit
            
            
            904,070
            
            
            782,264
            
            
            1,629,180
            
            
            1,383,139Operating
                expensesResearch
                and development
            
            
            346,707
            
            
            220,595
            
            
            670,305
            
            
            411,803Selling,
                general and administrative
            
            
            1,677,031
            
            
            1,474,208
            
            
            3,147,439
            
            
            2,825,1152,023,738
            
            
            1,694,803
            
            
            3,817,744
            
            
            3,236,918Loss
                from operations
            
            
            (1,119,668
            )
            
            (912,539
            )
            
            (2,188,564
            )
            
            (1,853,779
            )Other
                income
            
            
            79,437
            
            
            55,221
            
            
            281,159
            
            
            320,827Other
                expense
            
            
            (22,647
            )
            
            (24,979
            )
            
            (45,529
            )
            
            (50,231
            )56,790
            
            
            30,242
            
            
            235,630
            
            
            270,596Loss
                before income taxes
            
            
            (1,062,878
            )
            
            (882,297
            )
            
            (1,952,934
            )
            
            (1,583,183
            )Income
                taxes
            
            
            750
            
            
            750
            
            
            1,700
            
            
            2,700Net
                loss
            
            $
            (1,063,628
            )
            $
            (883,047
            )
            $
            (1,954,634
            )
            $
            (1,585,883
            )Net
                loss per share:Basic
                and diluted
            
            
            ($0.09
            )
            
            ($0.07
            )
            
            ($0.16
            )
            
            ($0.
                13
            )Weighted
                average shares outstanding:Basic
                and diluted
            
            
            11,872,331
            
            
            11,872,331
            
            
            11,872,331
            
            
            11,872,331




SEE
      ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL
      STATEMENTS


4
 Table
          of Contents





**APA
      ENTERPRISES, INC.**


**CONSOLIDATED
      CONDENSED STATEMENTS OF CASH
      FLOWS**


**(Unaudited)**





Six
                Months EndedSeptember
                30,2005
            
            2004**Cash
                Flow from operating activities**Net
                loss
            
            $
            (1,954,634
            )
            $
            (1,585,883
            )Adjustments
                to reconcile net loss to net cash used in operating activities, net
                of
                acquisition:Depreciation
                and amortization
            
            
            544,573
            
            
            476,303Gain
                on sale of assets
            
            
            (93,126
            )
            
            (208,314
            )Compensation
                expense, net
            
            
            2,690
            
            
            (28,908
            )Changes
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            (270,549
            )
            
            246,651Inventories
            
            
            (380,341
            )
            
            (3,083
            )Prepaid
                expenses and other
            
            
            (51,775
            )
            
            24,455Accounts
                payable and accrued expenses
            
            
            416,025
            
            
            133,199Net
                cash used in operating activities
            
            
            (1,787,137
            )
            
            (945,590
            )**Cash
                flow from investing activities**Purchases
                of property and equipment
            
            
            (234,793
            )
            
            (293,909
            )Proceeds
                from sale of assets
            
            
            111,680
            
            
            220,000Net
                cash used in investing activities
            
            
            (123,113
            )
            
            (73,909
            )**Cash
                flow from financing activities**Repayment
                of long-term debt
            
            
            (68,083
            )
            
            (205,648
            )Decrease
                in bond reserve funds
            
            
            45,648
            
            
            43,692Net
                cash used in financing activities
            
            
            (22,435
            )
            
            (161,956
            )Decrease
                in cash and cash equivalents
            
            
            (1,932,685
            )
            
            (1,181,455
            )Cash
                and cash equivalents at beginning of period
            
            
            10,813,492
            
            
            13,544,910Cash
                and cash equivalents at end of period
            
            $
            8,880,807
            
            $
            12,363,455Noncash
                investing and financing activitiesCapital
                expenditure included in accounts payable
            
            $
            -
            
            $
            (225,000
            )




SEE
      ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS




5
 Table
          of Contents


**NOTES
      TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**





**Note
      1. Basis of Presentation**





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





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





**Note
      2. Net Loss Per Share**





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





Three
                Months Ended
            
            Six
                Months EndedSeptember
                30,
            
            September
                30,2005
            
            2004
            
            2005
            
            2004Numerator
                for basic and diluted net loss
            
            $
            (1,063,628
            )
            $
            (883,047
            )
            $
            (1,954,634
            )
            $
            (1,585,883
            )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
            
            
            ($0.09
            )
            
            ($0.07
            )
            
            ($0.16
            )
            
            ($0.13
            )




Common
      stock options and warrants to purchase 647,195 and 873,742 shares of common
      stock with a weighted average exercise price of $2.96 and $6.65 were outstanding
      at September 30, 2005 and 2004, respectively, but were excluded from calculating
      diluted net loss per share because they were antidilutive.





**Note
      3. Segment Reporting**





The
      Company has identified two reportable segments based on its internal
      organizational structure, management of operations, and performance evaluation.
      These segments are (1) Optronics and (2) Cables and Networks
      (APACN).  Optronics’
      revenue is generated in the design, manufacture and marketing of ultraviolet
      (UV) detection and measurement devices and optical components. Cables &
Network’s revenue is derived primarily from standard and custom fiber optic
      cable assemblies, copper cable assemblies, value added fiber optics frames,
      panels and modules. Expenses are allocated between the companies based on
      detailed information contained in invoices. In addition, corporate overhead
      costs for management’s time and other expenses are allocated to each segment.


6
 Table
          of Contents


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







Optronics
            
            Cables
                & Networks
            
            Eliminations
            
            Consolidated**Three
                months ended September 30, 2005**External
                sales
            
            $
            109
            
            $
            4,058
            
            $
            (98
            )
            $
            4,069Gross
                profit (loss)
            
            
            (192
            )
            
            1,097
            
            
            (1
            )
            
            904Operating
                income (loss)
            
            
            (1,127
            )
            
            7
            
            
            -
            
            
            (1,120
            )Depreciation
                and amortization
            
            
            217
            
            
            58
            
            
            -
            
            
            275Capital
                expenditures
            
            
            52
            
            
            62
            
            
            -
            
            
            114Assets
            
            
            20,257
            
            
            7,440
            
            
            (7,347
            )
            
            20,350**Three
                months ended September 30, 2004**External
                sales
            
            $
            149
            
            $
            3,623
            
            
            (104
            )
            $
            3,668Gross
                profit (loss)
            
            
            (240
            )
            
            1,022
            
            
            -
            
            
            782Operating
                income (loss)
            
            
            (1,026
            )
            
            113
            
            
            -
            
            
            (913
            )Depreciation
                and amortization
            
            
            179
            
            
            58
            
            
            -
            
            
            237Capital
                expenditures
            
            
            2
            
            
            30
            
            
            -
            
            
            32Assets
            
            
            24,056
            
            
            7,506
            
            
            (7,391
            )
            
            24,171**Six
                months ended September 30, 2005**External
                sales
            
            $
            213
            
            $
            7,566
            
            $
            (197
            )
            $
            7,582Gross
                profit (loss)
            
            
            (378
            )
            
            2,009
            
            
            (2
            )
            
            1,629Operating
                loss
            
            
            (2,128
            )
            
            (61
            )
            
            -
            
            
            (2,189
            )Depreciation
                and amortization
            
            
            427
            
            
            118
            
            
            -
            
            
            545Capital
                expenditures
            
            
            139
            
            
            96
            
            
            -
            
            
            235Assets
            
            
            20,257
            
            
            7,440
            
            
            (7,347
            )
            
            20,350**Six
                months ended September, 2004**External
                sales
            
            $
            292
            
            $
            7,295
            
            
            (231
            )
            $
            7,356Gross
                profit (loss)
            
            
            (669
            )
            
            2,052
            
            
            -
            
            
            1,383Operating
                income (loss)
            
            
            (2,061
            )
            
            207
            
            
            -
            
            
            (1,854
            )Depreciation
                and amortization
            
            
            364
            
            
            112
            
            
            -
            
            
            476Capital
                expenditures
            
            
            236
            
            
            58
            
            
            -
            
            
            294Assets
            
            
            24,056
            
            
            7,506
            
            
            (7,391
            )
            
            24,171








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





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





**Note
      5. Sale of Land**





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


7
 Table
          of Contents





**Note
      6. Stock Based Compensation**





The
      Company has various incentive and non-qualified stock option plans which are
      used as an incentive for directors, officers, and other employees. The Company
      uses the intrinsic value method to value stock options issued to employees.
      Under this method, compensation expense is recognized for the amount by which
      the market price of the common stock on the date of grant exceeds the exercise
      price. The Company’s stock based compensation expense also reflects the benefit
      of the cancellation of previously unvested expensed options. The Company
      rec-ognized compensation income of $1,851 and expense of $2,690 for the three
      and six months ended September 30, 2005, versus recognizing compensation income
      of $15,446 and $28,908 for the three and six months ended September 30, 2004.
      For those stock options granted where the exercise price was equal to the market
      value of the underlying common stock on the date of grant, no stock-based
      employee compensation cost is reflected in the net loss. Had the fair value
      method been applied, our compensation expense would have been different.





The
      following table illustrates the effect on net loss and net loss per share if
      the
      Company had applied the fair value method *,* to
      stock-based employee compensation for the following three and six months
      ended:








Three
                Months Ended
            
            Six
                Months EndedSeptember
                30,
            
            September
                30,2005
            
            2004
            
            2005
            
            2004Net
                loss to common shareholders - as reported
            
            $
            (1,063,628
            )
            $
            (883,047
            )
            $
            (1,954,634
            )
            $
            (1,585,883
            )Less:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                effects
            
            
            (29,961
            )
            
            (37,980
            )
            
            (61,526
            )
            
            (86,322
            )Net
                loss - pro forma
            
            $
            (1,093,589
            )
            $
            (921,027
            )
            $
            (2,016,160
            )
            $
            (1,672,205
            )Basic
                and diluted net loss per common share - as reported
            
            
            ($0.09
            )
            
            ($0.07
            )
            
            ($0.16
            )
            
            ($0.13
            )Basic
                and diluted net loss per common share - pro forma
            
            
            ($0.09
            )
            
            ($0.08
            )
            
            ($0.17
            )
            
            ($0.14
            )








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





In
      December 2004, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 123 (revised 2004) (SFAS 123R), *Share-Based
      Payment* .
      This
      statement requires the compensation cost relating to share-based payment
      transactions to be recognized in a company’s financial statements. That cost
      will be measured based on the fair value of the equity or liability instruments
      issued. Statement 123(R) covers a wide range of share-based compensation
      arrangements including share options, restricted share plans, performance-based
      awards, share appreciation rights, and employee share purchase plans. The
      Company is required to apply Statement 123(R) effective April 1, 2006.
      Management has not yet determined the impact.


8
 Table
          of Contents




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





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





**OVERVIEW**





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





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





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





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





Plastic
      and metal models of the consumer Personal UV Monitor (PUVM) offered by Optronics
      continue in production, and the focus remains on sales for the spring/summer
      2006 season. An attractive new clip-on hybrid plastic/metal model that can
      be
      manufactured to our quality standards by the supplier has been developed. A
      new
      product called the *SunUVStation* TM has also
      been introduced and we plan to provide samples to retail channels in the third
      quarter of fiscal 2006. This product 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. Manufacturing will
      be performed, in part, in our APA facility in India. The SunUVStation
      complements the PUVM and retailers are interested in offering both.





Optronics’
      4-band *Profiler
      M* radiometer, which serves the printing and coating industries that use UV curing,
      is now in production and sales have started. 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 additional
      domestic and international distribution discussions are underway. We plan to
      sell the instrument through equipment and supplies manufacturers in addition
      to
      general distributors.





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


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Our
      wholly owned subsidiary, APA Optronics, Pvt. Ltd, India, established in fiscal
      year 2005, is now operational. The subsidiary, with its prime focus on low
      cost
      manufacturing of our products and components, has already started supplying
      samples for our Gallium Nitride and fiber optic products with expectations
      for
      products to be sold in the near future. The subsidiary is also providing
      software development for our Profiler M product. The subsidiary is also in
      process of providing marketing and sales support for our products both in the
      U.S. and India. The subsidiary, currently located in a leased facility, is
      in
      the process of constructing a larger facility in India, expected to be completed
      in the 4 th quarter
      of fiscal 2006, to accommodate its future operations requirements.





**RESULTS
      OF OPERATIONS**





**THREE
      MONTHS ENDED SEPTEMBER 30, 2005 VS. THREE MONTHS ENDED SEPTEMBER 30,
      2004**





Consolidated
      revenues for the three months ended September 30, 2005 increased $401,299,
      or
      11%, to $4,069,367 from $3,668,068 in 2004.





Revenues
      at Cables & Networks were $4,057,740, compared to sales of $3,622,735
      reported in the same quarter a year ago, an increase of 12%. Sales for the
      current quarter to broadband service providers and commercial data networks
      were
      $2,847,000 versus $2,478,000 in the prior year quarter. The increase was
      primarily due to higher revenues from customers in the Fiber-to-the-Premise
      market which were offset by slightly lower sales to commercial data networks.
      Sales to OEM’s were $1,210,000 versus $1,145,000 in the year ago period. The
      increase is due to orders from a new customer serving the test equipment market,
      offset by lower sales to our previously largest OEM customer compared to last
      year. This customer serves primarily the semiconductor industry. We expect
      that
      future sales of Cables & Networks products will continue to account for a
      substantial portion of our revenue. Historically, Cables & Networks has
      experienced a downturn in sales during the third quarter of the fiscal year
      due
      to the seasonal nature of some of the industries it serves. However, with the
      introduction of a broader product offering coupled with the expansion of the
      sales team into additional markets, we anticipate revenues at Cables &
Networks to remain consistent with the second quarter of this year.





Gross
      revenues at Optronics decreased 26% to $109,877 from $149,194 in the same
      quarter a year ago. Gross revenues for the second quarter ended September 30,
      2005 reflect $98,250 of sales to Cables & Networks for fiber optics products
      and subcontracted labor versus $103,861 in the comparable period last year.
      These sales are eliminated as intercompany sales in the consolidated financials
      in each quarter.





**GROSS
      PROFIT AND COST OF SALES**





Cables
      & Network’s gross profit increased $75,562, or 7%, to $1,097,245 from
      $1,021,683. The increase in gross profit was mainly from higher sales in the
      current quarter. The Company has successfully lowered product costs over the
      past year and continues to pursue component and labor cost reductions to respond
      to ongoing market pressures in order to maintain its gross margins.





Gross
      cost of sales at Optronics decreased $86,486, or 22%, to $302,127 from $388,613.
      Gross cost of sales reflects $97,325 related to cost of sales to Cables &
Networks for fiber optics products and subcontracted labor versus $103,861
      in
      the last year period. These costs are eliminated as intercompany cost of sales
      in the consolidated financials in each quarter. Cost of sales expenses for
      the
      current period for all Optronics product lines consists of approximately
      $146,000 in personnel costs, $64,000 in depreciation and $92,000 in materials
      and allocated overhead. This compares to prior year personnel expenses of
      approximately $171,000, depreciation of $71,000 and supplies and overhead of
      $147,000. The overall decrease in cost of sales expenses is due to lower
      materials and personnel related costs between years, mainly within the GaN
      area,
      both due to expense reductions related to the procurement of GaN products from
      off shore suppliers.


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





**RESEARCH
      AND DEVELOPMENT EXPENSES**





Research
      and development expenses consist of the research and development expense at
      Optronics. There have been no significant research and development expenses
      at
      Cables & Networks. Expenses increased $126,112 to $346,707, from $220,595 in
      the prior year period. The increase is due mainly to personnel and materials
      costs associated with power amplifier development, along with additional
      facility rent and depreciation expenses associated with the semiconductor
      machine housed at an outside facility which began operating in November
      2004.





**SELLING,
      GENERAL, AND ADMINISTRATIVE**





Consolidated
      selling, general, and administrative (S, G, & A) expenses increased
      $202,823, or 14%, to $1,677,031 from $1,474,208 in 2004.





S,
      G,
& A expenses at Cables & Networks increased $181,254, or 20%, to
      $1,090,184 from $908,930. 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 expenses to increase slightly
      as
      we continue to expand our sales presence and grow revenue.





S,
      G,
& A expenses at Optronics increased $22,494, or 4%, to $587,772 from
      $565,278. The increase is due mainly to higher personnel and material expenses
      associated with the start up our newly acquired India facility, offset by lower
      professional fees.





**INCOME
      (LOSS) FROM OPERATIONS**





Consolidated
      losses from operations increased $207,129, or 23%, to $1,119,668 from $912,539
      in 2004.


The
      income from operations at Cables & Networks was $7,061 versus income of
      $112,753 in the fiscal 2004 quarter.  The
      decreased income in the quarter was mainly due to increased selling expenses
      absorbed as part of Cables & Networks planned investment in revenue
      growth.





The
      loss
      from operations at Optronics increased $101,437, or 10%, to $1,126,729, from
      a
      loss of $1,025,292 in the year ago period. The increase in the loss is related
      to additional R&D expenses. We expect to incur losses at Optronics until we
      realize significant revenues from the sales of our PUVM and GaN related
      products.





**OTHER
      INCOME AND EXPENSE**





Consolidated
      other income and expense increased $26,548 to $56,790 from $30,242 in 2004.





Other
      income at Cables & Networks increased $4,321. Other expense increased
      $19,123 due to an increase in interest expense, primarily due to a higher
      interest rate in the current period.





Other
      income at Optronics increased $40,118 to $168,284. This resulted from an
      increase in interest income due to a higher rate of interest earned on
      investments over the prior year quarter ending September 30, 2004. Other expense
      decreased $1,232 to $21,599, from $22,831 in the prior year period ending
      September 30, 2004.





**NET
      LOSS**





Consolidated
      net loss for the quarter increased $180,581, or 20%, to $1,063,628, or $.09
      cents per share, from $883,047, or $.07 cents per share in the year ago
      period.




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Cables
      & Networks had a net loss of $83,334 in the quarter, compared to income of
      $37,160 in the year ago quarter. The decrease was due to increased S, G, & A
      expenses of $181,254 and higher interest expense of $19,123, offset by in
      increase of $75,562 in gross margin.





Optronics
      recorded a net loss of $980,294, an increase of $60,087 from a loss of $920,207
      from the same period of fiscal 2005. The increased losses were mainly due to
      start up costs incurred in its India operations. The fiscal 2006 quarter
      reflects reduced cost of sales from the prior year period due to cost reductions
      implemented, offset by increased R&D expenses related to the additional
      semiconductor machine and slightly increased S, G & A expenses. Achieving
      profitability in the future will strongly depend upon Optronic’s ability to
      successfully manufacture and market gallium-nitride products.





**SIX
      MONTHS ENDED SEPTEMBER 30, 2005 VS. SIX MONTHS ENDED SEPTEMBER 30,
      2004**





Consolidated
      revenues for the six months ended September 30, 2005 increased $226,144, or
      3%,
      to $7,581,930 from $7,355,786 in 2004.





Revenues
      at Cables & Networks increased $271,581, or 4% to $7,566,128 from
      $7,294,547. Sales to broadband service provider and commercial data networks
      were $5,432,000 or 72% of revenue, compared to sales of $4,961,000, or 68%
      of
      revenue, in the year ago period ending September 30, 2004. Sales to OEM’s were
      $2,134,000, or 28% of revenue, compared to sales of $2,334,000, or 32% of
      revenue, in the year ago period. The change reflects higher demand in the
      Fiber-to-the-Premise market, offset by slightly lower demand from OEM’s,
      principally from a large customer serving the semiconductor industry.





Gross
      revenues at Optronics decreased $78,913, or 27%, to $212,775 from $291,688
      in
      the same period a year ago. Gross revenues reflect $196,973 of sales to Cables
      & Networks for fiber optics products and subcontracted labor versus $230,449
      last year. These sales are eliminated as intercompany sales in the consolidated
      financials in each quarter.





**COST
      OF SALES AND GROSS PROFIT**





Cables
      & Network’s gross profit decreased $42,438, or 2%, to $2,009,185 from
      $2,051,623. The decrease is due mainly to higher production variances and
      personnel related overhead. Gross margins as a percent of revenues decreased
      slightly from 28% to 27%. The decrease in margin percentage is attributable
      to
      the competitive marketplace along with increased overhead support.





Gross
      cost of sales at Optronics decreased $369,660, or 38%, to $590,512 from
      $960,172. Gross cost of sales reflects $194,705 related to cost of sales to
      Cables & Networks for fiber optics products and subcontracted labor versus
      $230,449 last year. These costs are eliminated as intercompany cost of sales
      in
      the consolidated financials in each quarter. Cost of sales expenses for the
      six
      month period for all Optronics product lines consists of approximately $283,000
      in personnel costs, $131,000 in depreciation and $177,000 in materials and
      allocated overhead. This compares to prior year personnel expenses of
      approximately $543,000, depreciation of $148,000 and supplies and overhead
      of
      $269,000. The overall net decrease in cost of sales is due mainly to lower
      personnel and material costs associated with production outsourcing efforts
      in
      the GaN area implemented in the prior year.





**RESEARCH
      AND DEVELOPMENT EXPENSES**





Research
      and development expenses consist of the research and development expense at
      Optronics. There have been no research and development expenses at Cables &
Networks. Expenses increased $258,502 to $670,305 from $411,803 in the prior
      period. The increase in the expense is due mainly to increased personnel and
      operating costs associated with the semiconductor machine which was installed
      and brought on line in November of 2004.




12
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          of Contents





**SELLING,
      GENERAL AND ADMINISTRATIVE**





Consolidated
      S, G & A expenses increased $322,324, or 11%, to $3,147,439 from $2,825,115
      in 2004.





Selling,
      general and administrative expenses at Cables & Networks increased $225,445,
      or 12%, to $2,069,732 from $1,844,287. The majority of the increase is
      attributable to increased personnel expenses within the sales area generated
      as
      a part of the plan to expand sales presence and grow revenue.





Selling,
      general and administrative expenses at Optronics increased $99,147, or 10%,
      to
      $1,079,975 from $980,828. The increase is due to additional expense related
      to
      the India operations which were acquired in March, 2005.





**INCOME
      (LOSS) FROM OPERATIONS**





Consolidated
      losses from operations increased $334,785, or 18%, to $2,188,564 from $1,853,779
      in 2004.





The
      loss
      from operations at Cables & Networks was $60,547 versus income of $207,336
      in the year ago period.  The
      loss
      was mainly the result of higher selling and personnel expenses related to Cables
      & Networks planned investment in revenue growth.





The
      loss
      from operations at Optronics increased $66,902, or 3%, to $2,128,017, from
      $2,061,115. The increase is mainly due to the expenses related to the start
      up
      of the India operations.





**OTHER
      INCOME AND EXPENSE**





Consolidated
      other income and expense decreased $34,966 to $235,630 from $270,596.





Other
      expense increased at Cables & Networks by $41,986 to $176,763 for the six
      month period ended September 30, 2005, versus an expense of $134,777 in the
      year
      ago period, due to a higher rate of interest paid in the current six month
      period.





Other
      income at Optronics increased $4,555, or 1%, to $455,590 from $451,035. The
      sale
      of land at our Aberdeen facility and loss on disposal of other assets resulted
      in a gain of $93,126 in fiscal 2006. Additionally, interest income increased
      $108,814 in the current period due to a higher outstanding receivable due from
      Cables & Networks and a higher rate of interest earned versus last year.
      Rental income for part of our Blaine facility which is leased to the buyer
      of
      our optics operations increased approximately $11,000 in fiscal 2006 over the
      prior year. The sale of the optics manufacturing operations in April 2004
      accounted for approximately $208,000 in other income in fiscal 2005.





**NET
      INCOME (LOSS)**





Consolidated
      net loss increased $368,751, or 23%, to $1,954,634, or $.16 cents per share,
      from $1,585,883, or $.13 cents per share in the year ago period.





Cables
      & Networks had a net loss of $238,510 versus net income of $70,359 in the
      year ago period. The loss reflects slightly decreased gross margins and
      increased S, G, & A expenses attributable to revenue growth plans.





Optronics
      recorded a net loss of $1,716,124, an increase of $59,882, or 4%, from the
      loss
      of $1,656,242 reported in the same period of fiscal 2005. The increase is due
      mainly to start up costs of the India operations..








**LIQUIDITY
      AND CAPITAL RESOURCES**





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


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Cash
      used
      in operating activities was $1,787,137 for the six month period ending September
      30, 2005 compared to $945,590 used in the same period in fiscal 2004. The
      increase in the cash used in the current period reflects the negative impact
      of
      working capital changes in the amount of $286,640, primarily from growth in
      APACN’s accounts receivable and inventory as a result of increased sales, an
      overall increase in loss from operations, and $291,125 in cash consumed for
      capital expenditures and start up costs related to our India
      operations.





We
      used
      net cash of $123,113 in investing activities for the six months ended September
      30, 2005 compared to $73,909 used in the same period of the preceding fiscal
      year. The higher net use of cash in the current period occurred despite a
      decrease in capital expenditures in the amount of $59,116, and reflects proceeds
      from the sale of assets of $108,320 in the prior period. We anticipate
      approximately $300,000 to $500,000 in capital expenditures in fiscal 2006,
      including the building of a new facility in India.





Net
      cash
      used in financing activities for the six months ended September 30, 2005 totaled
      $22,435. We used $68,083 for reduction of debt and generated $45,648 from the
      reduction of bond reserve funds. During the same period in fiscal 2004 we used
      $161,956 in financing activities, of which $205,648 was used for the scheduled
      reduction of debt and $43,692 was generated from the reduction of bond reserve
      funds.





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





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





Total
            
            Less
                than
              1
                Year
            
            1-3
                years
            
            4-5
                years
            
            After
              5
                yearsLong-term
                debt
            
            $
            1,392
            
            $
            1,366
            
            $
            26
            
            $
            0
            
            $
            0Leases
            
            
            1,159
            
            
            420
            
            
            507
            
            
            207
            
            
            25Total
                  Contractual Cash Obligations
            
            $
            2,551
            
            $
            1,786
            
            $
            533
            
            $
            207
            
            $
            25








**APPLICATION
      OF CRITICAL ACCOUNTING POLICIES**





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





·
            Accounting
                for income taxes; and


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


·
            Revenue
                recognition





Accounting
      for Income Taxes





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


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Significant
      management judgment is required in determining our provision for income taxes,
      our deferred tax assets and liabilities and any valuation allowance recorded
      against our deferred tax assets. At March 31, 2005, we recorded a full
      valuation allowance of $12,167,207 against our deferred tax assets, due to
      uncertainties related to our ability to utilize our deferred tax assets,
      consisting principally of certain net operating losses carried forward. The
      valuation allowance is based on our estimates of taxable income by jurisdiction
      and the period over which our deferred tax assets will be recoverable. The
      Company had U.S. net operating loss (NOL) carryforwards of
      approximately $31,531,000 which expire in fiscal years 2006 to 2025.





Realization
      of the NOL carryforwards and other deferred tax temporary differences are
      contingent on future taxable earnings. The deferred tax asset was reviewed
      for
      expected utilization using a “more likely than not” approach by assessing the
      available positive and negative evidence surrounding its recoverability. We
      will
      continue to assess and evaluate strategies that will enable the deferred tax
      asset, or portion thereof, to be utilized, and will reduce the valuation
      allowance appropriately at such time when it is determined that the “more likely
      than not” approach is satisfied.





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





Valuation
      and evaluating impairment of long-lived assets and goodwill





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





The
      Company evaluates the recoverability of its long-lived assets in accordance
      with
      SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
SFAS 144 requires recognition of impairment of long-lived assets in the
      event that events or circumstances indicate an impairment may have occurred
      and
      when the net book value of such assets exceeds the future undiscounted cash
      flows attributed to such assets. We assess the impairment of long-lived assets
      whenever events or changes in circumstances indicate that the carrying value
      may
      not be recoverable. No impairment of long-lived assets has occurred through
      the
      year ended September 30, 2005.





Revenue
      Recognition





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





**FACTORS
      THAT MAY INFLUENCE FUTURE RESULTS**





The
      statements contained in this Report on Form 10-Q that are not purely historical
      are “forward-looking statements” within the meaning of the Private Securities
      Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
      Section 21E of the Securities Exchange Act of 1934, including, without
      limitations, statements regarding the Company’s expectations, hopes, beliefs,
      anticipations, commitments, intentions and strategies regarding the future.
      Forward-looking statements include, but are not limited to, statements contained
      in “Item 1. Business” and “Item 7. Management's Discussion and Analysis of
      Financial Condition and Results of Operations” in our Report on Form 10-K for
      the year ended March 31, 2005. Actual results could differ from those projected
      in any forward-looking statements for the reasons, among others, detailed below.
      We believe that many of the risks detailed here are part of doing business
      in
      the industry in which we compete and will likely be present in all periods
      reported. The fact that certain risks are characteristic to the industry does
      not lessen the significance of the risk. The forward-looking statements are
      made
      as of the date of this Report as Form 10-Q and we assume no obligation to update
      the forward-looking statements or to update the reasons why actual results
      could
      differ from those projected in the forward-looking statements.





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 Table
          of Contents




**Our
      Results of Operations**





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





We
      have
      not been profitable since fiscal 1990. As of September 30, 2005, we had an
      accumulated deficit of $35.1 million. We may incur operating losses for the
      foreseeable future, and these losses may be substantial. Further, we may
      continue to incur negative operating cash flow in the future. We have funded
      our
      operations primarily through the sale of equity securities and borrowings.
      We
      have significant fixed expenses and we expect to continue to incur significant
      and increasing manufacturing, sales and marketing, product development and
      administrative expenses. As a result, we will need to generate significantly
      higher revenues while containing costs and operating expenses if we are to
      achieve profitability.





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





In
      March
      2003, we completed the acquisition of the assets of CSP as part of our strategy
      to expand our product offerings, develop internal sources of components and
      materials, and acquire new technologies. We acquired the assets of Americable
      in
      June 2003 and integrated them with the assets of CSP. We acquired assets in
      India in March 2005 as part of a strategy to take advantage of lower
      manufacturing costs in India. We intend to continue reviewing acquisition and
      investment prospects. There are inherent risks associated with making
      acquisitions and investments including but not limited to:





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


·
            Potentially
                dilutive issuances of equity
                securities;


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


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


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


·
            Diversion
                of management attention from current
                responsibilities.








**Our
      Products and Introduction of New Products**





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





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





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





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


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





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





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





**Manufacturing
      and Operations**





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





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





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





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





·
            Difficulties
                in achieving adequate yields from new manufacturing
                lines,




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




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




·
            Lack
                of availability of qualified manufacturing
                personnel.





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


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


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





**Markets
      and Market Conditions**





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





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





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





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





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





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





·
            Seek
                lower cost suppliers of raw materials or
                components.


·
            Work
                to further automate our assembly
                process.


·
            Develop
                value-added components based on integrated
                optics.


·
            Seek
                offshore sources for manufacturing and assembly
                services.





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





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





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


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*Conditions
      in global markets could affect our operations.*





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





·
            local
                economic and market conditions;





·
            political
                and economic instability;





·
            fluctuations
                in foreign currency exchange rates;





·
            tariffs
                and other barriers and
                restrictions;





·
            geopolitical
                and environmental risks; and





·
            changes
                in diplomatic or trade relationships and natural
                disasters.





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







**Our
      Customers**





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





If
      we
      lose a significant customer, our sales and gross margins would be negatively
      impacted. In addition, the loss of sales may require us to record impairment,
      restructuring charges or exit a particular business or product line. As of
      September 30, 2005, no one customer provides greater than 10% of sales for
      all
      periods presented.





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





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





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





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


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**Performance
      Requirements and Performance of our Products**





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





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





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





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





·
            delayed
                market acceptance of our products;





·
            delays
                in product shipments;





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





·
            damage
                to our reputation and our customer
                relationships;





·
            delayed
                recognition of sales or reduced sales;
                and





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








**Intellectual
      Property**





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





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





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


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





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





*Intellectual
      property litigation could harm our business.*





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





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





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





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





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








**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.


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**ITEM
      4. CONTROLS AND
      PROCEDURES.**





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





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








**PART
      II**





**ITEM
      1. LEGAL PROCEEDINGS**





See
      Item
      3 in Part 1 of our report on Form 10-K for the fiscal year ended March 31,
      2005
      for information on EIT v. APA Enterprises, Inc. This is currently scheduled
      for
      trial at the end of December 2005.





**ITEMS
      2 THROUGH 5. NOT APPLICABLE**





**ITEM
      6. EXHIBITS AND REPORTS ON FORM 8-K.**





(a)
            Exhibits.





Exhibit
      10.6 - Amended and Restated Change of Control
      Agreement with Anil K. Jain, Ph.D. dated September 15, 2005





Exhibit
      10.11 - Severance Agreement with Cheri B. Podzimek dated September 15,
      2005





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








(b)
            Reports
                on Form 8-K.





A
      report
      on Form 8-K dated August 18, 2005 reporting changes in compensation and
      incentive plans for executive officers





A
      report
      on Form 8-K dated September 15, 2005 reporting the company entering into an
      a
      severance and change of control agreements with executive
      officers


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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.11/14/05
            
            
            /s/
                Anil K. JainDate
            
            
            Anil
                K. JainPresident,Chief
                Executive Officer and Chief Financial Officer (Principal Executive
                and
                Principal Financial Officer)11/14/05
            
            
            /s/
                Daniel HerzogDate
            
            
            Comptroller(Principal
                Accounting Officer)




23