**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 June 30, 2006
 
  ̈
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
  Commission
        File Number 0-16106
 
 **APA
        Enterprises, Inc.**
 (Exact
        name of Registrant as specified in its charter)
 
 **Minnesota**
              
              **41-1347235**(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)
 
 **2950
        N.E. 84** **th** **Lane, Blaine, Minnesota 55449**
 (Address
        of principal executive offices and zip code)
 
 **(763)
        784-4995**
 (Registrant’s
        telephone number, including area code)
  Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to the filing requirement
        for
        the past 90 days.
  Yesx
              
              No ̈
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, and
        accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
        the
        Exchange Act).
 
 Large
                  accelerated filer ̈
              Accelerated
                  filer ̈
              Non-accelerated
                  filerx
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 
 Yes ̈
              
              Nox
 
 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 August 2, 2006Common
                  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
              10ITEM
                  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK.
              15ITEM
                  4. CONTROLS AND PROCEDURES.
              15**PART
                  II**
              16ITEM
                  1. LEGAL PROCEEDINGS
              16ITEM
                  1A. RISK FACTORS
              16ITEMS
                  2 THROUGH 5. NOT APPLICABLE
              17ITEM
                  6. EXHIBITS
              17
  2
 *Table
            of Contents*
  **PART
        I. FINANCIAL INFORMATION**
  **ITEM
        1.  FINANCIAL STATEMENTS**
  **APA
        ENTERPRISES, INC.**
 **CONSOLIDATED
        CONDENSED BALANCE SHEETS**
 **(Unaudited)**
  June
                  30,
              
              March
                  31,2006
              
              2006**Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              8,143,946
              
              $
              8,947,777Accounts
                  receivable, net of allowance for uncollectible accounts of $75,529
                  at June
                  30, 2006 and $77,831 at March 31, 2006
              
              
              2,104,804
              
              
              1,892,483Inventories
              
              
              2,073,806
              
              
              1,836,843Prepaid
                  expenses and other
              
              
              171,492
              
              
              299,425Total
                  current assets
              
              
              12,494,048
              
              
              12,976,528Property,
                  plant and equipment, net
              
              
              2,644,810
              
              
              2,623,412Other
                  assets:Bond
                  reserve funds
              
              
              339,154
              
              
              343,241Goodwill
              
              
              3,422,511
              
              
              3,422,511Other
              
              
              249,621
              
              
              227,8794,011,286
              
              
              3,993,631Total
                  assets
              
              $
              19,150,144
              
              $
              19,593,571**Liabilities
                  and shareholders’ equity**Current
                  liabilities:Current
                  portion of long-term debt
              
              $
              1,256,678
              
              $
              1,342,481Accounts
                  payable
              
              
              1,350,776
              
              
              1,353,828Accrued
                  compensation
              
              
              620,869
              
              
              815,046Accrued
                  expenses
              
              
              150,442
              
              
              211,840Total
                  current liabilities
              
              
              3,378,765
              
              
              3,723,195Long-term
                  debt, net of current maturities
              
              
              14,796
              
              
              18,480Deferred
                  income taxes
              
              
              288,634
              
              
              272,454Total
                  liabilities
              
              
              3,682,195
              
              
              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 June 30, 2006 and March 31, 2006
              
              
              118,723
              
              
              118,723Additional
                  paid-in capital
              
              
              51,987,991
              
              
              51,968,366Accumulated
                  foreign currency translation
              
              
              (21,253
              )
              
              (2,153
              )Accumulated
                  deficit
              
              
              (36,617,512
              )
              
              (36,505,494
              )Total
                  shareholders’ equity
              
              
              15,467,949
              
              
              15,579,442Total
                  liabilities and shareholders’ equity
              
              $
              19,150,144
              
              $
              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 EndedJune
                  30,2006
              
              2005Revenues
              
              $
              5,025,917
              
              $
              3,512,563Cost
                  of sales
              
              
              3,695,930
              
              
              2,787,453Gross
                  profit
              
              
              1,329,987
              
              
              725,110Operating
                  expensesResearch
                  and development
              
              
              153,787
              
              
              323,598Selling,
                  general and administrative
              
              
              1,713,003
              
              
              1,470,408Gain
                  on disposal of asset
              
              
              (345,000
              )
              
              (109,935
              )1,521,790
              
              
              1,684,071Loss
                  from operations
              
              
              (191,803
              )
              
              (958,961
              )Other
                  income
              
              
              119,379
              
              
              91,787Other
                  expense
              
              
              (20,614
              )
              
              (22,882
              )98,765
              
              
              68,905Loss
                  before income taxes
              
              
              (93,038
              )
              
              (890,056
              )Income
                  taxes
              
              
              18,980
              
              
              950Net
                  loss
              
              $
              (112,018
              )
              $
              (891,006
              )Net
                  loss per share:Basic
                  and diluted
              
              $
              (0.01
              )
              $
              (0.08
              )Weighted
                  average shares outstanding:Basic
                  and diluted
              
              
              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)**
 
 Three
                  Months EndedJune
                  30,2006
              
              2005**Cash
                  Flow from operating activities**Net
                  loss
              
              $
              (112,018
              )
              $
              (891,006
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              154,416
              
              
              269,847Deferred
                  taxes
              
              
              16,180
              
              
              -Gain
                  on sale of assets
              
              
              (345,000
              )
              
              (109,935
              )Stock
                  based compensation
              
              
              19,625
              
              
              3,199Foreign
                  currency translation
              
              
              (19,100
              )
              
              1,342Changes
                  in operating assets and liabilities:Accounts
                  receivable, net
              
              
              (212,321
              )
              
              (2,923
              )Inventories
              
              
              (236,963
              )
              
              (110,977
              )Prepaid
                  expenses and other
              
              
              24,655
              
              
              44,130Accounts
                  payable and accrued expenses
              
              
              (258,627
              )
              
              161,503Net
                  cash used in operating activities
              
              
              (969,153
              )
              
              (634,820
              )**Cash
                  flow from investing activities**Purchases
                  of property and equipment
              
              
              (175,814
              )
              
              (121,259
              )Proceeds
                  from sale of assets
              
              
              345,000
              
              
              1,500Net
                  cash provided by (used in) investing activities
              
              
              169,186
              
              
              (119,759
              )**Cash
                  flow from financing activities**Repayment
                  of long-term debt
              
              
              (89,487
              )
              
              (96,624
              )Decrease
                  in bond reserve funds
              
              
              85,623
              
              
              89,600Net
                  cash used in financing activities
              
              
              (3,864
              )
              
              (7,024
              )Decrease
                  in cash and cash equivalents
              
              
              (803,831
              )
              
              (761,603
              )Cash
                  and cash equivalents at beginning of period
              
              
              8,947,777
              
              
              10,813,492Cash
                  and cash equivalents at end of period
              
              $
              8,143,946
              
              $
              10,051,889
 
 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 EndedJune
                  30,2006
              
              2005Numerator
                  for basic and diluted net loss per share
              
              $
              (112,018
              )
              $
              (891,066
              )Denominator
                  for basic and diluted net loss per share - weighted average shares
                  outstanding
              
              
              11,872,331
              
              
              11,872,331Basic
                  and diluted net loss per share
              
              $
              (0.01
              )
              $
              (0.08
              )
  Common
        stock options and warrants to purchase 613,980 and 633,940 shares of common
        stock with a weighted average exercise price of $2.85 and $6.35 were outstanding
        at June 30, 2006 and 2005, respectively, but were excluded from calculating
        diluted net loss per share because they were antidilutive.
  **Note
        3.  Segment Reporting**
  The
        Company has identified two reportable segments based on its internal
        organizational structure, management of operations, and performance evaluation.
        These segments are (1) Optronics and (2) Cables and Networks
        (APACN).  Optronics’
        revenue is generated in the design, manufacture and marketing of ultraviolet
        (UV) detection and measurement devices and optical components. Cables &
Networks’ revenue is derived primarily from standard and custom fiber optic
        cable assemblies, copper cable assemblies, value added fiber optics frames,
        panels and modules. Expenses are allocated between the two segments based
        on
        detailed information contained in invoices. In addition, overhead costs,
        including management’s time and other expenses, are allocated to each segment as
        appropriate.
  6
 *Table
            of Contents*
  Segment
        detail is summarized as follows (unaudited, in thousands):
 
 Optronics
              
              Cables
                  & Networks
              
              Eliminations
              
              Consolidated**Three
                  months ended June 30, 2006**External
                  sales
              
              $
              51
              
              $
              4,975
              
              $
              -
              
              $
              5,026Gross
                  profit (loss)
              
              
              (102
              )
              
              1,432
              
              
              -
              
              
              1,330Operating
                  income (loss)
              
              
              (362
              )
              
              170
              
              
              -
              
              
              (192
              )Depreciation
                  and amortization
              
              
              87
              
              
              67
              
              
              -
              
              
              154Capital
                  expenditures
              
              
              175
              
              
              1
              
              
              -
              
              
              176Assets
              
              
              18,855
              
              
              8,000
              
              
              (7,705
              )
              
              19,150**Three
                  months ended June 30, 2005**External
                  sales
              
              $
              103
              
              $
              3,508
              
              $
              (98
              )
              $
              3,513Gross
                  profit (loss)
              
              
              (186
              )
              
              912
              
              
              (1
              )
              
              725Operating
                  loss
              
              
              (891
              )
              
              (68
              )
              
              -
              
              
              (959
              )Depreciation
                  and amortization
              
              
              210
              
              
              60
              
              
              -
              
              
              270Capital
                  expenditures
              
              
              87
              
              
              34
              
              
              -
              
              
              121Assets
              
              
              21,149
              
              
              7,341
              
              
              (7,358
              )
              
              21,132
  **Note
        4.  Sale of Land**
  In
        June
        2005 the Company sold approximately 2 acres of its land in Aberdeen, South
        Dakota to the Aberdeen Development Corporation (ADC) in exchange for the
        retirement of its remaining $120,000 debt on its loan with ADC. The land
        was
        granted to APA in conjunction with building a facility in Aberdeen and was
        part
        of a single parcel of approximately 12 acres on which the Company constructed
        and operates its manufacturing facility. The Company recognized a gain of
        approximately $109,000 on the sale of the land in the first quarter of fiscal
        2006.
  **Note
        5.  Closing of Aberdeen Facility**
  The
        Company ceased all of its operations in Aberdeen during the later part of
        fiscal
        year 2006 as a part of its consolidation of manufacturing operations. The
        Company owned facility, located approximately on a 10-acre parcel, is designated
        for lease or sale after sub-division of the land in approximately two 5-acre
        parcels. The Company does not have a formal plan for leasing or selling the
        facility and thus the building remains classified as property, plant and
        equipment as of June 30, 2006. The company plans to retain the 5-acre vacant
        land for potential future use. The facility, built using proceeds from a
        South
        Dakota assisted bond, currently has a long-term debt balance of approximately
        $850,000, after adjusting the proceeds from the reserve funds.
  **Note
        6.  Sale of Metal Organic Chemical Vapor Deposition (MOCVD) Operation**
  In
        March
        2006 the Company sold certain equipment and related intellectual property
        related to its MOCVD operations to an unrelated party for a total consideration
        of $1.9 million in cash and a license back of the technology within a specified
        field of use. The asset purchase agreement includes an additional consulting
        agreement for up to $100,000 over the course of one year. The Company recorded
        a
        gain of approximately $1.2 million on the sale in the fourth quarter of fiscal
        2006. The Company does not track discrete financial information for these
        assets, therefore this has not been presented as a discontinued operation.
  **Note
        7.  Stock Based Compensation**
  Effective
        April 1, 2006, the Company adopted FASB Statement No. 123(R), “Share-Based
        Payment, *”* (SFAS
        123(R)) which requires an entity to reflect on its income statement, instead
        of
        pro forma disclosures in its financial footnotes, the cost of employee services
        received in exchange for an award of equity instruments based on the grant-date
        fair value of the award. Statement 123(R) supersedes the Company’s previous
        accounting under Accounting Principles Board Opinion No. 25, “Accounting for
        Stock Issued to Employees,” for periods beginning in fiscal 2007.
  7
 *Table
            of Contents*
  The
        Company adopted SFAS 123(R) using the modified prospective transition method,
        which requires the application of the accounting standard as of April 1,
        2006,
        the first day of the Company’s fiscal year ending March 31, 2007. The Company’s
        condensed consolidated financial statements as of and for the three months
        ended
        June 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified
        prospective transition method, the Company’s consolidated financial statements
        for prior periods have not been restated to reflect, and do not include,
        the
        impact of SFAS 123(R). As required by SFAS 123(R), the following pro forma
        table
        illustrates the effect on net loss as if the fair-value-based approach of
        SFAS
        No. 123 (R) had been applied during the three months ended June 30, 2005:
  Three
                  Months EndedJune
                  30, 2005Net
                  loss to common shareholders - as reported
              
              $
              (891,006
              )Less:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards, net of related tax
                  effects
              
              
              (31,565
              )Net
                  loss - pro forma
              
              $
              (922,571
              )Basic
                  and diluted net loss per common share - as reported
              
              $
              (0.08
              )Basic
                  and diluted net loss per common share - pro forma
              
              $
              (0.08
              )
  SFAS
        123(R) requires companies to estimate the fair value of share-based payment
        awards on the date of grant using an option-pricing model. The value of the
        portion of the award that is ultimately expected to vest is recognized as
        expense over the requisite service periods in the Company’s Consolidated
        Statements of Operations. The Company recorded $19,625 of related compensation
        expense for the three month period ended June 30, 2006. This expense is included
        in selling, general and administrative expense. There was no tax benefit
        from
        recording this non-cash expense. The compensation expense had impacted both
        basic and diluted loss per share by $0.01 for the three months ended June
        30,
        2006. As of June 30, 2006, $117,630 of total unrecognized compensation expense
        related to non-vested awards is expected to be recognized over a weighted
        average period of approximately 3.62 years.
  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).
  Stock
        Option Plans
  We
        have
        adopted a 1997 Stock Compensation Plan, a Stock Option Plan for Nonemployee
        Directors, and a 2007 Stock Compensation Plan pending approval of our
        shareholders (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 486,020 shares of our Company’s common stock remained available
        for issuance at June 30, 2006. In general, the stock options we have issued
        under the Plans vest over a period of five years and expire six years from
        the
        date of grant. New shares are issued under existing registration statements
        upon
        exercise. The 1997 Stock Compensation Plan expires on March 4, 2007, which
        means
        that we cannot grant new awards after that time. All outstanding incentives,
        granted under the 1997 Plan will remain in effect until satisfied or
        terminated.
  8
 *Table
            of Contents*
  Options
        transaction under these plans during the three months ended June 30, 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
              
              
              2.65
  The
        following table summarizes information concerning outstanding and exercisable
        stock options at June 30, 2006:
 
 **Options
                  outstanding**Range
                  ofexercise
                  prices
              
              Numberoutstanding
              
              Weighted
                  average remainingcontractual
                  life
              
              Weighted
                  averageexercise
                  price
              
              Aggregate
                  intrinsicvalue$1.30-$2.91
              
              
              228,980
              
              
              4.29
                  years
              
              $
              1.88
              
              $
              430,4825.53-8.90
              
              
              35,000
              
              
              0.65
                  years
              
              
              7.70
              
              
              269,500263,980
              
              
              3.81
                  years
              
              
              2.65
              
              $
              699,982
 
  **Options
                  exercisable**Range
                  ofexercise
                  prices
              
              Numberoutstanding
              
              Weighted
                  average remaining
                contractual
                  life
              
              Weighted
                  averageexercise
                  price
              
              Aggregate
                  intrinsic
                value$1.30-$2.91
              
              
              67,820
              
              
              3.21
                  years
              
              $
              2.21
              
              $
              149,8825.53-8.90
              
              
              31,250
              
              
              0.60
                  years
              
              
              7.55
              
              
              235,93899,070
              
              
              2.39
                  years
              
              
              3.89
              
              $
              385,820
 
 The
        Company estimates the fair value of stock option awards based on the following
        assumptions:
  **Three
                  Months Ended****June
                  30, 2006**Expected
                  volatility
              
              
              64
              %Expected
                  life (in years)
              
              
              5
                  yearsExpected
                  dividends
              
              
              0
              %Risk-free
                  interest rate
              
              
              4.95
              %
 
 The
        weighted average fair value of options granted during the three months ended
        June 30, 2006 was $0.78. 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.
  9
 *Table
            of Contents*
  **Note
        8.  Major Customer Concentration**
  As
        of
        June 30, 2006, one customer comprised approximately 13% of total sales for
        the
        first quarter ended June 30, 2006 and one customer accounted for 13% of accounts
        receivable as of the quarter end. No one customer provided greater than 10%
        of
        sales for the same period of the prior fiscal year.
  **Note
        9.  Commitments and Contingencies**
  Electronic
        Instrumentation and Technology, Inc. ("EIT") filed suit against APA on May
        25,
        2005 (see information in Part II, Item I of this Report.) The suit alleged
        that
        APA had committed various fraudulent acts in conjunction with preliminary
        business discussions between EIT and APA which preceded APA's introduction
        of
        its Profiler M product.  APA denied EIT's claims of wrongful conduct and
        the case went to trial in December 2005. The jury found in favor of EIT on
        one
        claim and awarded EIT $35,000. EIT filed certain post-trial motions, all
        of
        which were denied by the court. EIT did not appeal the verdict and this matter
        is concluded.
  **ITEM
        2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS**
  Statements
        in this Report about future sales prospects and other matters to occur in
        the
        future are forward looking statements and are subject to uncertainties due
        to
        many factors, many of which are beyond our control. These factors include,
        but
        are not limited to, the continued development of our products, acceptance
        of
        those products by potential customers, our ability to sell such products
        at a
        profitable price, and our ability to fund our operations. For further discussion
        regarding these factors, see “Factors That May Influence Future
        Results.”
  **OVERVIEW**
  APA
        Enterprises, Inc., (formerly known as APA Optics, Inc.) consists of the
        Optronics group and the Cables & Networks group (APACN or Cables &
Networks). Optronics is active in the development, design, manufacture and
        marketing of ultraviolet (UV) measurement instruments for consumers and
        industrial customers, and gallium nitride (GaN) based transistors for power
        amplifiers and other commercial applications. APACN designs, manufactures
        and
        markets a variety of fiber optic and copper components for the data
        communication and telecommunication industries. Both groups also source
        components and devices from third parties for direct and value-added sales
        to
        our customers in all these technology areas.
  APACN
        focuses on custom-engineered products for telecommunications customers,
        primarily related to cabling management requirements of the Fiber-to-the-Home
        (“FTTH”) marketplace and in designing and terminating custom cable assemblies
        for commercial and industrial original equipment manufacturers (“OEM’s”). To
        date, APACN has been able to successfully establish itself as a value-added
        supplier to its target market of independent telephone companies and cable
        television operators as well as OEM’s who value a high level of engineering
        services as part of their procurement process. APACN has expanded its product
        offerings and broadened its customer base since its inception three years
        ago.
  APACN
        also invested in expanding its sales and engineering expenditures by 32%
        during
        fiscal 2006 to increase its potential revenues during fiscal year 2007 and
        beyond. APACN is already realizing the impact of these efforts in terms of
        increased sales, particularly during the last two quarters of the fiscal
        year
        2006 and first quarter 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.
  10
 *Table
            of Contents*
  Optronics
        discontinued the fiber optic product line in March 2006.
  In
        fiscal
        year 2006 we sold our MOCVD facility, certain equipment and intellectual
        property related to our research and development work surrounding gallium
        nitride based heterojunction field effect transistors. The sale to an unrelated
        third party for consideration including $1.9 million in cash enables us to
        focus
        our R&D efforts on power amplifiers built using GaN technology by using
        commercially available parts, rather than building our own transistors. This
        is
        expected to decrease our operating costs and shorten our time to market for
        power amplifiers. The Company also sold certain intellectual capitalized
        assets
        for $345,000 during the first quarter of fiscal year 2007.
  Plastic
        and metal models of the consumer Personal UV Monitor (PUVM) offered by Optronics
        continue in production, and the focus remains on marketing and sales. We
        have
        also developed an attractive new clip-on hybrid plastic/metal model that
        can be
        manufactured to our quality standards by the supplier and have received the
        first group of production units for sampling and initial sales. We have also
        developed a new product called the *SunUVStation* TM .
        This
        product, which is similar in size to an outdoor temperature gauge, measures
        the
        UV Index and is targeted to consumers and institutions for use in backyards,
        patios, swimming pool areas, and other public places where people need to
        be
        reminded about UV intensity. Final assembly and packaging of this product
        is
        being performed in our APA facility in India and the production line there
        is
        now being qualified. The SunUVStation TM complements the PUVM and retailers are interested in offering both. We have
        already started to ship samples of both the SunUVStation TM and the
        PUVM to retail channels.
  Optronics’
        4-band *Profiler
        M* radiometer, which serves the printing and coating industries that use UV
        curing,
        is in production. This instrument measures the intensity and distribution
        of
        four UV bands to help set up and monitor the curing process. Two domestic
        distributors offer the product, and discussions and evaluation tests with
        additional domestic and international distributors are underway. We are in
        the
        process of establishing sales channels through equipment and supplies
        manufacturers in addition to general distributors. Optronics is exhibiting
        the *Profiler
        M* in
        selected trade shows with encouraging results. The Redtech show in April
        2006
        provided more than 75 leads. Additionally, several UV printing system
        manufacturers showed interest in introducing and/or marketing the *Profiler
        M* to their
        respective customers.
  Our
        wholly owned subsidiary, APA Optronics, Pvt. Ltd, India (APA India), established
        in fiscal year 2005, is now operational. The subsidiary, with its prime focus
        on
        low cost manufacturing of our products and components, has already started
        supplying samples for our Gallium Nitride and fiber optic products with
        expectations for products to be sold in the near future. Additionally, APA
        India
        is supporting manufacture of various components for APA Cables & Networks.
        The subsidiary is also providing software development for our *Profiler
        M* product.
        Phase II of the software for the Profiler has now been completed. The subsidiary
        provides marketing and sales support for our products both in the U.S. and
        India. In particular, they have now started the marketing of patch cords
        and
        associated equipment for fiber optic communications. The subsidiary, currently
        located in a leased facility, is in the process of constructing a larger
        facility in India to accommodate its future requirements. The new facility
        is
        expected to be completed in calendar year 2006.
  **RESULTS
        OF OPERATIONS**
  **THREE
        MONTHS ENDED JUNE 30, 2006 VS. THREE MONTHS ENDED JUNE 30,
        2005**
  Consolidated
        revenues for the three months ended June 30, 2006 increased $1,513,354, or
        43%,
        to $5,025,917 from $3,512,563 in 2005.
  Revenues
        at Cables & Networks were $4,975,074, compared to $3,508,388 reported in the
        same quarter a year ago, an increase of 42%. The overall increase in revenue
        reflects continued growth in new customers and product acceptance in both
        the
        broadband and OEM markets. Sales for the current quarter to broadband service
        providers and commercial data networks were approximately $3,709,000 versus
        $2,585,000 in the prior year quarter. The increase was primarily due to higher
        revenues from customers in the Fiber-to-the-Premise market. Sales to OEM’s were
        approximately $1,266,000 versus $923,000 in the year ago period. The increase
        is
        due to additional orders provided under a supply contract to a customer serving
        the test equipment market. We expect that future sales of Cables & Networks
        products will continue to account for a substantial portion of our revenue.
        With
        the introduction of a broader product offering in both segments, coupled
        with
        the expansion of the sales team into additional markets, we anticipate that
        future revenues at Cables & Networks will be comparable with the revenue of
        the first quarter of fiscal 2007.
  11
 *Table
            of Contents*
  Gross
        revenues at Optronics decreased 50% to $50,843 from $102,898 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 June 30, 2005
        reflect $98,723 of sales to Cables & Networks for subcontracted labor.
        Optronics did not provide any subcontract labor to Cables & Networks in the
        quarter ended June 30, 2006.
  **GROSS
        PROFIT AND COST OF SALES**
  Cables
        & Networks’ gross profit increased $520,269, or 57%, to $1,432,209 from
        $911,940. The increase in gross profit was mainly due to an increase in revenue
        without an increase in the corresponding fixed costs, as well as the continual
        pursuit of component and labor cost reductions. Specifically, gross profit
        as a
        percent of revenue was 29% in the current quarter as compared to 26% in the
        same
        quarter last year
  Gross
        cost of sales (before inter-company eliminations) at Optronics decreased
        $135,320, or 47%, to $153,065 from $288,385. Gross cost of sales for first
        quarter of fiscal year 2006 reflects $97,380 related to cost of sales to
        Cables
& Networks for subcontracted labor. Optronics did not provide any
        subcontract labor to Cables & Networks in the quarter ended June 30, 2006.
        These costs are eliminated as intercompany cost of sales in the consolidated
        financials in each quarter. Cost of sales expenses for the current period
        for
        all Optronics product lines consists of approximately $50,000 in personnel
        costs, $33,000 in depreciation and $70,000 in materials, overhead and other
        product expenses. This compares to prior year personnel expenses of
        approximately $138,000, depreciation of $67,000, and materials, allocated
        overhead and other expenses of $83,000. The reduced product development expenses
        within the GaN area also contributed to the decreased cost of sales.
  We
        anticipate comparable gross margins for Cables & Networks and cost of sales
        for Optronics for the upcoming quarter.
  **RESEARCH
        AND DEVELOPMENT EXPENSES**
  Research
        and development expenses consist of the research and development expense
        at
        Optronics. There have been no significant research and development expenses
        at
        Cables & Networks. Expenses decreased $169,811 to $153,787, from $323,598 in
        the prior year period. The change reflects a decrease in personnel, facility
        and
        depreciation costs due to the sale of its MOCVD operations.
  **SELLING,
        GENERAL, AND ADMINISTRATIVE**
  Consolidated
        selling, general, and administrative (S, G, & A) expenses increased
        $242,595, or 16%, to $1,713,003 from $1,470,408 in 2005.
  S,
        G,
& A expenses at Cables & Networks increased $282,344, or 29%, to
        $1,261,892 from $979,548. 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 quarter.
  S,
        G,
& A expenses at Optronics decreased $41,092, or 8%, to $451,111 from
        $492,203. The decrease is due largely to the expensing of warrants in the
        prior
        quarter which were fully amortized as of March 31, 2006.
  **GAIN
        ON DISPOSAL OF ASSETS**
  Gain
        on
        disposal of assets were entirely within the Optronics division. Gain on disposal
        of assets increased $235,065 to $345,000 from $109,935 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.
  12
 *Table
            of Contents*
  **INCOME
        (LOSS) FROM OPERATIONS**
  Consolidated
        losses from operations decreased $767,158, or 80%, to $191,803 from $958,961
        in
        2005.
  The
        income from operations at Cables & Networks was $170,317 versus loss of
        $67,608 in the fiscal 2006 quarter.  The
        increased income in the quarter was mainly due to increased revenues, offset
        by
        higher selling expenses absorbed as part of Cables & Networks’ planned
        investment in revenue growth.
  The
        loss
        from operations at Optronics decreased $529,233, or 59%, to $362,120, from
        a
        loss of $891,353 in the year ago period. The decrease in the loss is mainly
        due
        to the gain of $345,000 realized due to the sale of two patents and the
        termination of MOCVD related activities. We expect to incur losses at Optronics
        until we realize significant revenues from the sales of our PUVM and GaN
        related
        products.
  **OTHER
        INCOME AND EXPENSE**
  Consolidated
        other income and expense increased $29,860 to $98,765 from $68,905 in 2005.
  Other
        expense at Cables & Networks increased $24,773 due to an increase in
        interest expense, primarily due to a higher interest rate in the current
        period.
  Other
        income at Optronics increased $53,453 to $230,824. This resulted from an
        increase in interest income due to a higher rate of interest earned on
        investments over the quarter ending June 30, 2005. Other expense decreased
        $1,180 to $20,418, from $21,598 in the period ending June 30, 2005.
  **NET
        LOSS**
  Consolidated
        net loss for the quarter decreased $778,988, or 87%, to $112,018, or $.01
        cents
        per share, from $891,006, or $.08 cents per share in the year ago
        period.
  Cables
        & Networks had a net profit of $40,696 in the quarter, compared to a loss of
        $155,176 in the year ago quarter. The increased profitability was due mainly
        to
        increased revenues.
  Optronics
        recorded a net loss of $152,714, a decrease of $583,116 from a loss of $735,830
        from the same period of fiscal 2006. 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. Achieving profitability in the future will strongly
        depend upon Optronics’ ability to successfully manufacture and market
        gallium-nitride products.
  **LIQUIDITY
        AND CAPITAL RESOURCES**
  The
        Company’s cash and cash equivalents consist primarily of money market funds,
        U.S. Government instruments and other government instruments with original
        maturities of less than three months.
  Cash
        used
        in operating activities was $969,153 for the three month period ended June
        30,
        2006 compared to $634,820 used in the same period in fiscal 2006. The increase
        in the cash used in the current period reflects the impact of working capital
        changes from the prior year in the amount of $774,989. This is primarily
        attributable to increase in APACN’s accounts receivable and inventory associated
        with its growth in revenues.
  We
        realized net cash increase of $169,186 in investing activities for the three
        months ended June 30, 2006 compared to $119,759 used in the same period of
        the
        preceding fiscal year. The net realized cash due to investing activities
        in the
        current year includes sale of capital assets in the amount of $345,000
        offsetting capital expenditures in the amount of $175,814. The Company sold
        $1,500 worth of capital assets and had capital expenditures of $121,259 in
        the
        comparable quarter of the previous year. We anticipate approximately $300,000
        to
        $500,000 in capital expenditures in fiscal 2007, including the building of
        a new
        facility in India.
  13
 *Table
            of Contents*
  Net
        cash
        used in financing activities for the three months ended June 30, 2006 totaled
        $3,864. We used $89,487 for reduction of debt and generated $85,623 from
        the
        reduction of bond reserve funds. During the same period in fiscal 2006 we
        used
        $7,024 in financing activities, of which $96,624 was used for the scheduled
        reduction of debt and $89,600 was generated from the reduction of bond reserve
        funds.
  We
        believe we have sufficient funds for operations for at least the next twelve
        months.
  Our
        contractual obligations and commitments are summarized in the table below
        (in
        000’s):
  Total
              
              Less
                  than 1 Year
              
              1-3
                  years
              
              4-5
                  years
              
              After
                  5 yearsLong-term
                  debt (1)
              
              $
              1,272
              
              $
              1,257
              
              $
              15
              
              $
              -
              
              $
              -Leases
              
              
              2,124
              
              
              223
              
              
              679
              
              
              506
              
              
              716Total
                  Contractual Cash Obligations
              
              $
              3,396
              
              $
              1,480
              
              $
              694
              
              $
              506
              
              $
              716
 
 (1)
        Includes fixed interest from 0.62 to 10.60%
 
 **APPLICATION
        OF CRITICAL ACCOUNTING POLICIES**
  In
        preparing our consolidated financial statements, we make estimates, assumptions
        and judgments that can have a significant impact on our revenues, loss from
        operations and net loss, as well as on the value of certain assets and
        liabilities on our consolidated balance sheet. We believe that there are
        several
        accounting policies that are critical to an understanding of our historical
        and
        future performance, as these policies affect the reported amounts of revenues,
        expenses and significant estimates and judgments applied by management. While
        there are a number of accounting policies, methods and estimates affecting
        our
        consolidated financial statements, areas that are particularly significant
        include:
  ·
              Stock
                  Option Accounting;
 ·
              Accounting
                  for income taxes; and
 ·
              Valuation
                  and evaluating impairment of long-lived assets and
                  goodwill
 
 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 months ended June 30, 2006 reflect
        the impact of SFAS 123R. The compensation expense had impacted both basic
        and
        diluted loss per share by $0.01 for the three months ended June 30, 2006.
        The
        Company recorded $19,625 of related compensation expense for the three month
        period ended June 30, 2006. In accordance with the modified prospective
        transition method, our unaudited condensed consolidated financial statements
        for
        prior periods have not been restated, and do not include, the impact of
        compensation expense calculated under SFAS 123R.
  14
 *Table
            of Contents*
  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.
  We
        will
        continue to assess and evaluate strategies that will enable the deferred
        tax
        asset, or portion thereof, to be utilized, and will reduce the valuation
        allowance appropriately at such time when it is determined that the “more likely
        than not” approach is satisfied.
  Valuation
        and evaluating impairment of long-lived assets and goodwill
  Goodwill
        represents the excess of the purchase price over the fair value of net assets
        acquired. Goodwill is not amortized but reviewed for impairment at the fiscal
        year end or whenever conditions exist that indicate an impairment could exist.
  The
        Company evaluates the recoverability of its long-lived assets in accordance
        with
        SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
SFAS 144 requires recognition of impairment of long-lived assets in the
        event that events or circumstances indicate an impairment may have occurred
        and
        when the net book value of such assets exceeds the future undiscounted cash
        flows attributed to such assets. We assess the impairment of long-lived assets
        whenever events or changes in circumstances indicate that the carrying value
        may
        not be recoverable. No impairment of long-lived assets has occurred in fiscal
        2007 through the three months ended June 30, 2006.
  **ITEM
        3.** **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK.**
  Our
        exposure to market risk for changes in interest rates relates primarily to
        our
        investment portfolio. We invest in short-term securities of high credit issuers
        with maturities ranging from overnight up to 24 months. The average maturity
        of
        the portfolio does not exceed 12 months. The portfolio includes only marketable
        securities with active secondary or resale markets to ensure liquidity. We
        have
        no investments denominated in foreign country currencies and, therefore,
        our
        investments are not subject to foreign exchange risk.
  **ITEM
        4.  CONTROLS AND PROCEDURES.**
  (a)
              *Evaluation
                  of disclosure controls and procedures*.
                  The Company’s chief executive officer and chief financial officer have
                  concluded that as of the end of the fiscal period covered by this
                  report
                  the Company’s disclosure controls and procedures (as defined in Exchange
                  Act Rule 13a-14(c)) were effective.
  15
 *Table
            of Contents*
  (b)
              *Changes
                  in internal controls*.
                  There were no changes in the Company’s internal controls over financial
                  reporting during the fiscal period covered by this report that
                  materially
                  affected, or are likely to materially affect, the Company’s control over
                  financial reporting.
  **PART
        II**
 
 **ITEM
        1.  LEGAL PROCEEDINGS**
  Electronic
        Instrumentation and Technology, Inc. ("EIT") filed suit against APA on May
        25,
        2005 in the U.S. District Court for the Eastern District of Virginia, Case
        Number 1:05 CV 571 (the "EIT litigation"), alleging that APA had committed
        fraud
        by knowing concealment, fraud in making contract, fraud by intentional
        misrepresentation, misappropriation of trade secrets, tortious interference
        with
        prospective economic advantage, negligent misrepresentation, breach of contract,
        unfair competition, and inequitable conduct in conjunction with preliminary
        business discussions between EIT and APA which preceded APA's introduction
        of
        the Profiler M.  APA filed an Answer on July 28, 2005, which denied EIT's
        claims of wrongful conduct.
  The
        EIT
        litigation was tried to a jury on December 28, 2005.  The District Court
        dismissed, as a matter of law, six of EIT's nine causes of action either
        before
        or during the trial.  Three of EIT's causes of action were submitted to the
        jury for determination.  The jury found in favor of APA on EIT's claim for
        fraud in making contract and misappropriation of trade secrets. The jury
        found
        in favor of EIT on its breach of contract claim and awarded EIT $35,000.
        EIT has
        filed certain post-trial motions, all of which were denied by the court.
        EIT did
        not appeal the verdict and this matter is concluded.
   **ITEM
        1A.  RISK FACTORS**
  **FACTORS
        THAT MAY INFLUENCE FUTURE RESULTS**
  The
        statements contained in this Report on Form 10-Q that are not purely historical
        are “forward-looking statements” within the meaning of the Private Securities
        Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933
        and
        Section 21E of the Securities Exchange Act of 1934, including, without
        limitations, statements regarding the Company’s expectations, hopes, beliefs,
        anticipations, commitments, intentions and strategies regarding the future.
        Forward-looking statements include, but are not limited to, statements contained
        in “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, 2006. 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.
  **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.
  16
 *Table
            of Contents*
  **Markets
        and Market Conditions**
  *Our
        profitability can be adversely affected due to increased raw material
        costs*
  Our
        manufacturing costs may be impacted by un-anticipated increase 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, resulting in decreased profitability and/or
        losses.
  *Our
        inventory of raw material and supplies may incur significant obsolescence*
  Our
        market demands rapid turn around from receipt of purchase orders to shipping
        of
        the products. We maintain significant inventory of raw materials and supplies
        to
        meet this demand resulting in risk of inventory obsolescence. Whereas we
        anticipate and make provisions for a reasonable fraction of inventory
        obsolescence, a significant higher level of obsolescence can adversely impact
        our profitability.
  **Our
        Customers**
  *Our
        sales could be negatively impacted if one or more of our key customers
        substantially reduce orders for our products.*
  If
        we
        lose a significant customer, our sales and gross margins would be negatively
        impacted. In addition, the loss of sales may require us to record impairment,
        restructuring charges or exit a particular business or product line. As of
        June
        30, 2006, one customer comprised approximately 13% of total sales for the
        first
        quarter ended June 30, 2006 and one customer accounted for 13% of accounts
        receivable as of the quarter end. No one customer provided greater than 10%
        of
        sales for the same period of the prior fiscal year.
  **ITEMS
        2 THROUGH 5. NOT APPLICABLE**
  **ITEM
        6.  EXHIBITS**
  Exhibit
        31.1 - Certification of Chief Executive Officer
        and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
        Act of
        2002
  Exhibit
        32.1 - Certification required of Chief Executive
        Officer and Chief Financial Officer by Section 906 of the Sarbanes Oxley
        Act of
        2002
  17
 *Table
            of Contents*
  Signatures
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the Registrant
        has
        duly caused this report to be signed on its behalf by the undersigned, thereunto
        duly authorized.
  APA
                  ENTERPRISES, INC.8/10/06
              
              /s/
                  Anil K. JainDate
              Anil
                  K. JainPresident,Chief
                  Executive Officer and Chief Financial Officer (Principal Executive
                  and
                  Principal Financial and Accounting
                  Officer)
   18