**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|------------|---------------------------------------------------------------------------------------------------------|------------|

 

**For the quarterly period ended June 30, 2005**

 

**OR**

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

 

**For the transition period from                  to                  .**

 

**Commission file number 001-16047**

 

**Advanced Power Technology, Inc.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                    | ** ** | **93-0875072**         |
|---------------------------------|------------|------------------------|
| (State or other Jurisdiction of |       | (I.R.S. Employer       |
| Incorporation or Organization)  |       | Identification Number) |

 

**405 SW Columbia Street, Bend, Oregon  97702**

(Address of principal executive offices and Zip Code)

 

**(541) 382-8028**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to the filing requirements for thepast 90 days.  Yes ý     No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes ý     No o

 

The number of shares ofthe Registrant’s Common Stock outstanding as August 1, 2005 was 10,784,883shares.

 

 

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**ADVANCED POWER TECHNOLOGY, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

 
| **Part I**  | **Financial  Information** | ** **                                                                                             |
|------------------|----------------------------|--------------------------------------------------------------------------------------------------------|
|             |                       |                                                                                                   |   |
|             |                       |                                                                                                   |   |
|             | Item 1.                    | Financial Statements (unaudited):                                                                      |   |
|             |                       |                                                                                                   |   |
|             |                       | Consolidated  Balance Sheets as of June 30, 2005 and December 31, 2004                       |   |
|             |                       |                                                                                                   |   |
|             |                       | Consolidated  Statements of Operations for the three and six months ended June 30,  2005 and 2004 |   |
|             |                       |                                                                                                   |   |
|             |                       | Consolidated  Statements of Cash Flows for the six months ended June 30, 2005 and 2004            |   |
|             |                       |                                                                                                   |   |
|             |                       | Notes  to Consolidated Financial Statements                                                            |   |
|             |                       |                                                                                                   |   |
|             | Item 2.                    | Management’s Discussion and Analysis of Financial  Condition and Results of Operations            |   |
|             |                       |                                                                                                   |   |
|             | Item 3.                    | Quantitative and Qualitative Disclosure About Market  Risk                                             |   |
| ** **       | ** **                 | ** **                                                                                             | ** ** |
|             | Item 4.                    | Controls and Procedures                                                                                |   |
|             |                       |
| **Part II** | **Other Information**      | ** **                                                                                             |
|             |                       |                                                                                                   |
|             | Item 4.                    | Submission of Matters to a Vote of Security Holders                                                    |   |
|             |                       |                                                                                                   |   |
|             | Item 6.                    | Exhibits                                                                                               |   |
|             |                       |                                                                                                   |   |
|             |                       | Signature                                                                                              |   |
|             |                       |                                                                                                   |   |
|             |                       | Exhibits                                                                                               |   |

 

2

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**ITEM 1. FINANCIAL STATEMENTS**

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands, except share amounts)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **2005**          | ** ** | **2004**              | ** ** |
|                                                                                                                                                                                           |       |              |       |                  |       |
| **Assets**                                                                                                                                                                                     | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                                |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                     |       | $                 | 1,527      |                  | $          | 4,149 |   |
| Short-term  investments in available-for-sale securities                                                                                                                                       |       | 9,949             |       | 11,675                |       |
| Accounts  receivable, net of allowance of $178 (2005) and $192 (2004)                                                                                                                          |       | 9,824             |       | 10,044                |       |
| Inventories, net                                                                                                                                                                               |       | 13,730            |       | 14,647                |       |
| Prepaid expenses  and other current assets                                                                                                                                                     |       | 1,954             |       | 2,196                 |       |
| Total current  assets                                                                                                                                                                          |       | 36,984            |       | 42,711                |       |
| Property and  equipment, net of accumulated amortization and depreciation of $18,674 (2005)  and $16,994 (2004)                                                                                |       | 10,946            |       | 11,357                |       |
| Long-term  investments in available-for-sale securities                                                                                                                                        |       | 1,000             |       | 1,000                 |       |
| Other assets                                                                                                                                                                                   |       | 53                |       | 110                   |       |
| Intangible  assets, net of accumulated amortization of $3,661 (2005) and $3,030 (2004)                                                                                                         |       | 7,437             |       | 7,734                 |       |
| Goodwill                                                                                                                                                                                       |       | 15,570            |       | 15,570                |       |
| Total assets                                                                                                                                                                                   |       | $                 | 71,990     |                  | $          | 78,482 |   |
|                                                                                                                                                                                           |       |              |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                  |       |              |       |                  |       |
| Current  liabilities:                                                                                                                                                                          |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                               |       | $                 | 3,236      |                  | $          | 4,143 |   |
| Accrued expenses                                                                                                                                                                               |       | 2,772             |       | 2,193                 |       |
| Total current  liabilities                                                                                                                                                                     |       | 6,008             |       | 6,336                 |       |
| Other long term  liabilities                                                                                                                                                                   |       | 99                |       | 108                   |       |
| Total  liabilities                                                                                                                                                                             |       | 6,107             |       | 6,444                 |       |
|                                                                                                                                                                                           |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                    |       |              |       |                  |       |
| Preferred stock,  par value $.001, 1,000,000 shares authorized; no shares issued and  outstanding                                                                                              |       | —            |       | —                |       |
| Common stock,  par value $.01, 19,000,000 shares authorized; 10,896,327 issued and  10,779,477 shares outstanding in 2005; 10,804,620 shares issued and  10,687,770 shares outstanding in 2004 |       | 109               |       | 108                   |       |
| Additional  paid-in capital                                                                                                                                                                    |       | 89,839            |       | 89,138                |       |
| Treasury stock,  at cost, 116,850 shares                                                                                                                                                       |       | (1,761            | )          | (1,761                | )          |
| Deferred stock  compensation                                                                                                                                                                   |       | (46               | )          | —                |       |
| Accumulated  other comprehensive income                                                                                                                                                        |       | 311               |       | 545                   |       |
| Accumulated  deficit                                                                                                                                                                           |       | (22,569           | )          | (15,992               | )          |
| Total  stockholders’ equity                                                                                                                                                               |       | 65,883            |       | 72,038                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                               |       | $                 | 71,990     |                  | $          | 78,482 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(In thousands, except per share amounts)**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                       |       |                                  |       |                                |       |   |   |   |   |
| Revenue, net                                                                               |       | $                                     | 15,176     |                                | $          | 18,061 |   | $ | 29,308 |   | $ | 33,154 |   |
| Cost of goods  sold                                                                        |       | 10,182                                |       | 10,915                              |       | 20,292 |   | 20,282 |   |
| Amortization of  technology rights and other charges                                       |       | 269                                   |       | 274                                 |       | 538 |   | 548 |   |
| Total cost of  goods sold                                                                  |       | 10,451                                |       | 11,189                              |       | 20,830 |   | 20,830 |   |
| Gross profit                                                                               |       | 4,725                                 |       | 6,872                               |       | 8,478 |   | 12,324 |   |
| Operating  expenses:                                                                       |       |                                  |       |                                |       |   |   |   |   |
| Research and  development                                                                  |       | 1,205                                 |       | 783                                 |       | 2,372 |   | 1,670 |   |
| Selling, general  and administrative                                                       |       | 3,665                                 |       | 5,130                               |       | 7,624 |   | 9,240 |   |
| Restructuring  charges                                                                     |       | 124                                   |       | 115                                 |       | 169 |   | 321 |   |
| In-process  research and development charges                                               |       | (28                                   | )          | —                              |       | 4,868 |   | — |   |
| Total operating  expenses                                                                  |       | 4,966                                 |       | 6,028                               |       | 15,033 |   | 11,231 |   |
| Income (loss)  from operations                                                             |       | (241                                  | )          | 844                                 |       | (6,555 | ) | 1,093 |   |
| Interest income,  net                                                                      |       | 73                                    |       | 41                                  |       | 128 |   | 81 |   |
| Other income (expense),  net                                                               |       | (69                                   | )          | 12                                  |       | (120 | ) | 6 |   |
| Income (loss)  before income tax benefit                                                   |       | (237                                  | )          | 897                                 |       | (6,547 | ) | 1,180 |   |
| Income tax  expense                                                                        |       | —                                |       | 28                                  |       | 30 |   | 28 |   |
| Net income  (loss)                                                                         |       | $                                     | (237       | )                                   | $          | 869 |   | $ | (6,577 | ) | $ | 1,152 |   |
|                                                                                       |       |                                  |       |                                |       |   |   |   |   |
| Net income  (loss) per share:                                                              |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                                                      |       | $                                     | (0.02      | )                                   | $          | 0.08 |   | $ | (0.61 | ) | $ | 0.11 |   |
| Diluted                                                                                    |       | (0.02                                 | )          | 0.08                                |       | (0.61 | ) | 0.10 |   |
| Weighted average  number of shares used in the computation of net income (loss) per share: |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                                                      |       | 10,716                                |       | 10,605                              |       | 10,706 |   | 10,556 |   |
| Diluted                                                                                    |       | 10,716                                |       | 11,261                              |       | 10,706 |   | 11,212 |   |

 

See accompanying notes to consolidated financial statements.

 

4

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** **   | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|--------------|-------------------------------------|------------|
| ** **                                                                                | ** **   | **2005**                            | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                                    |         |                                |       |   |   |
| Net income  (loss)                                                                        |         | $                                   | (6,577     | ) | $ | 1,152 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |         |                                |       |   |   |
| Depreciation                                                                              |         | 1,627                               |       | 1,685 |   |
| Amortization of  intangible assets                                                        |         | 631                                 |       | 537 |   |
| Inventory  provision                                                                      |         | 100                                 |       | 169 |   |
| In-process  research and development charges                                              |         | 4,868                               |       | — |   |
| Amortization of  deferred stock compensation                                              |         | 28                                  |       | 21 |   |
| Amortization of  investment premium                                                       |         | 4                                   |       | 1 |   |
| Deferred gain on  sale-leaseback                                                          |         | (9                                  | )          | (8 | ) |
| Loss on disposal  of equipment                                                            |         | 64                                  |       | 2 |   |
| Changes in  operating assets and liabilities, net of acquisition:                         |         |                                |       |   |   |
| Accounts  receivable                                                                      |         | 265                                 |       | (3,344 | ) |
| Inventories                                                                               |         | 653                                 |       | (749 | ) |
| Prepaid expenses  and other assets                                                        |         | 305                                 |       | 141 |   |
| Accounts payable  and accrued expenses                                                    |         | (446                                | )          | 1,175 |   |
| Net cash  provided by operating activities                                                |         | 1,513                               |       | 782 |   |
| Cash flows from  investing activities:                                                    |         |                                |       |   |   |
| Purchases of  available-for-sale securities                                               |         | (6,201                              | )          | (5,710 | ) |
| Proceeds from  sale of available-for-sale securities                                      |         | 7,925                               |       | 4,500 |   |
| Acquisition, net  of cash acquired                                                        |         | (4,985                              | )          | — |   |
| Purchase of  property and equipment                                                       |         | (961                                | )          | (1,861 | ) |
| Net cash usedby  investing activities                                                     |         | (4,222                              | )          | (3,071 | ) |
| Cash flows from  financing activities:                                                    |         |                                |       |   |   |
| Payments on  capital lease obligations                                                    |         | (2                                  | )          | (3 | ) |
| Proceeds from  exercise of stock options                                                  |         | 124                                 |       | 493 |   |
| Net cash  provided by financing activities                                                |         | 122                                 |       | 490 |   |
| Effects of  exchange rate changes on cash                                                 |         | (35                                 | )          | 3 |   |
| Net change in  cash and cash equivalents                                                  |         | (2,622                              | )          | (1,796 | ) |
| Cash and cash  equivalents at beginning of period                                         |         | 4,149                               |       | 3,664 |   |
| Cash and cash  equivalents at end of period                                               |         | $                                   | 1,527      |   | $ | 1,868 |   |
|                                                                                      |         |                                |       |   |   |
| Supplemental  disclosure of cash flow information:                                        |         |                                |       |   |   |
| Cash paid during  the period for:                                                         | Interest     |                                | $          | 6 |   | $ | 19 |   |
|                                                                                      | Income taxes |                                | 34         |   | 48 |   |
|                                                                                      |         |                                |       |   |   |
| Supplemental  disclosure of noncash activities:                                           |         |                                |       |   |   |
| Issuance of  stock options in acquisition                                                 |         | $                                   | 570        |   | — |   |

 

See accompanying notes to consolidated financial statements.

 

5

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**ADVANCED POWER TECHNOLOGY, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(In thousands, except share amounts)**

**(Unaudited)**

 

**Note 1. Basisof Presentation**

 

Theaccompanying unaudited consolidated financial statements include normalrecurring adjustments necessary for a fair presentation of Advanced PowerTechnology, Inc.’s (APT) interim results. The consolidated financial statements and notes in this Form 10-Qare presented as permitted by Regulation S-X, and as such, they do not containcertain information included in APT’s 2004 annual consolidated financialstatements and notes.  This Form 10-Qshould be read in conjunction with APT’s consolidated financial statements andnotes included in its Annual Report on Form 10-K for the year ended December 31,2004.  The financial information as of December 31,2004 is derived from the audited consolidated financial statements as filedwith APT’s Annual Report on Form 10-K for the year ended December 31,2004.  The results of operations for thethree and six month periods ended June 30, 2005 are not necessarilyindicative of the results expected for the entire fiscal year ending December 31,2005.

 

APT’sfinancial quarters are 13 week periods. The second quarter of 2005 ended on July 3,2005 and the second quarter of 2004 ended on July 4, 2004.  For convenience, the first quarters of 2005and 2004 are both shown as ended on June 30.

 

**Note 2.Summary of Significant Accounting Policies**

 

***(a)******                                 SalesReturns and Allowances***

 

The balancesand changes in reserve for sales allowances, warranties and returns for thethree and six months ended June 30, 2005 and 2004 are as follows:

 
| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                          | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Balance –  beginning of period |       | $                                     | 679        |                                | $          | 313 |   | $ | 716 |   | $ | 431 |   |
| Provisions                          |       | 757                                   |       | 400                                 |       | 1,547 |   | 719 |   |
| Charge offs                         |       | (657                                  | )          | (190                                | )          | (1,484 | ) | (627 | ) |
| Balance – end of  period       |       | $                                     | 779        |                                | $          | 523 |   | $ | 779 |   | $ | 523 |   |

 

***(b)******                                 Stock-BasedCompensation***

 

APThas elected to continue to apply the prescribed accounting in Opinion 25 andprovide the required disclosures per SFAS 123 and SFAS 148. APT accounts forequity instruments issued to non-employees in accordance with the provisions ofSFAS 123 and Emerging Issues Task Force consensus on Issue No. 96-18,“Accounting for Equity Instruments that are Issued to Other than Employees, forAcquiring or in Conjunction with Selling Goods or Services.”

 

In December 2004,the FASB finalized SFAS No. 123R “Share Based Payment,” which will beeffective for annual reporting periods beginning after December 15, 2005.The new standard will require us to expense stock based compensation. UnderSFAS No. 123R, we must evaluate and determine the appropriate fair valuemodel to be used for valuing share-based payments, the amortization method for compensationcost and the transition method to be used at the date of adoption. We arecurrently evaluating the provisions of FAS 123R and expect that the adoption onJanuary 1, 2006 will have a material impact on the Company’s consolidatedresults of operations and earnings per share, as the stock based compensationexpense will be charged directly against our reported earnings. We do notexpect the accounting change to materially affect our liquidity as equity-basedcompensation is a non-cash expense.

 

6

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On July 22,2005, the Company announced that it accelerated the vesting of certain unvestedstock options awarded to its employees, officers and directors under its stockoption plans.  The acceleration appliesonly to those options with an exercise price of $8.00 or greater, which wereout-of-the-money at the time of the modification.  The closing sales price of APTI stock on theNASDAQ National Market on July 22, 2005 was $7.97.  As a result of this action, options topurchase approximately 244,000 shares became exercisable on July 22, 2005.In accordance with APB 25, the modification of these grants will not result inany charge to income in the third quarter of 2005. The Company believes thatthis action will result in lower compensation expense recorded in our resultsfrom operations once the provisions of SFAS 123R go into effect beginning January 1,2006 for APT. The expected impact of this action is to include an additional $500of stock compensation expense in our pro forma disclosures for the thirdquarter of 2005, the period the modification was approved. The fourth quarterof 2005 pro forma compensation expense disclosure will be reduced by $115. Thefinancial impact in 2006, 2007, 2008, and 2009 will be to reduce thecompensation expense recorded by $260, $84, $34, and $7, respectively.

 

HadAPT determined compensation cost based on the fair value at the grant date forits stock options under SFAS 123, APT’s net income (loss) would have beenthe pro forma amounts indicated in the table below.

 
| ** **                                                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Net income  (loss), as reported                                                           |       | $                                     | (237       | )                                   | $          | 869 |   | $ | (6,577 | ) | $ | 1,152 |   |
| Add: Stock based  compensation included in reported net income (loss)                     |       | 10                                    |       | 11                                  |       | 28 |   | 21 |   |
| Deduct: Stock  based compensation determined under fair value based method for all awards |       | (250                                  | )          | (247                                | )          | (499 | ) | (460 | ) |
| Pro forma net  income (loss)                                                              |       | $                                     | (477       | )                                   | $          | 633 |   | $ | (7,048 | ) | $ | 713 |   |
|                                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Income (loss)  per share:                                                                 |       |                                  |       |                                |       |   |   |   |   |
| Basic – as  reported                                                                 |       | $                                     | (0.02      | )                                   | $          | 0.08 |   | $ | (0.61 | ) | $ | 0.11 |   |
| Basic – pro  forma                                                                   |       | (0.04                                 | )          | 0.06                                |       | (0.66 | ) | 0.07 |   |
|                                                                                      |       |                                  |       |                                |       |   |   |   |   |
| Diluted – as  reported                                                               |       | $                                     | (0.02      | )                                   | $          | 0.08 |   | $ | (0.61 | ) | $ | 0.10 |   |
| Diluted – pro  forma                                                                 |       | (0.04                                 | )          | 0.06                                |       | (0.66 | ) | 0.06 |   |

 

Theeffects of applying SFAS 123 in this pro forma disclosure are not indicative offuture amounts and additional awards are anticipated in future years.

 

Thefair value of the compensation costs reflected in the above pro forma amounts wasdetermined using the Black-Scholes option pricing model and the weightedaverage assumptions as follows:

 
| ** **               | ** ** | **2005**      | ** ** | **2004** | ** ** |
|--------------------------|------------|---------------|------------|----------|------------|
|                     |       |          |       |     |       |
| Risk-free  interest rate |       | 4.0           | %          | 3.0-3.7  | %          |
| Expected  dividend yield |       | 0             | %          | 0        | %          |
| Expected life            |       | 6.5-6.7 years |       | 5 years  |       |
| Volatility               |       | 76-82         | %          | 100      | %          |

 

***(c)******                                  NetIncome (Loss) Per Share***

 

Basicnet income (loss) per share is computed using the weighted average number ofshares of common stock outstanding for the period. Diluted net income per shareis computed using the weighted average number of

 

7

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shares of common stock and dilutive potential common shares related tostock options and warrants outstanding during the period.  Anti-dilutive potential common shares areexcluded from the diluted net income share calculation.  Dilutive net loss per share excludes allpotential common shares from the calculation as the impact would beanti-dilutive.  Incremental dilutiveshares included in the calculation of diluted net income per share and incrementalanti-dilutive shares that were excluded from the calculation of diluted netincome per share for the three and six months ended June 30, 2005 and 2004are summarized in the following table:

 
| ** **                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                              |       |                                  |       |                                |       |   |   |   |   |
| Incremental  dilutive shares included in diluted net income per share calculation |       | —                                |       | 656,000                             |       | — |   | 656,000 |   |
| Anti-dilutive  shares excluded from diluted net loss per share calculation        |       | 1,442,000                             |       | 257,000                             |       | 1,440,000 |   | 543,000 |   |

 

***(d)******                                 Goodwilland Intangibles***

 

APTvalues goodwill and intangible assets in accordance with SFAS 142, “Goodwilland Other Intangible Assets.” The costs of internally developed intangibleassets are expensed as incurred.  Thecosts of acquired intangible assets are recorded at fair value at acquisition.Intangible assets with finite lives are amortized using the straight-linemethod over their estimated useful lives, the majority of which was estimatedat ten years, and evaluated for impairment in accordance with SFAS 144. Amortizationof intangible assets was approximately $315 in the second quarter of 2005 comparedto $267 in the second quarter of 2004, and $631 in the first six months of 2005compared to $537 in the first six months of 2004. Excluding the impact of anyfuture acquisitions, amortization of intangible assets will be approximately $1,262in 2005, $1,150 in 2006 and 2007, and $1,076 in 2008 and 2009.

 

***(e)******                                  IncomeTaxes***

 

Incometaxes are accounted for under the asset and liability method. Under the assetand liability method, deferred tax assets and liabilities are recognized forthe future tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin income in the period that includes the enactment date. A valuation allowanceis established when necessary to reduce deferred tax assets to the amountexpected to be realized. During the fourth quarter of 2003, the Companydetermined that a full valuation allowance should be recorded against its netdeferred tax assets. As of June 30, 2005, the Company still maintains afull valuation allowance against its deferred tax assets, net of certain deferredtax liabilities.

 

***(f)******                                    Reclassifications***

 

Certain reclassifications have been made to the prior year statement of cash flows to conform to current presentation. These changes had no impact on the previously reported balance sheet, results of operations, or shareholders’ equity.  The reclassification related to certain auction rate securities which are now classified as short-term investments in available-for-sale securities and which had previously been classified as cash and cash equivalents. The amounts for such auction rate securities as of June 30, 2005 and December 31, 2004 were $7,150 and $7,875, respectively.

 

8

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**Note 3.Acquisitions**

 

On December 22, 2004Advanced Power Technology, Inc. (APT) entered into a definitive agreementand plan of merger with PowerSicel, Inc. The acquisition wascompleted on January 7, 2005 and the company was re-named as AdvancedPower Technology Colorado, Inc.

 

Underthe terms of the agreement, APT paid approximately $5.4 million in cash fromoperations in exchange for all of the existing shares of PowerSicel, issued63,525 APT stock options in exchange for the PowerSicel stock options andissued 19,402 APT stock options for the retention of key employees. PowerSicelInc. was determined to be a development stage company, in accordance with EITF98-3 “Determining Whether a Nonmonetary Transaction Involves Receipt ofProductive Assets or of a Business.” Therefore, the transaction was considereda purchase of tangible and intangible assets, which were accounted for inaccordance with SFAS 142 “Goodwill and Other Intangible Assets.”  APT obtained a third party valuation study toestimate the fair value of the acquired intangible assets.  APT began to consolidate the financial resultsof PowerSicel on January 7, 2005. The purchase price for accounting purposes was derived as follows:

 
| ** **            | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
|-----------------------|------------|------------|------------|----------------|------------|
| Cash paid at  closing |       |       |       | $              | 5,387      |   |
| Exchanged  options    |       | 63,525     |       | 458            |       |
| Retention  options    |       | 19,402     |       | 112            |       |
| Direct costs          |       |       |       | 113            |       |
| Total purchase  price |       |       |       | $              | 6,070      |   |

 

Allvested and unvested PowerSicel options exchanged for APT options and retentionoptions issued by APT are included as part of the purchase price based on theirfair value.  The estimated fair value ofthe options is based upon the Black-Scholes model using the followingassumptions:

 
| ** **               | ** ** | **Exchanged  Options** | ** ** | **Retention  Options** | ** ** |
|--------------------------|------------|------------------------|------------|------------------------|------------|
| Expected life            |       | 3.0 years              |       | 6.25 years             |       |
| Expected  volatility     |       | 69                     | %          | 82                     | %          |
| Risk-free  interest rate |       | 3.4                    | %          | 4.0                    | %          |
| Expected  dividend yield |       | 0.0                    | %          | 0.0                    | %          |

 

PowerSicel’s expertise insilicon carbide and other compound semiconductor technology and productscomplement APT’s current portfolio of RF products which operate at frequenciesranging from 1 MHz to 4 GHz and are sold into applications such as semiconductorcapital equipment, medical imaging, radar, avionics and wirelesscommunications. The acquisition adds valuable development capability to APT’score capability in switching and RF power transistors allowing APT to betterserve its current markets and to expand into new markets.

 

The allocation of purchase price was as follows:

 
| Working capital                                          |   | $     | 483    |   |
|----------------------------------------------------------|--------|-------|--------|--------|
| Property and equipment                                   |   | 319   |   |
| Deferred compensation on unvested stock options  assumed |   | 66    |   |
| Acquired in-process research and development             |   | 4,868 |   |
| Acquired intangible assets                               |   | 334   |   |
| Allocated purchase price                                 |   | $     | 6,070  |   |

 

In connection with thisacquisition, APT originally recorded a charge of $4,896 for the write-off ofin-process research and development (IPR&D), which was reduced in the secondquarter of 2005 by $28 upon finalization of the

 

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IPR&D amount.  The value assigned to IPR&D related toresearch projects for which technological feasibility had not yet beenestablished and for which there was no other feasible alternative use for thetechnology.  In addition, APT recordedintangible assets of $223 and $111 for PowerSicel’s assembled workforce and forcertain employment contracts of key PowerSicel executives, respectively. Theassembled workforce intangible asset will be amortized over three years and theemployment contracts intangible asset will be amortized over one year,reflecting the expected life of the assets. The IPR&D and intangible asset amounts are not deductible for tax purposes.

 

The value of IPR&Dwas determined by estimating the net cash flows from the sale of products withsilicon carbide technology and discounting the net cash flows back to theirpresent value using a risk adjusted interest rate of 30%.  The estimated net cash flows were based onmanagement’s estimates of related revenue, costs of goods sold, operatingexpenses, income taxes, and additional costs to completion for the in-processtechnology.

 

The value of theassembled workforce was determined by estimating the cost to independentlyrecruit, hire, and train the acquired PowerSicel workforce.  The value of the employment contracts wasdetermined by calculating the difference between estimated net cash flows withand without the employment contracts over a two year period.  The net cash flows were discounted back totheir present value using a risk adjusted interest rate of 23%.

 

Thenature of the efforts to develop the in-process technology into commerciallyviable products principally relate to the completion of all designing,prototyping, verification and testing activities that are necessary toestablish that the product can be produced to meet its design specifications,including function, features, and technical performance requirements.  PowerSicel had one main product group underdevelopment at the acquisition date that met the minimum developmentrequirements for IPR&D projects.  Theproject included the commercialization of silicon carbide transistors.  The project was approximately 80% complete atthe time of the acquisition and was expected to be complete within nine totwelve months.  The estimated aggregatecost to complete the project was $260.

 

**Note 4.Restructuring Charges**

 

Restructuringcosts are accounted for in accordance with SFAS 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” A liability for a cost associatedwith an exit or disposal activity is recognized and measured at fair value inthe period the liability is incurred, except for liabilities related to ongoingservice requirements which are recognized over the service period. All otherrestructuring charges are directly expensed in the period they are paid.

 

Aspart of management’s cost reduction efforts, the Company announced in November of2003 restructuring actions intended to improve manufacturing efficiencies andlower administrative costs. The actions include consolidation of certainadministrative functions, rationalization of internal and external assembly andtest manufacturing, and the reduction of rent expense through the purchase andresale of one of the two buildings currently occupied by the Company’s SantaClara, California subsidiary. These announced actions were in addition topreviously disclosed plans to consolidate the Company’s wafer fabrication plantin Montgomeryville, Pennsylvania to Bend, Oregon. Total restructuring relatedcharges recognized in 2004 were $558, of which $206, $115, $38 and $199 wererecognized in the first, second, third and fourth quarters of 2004,respectively.

 

Thetotal severance related charge recognized in 2004 was $103, which wasrecognized as $65 and $38 in the first and second quarters of 2004,respectively. During the first quarter of 2005 an additional $45 of severancecharges was recognized. The severance charges related to already separatedpersonnel and personnel costs associated with benefits expected to be paid uponcompletion of certain eligible transfer activities. Additional restructuringcosts of $375 associated with costs to exit certain production activities werealso recognized in 2004, of which $141, $77, $38, and $119 were recognized inthe first, second, third and fourth quarters of 2004, respectively.  The charges relate to accelerateddepreciation on certain production related equipment to be abandoned aftershutdown and contractual closing costs.

 

Thebuilding purchase is reported as an asset held for sale and is being marketedfor sale as APT no longer requires the space. In accordance with SFAS 144, anasset held for sale is carried at net estimated fair value. As such, APTrecorded an impairment charge for the building in the fourth quarter of 2004and 2003 of approximately $80 and $350, respectively. Fair value was estimatedbased on comparable sales data of similar commercial space in the

 

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area. The net carrying value of the building as of June 30, 2005was approximately $930 and is included as a component of other current assets.

 

TheCompany estimates that the annual savings from these actions are approximately$1.4 million for cost of goods sold and $800 for selling, general andadministrative costs. The cost savings were realized gradually from theinception of the restructuring actions. The savings in cost of goods sold reached the estimated annual run rateof $350 per quarter in the fourth quarter of 2004, and the savings in selling,general and administrative costs reached the full annualized run rate of $200per quarter in the third quarter of 2004.

 

In July 2005,the Company announced that we would continue consolidating manufacturingoperations and moving certain production activities offshore and woulddisengage from a low growth product line currently with onshoreproduction.  As a result of restructuringactions, $124 of severance pay related charges was recognized in the secondquarter of 2005 and approximately $800 of additional restructuring charges isexpected to be recognized as these actions occur over the next twelve to eighteenmonths. The charges will include severance costs of approximately $600,000 tobe settled in cash, and the non-cash write-off or acceleration of depreciationof certain equipment of approximately $200,000.

 

Thechanges in the reserve for restructuring balance for all restructuringactivities for the three and six months ended June 30, 2005 and 2004 areshown in the table below. Certain of the restructuring charges were expensed asincurred and therefore are not included in the provision.

 
| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                          | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Balance –  beginning of period |       | $                                     | 54         |                                | $          | 155 |   | $ | 60 |   | $ | 178 |   |
| Provisions                          |       | 124                                   |       | 15                                  |       | 124 |   | 143 |   |
| Charge offs                         |       | (42                                   | )          | (47                                 | )          | (48 | ) | (198 | ) |
| Balance – end of  period       |       | $                                     | 136        |                                | $          | 123 |   | $ | 136 |   | $ | 123 |   |

 

**Note 5. ComprehensiveIncome (loss)**

 

Comprehensiveincome (loss) is the total of net income (loss) and all other non-owner changesin equity. Comprehensive income (loss) includes foreign currency translationsand unrealized gains and losses from investments, as presented in the followingtable.

 
| ** **                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                               | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                     |       |                                  |       |                                |       |   |   |   |   |
| Net income  (loss)                                       |       | $                                     | (237       | )                                   | $          | 869 |   | $ | (6,577 | ) | $ | 1,152 |   |
| Other  comprehensive income (loss):                      |       |                                  |       |                                |       |   |   |   |   |
| Unrealized  gain/(loss) on available for sale securities |       | 1                                     |       | (2                                  | )          | 2 |   | (2 | ) |
| Foreign currency  translation adjustment                 |       | (158                                  | )          | 19                                  |       | (236 | ) | 110 |   |
| Comprehensive  income (loss)                             |       | $                                     | (394       | )                                   | $          | 886 |   | $ | (6,811 | ) | $ | 1,260 |   |

 

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**Note 6. Inventories,net**

 
| ** **       | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------|------------|-------------------------|------------|-----------------------------|------------|
|             |       |                    |       |                        |       |
| Raw materials    |       | $                       | 2,886      |                        | $          | 3,003 |   |
| Work in process  |       | 6,291                   |       | 7,061                       |       |
| Finished goods   |       | 4,553                   |       | 4,583                       |       |
| Inventories, net |       | $                       | 13,730     |                        | $          | 14,647 |   |

 

**Note 7. SegmentInformation**

 

APT operates in onesegment and is engaged in the manufacture and marketing of high-performancepower semiconductors and modules for switching and RF applications. Overall,our revenue by geographic area for the second quarter of 2005 was 61.5% inNorth America, 17.5% in Europe and 21.0% in Asia, compared to 59.2% in NorthAmerica, 16.0% in Europe, and 24.8% in Asia during the second quarter of 2004.Our revenue for by geographic area for the first six months of 2005 was 61.6%in North America, 19.4% in Europe, and 19.0% in Asia, compared to 62.0% inNorth America, 15.4% in Europe, and 22.6% in Asia in the first six months of2004. We allocated revenue geographically based on the location to which weship our products.

 

Revenue from our five largest OEM and distributor customers in the secondquarter of 2005 and 2004 accounted for 40.0% and 46.1% of our total revenue,respectively. One customer accounted for 20.9% and 16.1% of our revenue in thesecond quarter of 2005 and 2004, respectively. Revenue from our five largestOEM and distributor customers in the first six months of 2005 and 2004accounted for 38.2% and 46.1% of our total revenue, respectively. One customeraccounted for 19.9% of our revenue in the first six months of 2005 and 16.3% ofour revenue in the first six months of 2004. No other customer exceeded 10.0%of our revenue during these periods. We generally provide our customers a 12-monthrepair or replacement warranty.

 

**Note 8. Line of Credit**

 

On March 31, 2005,we obtained a $10 million revolving line of credit with Silicon Valley Bank. Wecurrently have no advances outstanding under this line of credit.  The Company paid commitment fees of 20 basispoints upon closing and will pay 20 basis points per year on the unused portionof the line of credit, payable quarterly. Amounts borrowed under the credit agreement are secured by certaintangible and intangible assets of the Company. The credit agreement expires on June 30,2006, at which time all amounts borrowed and related interest are immediatelypayable if the agreement is not renewed.

 

**Note 9. Commitmentsand Contingencies**

 

From time to time theCompany is involved in various legal matters that arise out of the ordinaryconduct of our business, including those related to litigation overintellectual property rights, commercial transactions, contracts, productliability, environmental, safety and health, and employment matters.  The Company is not currently involved in anylegal proceedings. The Company accrues loss contingencies in connection withits litigation when it is probable that a loss has occurred and the amount ofthe loss can be reasonably estimated.

 

We have certain indemnification obligations to customers with respectto the infringement of third party intellectual rights by our products. Noassurance can be provided that future assertions of infringement ormisappropriation will not occur, or that claims for indemnification bycustomers of our products will not be made, or that assertions of infringementor misappropriation (especially if proven to be true) will not harm ourbusiness.

 

On June 22,2005, we entered into a wafer production agreement with CSMC Manufacturing Co.,Ltd. for the provision of foundry services to be performed by CSMC TechnologiesFab 1 Co., Ltd. (CSMC), a subsidiary located in Wuxi, Jiangsu Province, China.CSMC will produce and supply wafers to the Company according to the

 

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terms and conditions of the contract. There are no financialcommitments from the contract until production begins, which is expected inearly 2006.

 

APThas agreements with foundry partners in Europe, Taiwan, and China to processwafers. APT also has agreements with subcontractors in the Philippines andMalaysia for assembly and testing of most of its plastic encapsulated products.In addition, APT enters purchase order obligations in the normal course ofbusiness for the purchase of raw materials, capital equipment, and othersupplies. APT’s total commitments at June 30, 2005 and December 31,2004 under these purchase obligations were approximately $14,039 and $12,085,respectively.

 

**Note 10.Subsequent Event: Restructuring**

 

On July 21,2005, the Company announced that we would continue consolidating manufacturingoperations and moving certain production activities offshore and woulddisengage from a low growth product line currently with onshoreproduction.  For details regarding theserestructuring actions, refer to Note 4. Restructuring Charges of this Form 10-Q.

 

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

 

This discussion and analysisis intended to be read in conjunction with Management’s Discussion and Analysisof Financial Condition and Results of Operations set forth in our Annual Reporton Form 10-K for the year ended December 31, 2004.

 

**Forward-looking Statements and Risk Factors Affecting Business andResults of Operations**

 

All statements and trendanalyses contained in this item and elsewhere in this report on Form 10-Qrelative to the future constitute “forward-looking” statements within themeaning of the Private Securities Litigation Reform Act of 1995.Forward-statements are subject to the business and economic risks faced by usand our actual results of operations may differ materially from those containedin the forward-looking statements. In addition, results of operations for theperiods discussed below should not be considered indicative of the results tobe expected in any future period and fluctuations in operating results mightresult in fluctuations in the market price of our common stock. Our quarterlyand annual operating results may vary significantly depending on many factors,including but not limited to the ability of subcontractors and key vendors tomeet their delivery commitments; unfavorable changes in industry andcompetitive conditions; our mix of product shipments; the accuracy of ourcustomers’ forecasts; the effectiveness of our efforts to control and reducecosts; and other risks detailed in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations - Risk Factors Affecting Business andResults of Operations” in our Annual Report on Form 10-K for the yearended December 31, 2004, filed with the Securities and ExchangeCommission.

 

**BusinessOverview**

 

We are a leading designer, manufacturer and marketer ofhigh-performance RF and switching power semiconductors. We are primarilyfocused on the high-power, high-speed segment of the power semiconductormarket. Power semiconductors function as power amplifiers and power switches.They increase system efficiency and reliability by precisely managing andregulating electricity and converting it into the form required by electricaland electronic products. Our products permit the design of more compact endproducts and improve system features and functionality. Our products are foundin diverse applications, such as F-22 fighter cockpits, the Boeing 777 back-uppower system, the International Space Station, air traffic control radarsystems, semiconductor capital equipment, MRI systems, arc welding equipment,industrial lasers, solar power panels and base stations for wirelesscommunications.

 

Power semiconductors generally dissipate more than one watt of powerand have a broad range of frequency capabilities. We primarily focus onhigh-power, high-speed devices that dissipate at least several hundred watts ofpower and require operating frequencies greater than 20 kHz, or 20,000 cyclesper second (e.g., the product may switch on and off up to 20,000 times persecond).

 

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Certain markets we serve, such as the semiconductorcapital equipment and communications and data processing markets, havehistorically been quite cyclical. During periods of contraction in thesecyclical markets, we have experienced downward pressure on our revenue andgross margins. We have attempted to reduce this volatility through acquisitionsand product development in less cyclical markets, such as the militaryaerospace and medical equipment markets, and by rigorously managing our operatingexpenses as well as reducing the fixed portion of our manufacturing costs throughincreased offshore production.

 

We sell our products in North America, Europe, and Asia primarilypursuant to customer purchase orders. We sell through a network of independentsales representatives and distributors. We recognize revenue upon shipment ofour products. We have operations in Bend, Oregon, Santa Clara, California,Montgomeryville, Pennsylvania, Boulder, Colorado, and Bordeaux, France. We alsomake use of subcontract manufacturers for the fabrication of our wafers and forassembly and test operations. Our locations are more fully described in “Business—Properties”in our 2004 Form 10-K.

 

In 2002, we acquired GHz Technology and the product lines and certainassets of Microsemi RF Products to help us further penetrate the markets for RFdevices. We believe that these acquisitions have positioned us as a leadingsupplier in bipolar RF power transistors and added substantial RF technology,engineering, manufacturing and marketing capabilities.

 

In September 2004 and January 2005, weacquired the assets of two development stage companies.  In September 2004, we paid $175 in cashfrom operations for the assets of Zeus Semiconductor, Inc., includingprototype inventories, equipment, patents, and other intellectual property. In January 2005,we acquired PowerSicel, Inc. for approximately $5.4 million, from existingcash and marketable securities, in exchange for all of the existing shares ofPowerSicel, 63,525 APT stock options in exchange for the PowerSicel stockoptions and 19,402 APT stock options for the retention of key employees.PowerSicel’s and Zeus Semiconductor’s combined expertise in silicon carbide andother compound semiconductor technology and products complement APT’s currentportfolio of RF products which operate at frequencies ranging from 1 MHz to 4GHz and are sold into applications such as semiconductor capital equipment,medical imaging, radar, avionics and wireless communications. We believe theseacquisitions add valuable development capability to APT’s core capability in RFpower transistors allowing APT to better serve its current markets and toexpand into new markets.

 

As a result of the prior acquisitions made, we recorded acquisitionrelated charges for amortization of intangible assets and deferred compensationamortization of $1,098 in 2004, of which $1,086 was included in cost of goodssold and $12 in operating expenses. In 2004, we acquired the assets, includingprototype inventories, equipment, patents, and other intellectual property froma development stage business, Zeus Semiconductor, Inc. As a result of thistransaction, during the third quarter of 2004 we recorded acquisition relatedcharges for purchased IPR&D of $170. Also recorded in 2004 was $558 ofrestructuring related charges included in operating expenses. These chargesincluded severance related to downsizing and organizational changes we began in2003. The charges also include an additional impairment charge on theadministrative building we purchased in 2003, as well as costs to exit certainproduction activities. The latter charges relate to accelerated depreciation oncertain production related equipment to be abandoned after shutdown andcontractual closing costs. During the third and fourth quarters of 2004 we alsoincurred $225 of charges in connection with the filing and subsequentwithdrawal of a registration statement. The total amount of these items net oftaxes was $2,028. The total charges by quarter were pre-tax $486, $395, $658,$512 and after tax $486, $395, $645, $502, in the first, second, third, andfourth quarters, respectively.

 

In the first six months of 2005, we recorded acquisition relatedcharges for amortization of intangible assets and deferred compensationamortization of $651, of which $538 was included in cost of goods sold and $113in operating expenses.  In connectionwith our January 2005 acquisition of PowerSicel, Inc., we recordedin-process research and development charges of $4,868.  Also recorded in 2005 was $169 ofrestructuring related charges included in operating expenses, of which $45 wasassociated with additional severance related to downsizing and organizationalchanges we began in 2003, and $124 was related to plans announced in July 2005to continue consolidating manufacturing operations, move certain productionactivities offshore and disengage from a small low growth product linecurrently

 

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with onshore production. The total charges for thefirst six months of 2005 pre-tax and after tax were $5,688 and $5,681,respectively.

 

**OurMarkets**

 

We operate on a worldwide basis. As such, our operations are affectedby global, regional and industry-specific economic and political factors. Inthe first six months of 2005, 61.6% of our revenue was from customers in theNorth America, 19.4% from customers in Europe, and 19.0% from customers in Asiaand the rest of the world, compared to 62.0%, 15.4%, and 22.6% for the firstsix months of 2004. We allocate revenue geographically based on the location towhich we ship our products. The markets for our products are diversified, andinclude military and aerospace, semiconductor capital equipment, medical andindustrial, and communications and data processing.

 

We believe demand is being driven by the emergence of new applicationsfor higher power, higher frequency semiconductors that more precisely managepower, and also by the need to increase performance and improve power qualityfor existing applications. We believe demand is also being driven by the needfor more efficient energy use resulting from rising energy costs, governmentmandates and environmental concerns.

 

**BusinessStrategies**

 

Ourgoal is to be the world leader in providing high-performance powersemiconductors for high-power, high-speed applications.  To achieve our goal, we intend to:

 

•                  Increase ourpenetration of core markets and customers and expand globally;

 

•                  Continue todevelop and commercialize leading-edge technology for new and existingapplications;

 

•                  Capitalize onand expand our RF expertise;

 

•                  Continue tooptimize manufacturing operations, including the use of foundries and offshoreproduction; and

 

•                  Seek to enhancegrowth through selective acquisitions

 

**CriticalAccounting Policies and Estimates**

 

Thediscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with U.S. generally accepted accounting principles. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenue andexpenses, and related disclosures of contingent assets and liabilities. On anon-going basis, we evaluate our estimates, including those related to productreturns and warranty obligations, allowance for doubtful accounts, excess andobsolete inventories, income taxes, valuation of goodwill and intangible assetswith indefinite lives, valuation of long-lived assets, and contingencies andlitigation. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities and the timing of revenue recognition that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

We believethe following critical accounting policies involve more significant judgmentsand estimates used in the preparation of our consolidated financial statements.

 

***Revenue Recognition, Sales Allowances, Returns and WarrantyObligations***

 

Werecognize revenue when products are shipped and the customer takes ownershipand assumes risk of loss, collection of the relevant receivable is probable,persuasive evidence of an arrangement exists, and the sales price is fixed ordeterminable. In general, we provide for a one-year repair or replacementwarranty on our products. We use

 

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independent distributors to sell some of our products. Our distributorshave certain stock rotation rights which allow them to rotate, every sixmonths, their products in inventory for a value up to 5% of their purchasesover the preceding six month period in exchange for an order of an equal amountof new product. In addition we may elect to give price protections or otherallowances to our distributors. Price protections may be offered fordistributor inventory on hand when we update our price list. Additional priceallowances may be offered to our distributors in certain competitive biddingsituations in which we may further discount the price.  These price allowances are evaluated asrequested by the distributor on a case by case basis.  Upon shipment, we record an allowance for theestimated cost that may be incurred for product warranty, sales returns, priceallowances and contractual requirements with our distributors based onhistorical experience.

 

Whilewe engage in extensive product quality programs and processes, includingactively monitoring and evaluating the quality of our component suppliers, ourwarranty obligation is affected by product non-conformance rates, materialusage and service delivery costs incurred in correcting a productnon-conformance. Should actual product non-conformance rates, material usage,service delivery costs, or distributor returns differ from our estimates,revisions to the estimated revenue provision would be required.

 

***Allowance for Doubtful Accounts***

 

Wemaintain an allowance for doubtful accounts for estimated losses resulting fromthe inability of our customers to make required payments. We regularly reviewthe adequacy of the allowance after considering the size of the accountsreceivable balance, historical bad debts, the customer’s expected ability topay and our collection history with each customer. We review significantindividual accounts that are past due to determine whether an allowance shouldbe made based on these factors. If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required.

 

***Excess and Obsolete Inventories***

 

Inventoriesare stated at the lower of standard cost (approximates actual cost on afirst-in, first-out basis) or market (net realizable value). We adjustinventory costs for estimated unmarketable (excess) or obsolete inventory toestimated net realizable value based upon assumptions about future demand andmarket conditions. We establish reserves for excess component ordercancellation costs based on estimated net realizable value of the componentspurchased and any additional cancellation charges. We evaluate historical usageof the product, current customer demand, purchase commitments and forecastedusage of the product. If actual market conditions are less favorable than thoseprojected by management, additional adjustments or reserves may be required.

 

***Income Taxes***

 

Werecord a valuation allowance to reduce our deferred tax assets to the amountthat is more likely than not to be realized. We consider future taxable incomeand ongoing prudent and feasible tax planning strategies in assessing the needfor the valuation allowance. In the event we were to determine that we would beable to realize our deferred tax assets in the future in excess of our netrecorded amount, an adjustment to decrease the valuation allowance wouldincrease income in the period such determination was made. Should we determinethat we would not be able to realize all or part of our net deferred tax assetin the future, an adjustment to increase the valuation allowance would becharged to income in the period such determination was made. As of June 30,2005, we had a full valuation allowance recorded against our deferred taxassets, net of certain deferred tax liabilities.

 

***Valuation of Goodwill and Intangible Assets with IndefiniteLives***

 

Wevalue goodwill and intangible assets with indefinite lives in accordance withStatement of Financial Accounting Standards No. (SFAS) 142 “Goodwill andOther Intangible Assets.” Currently we carry a goodwill balance in connectionwith previous acquisitions, but have no other intangible assets with indefinitelives. We annually review goodwill for impairment and when events orcircumstances indicate the carrying value of the asset might exceed its currentfair value. We determine fair value using discounted cash flow analysis andother acceptable valuation methodologies such as market multiples andcomparable transactions. This requires us to make assumptions and estimatesregarding industry economic factors and future profitability. It is our policyto conduct

 

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impairment testing based on our most current business plans, whichreflect changes we anticipate in the economy and industry. If actual resultsare not consistent with our assumptions and judgments, we could be exposed to amaterial impairment charge as a result of writing down the carrying value ofgoodwill.

 

***Valuation of Long-Lived Assets***

 

Wevalue long-lived assets, including intangible assets with finite lives, inaccordance with SFAS 144 “Accounting for the Impairment or Disposal ofLong-Lived Assets.” We evaluate our long-lived assets for impairment wheneverevents or changes in circumstances indicate that the carrying amount may not berecoverable. We determine the potential impairment using undiscounted cash flowanalysis, which requires us to make certain assumptions and estimates regardingindustry economic factors and future profitability. It is our policy to conductimpairment testing based on our most current business plans, which reflectchanges we anticipate in the economy and industry. If actual results are notconsistent with our assumptions and judgments, we could be exposed to amaterial impairment charge as a result of writing down the carrying value oflong-lived assets. If the asset group is determined to be unable to recover thecarrying amount of its assets, then intangible assets are written down first,followed by the other long-lived assets of the operation, to fair value. Fairvalue is determined based on discounted cash flows or appraised values,depending on the nature of the assets. Long-lived assets considered held forsale are valued at the lower of historical cost or fair value less costs tosell. Such assets are not depreciated while so classified.

 

***Contingencies and Litigation***

 

We aresubject to the possibility of various loss contingencies arising in theordinary course of business. We consider the likelihood of loss or impairmentof an asset or the incurrence of a liability, as well as our ability toreasonably estimate the amount of loss in determining loss contingencies. Anestimated loss contingency is accrued when it is probable that an asset hasbeen impaired or a liability has been incurred and the amount of loss can bereasonably estimated. We regularly evaluate current information available to usto determine whether such accruals should be adjusted.

 

**Resultsof Operations**

 

The following tablepresents our consolidated statement of operations data for the periodsindicated as a percentage of net revenue:

 
| ** **                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30, 2004** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                              | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                 |       |                                  |       |                                     |       |   |   |   |   |
| Revenue, net                                         |       | 100.0                                 | %          | 100.0                                    | %          | 100.0 | % | 100.0 | % |
| Cost of goods  sold                                  |       | 67.1                                  |       | 60.5                                     |       | 69.3 |   | 61.2 |   |
| Amortization of  technology rights and other charges |       | 1.8                                   |       | 1.5                                      |       | 1.8 |   | 1.6 |   |
| Total cost of  goods sold                            |       | 68.9                                  |       | 62.0                                     |       | 71.1 |   | 62.8 |   |
| Gross profit                                         |       | 31.1                                  |       | 38.0                                     |       | 28.9 |   | 37.2 |   |
| Operating  expenses:                                 |       |                                  |       |                                     |       |   |   |   |   |
| Research and  development                            |       | 8.0                                   |       | 4.3                                      |       | 8.1 |   | 5.0 |   |
| Selling, general  and administrative                 |       | 24.1                                  |       | 28.4                                     |       | 26.0 |   | 27.9 |   |
| Restructuring  charges                               |       | 0.8                                   |       | 0.6                                      |       | 0.6 |   | 1.0 |   |
| In-process  research and development charges         |       | (0.2                                  | )          | —                                   |       | 16.6 |   | — |   |
| Total operating  expenses                            |       | 32.7                                  |       | 33.3                                     |       | 51.3 |   | 33.9 |   |
| Income (loss)  from operations                       |       | (1.6                                  | )          | 4.7                                      |       | (22.4 | ) | 3.3 |   |
| Interest and  other income (expense), net            |       | —                                |       | 0.3                                      |       | 0.1 |   | 0.3 |   |
| Income (loss)  before income tax benefit             |       | (1.6                                  | )          | 5.0                                      |       | (22.3 | ) | 3.6 |   |
| Income tax  expense (benefit)                        |       | —                                |       | 0.2                                      |       | 0.1 |   | 0.1 |   |
| Net income  (loss)                                   |       | (1.6                                  | )%         | 4.8                                      | %          | (22.4 | )% | 3.5 | % |

 

17

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*Revenue.* Revenue for the secondquarter of 2005 was $15.2 million, sequentially up 7.4% from $14.1 million inthe first quarter of 2005 and down 16.0% from $18.1 million in the secondquarter of 2004. The increase in revenue sequentially is primarily attributableto the semiconductor capital equipment market, which increased by 60.4% from$1.7 million in the first quarter of 2005 to $2.7 million in the second quarterof 2005. We believe the sequential improvement in this market is the result ofthe completion of an inventory correction by our customers.  We expect that shipments will more closelymatch our customers’ consumption now that the inventory correction is complete.

 

Revenue for the first six months of 2005 was $29.3million, down 11.6% from $33.2 million in the first six months of 2004. Thedecline in revenue for quarter over quarter and year to date over year to date wasprimarily due to a decline in revenue in the semiconductor capital equipmentmarket and a decline in the communications and data processing market,partially offset by an increase in revenue in our military/aerospace market.The decline in revenue in the semiconductor capital equipment market was due toboth reduced end market demand and an inventory correction that was underway atour customers, as previously mentioned. Compared to the prior year quarter, thesemiconductor capital equipment market was down 52.3%, the communications anddata processing market was down 20.6%, and military/aerospace market was up16.8%. Compared to the prior year six months, the semiconductor capitalequipment market was down 57.6%, the communications and data processing marketwas down 13.3%, and military/aerospace market was up 24.3%. We expectsequential growth in our industrial/medical and military/aerospace markets inthe third quarter of 2005. We anticipate flat end-market demand in thesemiconductor capital equipment market in the second half of 2005.

 

*Gross Profit*. Gross margin forthe second quarter of 2005 was 31.1%, compared to 38.0% in the second quarterof 2004, and 26.6% in the first quarter of 2005.  Included in our costs of goods sold in the firstand second quarter of 2005 and the second quarter of 2004, was $269,000 and$274,000, of amortization of technology rights assets, respectively. Theimprovement in gross profit margin sequentially was primarily due to higherfixed cost absorption at our Bend, Oregon facility on higher volumes,reflecting the improvement in the semiconductor capital equipment market, asmentioned in the *Revenue*section above.  However, fixed cost absorption in the secondquarter of 2005 was still lower relative to the year ago quarter, as our salesto the semiconductor capital equipment market were still much lower than theyear ago quarter. This was partially offset by an increase in the higher grossmargin RF product revenue from our Santa Clara, California facility.

 

Gross margin for the first six months of 2005 was 28.9%,compared to 37.2% in the first six months of 2004. Included in our costs ofgoods sold in the first six months of 2005 and 2004, was $538,000 and $548,000of amortization of technology rights assets, respectively.  The decline in gross profit margin over theprior year was due to reduced fixed cost absorption on lower productionvolumes, lower manufacturing yields, higher product returns, and a lessfavorable product mix on lower RF and semiconductor capital equipment market relatedrevenue.  Our return and sales allowance provisionas a percentage of total revenues increased to 5.3% in the first six months of2005 from 2.2% in the first six months of 2004. There were two specificcustomer product returns in the first quarter of 2005 that contributed to theincrease in the return provision. The decline in gross margin was alsoattributable to abnormally low wafer manufacturing yields on certain productsproduced during in the first quarter of 2005 and lower fixed cost absorption atour Bend, Oregon facility over the first six months of 2005. The abnormal yieldlosses were estimated to be approximately $200,000 and actions have successfullybeen taken to resolve these low yield issues. In addition, as the Company experienced sequential revenue declines inboth the fourth quarter of 2004 and first quarter of 2005, we took actions tolimit inventory build up by lowering orders from vendors and loweringproduction levels. While this helped the Company to lower overall inventory by$0.9 million in the first six months of 2005 even while our revenues declined,the lower production had a negative impact on our margins. We expect productionlevels to improve in the third quarter of 2005, but not to the same levels asin 2004.

 

*Researchand Development Expense.* Second quarter of 2005 research and development expenses were $1.2million or 8.0% of revenue, compared to $783,000 in the second quarter of 2004,or 4.3% of revenue.  Research anddevelopment expenses in the first six months of 2005 and 2004 were $2.4 millionand $1.7 million or 8.1% and 5.0% of revenue, respectively.  The dollar increase in both the quarter overquarter and year to date over year to date research and development spending wereboth primarily attributable to increased payroll expense for additionalpersonnel dedicated to research and development activities. The increase inpayroll expense for quarter over quarter and year to date over year to date was$208,000 and 353,000, respectively.  Higherspending on supplies and materials also

 

18

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contributed to the increase in expense quarter over quarter and year todate over year to date. The increase in the percentage of revenue was due to bothhigher spending and lower revenue levels in 2005. The Company plans to continueits research and development programs leading to the introduction of newproducts for use in both switching and RF applications.  Therefore, we expect the level of researchand development expenses to be approximately 7.5% over sustained periods oftime.

 

*Selling,General and Administrative Expense.* Second quarter of 2005selling, general, and administrative expenses were $3.7 million or 24.1% of revenue,compared to $5.1 million in the second quarter of 2004, or 28.4% of revenue.  Selling, general, and administrative expensesin the first six months of 2005 and 2004 were $7.6 million and $9.2 million or 26.0%and 27.9% of revenue, respectively. The decrease in both the quarter overquarter and year to date over year to date spending levels was primarilyattributable to legal fees incurred in 2004 associated with a resolved patentlitigation matter and lower sales commissions on lower revenues in 2005. Thedecrease in selling, general, and administrative expenses was partially offsetby costs associated with our new office in Shenzen China, and additionalselling, general, and administrative expenses from our first quarteracquisition of PowerSicel, Inc. The decrease in the percentage of revenueis due to both lower spending and lower revenue levels in 2005.

 

*RestructuringActivities:* As part of management’s cost reduction efforts,the Company announced in November of 2003 restructuring actions intendedto improve manufacturing efficiencies and lower administrative costs. Theactions include consolidation of certain administrative functions,rationalization of internal and external assembly and test manufacturing, andthe reduction of rent expense through the purchase and resale of one of the twobuildings currently occupied by the Company’s Santa Clara, Californiasubsidiary. These announced actions were in addition to previously disclosedplans to consolidate the Company’s wafer fabrication plant in Montgomeryville,Pennsylvania to Bend, Oregon. Total restructuring related charges recognized in2004 were $558,000, of which $206,000, $115,000, $38,000 and $199,000 wererecognized in the first, second, third and fourth quarters of 2004,respectively.

 

Thetotal severance related charge recognized in 2004 was $103,000, which wasrecognized as $65,000 and $38,000 in the first and second quarters of 2004,respectively. During the first quarter of 2005 an additional $45,000 ofseverance charges was recognized. The severance charges related to alreadyseparated personnel and personnel costs associated with benefits expected to bepaid upon completion of certain eligible transfer activities. Additionalrestructuring costs of $375,000 associated with costs to exit certainproduction activities were also recognized in 2004, of which $141,000, $77,000,$38,000, and $119,000 were recognized in the first, second, third and fourthquarters of 2004, respectively.  Thecharges relate to accelerated depreciation on certain production relatedequipment to be abandoned after shutdown and contractual closing costs.

 

Thebuilding purchase, as described above, is reported as an asset held for saleand is being marketed for sale as APT no longer requires the space. Inaccordance with SFAS 144, an asset held for sale is carried at net estimatedfair value. As such, APT recorded an impairment charge for the building in thefourth quarter of 2004 and 2003 of approximately $80,000 and $350,000,respectively. Fair value was estimated based on comparable sales data ofsimilar commercial space in the area. The net carrying value of the building asof June 30, 2005 was approximately $930,000 and is included as a componentof other current assets.

 

TheCompany estimates that the annual savings from these actions are approximately$1.4 million for cost of goods sold and $800,000 for selling, general andadministrative costs. The cost savings were realized gradually from theinception of the restructuring actions. The savings in cost of goods sold reached the estimated annual run rateof $350,000 per quarter in the fourth quarter of 2004, and the savings inselling, general and administrative costs reached the full annualized run rateof $200,000 per quarter in the third quarter of 2004.

 

In July 2005,the Company announced that we would continue consolidating manufacturingoperations and moving certain production activities offshore and woulddisengage from a low growth product line currently with onshoreproduction.  As a result of restructuringactions, $124,000 of severance pay related charges was recognized in the secondquarter of 2005 and approximately $800,000 of additional restructuring chargesis expected to be recognized as these actions occur over the next twelve to eighteenmonths. The charges will include severance costs of approximately $600,000 tobe settled in cash, and the non-cash write-off or acceleration of depreciationof certain equipment of approximately $200,000.

 

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*Interest income and o**therexpense, net*.  Interest incomeand other expense, net, which includes interest income, interest expense andother expense, was a net income of $4,000 in the second quarter of 2005compared to a net income of $53,000 in the second quarter of 2004.  Net interest income was $73,000 in the secondquarter of 2005 compared to $41,000 in the second quarter of 2004.  The increase in interest income was due to higherinterest rates on our marketable securities. Net other expense of $69,000 and$12,000 in the second quarter of 2005 and 2004, respectively, primarilyincluded foreign exchange losses associated with the operations of oursubsidiary in Bordeaux, France.

 

*IncomeTax Expense (Benefit)*. For the first six months of 2005, the Company recorded a tax expense of$30,000. Although the Company had a consolidated net loss, we recorded taxexpense for certain state income taxes owed. For the first six months of 2004,the Company recorded a tax expense of $28,000 for certain state income taxes, resultingin an effective rate of 2.4%.

 

TheCompany recorded a full valuation allowance against its remaining net deferredtax assets in the fourth quarter of 2003. In assessing the valuation ofdeferred tax assets, SFAS No. 109 “Accounting for Income Taxes,” requiresa more likely than not standard. The ultimate realization of deferred taxassets is dependent on the generation of future domestic taxable income duringthe periods in which the associated temporary differences become deductible.Management considers the scheduled reversals of deferred tax liabilities,projected future taxable income, and tax planning strategies in making thisassessment. Although the Company anticipates future long term profitability,SFAS No. 109 requires that recent historical operating performance weighmore heavily in assessing the valuation of deferred tax assets. The more likelythan not assessment was principally based upon the losses generated during2002, 2003, and first half of 2005 and the cyclical nature of the industrywhich make projections of industry trends difficult. While the Company hassufficient net operating loss carry-forwards (NOL’s) to offset federal taxableincome for regular tax purposes, the Company’s use of its NOL’s for alternativeminimum tax (AMT) purposes are limited to 90% of its AMT income (AMTI).Therefore, the Company expects to pay AMT of approximately 20% on the remainingAMTI, resulting in an approximate effective tax rate of 2% on domestic taxableincome.  However, at such time theCompany is able to determine if it is more likely than not that it will be ableto utilize its net operating losses, the reserve against the net deferred taxasset would be reversed.

 

**Liquidityand Capital Resources**

 

Management assesses the Company’s liquidity in termsof its ability to generate cash to fund its operating, investing, and financingactivities. Significant factors affecting the management of liquidity are: cashflows from operating activities, capital expenditures, investments inbusinesses, and access to bank credit when required and at reasonable rates.

 

*Operating Cash Flows:* In the first six months of 2005, we generated approximately $1.5 millionfrom operating activities. This resulted from our net loss of $6.6 millionoffset by $2.4 million of non-cash charges for depreciation, amortization, andprovisions, $4.9 million for in-process research and development charges, and$0.8 million for reduced working capital requirements. The lower workingcapital requirements reflected lower accounts receivable, inventory, prepaidexpenses and other current assets, and payables on lower revenue.

 

*InvestingCash Flows:* In the first six months of 2005, we used $4.2million in investing activities which primarily consisted of our acquisition ofPowerSicel, Inc., partially offset by net proceeds from the sale andpurchase of marketable securities of $1.7 million. The acquisition ofPowerSicel consumed approximately $5.0 million of cash and direct costs duringthe period, net of $460,000 cash acquired. In addition, we issued APT stock options valued at $570,000.  We also purchased $961,000 of property,plant, and equipment during the period.

 

*FinancingCash Flows:* In the first six months of 2005, we generatedapproximately $122,000 from financing activities, which primarily consisted ofproceeds from the exercise of stock options.

 

20

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As of June 30,2005, we had $31.0 million in working capital. Our trade accounts receivable balance was $9.8 million reflecting a dayssales outstanding ratio of 55 days, compared to trade accounts receivable of $10.0million at December 31, 2004, reflecting a days sales outstanding ratio of60 days. Based on the geographic mix of our customers and the credit terms weextend, management expects our days sales outstanding ratio to range from 50 to60 days. Our inventory balance at June 30, 2005 was $13.7 millionreflecting inventory turns of 3.1 times per year, compared to an inventorybalance of $14.6 million at December 31, 2004, reflecting inventory turnsof 3.0 times per year. The Company continues to pursue actions to monitorinventory levels and improve inventory turns. The calculations above are basedon quarterly average balances of trade accounts receivable and inventory.

 

On March 31,2005, we entered into a loan and security agreement with Silicon Valley Bank.The agreement is for a $10 million revolving line of credit that bearsinterest, at the election of the Company, at either the Silicon Valley Bankprime rate plus a margin or the LIBOR rate plus a margin.  The margin for either rate is dependent onthe adjusted quick ratio of the Company as defined in the agreement.  The Company paid commitment fees of 20 basispoints upon closing and will pay 20 basis points per year on the unused portionof the line of credit, payable quarterly. Amounts borrowed under the credit agreement are secured by certaintangible and intangible assets of the Company. The credit agreement expires on June 30,2006, at which time all amounts borrowed and related interest are immediatelypayable if the agreement is not renewed. We currently have no advances underthis line of credit.

 

Wecurrently expect to fund expenditures for capital requirements as well asliquidity needs from a combination of available cash balances, internallygenerated funds, and our line of credit with Silicon Valley Bank.  As of June 30, 2005, APT had $12.5 millionin cash and cash equivalents and available-for-sale securities. APT’sinvestment policy is to invest in short term, high-grade liquid investmentswith the goal of capital preservation. APT’s ability to generate positive cashflow from operations may be affected by market conditions as well as other riskfactors as described in our Annual Report on Form 10-K for the year ended December 31,2004. We expect from time to time to evaluate potential acquisitions and equityinvestments complementary to our market strategy. To the extent we pursue suchtransactions, we could require additional equity or debt financing to fund suchactivities or to fund our working capital requirements in the event of anindustry downturn or an unexpected adverse change in our business operations.To the extent we require additional capital we cannot be certain that we willbe able to obtain such financing on terms favorable to us, or at all.

 

**OffBalance Sheet Arrangements & Commitments**

 

As of June 30,2005 the Company did not have any unconsolidated entities or off balance sheetfinancial arrangements, guarantees or similar commitments with such entities. Asof June 30, 2005 the open value of purchase order commitments was $14.0million compared to $12.1 million at December 31, 2004. This representsthe amounts committed per open purchase orders with third parties. The increaseover the December 31, 2004 balance is primarily due to higher material andsubcontractor commitments after reducing our purchasing needs in the fourthquarter of 2004 to limit inventory build up, as explained in the *Gross Profit* section above. The Company did not enteror terminate any lease agreements during the quarter.

 

**RecentAccounting Pronouncements**

 

In December 2004, the FASB issued SFAS 123(revised 2004), “Share-Based Payment” (“SFAS 123R”), which is a revision ofSFAS 123. SFAS 123R supersedes APB 25 and amends FASB Statement No. 95, “Statementof Cash Flows”, see  Note 2(b) forfurther discussion.

 

In November 2004,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 151, “Inventory Costs, an amendment of ARBNo. 43, Chapter 4” (SFAS 151).  SFAS151 clarifies that abnormal inventory costs such as costs of idle facilities,excess freight and handling costs, and wasted materials (spoilage) are requiredto be recognized as current period charges. The Company early adopted SFAS 151 in the second quarter of 2005. Theadoption of this pronouncement did not have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

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In May 2005,FASB issued SFAS No. 154, *AccountingChanges and Error Corrections*(SFAS154). SFAS 154 requires retrospective application of a voluntary changein accounting principle to prior period financial statements unless it isimpracticable. This Statement also requires that a change in method ofdepreciation, amortization, or depletion for long-lived, non-financial assetsbe accounted for as a change in accounting estimate that is affected by achange in accounting principle and requires retrospective application to priorperiod financial statements. SFAS 154 replaces APB Opinion 20, *Accounting Changes*, and SFAS 3, *Reporting Accounting Changes in Interim FinancialStatements*. The Company does not anticipate that the adoption ofthis standard will have a material impact on its consolidated financialstatements. SFAS 154 is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005, and accordingly,the Company will adopt SFAS 154 in the first quarter of 2006.

 

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

 

We donot use derivative financial instruments in our investment portfolio. Due tothe short duration and conservative nature of our cash equivalents, and thehigh quality and conservative nature of our long-term investments, we do notexpect any material loss with respect to our investment portfolio.

 

Currentlyless than 3% of our sales are transacted in foreign currencies, primarilyEuros. As a result, our international results of operations have limitedexposure to foreign exchange rate fluctuations. We do not currently hedgeagainst foreign currency rate fluctuations. Most of our export sales and salesby APT Europe are in U.S. dollars, and most of our foreign currency sales arefrom operations with significant expenses in the same currency. As a result,gains and losses from such fluctuations have not been material to ourconsolidated results of operations.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

As required by newRule 13a-15 under the Securities Exchange Act of 1934, the Company carriedout an evaluation under the supervision and with the participation of theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures, as of the end of the periodcovered by this report. Based upon that evaluation, the Chief Executive Officerand Chief Financial Officer concluded that the Company’s disclosure controlsand procedures are effective to ensure that information required to bedisclosed by the Company in the reports it files or submits under the ExchangeAct is recorded, processed, summarized and reported, within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

 

**Changes in Internal Controls overFinancial Reporting**

 

No change in our internal control over financialreporting (as defined in Rule 13a-15(f) under the Exchange Act)occurred during the second quarter of 2005 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II. OTHER INFORMATION**

 

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

 

AtAdvanced Power Technology Inc.’s Annual Shareholders’ Meeting on May 3,2005, shareholders elected each of the director nominees, ratified theappointment our independent registered public accounting firm, and approved theadoption of the 2005 Equity Incentive Plan with a share reserve of 1,500,000.

 

Directorsare elected by a plurality of the votes cast. That is, the six directorsreceiving the highest number of votes are elected, regardless of whether thatnumber represents a majority of the votes cast. The ratification of theappointment of the independent registered public accounting firm requires theaffirmative vote of a majority of the shares of Common Stock present orrepresented and entitled to vote at the Annual Meeting. The approval of theadoption of the 2005 Equity Incentive Plan requires the affirmative vote of amajority of the total number of votes cast at the meeting. Abstentions andbroker non-votes have no effect on the voting on a matter that requires theaffirmative vote of a certain percentage of the votes cast or shares voting ona matter. However, because shares that abstain and shares represented by brokernon-votes are nonetheless considered outstanding shares, abstentions and brokernon-votes have the same effect as a vote against a proposal which requires theaffirmative vote of a majority of the shares of Common Stock outstanding. Underthe rules of the NASDAQ, if shareholders do not give instructions to theirbank or brokerage firm, it will still be able to vote the shares with respectto certain “discretionary” items, but will not be allowed to vote the shareswith respect to certain “non-discretionary” items. In the case ofnon-discretionary items, the shares will be treated as “broker non-votes.”  A brief description and the voting resultsfor each proposal voted on at the meeting are included in the tables below:

 
| ** **                                                                                                                                                                                    | ** ** | **Number of Shares** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **Voted For**        | ** ** | **Withheld** | ** ** |
|                                                                                                                                                                                          |       |                 |       |   |   |
| **Election  of Directors.** To elect six directors, to hold office until  the 2006 Annual Meeting of Shareholders or until their successors are elected  and qualified (Proposal No. 1); |       |                 |       |   |   |
| Patrick P. H.  Sireta                                                                                                                                                                         |       | 6,212,700            |       | 2,404,127 |   |
| Robert C.  Pearson                                                                                                                                                                            |       | 8,380,316            |       | 236,511 |   |
| James E.  Petersen                                                                                                                                                                            |       | 7,189,295            |       | 1,427,532 |   |
| Douglas S.  Schatz                                                                                                                                                                            |       | 6,183,495            |       | 2,433,332 |   |
| Alfred J. Stein                                                                                                                                                                               |       | 8,362,363            |       | 254,464 |   |
| Ronald F.  McKenna                                                                                                                                                                            |       | 8,364,363            |       | 252,464 |   |

 
| ** **                                                                                                                                                                                                                                                       | ** ** | **Number of Shares** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                                                       | ** ** | **For**              | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-  Vote** | ** ** |
| **Ratification  of Appointment of Independent Registered Public Accounting Firm.**To  ratify the appointment of KPMG LLP as the Company’s independent registered  public accounting firm for the year ending December 31, 2005 (Proposal  No. 2); |       | 8,607,276            |       | 9,135 |   | 416 |   | — |   |
|                                                                                                                                                                                                                                                             |       |                 |       |   |   |   |   |   |   |
| **Approval  of the Advanced Power Technology, Inc. 2005 Equity Incentive Plan.**  To approve the adoption of the 2005 Equity Incentive Plan with a share  reserve of 1,500,000 (Proposal No. 3);                                                       |       | 6,976,795            |       | 325,964 |   | 1,876 |   | 1,312,192 |   |

 

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**ITEM 6. EXHIBITS**

 

(a) The exhibitsfiled as part of this report are listed below:

 
| **Exhibit No.** | ** ** | ** **                                                                                                                          |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                |
| 31                   |       | Rule13a-14(a)/15d-14(a) Certification,  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.             |
|                 |       |                                                                                                                                |
| 32                   |       | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

 

**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized this 11th day of August, 2005.

 
|   | ADVANCED POWER  TECHNOLOGY, INC.             |
|--------|----------------------------------------------|
|   |                                         |
|   |                                         |
|   | By:                                          | /s/ GREG M.  HAUGEN |   |
|   |                                         |
|   | Greg M. Haugen                               |
|   | Vice President,  Finance and Administration, |
|   | Chief Financial Officer and Secretary        |
|   | (Principal  Financial Officer)               |

 

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