**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 September 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  Incorporation or Organization) |       | (I.R.S. Employer  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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). o Yes ýNo

 

The number of shares ofthe Registrant’s Common Stock outstanding as of November 1, 2005 was 10,826,064shares.

 

 

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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 September 30, 2005 and December 31, 2004                        |   |
|             |                       |                                                                                                         |   |
|             |                       | Consolidated  Statements of Operations for the three and nine months ended September 30,  2005 and 2004 |   |
|             |                       |                                                                                                         |   |
|             |                       | Consolidated  Statements of Cash Flows for the nine months ended September 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 6.                    | Exhibits                                                                                                     |   |
|             |                       |                                                                                                         |
|             | Signature                  |                                                                                                         |
|             |                       |                                                                                                         |
|             | Exhibits                   |                                                                                                         |
|                  |                            |                                                                                                              |  |  |

 

2

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**ITEM 1. FINANCIAL STATEMENTS**

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                                                                                                                                                                    | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                                    | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                               |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                     |       | $                            | 3,653      |                        | $          | 4,149 |   |
| Short-term investments in available-for-sale  securities                                                                                                                                      |       | 11,800                       |       | 11,675                      |       |
| Accounts receivable, net of allowance of $185 (2005)  and $192 (2004)                                                                                                                         |       | 9,836                        |       | 10,044                      |       |
| Inventories, net                                                                                                                                                                              |       | 13,467                       |       | 14,647                      |       |
| Prepaid expenses and other current assets                                                                                                                                                     |       | 1,094                        |       | 2,196                       |       |
| Total current assets                                                                                                                                                                          |       | 39,850                       |       | 42,711                      |       |
|                                                                                                                                                                                          |       |                         |       |                        |       |
| Property and equipment, net of accumulated  amortization and depreciation of $19,747 (2005) and $16,994 (2004)                                                                                |       | 11,177                       |       | 11,357                      |       |
| Long-term  investments in available-for-sale securities                                                                                                                                       |       | —                       |       | 1,000                       |       |
| Other assets                                                                                                                                                                                  |       | 58                           |       | 110                         |       |
| Technology  assets, net of accumulated amortization of $3,977 (2005) and $3,030 (2004)                                                                                                        |       | 7,122                        |       | 7,734                       |       |
| Goodwill                                                                                                                                                                                      |       | 15,570                       |       | 15,570                      |       |
|                                                                                                                                                                                          |       |                         |       |                        |       |
| Total assets                                                                                                                                                                                  |       | $                            | 73,777     |                        | $          | 78,482 |   |
|                                                                                                                                                                                          |       |                         |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                 |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                                                                         |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                              |       | $                            | 3,723      |                        | $          | 4,143 |   |
| Accrued expenses                                                                                                                                                                              |       | 2,727                        |       | 2,193                       |       |
| Total current liabilities                                                                                                                                                                     |       | 6,450                        |       | 6,336                       |       |
| Other long term  liabilities                                                                                                                                                                  |       | 232                          |       | 108                         |       |
| Total liabilities                                                                                                                                                                             |       | 6,682                        |       | 6,444                       |       |
|                                                                                                                                                                                          |       |                         |       |                        |       |
| Commitments and  contingencies                                                                                                                                                                |       |                         |       |                        |       |
|                                                                                                                                                                                          |       |                         |       |                        |       |
| 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; 10,935,133 issued and 10,818,283 shares outstanding in 2005;  10,804,620 shares issued and 10,687,770 shares outstanding in 2004 |       | 109                          |       | 108                         |       |
| Additional paid-in capital                                                                                                                                                                    |       | 89,877                       |       | 89,138                      |       |
| Treasury stock, at cost, 116,850 shares                                                                                                                                                       |       | (1,761                       | )          | (1,761                      | )          |
| Deferred stock compensation                                                                                                                                                                   |       | (36                          | )          | —                      |       |
| Accumulated other comprehensive income                                                                                                                                                        |       | 647                          |       | 545                         |       |
| Accumulated deficit                                                                                                                                                                           |       | (21,741                      | )          | (15,992                     | )          |
| Total stockholders’ equity                                                                                                                                                               |       | 67,095                       |       | 72,038                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                               |       | $                            | 73,777     |                        | $          | 78,482 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Revenue, net                                                                               |       | $                                          | 16,843     |                                      | $          | 18,660 |   | $ | 46,151 |   | $ | 51,814 |   |
| Cost of goods sold                                                                         |       | 10,821                                     |       | 12,079                                    |       | 31,113 |   | 32,361 |   |
| Amortization of technology rights and other charges                                        |       | 269                                        |       | 269                                       |       | 807 |   | 817 |   |
| Total cost of  goods sold                                                                  |       | 11,090                                     |       | 12,348                                    |       | 31,920 |   | 33,178 |   |
| Gross profit                                                                               |       | 5,753                                      |       | 6,312                                     |       | 14,231 |   | 18,636 |   |
|                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Operating  expenses:                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Research and development                                                                   |       | 1,308                                      |       | 903                                       |       | 3,680 |   | 2,573 |   |
| Selling, general and administrative                                                        |       | 3,703                                      |       | 3,857                                     |       | 11,327 |   | 13,097 |   |
| Restructuring charges                                                                      |       | —                                     |       | 38                                        |       | 169 |   | 359 |   |
| In-process research and development charges                                                |       | —                                     |       | 170                                       |       | 4,868 |   | 170 |   |
| Total operating  expenses                                                                  |       | 5,011                                      |       | 4,968                                     |       | 20,044 |   | 16,199 |   |
| Income (loss)  from operations                                                             |       | 742                                        |       | 1,344                                     |       | (5,813 | ) | 2,437 |   |
| Interest income,  net                                                                      |       | 81                                         |       | 66                                        |       | 209 |   | 147 |   |
| Other income  (expense), net                                                               |       | 5                                          |       | (153                                      | )          | (115 | ) | (147 | ) |
|                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Income (loss)  before income tax expense (benefit)                                         |       | 828                                        |       | 1,257                                     |       | (5,719 | ) | 2,437 |   |
| Income tax  expense                                                                        |       | —                                     |       | 29                                        |       | 30 |   | 57 |   |
| Net income  (loss)                                                                         |       | $                                          | 828        |                                      | $          | 1,228 |   | $ | (5,749 | ) | $ | 2,380 |   |
|                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Net income  (loss) per share:                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                                                      |       | $                                          | 0.08       |                                      | $          | 0.11 |   | $ | (0.54 | ) | $ | 0.22 |   |
| Diluted                                                                                    |       | 0.07                                       |       | 0.11                                      |       | (0.54 | ) | 0.21 |   |
| Weighted average number of shares used in the  computation of net income (loss) per share: |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                                                      |       | 10,793                                     |       | 10,682                                    |       | 10,735 |   | 10,598 |   |
| Diluted                                                                                    |       | 11,189                                     |       | 11,170                                    |       | 10,735 |   | 11,215 |   |

 

See accompanying notes to consolidated financial statements.

 

4

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                                    |       |                                      |       |   |   |
| Net income (loss)                                                                         |       | $                                         | (5,749     | ) | $ | 2,380 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                                      |       |   |   |
| Depreciation                                                                              |       | 2,477                                     |       | 2,448 |   |
| Amortization of intangible assets                                                         |       | 947                                       |       | 807 |   |
| Inventory adjustments                                                                     |       | 328                                       |       | 547 |   |
| In-process research and development charges                                               |       | 4,868                                     |       | 170 |   |
| Amortization of deferred stock compensation                                               |       | 38                                        |       | 21 |   |
| Amortization of investment premium                                                        |       | 4                                         |       | 4 |   |
| Deferred gain on sale-leaseback                                                           |       | (13                                       | )          | (13 | ) |
| Loss on disposal of equipment                                                             |       | 67                                        |       | 2 |   |
| Changes in operating assets and liabilities, net of  acquisition:                         |       |                                      |       |   |   |
| Accounts receivable, net                                                                  |       | 272                                       |       | (3,629 | ) |
| Inventories                                                                               |       | 705                                       |       | (928 | ) |
| Prepaid expenses and other assets                                                         |       | 228                                       |       | 209 |   |
| Accounts payable and accrued expenses                                                     |       | 204                                       |       | 573 |   |
| Net cash provided by operating activities                                                 |       | 4,376                                     |       | 2,591 |   |
|                                                                                      |       |                                      |       |   |   |
| Cash flows from  investing activities:                                                    |       |                                      |       |   |   |
| Purchases of available-for-sale securities                                                |       | (12,101                                   | )          | (8,710 | ) |
| Proceeds from sale of available-for-sale securities                                       |       | 12,975                                    |       | 6,925 |   |
| Acquisitions, net of cash acquired                                                        |       | (4,985                                    | )          | (175 | ) |
| Proceeds from sale of property and equipment                                              |       | 930                                       |       | — |   |
| Purchase of property and equipment                                                        |       | (1,805                                    | )          | (2,772 | ) |
|                                                                                      |       |                                      |       |   |   |
| Net cash used by investing activities                                                     |       | (4,986                                    | )          | (4,732 | ) |
|                                                                                      |       |                                      |       |   |   |
| Cash flows from  financing activities:                                                    |       |                                      |       |   |   |
| Payments on capital lease obligations                                                     |       | (2                                        | )          | (5 | ) |
| Proceeds from exercise of stock options                                                   |       | 162                                       |       | 504 |   |
| Net cash provided by financing activities                                                 |       | 160                                       |       | 499 |   |
| Effects of exchange  rate changes on cash                                                 |       | (46                                       | )          | (5 | ) |
| Net change in cash and cash equivalents                                                   |       | (496                                      | )          | (1,647 | ) |
| Cash and cash  equivalents at beginning of period                                         |       | 4,149                                     |       | 3,664 |   |
| Cash and cash  equivalents at end of period                                               |       | $                                         | 3,653      |   | $ | 2,017 |   |
|                                                                                      |       |                                      |       |   |   |
| Supplemental disclosure  of cash flow information:                                        |       |                                      |       |   |   |
| Cash paid during the period for: Interest                                                 |       | $                                         | 15         |   | $ | 10 |   |
| Income taxes                                                                              |       | 47                                        |       | 91 |   |
|                                                                                      |       |                                      |       |   |   |
| Supplemental  disclosure of noncash activities:                                           |       |                                      |       |   |   |
| Unrealized gain (loss) on short-term and long-term  investments                           |       | $                                         | 3          |   | $ | (2 | ) |
| 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 and per 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 nine month periods ended September 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 third quarter of 2005 ended on October 2,2005 and the third quarter of 2004 ended on October 3, 2004.  For convenience, the third quarters of 2005and 2004 are both shown as ended on September 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 nine months ended September 30, 2005 and 2004 are as follows:

 
| ** **                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                |       |                                       |       |                                      |       |   |   |   |   |
| Balance – beginning  of period |       | $                                          | 779        |                                      | $          | 523 |   | $ | 716 |   | $ | 431 |   |
| Provisions                          |       | 674                                        |       | 257                                       |       | 2,221 |   | 976 |   |
| Charge offs                         |       | (651                                       | )          | (312                                      | )          | (2,135 | ) | (939 | ) |
| Balance – end of  period       |       | $                                          | 802        |                                      | $          | 468 |   | $ | 802 |   | $ | 468 |   |

 

***(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. Thenew standard will require us to expense stock based compensation. Under SFAS No. 123R,we must evaluate and determine the appropriate fair value model to be used forvaluing share-based payments, the amortization method for compensation cost andthe transition method to be used at the date of adoption. We are currentlyevaluating the provisions of FAS 123R and expect that the adoption on January 1,2006 will have a material impact on the Company’s consolidated results ofoperations and earnings per

 

6

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share, as the stock basedcompensation expense will be charged directly against our reported earnings. Wedo not expect the accounting change to materially affect our liquidity asequity-based compensation is a non-cash expense.

 

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 did 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 impact of this action is an additional $500 of stockcompensation expense in our pro forma disclosures for the third quarter of2005, the period the modification was approved and effective. The fourthquarter of 2005 pro forma compensation expense disclosure will be reduced by$115. The financial 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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Net income  (loss), as reported                                                           |       | $                                          | 828        |                                      | $          | 1,228 |   | $ | (5,749 | ) | $ | 2,380 |   |
| Add: Stock based compensation included in reported  net income (loss)                     |       | 10                                         |       | —                                    |       | 38 |   | 21 |   |
| Deduct: Stock based compensation determined under  fair value based method for all awards |       | (744                                       | )          | (272                                      | )          | (1,243 | ) | (732 | ) |
| Pro forma net  income (loss)                                                              |       | $                                          | 94         |                                      | $          | 956 |   | $ | (6,954 | ) | $ | 1,669 |   |
|                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Income (loss)  per share:                                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Basic – as reported                                                                  |       | $                                          | 0.08       |                                      | $          | 0.11 |   | $ | (0.54 | ) | $ | 0.22 |   |
| Basic – pro forma                                                                    |       | 0.01                                       |       | 0.09                                      |       | (0.65 | ) | 0.16 |   |
|                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Diluted – as reported                                                                |       | $                                          | 0.07       |                                      | $          | 0.11 |   | $ | (0.54 | ) | $ | 0.21 |   |
| Diluted – pro forma                                                                  |       | 0.01                                       |       | 0.09                                      |       | (0.65 | ) | 0.15 |   |
|                                                                                           |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |

 

The effectsof applying SFAS 123 in this pro forma disclosure are not indicative of futureamounts and additional awards are anticipated in future years. The fair valueof 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 |       | 4.0-4.1            | %          | 3.0-3.7  | %          |
| Expected  dividend yield |       | 0                  | %          | 0        | %          |
| Expected life            |       | 6.5–6.7 years |       | 5 years  |       |
| Volatility               |       | 68-82              | %          | 100      | %          |

 

7

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***(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 shares of common stock anddilutive potential common shares related to stock options and warrantsoutstanding during the period. Anti-dilutive potential common shares are excluded from the diluted netincome share calculation.  Dilutive net lossper share excludes all potential common shares from the calculation as theimpact would be anti-dilutive.  Incrementaldilutive shares included in the calculation of diluted net income per share andincremental anti-dilutive shares that were excluded from the calculation ofdiluted net income per share for the three and nine months ended September 30,2005 and 2004 are summarized in the following table:

 
| ** **                                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Incremental dilutive shares included in diluted net  income per share calculation   |       | 396,000                                    |       | 488,000                                   |       | — |   | 617,000 |   |
| Anti-dilutive shares excluded from diluted net  income (loss) per share calculation |       | 894,000                                    |       | 632,000                                   |       | 1,372,000 |   | 545,000 |   |

 

***(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.Amortization of intangible assets was approximately $316 in the third quarterof 2005 compared to $269 in the third quarter of 2004, and $947 in the firstnine months of 2005 compared to $807 in the first nine months of 2004.Excluding the impact of any future acquisitions, amortization of intangibleassets will be approximately $1,262 in 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 September 30, 2005, the Company still maintainsa full valuation allowance against its deferred tax assets, net of certaindeferred tax 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 September 30, 2005 and December 31, 2004 were $10,000 and $7,875, respectively.

 

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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 financialresults of 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 assemiconductor capital 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  |   |

 

9

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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 thesecond quarter of 2005 by $28 upon finalization of the purchase priceallocation.  The value assigned toIPR&D related to research projects for which technological feasibility hadnot yet been established and for which there was no other feasible alternativeuse for the technology.  In addition, APTrecorded intangible assets of $223 and $111 for PowerSicel’s assembledworkforce and for certain employment contracts of key PowerSicel executives, respectively.The assembled workforce intangible asset will be amortized over three years andthe employment 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 taxpurposes.

 

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. As of September 30, 2005, weestimate that the project is approximately 85% complete, with estimatedremaining spending of $175.

 

**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.

 

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Thebuilding purchase was reported through the second quarter of 2005 as an assetheld for sale, as APT no longer required the space. In accordance with SFAS144, an asset held for sale is carried at net estimated fair value. As such,APT recorded an impairment charge for the building in the fourth quarter of2004 and 2003 of approximately $80 and $350, respectively. Fair value wasestimated based on comparable sales data of similar commercial space in thearea. The building was sold in the third quarter of 2005.  Net proceeds from the sale of the buildingwere $930, resulting in no gain or loss on the transaction.

 

TheCompany estimates that the annual savings from the transfer of the Company’swafer fabrication plant in Montgomeryville, Pennsylvania to Bend, Oregon and therestructuring actions announced in November 2003 are approximately $1.4million for cost of goods sold and $800 for selling, general and administrativecosts. The cost savings were realized gradually from the inception of therestructuring actions.  The savings incost of goods sold reached the estimated annual run rate of $350 per quarter inthe fourth quarter of 2004, and the savings in selling, general andadministrative costs reached the full annualized run rate of $200 per quarterin the third quarter of 2004.

 

In July 2005,the Company announced that it would continue consolidating manufacturingoperations and move certain production activities offshore and that it woulddisengage from a low growth product line currently with onshore production.  As a result of restructuring actions, $124 ofseverance pay related charges was recognized in the second quarter of 2005.  There were no restructuring chargesrecognized in the third quarter of 2005. Approximately $530 of additional restructuring charges is expected to berecognized as these actions occur over the next nine to fifteen months. Thecharges will include severance costs of approximately $405 to be settled incash, and the non-cash write-off or acceleration of depreciation of certainequipment of approximately $125.

 

Thechanges in the reserve for restructuring balance for the three and nine monthsended September 30, 2005 and 2004 are shown in the table below. Certain ofthe restructuring charges were expensed as incurred and therefore are notincluded in the provision.

 
| ** **                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Restructuring  Reserve             |       |                                       |       |                                      |       |   |   |   |   |
| Balance – beginning of period |       | $                                          | 136        |                                      | $          | 123 |   | $ | 60 |   | $ | 178 |   |
| Provision                          |       | —                                     |       | 38                                        |       | 124 |   | 181 |   |
| Payments                           |       | (3                                         | )          | (74                                       | )          | (51 | ) | (272 | ) |
| Balance – end of period       |       | $                                          | 133        |                                      | $          | 87 |   | $ | 133 |   | $ | 87 |   |
|                               |       |                                       |       |                                      |       |   |   |   |   |
| Restructuring  Charges             |       |                                       |       |                                      |       |   |   |   |   |
| Provision                          |       | $                                          | —     |                                      | $          | 38 |   | $ | 124 |   | $ | 181 |   |
| Direct expenses                    |       | —                                     |       | —                                    |       | — |   | 23 |   |
| Non-cash charges T                 |       | —                                     |       | —                                    |       | 45 |   | 155 |   |
| Total restructuring charges        |       | $                                          | —     |                                      | $          | 38 |   | $ | 169 |   | $ | 359 |   |

 

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**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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Net income  (loss)                                       |       | $                                          | 828        |                                      | $          | 1,228 |   | $ | (5,749 | ) | $ | 2,380 |   |
|                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Other  comprehensive income (loss):                      |       |                                       |       |                                      |       |   |   |   |   |
| Unrealized gain (loss) on available for sale  securities |       | 1                                          |       | —                                    |       | 3 |   | (2 | ) |
| Foreign currency translation adjustment                  |       | 335                                        |       | 2                                         |       | 99 |   | 112 |   |
| Comprehensive  income (loss)                             |       | $                                          | 1,164      |                                      | $          | 1,230 |   | $ | (5,647 | ) | $ | 2,490 |   |

 

**Note 6. Inventories**

 
| ** **       | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------|------------|------------------------------|------------|-----------------------------|------------|
|             |       |                         |       |                        |       |
| Raw materials    |       | $                            | 3,123      |                        | $          | 3,003 |   |
| Work in process  |       | 6,530                        |       | 7,061                       |       |
| Finished goods   |       | 3,814                        |       | 4,583                       |       |
| Inventories, net |       | $                            | 13,467     |                        | $          | 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 third quarter of 2005 was 67.2% in NorthAmerica, 16.3% in Europe and 16.5% in Asia, compared to 64.5% in North America,18.2% in Europe, and 17.3% in Asia during the third quarter of 2004. Ourrevenue by geographic area for the first nine months of 2005 was 63.7% in NorthAmerica, 18.2% in Europe, and 18.1% in Asia, compared to 62.9% in NorthAmerica, 16.4% in Europe, and 20.7% in Asia in the first nine months of 2004.We allocated revenue geographically based on the location to which we ship ourproducts.

 

Revenue from our five largest OEM and distributor customers in thethird quarter of 2005 and 2004 accounted for 38.7% and 46.9% of our totalrevenue, respectively. One customer accounted for 18.2% and 21.7% of ourrevenue in the third quarter of 2005 and 2004, respectively. Revenue from ourfive largest OEM and distributor customers in the first nine months of 2005 and2004 accounted for 37.1% and 45.9% of our total revenue, respectively. Onecustomer accounted for 19.3% of our revenue in the first nine months of 2005.Our top two customers accounted for 18.2% and 11.0% of our revenue in the firstnine months of 2004. No other customer exceeded 10.0% of our revenue duringthese periods. We generally provide our customers a 12-month repair orreplacement 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

 

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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. Commitments and 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, product liability,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 terms andconditions of the contract. There are no financial commitments from thecontract until production begins, which is expected in early 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 of businessfor the purchase of raw materials, capital equipment, and other supplies. APT’stotal commitments at September 30, 2005 and December 31, 2004 underthese purchase obligations were approximately $13,461 and $12,085,respectively.

 

**Note 10. Subsequent Event: MergerAnnouncement**

 

On November 2,2005, Advanced Power Technology, Inc., a Delaware corporation (the “Company”),announced that it has entered into a definitive agreement and plan of merger(the “Merger Agreement”) with Microsemi Corporation, a Delaware corporation (“Microsemi”)and its newly formed, wholly-owned subsidiary, APT Acquisition Corp., aDelaware corporation (“Merger Subsidiary”). Under the terms of the Merger Agreement, which has been approved by eachcompany’s Board of Directors, Microsemi will pay the equivalent of $12.20 foreach share of the Company’s common stock that is outstanding, based on closingprices on November 2, 2005. Shareholders of the Company will receive $2.00 in cash, plus 0.435shares of Microsemi common stock, for each share of the Company’s commonstock.  As of November 2, 2005, theCompany had 10,826,064 common shares outstanding and 11,176,003 sharesoutstanding on a fully diluted basis. At the effective time of the merger, allshares of the Company’s common stock will convert into an aggregate ofapproximately  4.7 million shares ofMicrosemi’s common stock.  Pursuant tothe Merger Agreement, the Company will merge into the Merger Subsidiary (the “Merger”),whereupon the separate existence of the Company shall cease.  The Merger is expected to close in early2006.  The Merger is subject toregulatory approvals and the approval of the Company’s shareholders and otherclosing conditions.  A copy of the MergerAgreement is attached as Exhibit 10.39 of this report on Form 10-Q.

 

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**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, includingbut not limited to the ability of subcontractors and key vendors to meet theirdelivery commitments; unfavorable changes in industry and competitiveconditions; our mix of product shipments; the accuracy of our customers’forecasts; the effectiveness of our efforts to control and reduce costs; andother 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, industriallasers, solar power inverters and base stations for wireless communications.

 

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).

 

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 ouroperating expenses as well as reducing the fixed portion of our manufacturingcosts through increased 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. APT is headquartered in Bend, Oregon and has operations andoffices in North America, France, and China. We also make use of subcontractmanufacturers for the fabrication of our wafers and for assembly and testoperations. Our locations are more fully described in “Business—Properties” inour 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 leading

 

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supplier inbipolar 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’sand Zeus Semiconductor’s combined expertise in silicon carbide and othercompound 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 subsequent withdrawalof a registration statement. The total amount of these items net of taxes was$2,028. The total charges in 2004 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 nine months of 2005, we recorded acquisition relatedcharges for amortization of intangible assets and deferred compensationamortization of $977, of which $807 was included in cost of goods sold and $170in 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 with onshore production. The total charges for the first nine monthsof 2005 pre-tax and after tax were $6,014 and $6,007, respectively.

 

**OurMarkets**

 

We operate on a worldwide basis. As such, our operations are affectedby global, regional and industry-specific economic and political factors. Thedetails of our revenue by geographic region is included in the notes to ourfinancial statements. The markets for our products are diversified, and includemilitary 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.

 

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**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:

 

•                  Increaseour penetration of core markets and customers and expand globally;

 

•                  Continueto develop and commercialize leading-edge technology for new and existingapplications;

 

•                  Capitalizeon and expand our RF expertise;

 

•                  Continueto optimize manufacturing operations, including the use of foundries andoffshore production; and

 

•                  Seekto enhance growth 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.

 

Webelieve the following critical accounting policies involve more significantjudgments and estimates used in the preparation of our consolidated financialstatements.

 

***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 independent distributors to sell some of ourproducts. Our distributors have certain stock rotation rights which allow themto rotate, every six months, their products in inventory for a value up to 5%of their purchases over the preceding six month period in exchange for an orderof an equal amount of new product. In addition we may elect to give priceprotections or other allowances to our distributors. Price protections may beoffered for distributor inventory on hand when we update our price list.Additional price allowances may be offered to our distributors in certain competitivebidding situations 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, servicedelivery costs, or distributor returns differ from our estimates, revisions tothe estimated revenue provision would be required.

 

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***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 September 30,2005, we had a full valuation allowance recorded against our deferred tax assets,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 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

 

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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 has beenimpaired 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 table presentsour consolidated statement of operations data for the periods indicated as apercentage of net revenue:

 
| ** **                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                |       |                                       |       |                                      |       |   |   |   |   |
| Revenue, net                                        |       | 100.0                                      | %          | 100.0                                     | %          | 100.0 | % | 100.0 | % |
|                                                |       |                                       |       |                                      |       |   |   |   |   |
| Cost of goods sold                                  |       | 64.2                                       |       | 64.7                                      |       | 67.4 |   | 62.4 |   |
| Amortization of technology rights and other charges |       | 1.6                                        |       | 1.5                                       |       | 1.8 |   | 1.6 |   |
| Total cost of  goods sold                           |       | 65.8                                       |       | 66.2                                      |       | 69.2 |   | 64.0 |   |
| Gross profit                                        |       | 34.2                                       |       | 33.8                                      |       | 30.8 |   | 36.0 |   |
| Operating  expenses:                                |       |                                       |       |                                      |       |   |   |   |   |
| Research and development                            |       | 7.8                                        |       | 4.8                                       |       | 8.0 |   | 5.0 |   |
| Selling, general and administrative                 |       | 22.0                                       |       | 20.7                                      |       | 24.5 |   | 25.3 |   |
| Restructuring charges                               |       | —                                     |       | 0.2                                       |       | 0.4 |   | 0.7 |   |
| In-process research and development charges         |       | —                                     |       | 0.9                                       |       | 10.5 |   | 0.3 |   |
| Total operating expenses                            |       | 29.8                                       |       | 26.6                                      |       | 43.4 |   | 31.3 |   |
| Income (loss)  from operations                      |       | 4.4                                        |       | 7.2                                       |       | (12.6 | ) | 4.7 |   |
| Interest and  other income (expense), net           |       | 0.5                                        |       | (0.5                                      | )          | 0.2 |   | — |   |
| Income (loss)  before income tax benefit            |       | 4.9                                        |       | 6.7                                       |       | (12.4 | ) | 4.7 |   |
| Income tax  expense (benefit)                       |       | —                                     |       | 0.1                                       |       | 0.1 |   | 0.1 |   |
| Net income  (loss)                                  |       | 4.9                                        | %          | 6.6                                       | %          | (12.5 | )% | 4.6 | % |

 

*Revenue.* Revenue for the thirdquarter of 2005 was $16.8 million, sequentially up 11.0% from $15.2 million inthe second quarter of 2005 and down 9.7% from $18.7 million in the thirdquarter of 2004. The sequential increase in revenue is primarily attributableto the industrial and medical market and the military/aerospace market whichincreased in the third quarter of 2005 by $1.1 million or 25.0% and $1.0 millionor 22.1%, respectively. The sequential improvement in the industrial andmedical market is primarily due to improved demand from our medical marketcustomers in both implantable defibrillator and medical imaging applications. Theseincreases were partially offset by declines in the semiconductor capitalequipment market.

 

Revenue for the first nine months of 2005 was $46.2million, down 10.9% from $51.8 million in the first nine months of 2004. Thedecline in year to date revenue was primarily due to a decrease in revenue inthe semiconductor capital equipment market. The decline in revenue in thesemiconductor capital equipment market was due to both reduced end marketdemand and an inventory correction that was underway at our customers. Webelieve that the inventory correction by our customers was completed in thesecond quarter of 2005 and that shipments are now more closely matching ourcustomers’ consumption rates.  Comparedto the prior year nine months, the semiconductor capital

 

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equipment market was down $8.2 million or 55.1%. The decline in thirdquarter of 2005 revenue compared to third quarter of 2004 is also attributableto a decrease in revenue in the semiconductor capital equipment market.  Compared to the prior year quarter, thesemiconductor capital equipment market was down $2.2 million or 49.2%.

 

The overall classification of our revenue by market inthe first nine months of 2005 was communications and data processing 22.2%,semiconductor capital equipment 14.4%, industrial and medical 29.6%, militaryand aerospace 32.0%, and 1.8% other. This compares to the first nine months of 2004 classification ofcommunication and data processing 21.7%, semiconductor capital equipment 28.6%,industrial and medical 25.3%, and military and aerospace 24.4%.

 

*Gross Profit*. Gross profit marginfor the third quarter of 2005 was 34.2%, compared to 33.8% in the third quarterof 2004, and 31.1% in the second quarter of 2005.  Included in our costs of goods sold in thesecond and third quarter of 2005 and the third quarter of 2004, was $269,000 ofamortization of technology rights assets. The sequential improvement in grossprofit margin was primarily due to a more favorable mix of products sold andslightly higher fixed cost absorption at our Bend, Oregon facility on highervolumes.  The sequential improvement ingross profit margin was also due to higher gross margin RF product revenue fromour Santa Clara, California facility. The increase in gross profit margin overthe prior year quarter was primarily due to a more profitable mix of productssold from our Santa Clara, California facility. The increase from the prioryear quarter was partially offset by lower fixed cost absorption at our Bend,Oregon facility, as a result of reduced production levels in response todecreased sales to the semiconductor capital equipment, as mentioned in the *Revenue* section above.

 

Gross profit margin for the first nine months of 2005was 30.8%, compared to 36.0% in the first nine months of 2004. Included in ourcosts of goods sold in the first nine months of 2005 and 2004, was $807,000 and$817,000 of amortization of technology rights assets, respectively.  The decline in gross profit margin over theprior year was primarily due to reduced fixed cost absorption on lowerproduction volumes at our Bend, Oregon facility, and to customer return andproduction yield issues. The decrease in production volumes and lower fixedcost absorption at our Bend, Oregon facility was due to lower sales to thesemiconductor capital equipment market, as mentioned in the *Revenue* section above. These declines were partiallyoffset by improved gross margins on our RF products at our Montgomeryville,Pennsylvania facility as we began to benefit from restructuring actions thatresulted in the transfer of wafer production activities from ourMontgomeryville operation to our Bend facility. The overall product mix of ourrevenue also improved which also served to offset some of the decline in grossmargin.

 

*Researchand Development Expense.* Third quarter of 2005 research and development expenses were $1.3million or 7.8% of revenue, compared to $903,000 in the third quarter of 2004,or 4.8% of revenue.  Research anddevelopment expenses in the first nine months of 2005 and 2004 were $3.7million and $2.6 million or 8.0% 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 spendingwere both 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$186,000 and $545,000, respectively. Higher spending on supplies and materials also contributed to theincrease in expense quarter over quarter and year to date over year to date.The increase in the percentage of revenue was due to both higher spending andlower revenue levels in 2005. The Company plans to continue its research anddevelopment programs leading to the introduction of new products for use inboth switching and RF applications.

 

*Selling,General and Administrative Expense.* Third quarter of 2005selling, general, and administrative expenses were $3.7 million or 22.0% ofrevenue, compared to $3.9 million in the third quarter of 2004, or 20.7% ofrevenue.  Selling, general, andadministrative expenses in the first nine months of 2005 and 2004 were $11.3million and $13.1 million or 24.5% and 25.3% of revenue, respectively. Thedecrease in both the quarter over quarter and year to date over year to datespending levels was primarily attributable to legal fees incurred in 2004associated with a resolved patent litigation matter.  Such legal fees in the third quarter of 2004and year to date 2004 were $97,000 and $2.0 million, respectively. Lower salescommissions on lower revenues in 2005 and lower payroll costs associated with ourmanagement cash incentive plan also contributed to the decrease in spendinglevels for both the quarter over quarter and year to date over year to datecomparisons. The decrease in selling, general, and administrative expenses forboth the quarter over quarter and year to date over year to date was partiallyoffset by additional costs associated with our new office in Shenzen China, andadditional selling, general, and administrative expenses from our first quarteracquisition of

 

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PowerSicel, Inc. inBoulder, Colorado. We anticipate our spending levels for our new China officeand for our acquired business in Boulder, Colorado to be approximately $85,000and $165,000 per quarter, respectively, over the next several quarters.

 

*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 was reported through the second quarter of 2005 as an assetheld for sale, as APT no longer required the space. In accordance with SFAS144, an asset held for sale is carried at net estimated fair value. As such,APT recorded an impairment charge for the building in the fourth quarter of2004 and 2003 of approximately $80,000 and $350,000, respectively. Fair valuewas estimated based on comparable sales data of similar commercial space in thearea. The building was sold in the third quarter of 2005.  Net proceeds from the sale of the buildingwere $930,000, resulting in no gain or loss on the transaction.

 

TheCompany estimates that the annual savings from the transfer of the Company’swafer fabrication plant in Montgomeryville, Pennsylvania to Bend, Oregon andthe restructuring actions announced in November 2003 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 it would continue consolidating manufacturingoperations and move certain production activities offshore and that it 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.  There were norestructuring charges recognized in the third quarter of 2005.  Approximately $530,000 of additionalrestructuring charges is expected to be recognized as these actions occur overthe next nine to fifteen months. The charges will include severance costs ofapproximately $405,000 to be settled in cash, and the non-cash write-off oracceleration of depreciation of certain equipment of approximately $125,000.

 

*Interest income and o**therexpense, net*.  Interest incomeand other expense, net, which includes interest income, interest expense andother expense, was a net income of $86,000 in the third quarter of 2005compared to a net loss of $87,000 in the third quarter of 2004.  Net interest income was $81,000 in the thirdquarter of 2005 compared to $66,000 in the third quarter of 2004.  Net interest income for the first nine monthsof 2005 was $209,000 compared to $147,000 in the first nine months of 2004. Theincrease in net interest income for both quarter over quarter and year to dateover year to date is due to higher interest rates on our marketablesecurities.  Net other expense for thefirst nine months of 2005 was $115,000 compared to $147,000 in the first ninemonths of 2004.  Net other expense in thefirst nine months of 2005 includes primarily foreign exchange losses associatedwith our subsidiary in Bordeaux, France. Net other expense in the first nine months of 2004 includes $181,000 of expensedlegal and accounting fees associated

 

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with the filing andsubsequent withdrawal of the Company’s S-3 registration statement, which wasrecorded in the third quarter of 2004.

 

*IncomeTax Expense (Benefit)*. For the first nine 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 nine months of 2004,the Company recorded a tax expense of $57,000 for certain state income taxes.

 

TheCompany recorded a full valuation allowance against its remaining deferred taxassets net of certain deferred tax liabilities in the fourth quarter of 2003.In assessing the valuation of deferred tax assets, SFAS No. 109 “Accountingfor Income Taxes,” requires a more likely than not standard. The ultimaterealization of deferred tax assets is dependent on the generation of futuredomestic taxable income during the periods in which the associated temporarydifferences become deductible. Management considers the scheduled reversals ofdeferred tax liabilities, projected future taxable income, and tax planningstrategies in making this assessment. Although the Company anticipates futurelong term profitability, SFAS No. 109 requires that recent historicaloperating performance weigh more heavily in assessing the valuation of deferredtax assets. The more likely than not assessment was principally based upon thelosses generated during 2002, 2003, and first nine months of 2005 and thecyclical nature of the industry which make projections of industry trendsdifficult. While the Company has sufficient net operating loss carry-forwards(NOL’s) to offset federal taxable income for regular tax purposes, the Company’suse of its NOL’s for alternative minimum tax (AMT) purposes are limited to 90%of its AMT income (AMTI). Therefore, the Company expects to pay AMT ofapproximately 20% on the remaining AMTI, resulting in an approximate effectivetax rate of 2% on domestic taxable income. However, at such time the Company is able to determine if it is morelikely than not that it will be able to utilize its net operating losses, thereserve against the net deferred tax asset 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 nine months of 2005, we generated approximately $4.4million from operating activities. This resulted from our net loss of $5.7million offset by $3.8 million of non-cash charges for depreciation,amortization, and provisions, $4.9 million for in-process research anddevelopment charges, and $1.4 million for reduced working capital requirements.The lower working capital requirements primary reflected lower accountsreceivable, inventory, and prepaid expenses and other current assets on lowerrevenue.

 

*InvestingCash Flows* In the first nine months of 2005, we used $5.0million in investing activities which primarily consisted of our acquisition ofPowerSicel, Inc., partially offset by net proceeds from the sale andpurchase of marketable securities of $0.9 million and the net proceeds of $0.9million from the sale of a building at our Santa Clara, California facility, asexplained further in the *Restructuring Activities*section above. The acquisition of PowerSicel consumed approximately $5.0million of cash and direct costs during the period, net of $460,000 cashacquired.  In addition, we issued APTstock options valued at $570,000 for the acquisition.  We also purchased $1.8 million of property,plant, and equipment during the first nine months of 2005, compared to $2.8million in the first nine months of 2004. The decrease in the purchase of property, plant, and equipment in 2005was primarily due to expenditures in 2004 for the expansion of our waferfabrication facility at our Bend, Oregon plant.

 

*FinancingCash Flows:* In the first nine months of 2005, we generatedapproximately $160,000 from financing activities, which primarily consisted ofproceeds from the exercise of stock options.

 

As of September 30,2005, we had $33.4 million in working capital. Our trade accounts receivable balance was $9.8 million reflecting a dayssales outstanding ratio of 53 days, compared to trade accounts receivable of$10.0 million at December 31, 2004, reflecting a days sales outstandingratio of 60 days. Based on the geographic mix of our customers and the creditterms we extend, management expects our days sales outstanding ratio to rangefrom 50 to 60

 

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days. Our inventorybalance at September 30, 2005 was $13.5 million reflecting inventory turnsof 3.3 times per year, compared to an inventory balance of $14.6 million at December 31,2004, reflecting inventory turns of 3.0 times per year. The Company continuesto pursue actions to monitor inventory levels and improve inventory turns. Thecalculations above are based on quarterly average balances of trade accountsreceivable 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 Bank primerate 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 September 30, 2005, APT had $15.5 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 September 30,2005 the Company did not have any unconsolidated entities or off balance sheetfinancial arrangements, guarantees or similar commitments with such entities. Asof September 30, 2005 the open value of purchase order commitments was $13.5million compared to $12.1 million at December 31, 2004. This representsthe amounts committed per open purchase orders with third parties. The Companydid not enter or 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) in the notes to the consolidated financialstatements for further 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.

 

In May 2005,FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” (SFAS 154). SFAS 154 requiresretrospective application of a voluntary change in accounting principle toprior period financial statements unless it is impracticable. This Statementalso requires that a change in method of depreciation, amortization, ordepletion for long-lived, non-financial assets be accounted for as a change inaccounting estimate that is affected by a change in accounting principle andrequires retrospective application to prior period financial statements. SFAS154 replaces APB Opinion 20, “AccountingChanges”, and SFAS 3, “ReportingAccounting Changes in Interim Financial Statements”. The Company doesnot anticipate that the adoption of this standard will

 

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have a material impact onits consolidated financial statements. SFAS 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005, and accordingly, the Company will adopt SFAS 154 in the first quarter of2006.

 

**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 third 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 6. EXHIBITS**

 

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

 
| **Exhibit No.** | ** ** | ** **                                                                                                                                                                                                                                                                                                                |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                      |
| 10.39                |       | Agreement and  Plan of Merger dated November 2, 2005 among Microsemi Corporation, APT  Acquisition Corp., a Delaware corporation that is a wholly owned subsidiary  of Microsemi Corporation, and Advanced Power Technology, Inc., a  Delaware corporation, including (except as noted) the following exhibits: |
|                 |       | Voting Agreement                                                                                                                                                                                                                                                                                                          |
|                 |       | Non-Competition Agreement                                                                                                                                                                                                                                                                                                 |
|                 |       | Lock-up Agreement                                                                                                                                                                                                                                                                                                         |
|                 |       | Employment Agreement*                                                                                                                                                                                                                                                                                                     |
|                 |       | Option Assumption Agreement                                                                                                                                                                                                                                                                                               |
|                 |       | Certificate of Merger*                                                                                                                                                                                                                                                                                                    |
|                 |       | List of Parties to Ancillary Agreements*                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                      |
| 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.                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                      |

 

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*      Omittedfrom this filing but to be made available to the SEC at the SEC’s request.

 

 

**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 9th day of November, 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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