**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-KSB**

**(Mark One)**

**x**                              ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe fiscal year ended**December 31,2006

**OR**

**o**                                 TRANSITIONREPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe transition period from                           to                                  .**

**APOGEE TECHNOLOGY, INC.**

(Exact name of registrantas specified in its charter)

Commission File No:  000-30656

| **DELAWARE**                              |   | **04-3005815**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction             |   | (I.R.S. Employer  Identification No.) |
| of incorporation  or organization)        |   |                                  |
| **129 MORGAN DRIVE**                      |   | ** **                            |
| **NORWOOD,  MASSACHUSETTS**               |   | **02062**                             |
| (Address of  principal executive offices) |   | (Zip Code)                            |

 

Registrant’s telephone number, including area code: **(781) 551-9450**

Securities registeredpursuant to Section 12(b) of the Exchange Act:

| **Title of each class**                 | ** ** | **Name of  each exchange  on which registered** |
|-----------------------------------------|------------|-------------------------------------------------|
| Common Stock, $.01  Par Value Per Share |       | American Stock  Exchange                        |

 

Securities registeredpursuant to Section 12(g) of the Exchange Act:  None

Check whether the issuer is not required to filereports pursuant to Section 13 or 15(d) of the Exchange Act: o

Check whether issuer (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x    No o

Check if there is no disclosure of delinquent filerspursuant to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form  10-KSB or any amendment to this Form 10-KSB. o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x

State issuer’s revenue for the most recent year: $1.9million

The aggregate market value of the voting and non-votingcommon stock held by non-affiliates of the registrant on March 15, 2007,based on the last sale (closing) price of the common stock on the AmericanStock Exchange of $1.35 per share on such date was $9,689,936.

The number of outstanding shares of the registrant’sCommon Stock, $.01 par value, as of March 15, 2007 was 11,968,331.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) areincorporated by reference into the following parts of this Form 10-KSB:Certain information required in Part III of this Annual Report on Form 10-KSBis incorporated from the Registrant’s Proxy Statement which the Company intendsto file within 120 days after the Company’s fiscal year ended December 31,2006.

TransitionalSmall Business Disclosure Format: Yes o    No x

 

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**INDEX**

|              | ** ** | ** **                                                                                                        | ** ** | **PAGE**   |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART I**   | ** ** | ** **                                                                                                        | ** ** | ** ** |
| ITEM 1  |       | Description  of Business                                                                                          |       | 3          |
| ITEM 2  |       | Description  of Property                                                                                          |       | 14         |
| ITEM 3  |       | Legal  Proceedings                                                                                                |       | 14         |
| ITEM 4  |       | Submission of  Matters to a Vote of Security Holders                                                              |       | 14         |
| **PART II**  | ** ** | ** **                                                                                                        | ** ** | ** ** |
| ITEM 5  |       | Market for the  Common stock and Related Stockholder Matters                                                      |       | 15         |
| ITEM 6  |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       |       | 17         |
| ITEM 7  |       | Financial  Statements and Supplementary Data                                                                      |       | 34         |
|         |       | Report of  Independent Registered Public Accounting Firm                                                          |       | F-1        |
|         |       | Consolidated  Balance Sheets at December 31, 2006 and 2005                                                        |       | F-2        |
|         |       | Consolidated  Statements of Operations for the Years Ended December 31, 2006 and 2005                             |       | F-3        |
|         |       | Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31, 2006 and  2005             |       | F-4        |
|         |       | Consolidated  Statements of Cash Flows for the Years Ended December 31, 2006 and 2005                             |       | F-5        |
|         |       | Notes to  Consolidated Financial Statements                                                                       |       | F-6        |
| ITEM 8  |       | Changes in and  Disagreements with Accountants and Financial Disclosure                                           |       | 35         |
| ITEM 8A |       | Controls and  Procedures                                                                                          |       | 35         |
| ITEM 8B |       | Other Information                                                                                                 |       | 35         |
| **PART III** | ** ** | ** **                                                                                                        | ** ** | ** ** |
| ITEM 9  |       | Directors,  Executive Officers, Promoters and Control Persons: Compliance with Section  16(a) of the Exchange Act |       | 35         |
| ITEM 10 |       | Executive and  Director Compensation                                                                              |       | 35         |
| ITEM 11 |       | Security  Ownership of Certain Beneficial Owners and Management, and Related  Stockholder Matters                 |       | 35         |
| ITEM 12 |       | Certain  Relationships and Related Transactions                                                                   |       | 35         |
| ITEM 13 |       | Exhibits  and Reports                                                                                             |       | 36         |
| ITEM 14 |       | Principal  Accountant Fees and Services                                                                           |       | 38         |
|         |       | Signatures                                                                                                        |       | 39         |

 

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**PART I**

This document andthe documents incorporated by reference herein contain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995. Also, Apogee’s management may make forward-looking statements orallyor in writing to investors, analysts, the media and others. Forward-lookingstatements express our expectations or predictions of future events or results.They are not guarantees and are subject to many risks and uncertainties. Thereare a number of factors that could cause actual events or results to besignificantly different from those described in the forward-looking statements.Forward-looking statements might include one or more of the following:

·       anticipatedfinancing activities;

·       anticipatedstrategic alliances or arrangements with development or marketing partners;

·       anticipatedresearch and product development results;

·       projecteddevelopment and commercialization timelines;

·       descriptionsof plans or objectives of management for future operations, products orservices;

·       forecastsof future economic performance; and

·       descriptionsor assumptions underlying or relating to any of the above items.

Forward-looking statements can be identified by thefact that they do not relate strictly to historical or current facts or events.They use words such as “anticipate”, “estimate”, “expect”, “project”, “intend”,“opportunity”, “plan”, “potential”, “believe” or words of similar meaning. Theymay also use words such as “will”, “would”, “should”, “could” or “may”.

Although we believe thatthe expectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements. Moreover, we do not assume responsibility for the accuracy andcompleteness of such statements. We do not intend to update any of theforward-looking statements after the date of this report to conform suchstatements to actual results except as required by law. Given theseuncertainties, you should not place undue reliance on these forward-lookingstatements, which speak only as of the date of this report. You shouldcarefully consider that information before you make an investment decision. Youshould review carefully the risks and uncertainties identified in this report.

**Item 1.**                        BUSINESS

**Corporate Overview**

Apogee Technology, Inc. (“Apogee”, the “Company”,“we”, “us” or “our”) is designing and developing advanced intradermal anddermal drug delivery systems while further developing and marketing sensorsolutions based upon the Company’s proprietary nanotechnology andMicro-Electromechanical Systems (“MEMS”) and drug delivery technologies.

Our Medical Products Group is developing advancedintradermal drug delivery systems to meet the needs of patients, healthinsurers, companies’ developing pharmaceuticals, as well as, governments andinternational health organizations. We are in preclinical development of ourPyraDermTM intradermal drug system, which we believe could have significantadvantages over competitive approaches for the delivery of vaccines, small dosehigh potency therapeutic protein drugs and other active ingredients. PyraDermis designed to be a low-cost, effective, painless delivery system that can beself administered and easily stored while potentially providing pharmaceuticalcompanies extended patent position for their current drug formulations. We haveevaluated the feasibility of our PyraDerm approach by performing in vitro testswith model drugs and are planning to start in vivo testing in the near future.We are working to establish 

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pharmaceutical industrycompliant manufacturing methods and to define regulatory strategies to supportthe commercialization of PyraDerm. Our business strategy may include: (i) the licensingor selling of our technologies to pharmaceutical or medical device companies, (ii) establishingpartnerships with pharmaceutical and device companies to commercialize ourproducts and; (iii) developing, producing and marketing our own medicalproducts.

Our Sensor Products Groupis focused on the design, development and marketing of our proprietaryMEMS/Nanotechnology based sensors for the medical, automotive, industrial andconsumer markets. In December 2005, we introduced our first sensorproducts, a family of miniature pressure sensor die, trademarked under theSensilica® brand name. These devices are produced using anovel manufacturing technology that we believe reduces size and cost whileimproving reliability as compared to alternative MEMS sensor solutions. We areselling these sensor devices as stand-alone die to sensor integrators and aspackaged solutions directly and through independent representatives anddistributors. We are currently providing customer samples of our sensor die andpackaged products and have shipped small quantities of production sensor die.

**History**

Apogee was organized as a Delaware corporation in1987, and initially operated through its wholly owned subsidiary, ApogeeAcoustics Incorporated (“Acoustics”). Acoustics engineered, manufactured, andmarketed high quality, high-end patented ribbon loudspeaker systems for use inhome audio and video entertainment systems. This technology was considered soinnovative that a pair of Apogee loudspeakers is on display at the SmithsonianMuseum.

We discontinued our loudspeaker business in 1994 andutilized our audio experience on the development of the worlds’ first all-digital,high efficiency audio amplifier ICs, which we trademarked as Direct DigitalAmplification or DDX®.We transitioned our business to take advantage of the patent we received in1991 for related technology and to pursue the market opportunity created by theindustry adoption of digital audio transmission, recording and playback. In1999, we released our first digital DDX Controller IC. Subsequently, wereleased six additional Controller ICs, 13 DDX power devices and a family of ICs that combined DDX Controller andDDX Power Devices. In addition to our IC product sales, we also licensed DDXtechnology to several IC companies, including STMicroelectronics NV (“ST”), oneof the world’s largest semiconductor companies. In conjunction with ST ourprincipal licensee, DDX technology became the market standard and over 35million DDX ICs were sold in the first 4 years to consumer electronic companiessuch as Sony, Sharp, Samsung, LG, Philips, RCA and Zenith. During the growth ofthis business, we won the Deloitte Technology Fast 50 awards in 2003 as thesecond fastest and 2004 as the fastest growing technology company in NewEngland.

In May 2004, in order to expand our technologybase and to further diversify our product and market opportunities, we acquireda portfolio of MEMS and nanotechnology intellectual property, trade secrets andknow-how developed by Standard MEMS, Inc. MEMS are devices produced usinghigh volume IC manufacturing techniques that include both electrical circuitsand microscopic mechanical systems. During this time, we also hired employeesfrom the former Standard MEMS, Inc. and established a MEMS Division thatwe subsequently consolidated into our Norwood headquarters. Since thisacquisition, we have been using this acquired know-how plus additionaltechnologies to develop MEMS and nanotechnology based medical and sensorproducts.

On October 5, 2005, we sold our audio ICbusiness, including the DDX technology and the associated royalties from ourlicense agreement with ST to SigmaTel, Inc. (“SigmaTel”), forapproximately $9.4 million plus a one-year earn-out that subsequently amountedto $383,000. After the sale, we reorganized the Company’s remaining MEMSdivision into two business groups, the Medical Products Group and the 

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Sensor Products Group. Wealso closed our sales offices in China, Japan, Taiwan and Hong Kong andterminated our agreements with our independent sales representatives anddistributors.

In 2006, the majority of our revenue was derived fromthe sale of the remaining DDX IC inventory, primarily as a result of therecognition of all the deferred distributor revenue. We expect that futurerevenue will initially be the result of sensor sales or licensing anddevelopment related revenues resulting from the grant of rights to our intellectualproperty. In order to support our operations and maintain our listing on theAmerican Stock Exchange (the “AMEX”) we intend to secure additional funding in2007. As more of our products reach a commercializable phase, we plan to add anetwork of direct sales staff, independent sales representatives anddistributors to support the sales of our medical and sensor products. Wepresently outsource the manufacturing, assembly and certain testing of ourmedical and sensor products.

Apogee maintains an Internetsite at http://www.apogeemems.com.**Theinformation contained on our Internet site is not incorporated by reference inthis report and it should not be considered part of this report. Apogee’sAnnual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB,Current Reports on Form 8-K, and any amendments to those reports,are available free of charge on our website as soon as reasonably practicableafter they are filed with, or furnished to, the Securities and ExchangeCommission.

**Medical Products Group**

**Background**

The drug delivery market is driven by the needs ofpatients, health insurers, companies’ developing pharmaceuticals as well asgovernments and international health organizations. Patients’ desire drugdelivery systems that are inexpensive, easy to use, can be self applied, arepainless and do not require any special storage or handling. We believe healthinsurers desire similar standards in drug delivery systems to reduce treatmentcost and difficulties associated with drug delivery. If such goals arerealized, the ancillary benefits could be higher efficacy, as a result ofimproved patient compliance, and wider self-administration avoiding the costand inconvenience of doctor or hospital visits. We believe pharmaceuticalcompanies desire delivery systems that improve efficacy, are safe, reduce sideaffects and the associated liabilities, and have the potential to extend thepatent life of drugs to protect market position. Similar to the above, webelieve that both government and international health organizations desire lowcost drug delivery systems that can be applied without the need of health careprofessionals and can be easily stored and distributed efficiently.

We believe that existingdrug delivery methods of parenteral (*i.e.* intra muscular,subcutaneous and intra venous injection), oral, nasal, and transdermal do notmeet all of the needs or stated goals for existing and emerging therapies. Forexample, protein drugs do not lend themselves to oral delivery because of poorbioavailability. Consequently, these drugs are delivered parenterally by healthcare professionals resulting in increased costs and less patient compliance.****Traditionaltransdermal patches cannot be used to deliver large molecule drugs because theywill not penetrate the skin under normal conditions. In order to overcome thisproblem, companies are using electrical forces (iontophoresis), chemicalenhancers and microporation methods, which include; RF energy, lasers, thermalenergy and microneedles. We are developing a microneedle-based approach that webelieve will satisfy important medical needs for small dose protein drugs(large molecule drugs) while avoiding the complexity associated with many ofthe competitive transdermal delivery technologies.

**PyraDerm Solution**

Our PyraDerm delivery system consists of an array ofmicroneedles covered in a solid-state drug formulation that can be applied withan easy to use applicator to deliver drugs into the skin for local or systemictreatments. We utilize micro-fabrication techniques to create our microneedlearrays out of 

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silicon or otherbiocompatible materials. Our microneedle array design can be tailored to meetspecific delivery requirements and may have from one to over 100 solidmicroneedles that are from 100 to 1000 microns in length. We have developedunique methodologies to precisely coat our microneedles with a solid-statepolymer drug formulation. Our coating is designed to work with many differenttypes of drugs, be biocompatible, maintain drug stability and to dissolve asrequired, *i.e.* rapidly or in a prolonged manner,to meet specific drug delivery requirements. In order to ensure the properapplication of our coated micro-needle array, we have designed a low cost andeasy to use applicator system.

We believe our PyraDerm system will offer advantagesover competitive transdermal delivery systems and non-transdermal systems forvaccines, small dose high potency protein drugs, nutraceutical andcosmeceutical active ingredients. We also believe that our technology has thepotential to enhance the delivery rate of certain small molecule drugs comparedto existing passive transdermal systems or patches. When compared with otheractive transdermal systems that utilize electrical/thermal/RF/laser energy orparticle ablation, we believe our system will be lower in cost, safelydisposable and will have the potential for self-administration. In addition,our system is designed to deliver some large molecule drugs that, at present,cannot be delivered using iontophoresis-based transdermal systems. Compared toparenteral delivery methods that are painful, we believe our solution has thepotential to be easier to store, pain free, safer to dispose andself-administered. In addition, our system may even provide improved efficacyfor vaccines. Compared to oral administration, our approach avoids thedigestion system thereby potentially reducing side affects and improving thebioavailability for specific drugs.

A summary of the advantages we perceive from ourdelivery technologies are presented below along with a table summarizing why webelieve our PyraDerm system addresses important medical needs.

**Micro Needle Intradermal Delivery**:   Wehave developed and applied for a patent on a novel micro-machined siliconmicroneedle structure and have developed new micro-needle designs using otherbiocompatible materials. We believe the advantages of our microneedle arraydesigns are that: (i) the length/design of our micro needles can beprecisely manufactured to meet the needs of the optimal drug delivery depth inthe skin, (ii) the design can be tailored to deliver microencapsulateddrugs and very large molecules; (iii) our design approach utilizesmanufacturing methods that can be scaled to high volume production to meet costgoals; and (iv) our silicon design has the potential to be modified to addelectronics to perform additional functionality such as sensing or enhancedtherapeutic delivery to meet future market needs.

***Drug Delivery Formulations:***   We are developing novelsolid-state polymer/drug formulations to coat our microneedle arrays with thegoal of dissolving and releasing bio-active compounds or drugs in a controlledmanner. We currently have rights to patents and have filed patent applicationson polymer formulations for use in drug delivery, targeted applications andrelated manufacturing processes. We believe the advantages of thesetechnologies are:

·        ***Drug Stability/Shelf Life:***   OurSolid-state drug formulations may improve the stability of biologically activecompounds as compared to liquid formulations, which may require refrigeratedstorage and transport. This potential advantage could provide a longershelf-life without loss of efficacy, while at the same time simplifying andreducing the cost of transport and storage.

·        ***Controlled Release:***   Webelieve our formulation technology can be customized to meet the needs ofspecific drug release requirements. Our approach is amenable to use bothwater-soluble polymers, which generally results in quick drug release andhydrophobic biodegradable polymers, which provide more prolonged drug releaseprofiles.

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·        ***Dose Control:***   Ourformulation processes, micro-needle design and coating process are designed toprovide for high efficiency of drug incorporation to minimize losses, or wastedbio-active material, and to better control the dose of drug to be delivered.

| **Drug Delivery Needs**                             | ** ** | **PyraDerm Advantage**                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Patient**                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Few Side Affects                                    |       | -         May avoid side  affects associated with oral delivery                                                                                                                                                                                                                                                                                                                                                                                    |
| Safe                                                |       | -         Single use

-         Lower probability of  needle sticks

-         Less chance of  accidental overdose                                                                                                                                                                                                                                                      |
| Painless and no Needles                             |       | -         Minimal or no pain due  to size of microneedles

-         Patient friendly and  easy to use applicator                                                                                                                                                                                                                                                                                               |
| No Hospital or Doctor Visits                        |       | -         Self administration  limits need for doctor and hospital visits                                                                                                                                                                                                                                                                                                                                                                               |
| **Health  Insurers**                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Reduce Current and Future Treatment Cost of Patient |       | -         Low cost design

-         Designed for higher  efficacy (vaccines) potentially reducing need for multiple administrations

-         Self administration  limits cost of doctor/hospital visits

-         Painless and easy  delivery improves compliance and patient realizes the benefits of enhanced  compliance |
| **Government/World  Health Organizations**          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Low Treatment Cost                                  |       | -         Low cost design                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Long term storage/ Ease of Transport                |       | -         Solid-state formulation  may provide extended shelf life and minimizes need of refrigerated storage  and transport                                                                                                                                                                                                                                                                                                                            |
| Rapidly Deployable                                  |       | -         Self administration

-         no health care  professionals required                                                                                                                                                                                                                                                                                                                                 |
| Disposable/No Reuse/Contamination                   |       | -         Single use for no cross  contamination

-         Easier to dispose

-         All of the drug is  consumed no disposal abuse                                                                                                                                                                                                                                 |
| **Pharmaceutical  Companies**                       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Higher Efficacy                                     |       | -         Targeted intradermal  delivery of vaccines may lead to higher immune responses (more effective  vaccines), dose sparing, and potentially new vaccines                                                                                                                                                                                                                                                                                         |
| Improved Safety/Less Side Affects                   |       | -         No potential for needle  reuse and cross contamination

-         No gastric tract  related side affects

-         Less chance of  accidental overdose with the single use design                                                                                                                                                                            |
| Extend Patent Life                                  |       | -         Solid-state drug  formulation and intradermal delivery may extended drug patent life                                                                                                                                                                                                                                                                                                                                                          |
| Release Control                                     |       | -         Solid-state drug  formulation has potential to be customized for rapid or prolonged release                                                                                                                                                                                                                                                                                                                                                   |
| Targeted Delivery                                   |       | -         Delivery to targeted  area of skin possible                                                                                                                                                                                                                                                                                                                                                                                                   |
| Platform Design for Wide Use                        |       | -         Potentially suitable  for vaccines, high potency large molecule drugs and active ingredients                                                                                                                                                                                                                                                                                                                                                  |

 

**MarketOpportunities**

We believe that with the appropriate technology, themarket for transdermal technologies within the drug delivery market could beexpanded to capture a larger percentage of the $550 billon dollar total drug 

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market with the adoptionof new active technologies, like our PyraDerm solution, which may allow for thedelivery of a broader range of drugs into the skin. Currently, the FDA hasapproved over 13 specific transdermal drug and over 35 passive transdermalpatches. According to a leading independent research organization, theworldwide market for transdermal delivery was $12.7 billion in 2005 with ananticipated growth to $21.5 billion by 2010. Potential applications forenhanced transdermal delivery systems include the delivery of pain managementtherapies, anxiety therapeutics, antidepressants, treatments relating to sexualdysfunction, vaccines and therapies for diabetes and others. In particular, webelieve that PyraDerm’s advantages of targeted intradermal delivery,self-administration and controlled release may have particular benefits for thedelivery of vaccines, small dose high potency protein based therapeutics andthe delivery of non-pharmaceutical active ingredients for the cosmeceutical andnutraceutical market as summarized below.

***Vaccines****:*   Below the top layer of the skinare cells whose function is to facilitate the body’s protective immune responsemechanism. PyraDerm is designed to deliver vaccines to the skin layer rich insuch cells thereby potentially increasing efficacy over intramuscularinjection. This targeted approach may have the potential to reduce the vaccinedose required for an effective immunization. In addition, new vaccines that donot meet efficacy requirements using an intramuscular injection may be viableusing intradermal delivery thus expanding market opportunities. Because ourdelivery system is designed to be self-administered, vaccines can be deployedrapidly to a large population in the event of a flu outbreak or a bioterrorismattack. The anticipated stability of our solid-state formulation will havebenefits for the viability and utility of such vaccines.

The global vaccine market is about $8 billion dollarsand growing at approximately 12% per year. Over 80 million doses of flu vaccineare administered in the US on an annual basis.

***Protein/Polypeptide Drugs****:*   Protein and polypeptidetherapeutics are among the most effective treatments available today forcertain diseases. These large molecule pharmaceuticals can be a challenge todeliver orally because they are usually inactivated during digestion andtherefore are typically administered parenterally. The need for professionaladministration of these therapies is one of the challenges limiting theiracceptance and market growth. For the protein drugs that only require a smalldosage, our PyraDerm system may offer the following potential advantages:

·        painlessself administration thereby avoiding the need for a hospital or doctors visit,

·        simplifiedstorage and extended product shelf life of large molecule drugs, and

·        extensionto the patent life of specific drugs through the adoption of a new transdermalformulation protecting pharmaceutical market share and product revenue.

Currently there are more than 40 marketedpeptide/protein based drugs for the treatment of diseases such as diabetes,osteoporosis, hepatitis and cancer. The US market in 2003 was $9 billion forpeptides and $37 billion for proteins. The total market for these therapiescombined is expected to grow to $90 billion by 2010.

***Non-PharmaceuticalActive Ingredients:****  *Withthe aging of the population there is an increasing interest in health andbeauty. This market need is driving the development of more effectivetreatments such as cosmeceutical products that do more than cosmetics, whichoften just mask conditions. Because of this trend, the cosmeceutical portion ofthe $7 billion US skin care market has grown from 50% in 2001 to over 60% in2005. We believe our delivery technologies have the potential to enhance theeffectives of cosmeceutical products and thus we are exploring the developmentand commercialization of delivery products for this market as well as thenutraceutical market. We believe these compounds may not require a longregulatory approval process and thus could provide a source of near termproduct revenue for the Company.

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We believe that thepotential benefits of our approach to this market are:

·        improvedpreservation of active ingredients increasing product shelf life and efficacy,

·        enhancedcontrol over the active ingredient release to meet specific applicationrequirements, and

·        ease and convenience ofuse.

**GovernmentRegulation**

Drug delivery products requireFDA approval for many of the applications discussed above before they can besold in the United States. If these products are marketed abroad, they willalso be subject to export requirements as well as to regulation by foreigngovernments. The FDA administers the Federal Food, Drug and Cosmetic Act (“FFDCA”)and has adopted regulations to administer the FFDCA. These regulations includepolicies that: i) govern the introduction of new medical devices, drugs, andexcipients; ii) require observing certain standards and practices in themanufacture and labeling of medical devices; and iii) require medical deviceand drug companies to maintain certain records and report related deaths,serious injuries and certain malfunctions to the FDA. The FDA approval processcan last several years before a product can be marketed and sold. Because ofthese regulations, we intend to pursue licensing/development or partnershipagreements with pharmaceutical companies and have retained experienced FDAconsultants to support this effort.

**Our BusinessStrategy**

Depending upon the results of our research anddevelopment activities, market conditions and business opportunities, we maypursue a licensing/partnership strategy as well as a direct sales strategy tobuild revenue from the operations of our Medical Products Group.

For vaccines and protein drug delivery products thatrequire FDA regulatory approval, we intend to pursue licensing/development orpartnership agreements with pharmaceutical companies due to the significantcost associated with the approval process. Under a licensing/developmentagreement with a potential pharmaceutical company we would provide rights toour intellectual property in exchange for license fees, milestone developmentpayments and/or royalties tied to product sales. Under a partnership agreementwe would jointly invest in the product development and regulatory approval andshare on some basis the resulting revenues. We may also sell the rights to ourdesigns to companies for specific applications. During the first half of 2007,we expect to initiate a series of in vivo testing in order to validate proof ofconcept of our delivery system. The results of these tests and otherdevelopment efforts will determine when we begin to pursue agreements withpotential pharmaceutical and medical device companies.

For the delivery ofcompounds that may have lesser regulatory requirements (e.g., cosmeceutical ornutraceutical active ingredients) or that may not require FDA approval, we willdesign, develop, have manufactured, and sell complete products to end users ordistribution partners. We are currently looking for and evaluating variousactive ingredients and are developing product concepts using our drug deliverytechnologies. If we can successfully commercialize these delivery products, webelieve that we can generate revenue more quickly than with products requiringregulatory approval.

**Competition**

As presented above, webelieve that we are positioned to compete effectively in the drug deliverymarketplace. However, our intellectual property is uncertain, the majority ofour competitors are substantially larger, have been in this field longer andhave financial resources significantly greater than 

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our own.Companies developing similar drug delivery technologies include; 3M Company,Alza Corporation, Becton Dickinson and Company and BioValve Incorporated.

**Sensor ProductsGroup and Market**

**Background**

The sensor industry is a highly diversified businesswith a wide range of applications and a broad range of markets including medical,consumer, automotive, industrial and defense. We believe the wide range ofmarkets and applications provide sensor companies, such as ourselves, anopportunity for good margin, nominal selling price erosion and the ability todefend market position. In addition, it is our view that many of the marketsare relatively stable, which can create long product life cycles.

An array of technologieshave been developed and employed to address specific sensor applications. Inparticular, Micro-electrical Mechanical Systems (“MEMS”) technology was adaptedfor sensor applications because it enables the integration of the sensorelement and supporting electronics. This approach can significantly reducesystem cost and size compared to previous approaches, which utilized multiplemachined components and separate, discrete electronics. In addition, MEMSsensors can be produced at a relatively low cost because they can be producedusing batch-manufacturing methods built upon the infrastructure developed bythe IC industry. One of the first MEMS devices developed in the mid 1960’s werepressure sensors. Since that time, MEMS technology has been applied to amultitude of applications including the measurement or sensing of flow,displacement, force, humidity, biological and chemical substances. According toa leading research firm, the global market size for sensors is forecasted togrow to over $12 billion by 2009. The current pressure sensor market size isapproximately $2.2 billion, of which approximately $830 million is related tothe MEMS portion. Applications using MEMS pressure sensors include enginecontrol, tire pressure monitoring, pump control, blood pressure monitoring andbarometric pressure measurement.

**Our SensorTechnology and Products**

We are focusing ourinitial research and development efforts toward pressure sensor products forthe medical, consumer, industrial and automotive markets. We selected thepressure sensor market because it is the largest MEMS sensor market and alsobecause we have access to unique all-silicon MEMS manufacturing process. Webelieve this manufacturing process has significant advantages that will allowus to produce value added products at good operating margins, as summarizedbelow:

·       ***Cost:***   Our novelall-silicon manufacturing approach creates the pressure cavity within thesilicon, which does not require additional manufacturing steps, thus lowingcosts. Traditional MEMS pressure sensors are produced using a more costlyprocess that bonds two different materials (typically glass and silicon) tocreate a pressure cavity.

·       ***Size****:*   By using only silicon our pressuresensor is much smaller and thinner (up to a factor of four times), allowing thedevice to be used in demanding applications where size is important, e.g.internal blood pressure measurement systems.

·       ***Reliability:***   Sensilica’sall-silicon design eliminates the glass silicon bonding and thereby reduces thepotential for pressure cavity leakage and sensor failure. Sensilica alsoutilizes a very small pressure cavity, which prevents excess deflection of thepressure membrane, a common reason for sensor failures.

Weinitiated the development in 2004, and in December 2005 we released afamily of miniature pressure sensors trademarked under the Sensilica® brand name. Sensilica pressure sensors areextremely small (0.8mm x 0.8mm x 0.4mm) MEMS-based piezoresistive pressuresensing die designed to support pressure measurement from vacuum to 1000 poundsper square inch (“PSI”). As set forth in the chart 

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below, Sensilica die product sensors are ideal forcompanies producing packaged sensor products where cost and performance arecritical factors, such as tire pressure monitoring and disposable pressuresensing.

| **Die Products**                                                                      | ** ** | **Potential Applications**                                                              |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|
| Low Pressure Die  (15 PSI)

ASD5-0015A                                                |       | Altimeters, weather stations, medical, HVAC                                             |
| Medium Pressure  Die (45 to 200 PSI)

ASD5-0045A

ASD5-0060A

ASD6-0100A

ASD5-0200A  |       | Tire pressure monitoring, scuba, automotive engine  control, Industrial Process Control |
| High Pressure Die  (300 to 1000 PSI)

ASD5-0300A,

ASD5-0500A

ASD5-0750A

ASD5-1000A |       | Diesel engine control, transmission control,  Industrial process control                |

 

Inaddition to our sensor die offerings, we are developing packaged sensorsolutions that will allow our customers to more easily adopt our sensors. Inthe future we intend to add compensation electronics and other electronics,such as connectivity, to enhance our sensor product offerings and meet ourcustomer demands. In late 2006 we introduced our first package product: afamily of TO-5 header sensors. The 1/8 inch nickel tube connector is easyto apply and is well suited for a variety of industrial, medical and othercommercial applications as summarized in the chart below.

| **Packaged Products**                                                             | ** ** | **Potential Applications**                                                    |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|
| Low Pressure Die  (15 PSI)

ASTO-U-0015-A                                         |       | Altimeters, weather stations, medical, HVAC                                   |
| Medium Pressure  Die (45 to 200 PSI)

ASTO-U-0045-A

ASTO-U-0060-A

ASTO-U-0100-A |       | Gas pressure systems, pneumatic systems, medical,  industrial process control |

 

To date we have provided samples of our die andpackaged sample products to customers for evaluation and have shipped our firstnominal orders of our die products. Based upon the initial customer feedback weintend to develop new sensor products. This will be done in conjunction withthe transition of our manufacturing partner from a 6 inch wafer process to an 8inch wafer process during the second half of 2007.

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**Competition in theSensor Products Industr*y***

We believe that the marketfor MEMS-based pressure sensors is robust. There are either applications orniche markets that exist where we can effectively compete. There is minimalintellectual property protection in the Sensor Products Group. To manage thishighly competitive industry we are relying on proprietary manufacturingprocesses, the advanced state of our technology, the breadth of the marketplaceand the large number of potential applications for our MEMS based pressuresensors. Companies developing or marketing pressure sensor products includeFreescale Semiconductor, Inc., General Electric Company, HoneywellInternational, Inc. and Infineon Technologies AG.

**Business Operations**

**Research andDevelopment**

During the year ended December 31,2006 Apogee spent approximately $1.7 million on research and development (“R&D”)activities to support its Medical and Sensor Product Groups. During the yearended December 31, 2005 Apogee spent approximately $2.7 million on R&D.The decline in 2006 was directly related to the reduction in our engineeringstaff following the SigmaTel transaction. Although we reduced R&Dexpenditures subsequent to the SigmaTel transaction, we are now makingincreased investments in research and development to support our MedicalProducts and Sensor Products Group.

**IntellectualProperty**

Our policy is to protectthe technology important to the success of our business by filing U.S. patentapplications and, where appropriate, corresponding foreign patent applications.We have filed six patent applications related to our drug delivery products andhave licensed exclusive rights from a third party to three additional patents.In May 2004, we acquired a portfolio of MEMS intellectual property, trade secretsand know-how developed by Standard MEMS, Inc, which has certain rights androyalty obligations associated with it. We are evaluating this intellectualproperty to determine what intellectual property should be utilized and filedto support our current business operations. We intend to file, or acquire therights to, additional patents with the objective of protecting our commercialendeavors.

**Marketing and Sales**

The marketing and saleseffort of the Medical and Sensor Groups is currently being directed from ourU.S. office. We intend to add independent distributors and representatives tomarket and sell our medical and sensor products. Our strategy is to make iteasy for our customers to adopt and utilize our products and technologies byproviding them with quality application support, application notes, testresults and demonstration systems. We have registered the Sensilica® trademarkand it is our intention to build brand recognition for our products. We willmarket our products by attending and exhibiting at key industry tradeshows, aswell as through our website at http://www.apogeemems.com. The Company sold itsformer website http://www.apogeeddx.com as part of the SigmaTel transaction.

**Manufacturing andQuality**

We have developed a low cost manufacturing process toproduce our silicon-based micro-needles and have retained a qualified MEMSfoundry to support production. We are also developing manufacturing methods toproduce micro-needles out of biocompatible materials other than silicon. Wehave retained the services of a certified medical device manufacturer toproduce our drug delivery device prototypes for clinical testing and marketdevelopment. And we are developing proprietary manufacturing methods to applydrugs and other active ingredients for our products. As we progress in ourdevelopment, we plan to add resources to help meet the regulatory requirementsfor our products.

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We utilizeSTMicroelectronics, an ISO certified manufacturer and a company with which wehave had a long-term supply relationship to produce our pressure sensor dieproducts. ST provides many services, along with production, including qualityinspection, which greatly enhances our quality control capabilities. We providethe final test and inspection of the pressure sensor devices. We are currentlyworking with ST to transition the manufacturing production of our sensorproducts from a 6” wafer process to an 8” process. This transition is expectedto be completed during the second half of this year. We believe that when thistransition is complete ST will have the capacity to meet our projectedproduction requirements for 2007 and beyond. We inventory and ship our productfrom our headquarters in Norwood, Massachusetts.

**Environmental Lawsand Regulations**

Since January 2007, wehave been operating a formulation and analytical laboratory at our headquartersin Norwood, MA. This laboratory is supports our Medical Products Group and as aresult of this; we use materials, from time to time, that are potentiallybiologically hazardous. These materials are segregated and handled inaccordance with specific procedures that minimize the potential exposure forour employees. Such materials are disposed of in accordance with specificprocedures. The costs of compliance with these procedures are not significant.

**Scientific AdvisoryBoard**

OurScientific Advisory Board is comprised of scientists who provide specificexpertise on consulting basis. The Board assists us on issues related tofundamental technologies, product development, potential applications andclinical testing. Its members, and their affiliations and area of expertise,include:

| **Name**               | ** ** | ** **                                                                           | ** ** | **Affiliation**            | ** ** | **Area of Expertise** |
|------------------------|------------|--------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------|
| R. Rox Anderson M. D.  |       | Mass General Hospital  Harvard Medical School  Massachusetts Institute of Technology |       | Dermatology                |
| Joachim Kohn, Ph. D.   |       | Rutgers University  New Jersey Medical School  New Jersey Center for Biomaterials    |       | Biomaterials               |
| Mark Prausnitz, Ph. D. |       | Georgia Institute of Technology                                                      |       | Drug Delivery Technologies |

 

**Employees**

As of December 31, 2006, Apogee had 12 employees,of which 11 were full-time employees, including 7 in research and development,1 in sales and marketing and 4 in general and administration. Prior to the saleof the audio business to SigmaTel in October 2005, we had 36 employees. Noneof our employees are represented by a collective bargaining agreement, nor havewe experienced work stoppages. It is our belief that relations with ouremployees are good.

The following table setsforth certain information with respect to the executive officers of ApogeeTechnology as of December 31, 2006. All officers serve at the pleasure ofthe Board of Directors.

**Executive Officers of the Company**

| **Name**                       | ** ** | ** ** | ** ** | **Age**                                                       | ** ** | **Position** |
|--------------------------------|------------|------------|------------|---------------------------------------------------------------|------------|--------------|
| Herbert M. Stein               |       | 78         |       | President, Chief  Executive Officer and Chairman of the Board |
| Paul J. Murphy                 |       | 59         |       | Chief Financial Officer  and Vice President of Finance        |
| David B. Meyers                |       | 48         |       | Chief Operating Officer                                       |
| Alexander J. Andrianov, Ph. D. |       | 49         |       | Vice President Research and Development                       |

 

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Mr. Herbert M. Stein has served as the Company’sChief Executive Officer since January 2001. Mr. Stein has been aDirector of the Company since 1996 and has been Chairman of the Board since January 2000.Mr. Stein was Chairman of the Board of Directors of Organogenesis Inc.from 1991 through 1999 and was Chief Executive Officer of Organogenesis from1987 through 1999.

Mr. Paul J. Murphy joined the Company in June 2005in the role of Chief Financial Officer and Vice President of Finance, includingthe responsibilities of the Company’s Principal Accounting Officer. Prior tojoining the Company, from June 2004 to June 2005, Mr. Murphy wasan independent contractor with JH Cohn, LLP, an accounting firm, working onengagements with public companies to design, assess and test controls forcompliance with Section 404 of the Sarbanes-Oxley Act of 2002. From March 2002until June 2004, Mr. Murphy worked as a self-employed consultant forcompanies on short-term projects of the type ordinarily undertaken by a ChiefFinancial Officer. From February 1999 through January 2002, Mr. Murphywas the Senior Vice President, Chief Financial Officer and Treasurer of ArtelVideo Systems, Inc., a video networking technology company. Previous to1999, Mr. Murphy worked as a Chief Financial Officer with four companies,three of which were publicly traded issuers.

Mr. David B. Meyers was appointed the Company’sChief Operating Officer in February 2001. From January 2000 until February 2001he was the Company’s Vice-President, Business Development. Since 1996 he hasserved under various research, engineering and development roles at Apogee andis one of the inventors of the DDX technology and the Company’s drug deliverytechnologies. Prior to joining the Company, Mr. Meyers was a principalengineer with Arinc Research Corporation and held engineering and researchpositions at Northrop Grumman Corporation and Rockwell International performingsystems analysis and MEMS sensor development.

Dr. Alexander K.Andrianov joined the Company in September 2006 as the Vice President ofResearch and Development. Dr. Andrianov brings over 20 years experience inthe application of polymers as biomaterials and drug delivery systems. Mostrecently, he was the founder and Chief Scientific Officer of Parallel Solutions, Inc.from 2001 until 2005, where he developed biodegradable polymers for proteindelivery and discovered a new class of potent vaccine immunoadjuvants. Prior tostarting Parallel, he worked for Physical Science, Inc. as PrincipalResearch Scientist and at Avant Immuonotherapeutics, Inc. as Director ofPolymer Synthesis and Formulation. Dr. Andrianov is listed as an inventoron over 35 patents and patent applications and has published numerous technicalpapers. Dr. Andrianov received his Ph.D. in Polymer Science from MoscowState University in 1985 and served as a faculty member until 1991. Hecontinued his academic training at the Massachusetts Institute of Technology.

**Item 2.**                        PROPERTIES

Apogee rents approximately5,000 square feet of office space at 129 Morgan Drive, Norwood, Massachusettsfrom an entity controlled by a major stockholder. See Footnote 9 of thefinancial statements—Related Parties. This lease expired on December 31,2005. Currently, Apogee is renting this facility on a month-to-month basis andbelieves that this rent is at or below market rate.

**Item 3.**                        LEGALPROCEEDINGS

None

**Item 4.**                        SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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**PART II**

**Item 5.**                        MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

**Market Information**

After being quoted on various markets, on October 5,2003, the AMEX approved Apogee’s application to list its securities on theAmerican Stock Exchange under the symbol ATA. Apogee has remained listed on theAMEX since that time.

As previously reported, on August 2, 2005, Apogeereceived notice from the Staff of the American Stock Exchange indicating thatAMEX had determined to proceed with an application to the Securities andExchange Commission to remove the common stock of Apogee from listing andregistration on AMEX. This action was taken because Apogee was no longer incompliance with the AMEX’s continuing listing standards due to the failure tofile its Annual Report on Form 10-KSB for the year ended December 31,2004 and a Quarterly Report on Form 10-QSB for the period ended March 31,2005. On August 31, 2005 the American Stock Exchange notified the Companythat it had completed the submission of all required periodic financial reportswith the Securities and Exchange Commission, thereby regaining compliance withSections 134 and 1101 of the Amex Company Guide. Subsequently, the Company wasadvised that the staff of the AMEX recommended to the Hearings Department thatthe hearing related to the Company’s non-compliance be cancelled and the matterclosed. Apogee has had no further interaction with the AMEX to date on thismatter.

As previously reported, on November 1, 2006Apogee received a notice from the AMEX informing the Company that it did notmeet certain continued listing standards, as set forth in Part 10 of theAMEX Company Guide (the “Company Guide”) and has therefore has become subjectto the procedures and requirements of Section 1009 of the Company Guide. TheCompany is presently not in compliance, and has not been in compliance sincethe notice of November 1, 2006, with Section 1003 (a) (ii) ofthe Company Guide as it has shareholders’ equity of less than $4 million andlosses from continuing operations and/or net losses in three out of its fourmost recent fiscal years. The Company is also not presently in compliance, andhas not been in compliance since the notice of November 1, 2006, with Section 1003(a) (iii) of the Company Guide as its shareholders’ equity of lessthan $6 million and losses from continuing operations in its five most recentfiscal years.

According to the AMEX notice, the Company was requiredto submit a plan by December 1, 2006, advising the staff of the AMEX ofthe action it has taken, or will take, to bring the Company into compliancewith Sections 1003(a) (ii) and 1003(a) (iii) of the CompanyGuide within a maximum of 12 months.

In response to the November 1, 2006 notification,the Company, on November 30, 2006, submitted a plan of compliance to AMEXoutlining the Apogee’s operational and strategic objective to regain compliancewith the continued listing standards of the American Stock Exchange. In aneffort to further the Company’s commitment of regaining compliance, the Companysubmitted a revised and expanded Plan to AMEX on December 20, 2006.

On January 12, 2007, the Company receivednotification that the American Stock Exchange has accepted the Company’s planto regain compliance with AMEX continued listing standards, and that theCompany’s listing will be continued pursuant to an extension. The Company issubject to periodic review by AMEX Staff during the extension period, whichends on November 1, 2007. If Apogee fails to make progress consistent withthe plan, or to otherwise regain compliance with the continued listingstandards by the end of the extension period, it could result in the Companybeing delisted from the AMEX.

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Thefollowing table sets forth, for the periods indicated, the high and low salesprices for the Common Stock as reported by the American Stock Exchange. The bidquotations represent inter-dealer prices, without adjustment for mark-ups,mark-downs or commissions and do not necessarily represent actual transactions. All prices listed below have beenadjusted to reflect post split prices.

| ** **     | ** ** | **Common Stock** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **High**              | ** ** | **Low** | ** ** |
| **2005:**      | ** ** | ** **            | ** ** | ** ** | ** ** |
| First Quarter  |       | 4.49                  |       | 1.95 |   |
| Second Quarter |       | 2.13                  |       | 1.00 |   |
| Third Quarter  |       | 1.22                  |       | 0.88 |   |
| Fourth Quarter |       | 1.09                  |       | 0.70 |   |
| **2006:**      | ** ** | ** **            | ** ** | ** ** | ** ** |
| First Quarter  |       | 2.10                  |       | 0.65 |   |
| Second Quarter |       | 1.45                  |       | 0.71 |   |
| Third Quarter  |       | 1.25                  |       | 0.77 |   |
| Fourth Quarter |       | 2.39                  |       | 0.35 |   |

 

**Stockholders**

As of March 15, 2007,there were approximately****67 registeredholders and approximately 1,097 beneficial holders of 11,968,332 outstandingshares of Common Stock.

**Dividends**

It is the presentintention of the board of directors to not pay any dividends and retain anyearnings to provide funds for the operation and expansion of the Company’sbusiness.  Any future determination topay dividends will be at the discretion of our board of directors and willdepend on the Company’s results of operations, financial conditions,contractual and legal restrictions and other factors the board of directorsdeems relevant.

**Unregistered Salesof Securities**

None.

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**Item6.**                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY’SFINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTIONWITH THE COMPANY’S FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE INTHIS ANNUAL REPORT ON FORM 10-KSB. THIS DISCUSSION CONTAINS, INADDITION TO HISTORICAL STATEMENTS, FORWARD-LOOKING STATEMENTS THAT INVOLVERISKS AND UNDERTAINTIES. THE COMPANY’S ACTUAL RESULTS COULD DIFFER SIGNIFICANTLYFROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THATCOULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE FACTORS DISCUSSED ABOVEIN THE SECTION BELOW ENTITLED “RISK FACTORS” AS WELL AS OTHER FACTORS INTHIS ANNUAL REPORT ON FORM 10-KSB.**

**OVERVIEW**

Apogee designs, developsand commercializes advanced intradermal and dermal drug delivery and sensorsolutions based upon its proprietary Micro-Electro Mechanical Systems (“MEMS”),nano fabrication and drug delivery technologies. Our Medical Products Group isdeveloping advanced intradermal drug delivery systems to meet the needs ofpatients, health insurers, companies’ developing pharmaceuticals, as well as,governments and international health organizations. We are in preclinicaldevelopment of our PyraDermTM intradermal drug system, which we believe hassignificant advantages over competitive approaches for the delivery ofvaccines, low dose high potency therapeutic protein drugs and other activeingredients. We have evaluated the feasibility of PyraDerm by performingin-vitro tests with model drugs and are planning to start in vivo testing inthe near future. We are working to establish pharmaceutical industry compliantmanufacturing methods and to define regulatory strategies to support its commercialization.Our business strategy is flexible and includes: (i) the licensing orselling of our technologies to pharmaceutical or medical device companies, (ii) establishingpartnerships with pharmaceutical and device companies to commercialize our products;and (iii) developing, producing (with outsourcing assistance) andmarketing our own medical products. Our Sensor Products Group is focused on thedesign, development and marketing of proprietary MEMS/Nanotechnology basedsensors for the medical, automotive, industrial and consumer markets. In December 2005,we introduced our first sensor products, a family of miniature pressure sensordie, trademarked under the Sensilica® brand name. These devices are producedusing a novel manufacturing technology that we believe reduces size and costwhile improving reliability as compared to alternative MEMS sensor solutions.We intend to sell these sensor devices as stand-alone die to sensor integratorsand as packaged solutions directly and through independent representatives anddistributors. We have begun the sales cycle by providing customer samples ofour sensor die and packaged products and by shipping small quantities ofproduction sensor die.

In 2006, the majority ofour revenue was derived from the sale of the remaining DDX IC inventory,primarily as a result of the recognition of all the deferred distributorrevenue. We expect that future revenue will initially be the result of sensorsales, potential licensing and development revenues resulting from the grant ofrights to our intellectual property. In order to support our operations andmaintain our AMEX listing, we intend to secure additional funding in 2007. Weplan to add a network of direct sales staff, independent sales representativesand distributors to support our medical and sensor products. We currentlyoutsource the manufacturing, assembly and certain testing of our medical andsensor products.

At December 31, 2006,we had an accumulated deficit of approximately $15.7 million, as compared to adeficit of $12.7 million as of December 31, 2005. Our historical netlosses and accumulated deficit (since 1995) result primarily from the costsassociated with our efforts to design, develop and market our DDX technology aswell as costs associated with our efforts to develop new medical and sensorproduct.

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**Results of Operations**

Thefollowing table sets forth financial statement data expressed as a percentageof sales:

| ** **                           | ** ** | **Fiscal Year Ended  December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| Product Sales                        |       | 99.93                                              | %          | 87.04 | % |
| Royalties                            |       | 0.07                                               |       | 9.29 |   |
| Consulting                           |       | —                                             |       | 3.67 |   |
| Cost of Sales                        |       | (71.70                                             | )          | (76.68 | ) |
| Research and  Development            |       | (91.48                                             | )          | (52.38 | ) |
| Selling, General  and Administrative |       | (124.65                                            | )          | (77.61 | ) |
| Operating Loss                       |       | (187.83                                            | )%         | (106.67 | )% |
| Other Income  (Expense)*             |       | 30.20                                              |       | 163.64 |   |
| Net Loss                             |       | (157.63                                            | )%         | 57.07 | % |

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*                    Includesapproximately $8.9 million in gain on sale of assets to SigmaTel, Inc. on October 5,2005.

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

Apogee prepares itsconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America. The preparation of thesefinancial statements requires us to make estimates, judgments and assumptionsthat we believe are reasonable based upon the information currently available.These estimates and assumptions affect the reported amounts of assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the periods presented. Any future changes to theseestimates and assumptions could have a significant impact on the reportedamounts of revenue, expenses, assets and liabilities in our financialstatements. The significant accounting policies which we believe are the mostcritical to aid in fully understanding and evaluating our reported financialresults include the following:

**Revenue Recognition**

Apogee recognizes revenuein accordance with Securities and Exchange Commission Staff Accounting BulletinNo. 104 (“SAB 104”), “Revenue Recognition in Financial Statements: RevenueRecognition”, which states that revenue should be recognized when the followingrevenue recognition criteria are met:  (1) persuasive evidence of anarrangement exists; (2) the product has been shipped and the customertakes ownership and assumes the risk of loss; (3) the selling price isfixed or determinable; and (4) collection of the resulting receivable isreasonably assured. The following policies apply to Apogee’s two major productsales categories for revenue recognition. Sales to end users (“OEM”):  Revenueis recognized under our standard terms and conditions of sale, title and riskof loss transfer to the customer at the time products are shipped from ourwarehouse or delivered to the customer’s representative/freight forwarder.Sales to Distributors:  From time to time we provide stock rotationrights, price protection and other incentives to our Distributors. See Footnote2 of the financial statements. As a result of these incentives, Apogee hasadopted a policy of deferring recognition of revenue until the distributorsells products to its customers based upon receipt of point-of-sale reportsfrom the distributors. We accrue the estimated cost of post-sale obligationsincluding product warranty returns, based on historical experience. To date wehave experienced minimal warranty returns.

In addition, we recordroyalty revenue when earned in accordance with the underlying agreements.Consulting and licensing revenue is recognized as services are performed.

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**Accounts Receivable**

Apogee performs credit evaluationsof customers and determines credit limits based upon payment history, customers’creditworthiness and other factors, as determined by our review of theircurrent credit information. For a majority of our larger sales, we can requirethe issuance of a Letter of Credit. Smaller accounts must either pay via creditcard or in advance of shipment. We continuously monitor collections andpayments from our customers, and we maintain a provision for estimated creditlosses based upon our historical experience and any specific customercollection issues that we have identified. While we have not had anysignificant credit losses to date, we cannot guarantee that we will continue toavoid credit losses in the future. If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required. Since our accountsreceivable are highly concentrated in a small number of customers, asignificant change in the liquidity or financial position of any one of thesecustomers could have a material adverse impact on the collectibility of ouraccounts receivable, our liquidity or our future results of operations.

**Inventory**

Apogee states itsinventory at the lower of cost (first-in, first-out) or market. This policyrequires that we make certain estimates regarding the market value of theinventory, including an assessment of excess or obsolete inventory. In therecent past, Apogee had determined excess and obsolete inventory based on estimatedfuture demands and estimated selling prices for our products within a specifiedtime frame, which was generally 12 months. The estimates used for expecteddemand were also used for short-term capacity planning and inventory purchasingand were consistent with revenue forecasts.  Our current inventory is associated with ourformer audio business. We have chosen to expense our sensor die and sensorpackaged products until such time as we have material results from thisbusiness. We are still in the research and developmental phase of our medicalproducts and thus do not have related inventory. For the fiscal year ended December 31,2006 we have approximately $1.8 million of audio IC inventory that has been100% reserved and has no carrying value on the balance sheet. This compares toinventory at December 31, 2005, net of reserves, of approximately $1.3million consisting of $719,000 held at distributors with the remaining $609,000held at Apogee.

**Valuation of Long-Lived Assets**

Property, plant and equipment,patents, trademarks and other intangible assets are amortized over theirestimated useful lives. Useful lives are based on management’s estimates overthe period that such assets will generate revenue. Intangible assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying value of an asset may not be recoverable. Future adversechanges in market conditions or poor operating results of underlying capitalinvestments or intangible assets could result in losses or an inability torecover the carrying value of such assets, thereby possibly requiring animpairment charge in the future.

**Stock Compensation**

Prior to fiscal 2006, weaccounted for stock-based compensation plans under the recognition andmeasurement provisions of APB Opinion No. 25. Effective January 1,2006, we adopted the provisions of SFAS 123(R) using themodified-prospective-transition method. SFAS 123(R) requirescompanies to recognize the fair-value of stock-based compensation transactionsin the statement of income. The fair value of our stock-based awards isestimated at the date of grant using the Black-Scholes option pricing model.The Black-Scholes valuation calculation requires us to estimate key assumptionssuch as future stock price volatility, expected terms, risk-free rates anddividend yield. Expected stock price volatility is based on implied volatilityfrom traded options on our stock in the marketplace and historical volatilityof our stock. We use historical data to estimate option exercises and employeeterminations within the valuation model. The expected term of options grantedis derived from an analysis of historical exercises and remaining contractuallife of stock options, and represents the period of time that options grantedare 

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expectedto be outstanding. The risk-free rate is based on the U.S. Treasury yield curvein effect at the time of grant. We have never paid cash dividends, and do notcurrently intend to pay cash dividends, and thus have assumed a 0% dividendyield. If our actual experience differs significantly from the assumptions usedto compute our stock-based compensation cost, or if different assumptions hadbeen used, we may have recorded too much or too little stock-basedcompensation cost. In addition, we are required to estimate the expectedforfeiture rate of our stock grants and only recognize the expense for thoseshares expected to vest. If the actual forfeiture rate is materially differentfrom our estimate, our stock-based compensation expense could be materiallydifferent.

**Off Balance Sheet Arrangements**

We have no off balancesheet arrangements nor do we have any special purpose entities.

**Year Ended December 31, 2006 Compared to YearEnded December 31, 2005**

**Revenue**

We derive our revenue fromthree sources: (1) product sales, which consist of merchandise sales madeeither directly to original equipment manufacturers or sell through point ofsale (“POS”) by distributors. All such shipments are fulfilled from ourcontracted warehouse in Hong Kong or from our Norwood, Massachusetts office andis reported net of returns; (2) royalty revenue, which formerly consistedof royalties paid by STMicroelectronics which have now been sold aspart of the transaction with SigmaTel and (3) consulting incomerelated to contractual services or development activities for third parties. TheCompany may, in the future, receive royalties under its remaining audiolicensing agreements and from new agreements contemplated under its two newbusiness groups. See Footnote 2 of the financial statements.

Apogee recognized revenuefor the fiscal year ended December 31, 2006 of approximately $1.9 million,a decrease of $3.3 million or 64% from revenue recognized in 2005 ofapproximately $5.2 million. This decline in revenue is directly related to thesale of certain assets of the audio division, including the DDX® technology andthe associated royalties to SigmaTel in October 2005. Product salesconsisted of semiconductor products sold directly to end users or POS revenueby our distributors. Subsequent to the transaction with SigmaTel, we no longerrecognize, or are eligible to receive, royalties under the ST LicensingAgreement. As a result, no royalty revenue was recorded for the fiscal yearended December 31, 2006 under the ST Licensing Agreement. For the fiscalyear ended December 31, 2006, we did, however, record royalty revenue of$1,250 as a result of an agreement with QSound Labs, Inc. For the fiscalyear ended December 31, 2005 we recognized royalty revenue ofapproximately $480,000, primarily related to the ST Licensing Agreement. Apogeedid not earn any consulting revenue for the fiscal year ended December 31,2006 compared to approximately $190,000 for the fiscal year ended December 31,2005.

Totalrevenue for the years 2006 and 2005 consisted of:

| ** **      | ** ** | **For the Fiscal Year Ended  December 31,** | ** ** |
|-----------------|------------|----------------------------------------------------------------------|------------|
| ** **      | ** ** | **2006**                                                             | ** ** | **2005** | ** ** |
| Product Revenue |       | $                                                                    | 1,883,534  |   | $ | 4,502,333 |   |
| Royalties       |       | 1,250                                                                |       | 480,468 |   |
| Consulting      |       | —                                                               |       | 190,000 |   |
| Total:          |       | $                                                                    | 1,884,784  |   | $ | 5,172,801 |   |

 

Some revenue from the sale of DDX products is expectedto continue over the short term as the remaining DDX inventory is sold. Inaddition, licensing revenue from the ST Licensing Agreement has been assignedto SigmaTel in conjunction with the sale of certain DDX assets to SigmaTel. Accordingly,we expect that the decline in our revenues will continue until such time as weare able to generate revenues from the sale of our medical and sensor products.

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**Cost of Revenue**

Cost of revenue decreased as a result of reducedproduct revenue to approximately $1.4 million for the fiscal year ended December 31,2006, compared to approximately $4.0 million for the fiscal year ended December 31,2005. Cost of revenue from our former DDX business primarily consists ofpurchasing finished semiconductor chips and storage fees associated withwarehousing a large portion of our semiconductor products in Asia. For the 12months ended December 31, 2006 we recorded a gross margin from productrevenue of approximately 28%, compared to a gross margin of approximately 23%for the 12 months ended December 31, 2005. This increase in grossmargin from product revenue was due to an adjustment to Cost of Goods forrecovery of previous reserve provision.

During the twelve monthsended December 31, 2006 we recorded a net recovery of previous provisionsof approximately $117,000 to adjust for current inventory levels. For thefiscal years ended December 31, 2006 and 2005, the Company wrote offapproximately $11,000 and $44,000, respectively, of obsolete inventory.

**Operating Expenses**

**Research andDevelopment Costs**

The Company’s research and development (“R&D”)expenses consist primarily of salaries, development material costs, externalconsulting and service costs related to the design of new products and therefinement of existing products. Research and development expenses were reducedto approximately $1.7 million for the 12 months ended December 31,2006, compared to approximately $2.7 million for the prior fiscal year.This decrease of approximately $1.0 million or 36% was the result of thetransaction with SigmaTel and the transfer of our audio related R&D staffto SigmaTel. Human resource costs decreased by approximately $1.1 millionor 62% to approximately $694,000 for the twelve months ended December 31,2006, compared to approximately $1.8 million for the same period in 2005.For the fiscal year ended December 31, 2005, human resource costsassociated with our former audio division were approximately $1.4 million.Although our overall human resource expense was reduced, we continue to supportboth our medical and sensor groups and anticipate that human resource expenseassociated with R&D will increase in the coming quarters. For the 12 monthsended December 31, 2006, approximately $39,000 in human resource expensewas a result of our adoption of SFAS 123(R) effective as of January 1,2006.

During the fiscal year ended December 31, 2006essentially all our $1.7 million in R&D in expense was associated withthe development of our medical and sensor products, compared to approximately$1.0 million for the 12 months ended December 31, 2005. In an effortto support and expand the development of both our medical device and sensorproducts, we incurred approximately $531,000 in professional fees for the 12months ended December 31, 2006 compared to approximately $295,000 for thesame period in 2005. This represents an increase of approximately $235,000 or80%. In addition, due to the technical nature of both the medical device andsensor components, for the 12 month-period ended December 31, 2006 weincurred approximately $264,000 in developmental wafer costs as well asdevelopmental costs associated with our micro needle project. This representsan increase of approximately $207,000 or 366% for the same period in 2005. Ofthis amount we expensed approximately $146,000 in wafers related to our sensorbusiness. We will continue to invest in the development of our medical andsensor products. During the fourth quarter of 2006 we completed most of theconstruction of our formulation and analytical laboratory at our Norwoodheadquarters to support our medical product research and developmentactivities. The installation of the laboratory was completed in January 2007.Our investment in laboratory equipment and the associated renovation of ourfacility are estimated to be $210,000. We expect that this new capability willallow us to have greater efficiency and productivity as well as better controlof expenses. In January 2006, we consolidated our MEMS division to ourhome office in 

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Norwood, Massachusetts andclosed our Long Island, New York office. We anticipate that we will continue tocommit resources to research and development activities and R&D costs areexpected to increase in the future.

**Selling, Generaland Administrative Costs**

Selling expenses consist primarily of salaries andrelated expenses for personnel engaged in the marketing and selling of theCompany’s products, as well as costs related to trade shows, productliterature, travel and other promotional support costs. In addition, sellingexpenses had included costs related to the operation of Apogee’s Hong Kong,Taiwan, China and Japan sales offices. Subsequent to the SigmaTel transaction,the Taiwan and China offices were closed. In February 2006 we closed ourHong Kong office and in July 2006 we closed our Japanese office. Generaland administrative costs consist primarily of executive and administrative salaries,professional fees and other associated corporate expenses. Selling, General andAdministrative (“SG & A”) expenses decreased approximately $1.7 millionor 41% to approximately $2.3 million for the twelve months ended December 31,2006, compared to approximately $4.0 million for the 12 months ended December 31,2005. The decrease in SG&A, described below, was attributable primarily tothe closing of the Hong Kong, Japanese and Taiwan offices as well as decreasedselling and distribution costs, professional fees, travel and human resourcecosts partially offset by an increase in human resource costs as a result ofour adoption of SFAS 123(R).

Human resource costs decreased by approximately$200,000 or 16% to approximately $1.3 million for the 12 months ended December 31,2006, compared to approximately $1.5 million for the twelve months ended December 31,2005. This decrease was partially offset by the inclusion of the stock basedcompensation expense as a result of our adoption of SFAS 123(R). With ouradoption of SFAS 123(R), the human resource expense for the twelve monthsended December 31, 2006 was increased by approximately $254,000. Thisdecrease, net of stock based compensation expense, reflects the reduction instaffing and subsequent closing of the Taiwan office in 2005, the Hong Kongoffice in February 2006 and the Japanese office in July 2006, as aresult of the sale of the audio division to SigmaTel, Inc. in October 2005.As of December 31, 2006, Apogee employed a total of 12 employees, all operatingout of our Norwood office. As of December 31, 2005 we employed a total of12 employees, 10 domestically with 1 employee each in our Hong Kong andJapanese offices. However, prior to the sale of the audio business to SigmaTelin October 2005, we had 36 employees.

Professional expenses decreased by approximately$899,000 or 60% to approximately $569,000 for the twelve months ended December 31,2006, compared to approximately $1.5 million for the twelve months ended December 31,2005. Of this decrease approximately $471,000 or 52% was the result ofdecreased legal and accounting fees as a result of becoming compliant with ourfilings required by the Securities Exchange Act of 1934, as amended, and thecompletion of the Audit Committee’s investigation and subsequent restatement ofApogee’s financial statements. This decrease was partially offset by anincrease in legal fees associated with the indemnification costs, in connectionwith the civil case in the Circuit Court of the Fifteenth Judicial Circuit inand for Palm Beach County, Florida entitled Joseph Shamy v. Herbert M. Stein,case No.: 50 2005 CA 007719 XXXXMB, which were approximately $218,000 for the12 months ended December 31, 2006 compared to approximately $60,000 forthe 12 months ended December 31, 2005. See Footnote 12 of thefinancial statements—Indemnification Arrangements with our Executives. For the12-month period ended December 31, 2006, we incurred accountingexpenses of approximately $82,000, compared to accounting expenses ofapproximately $424,000 for the prior fiscal year. A decrease in third partymarketing consultants and recruiting fees accounted for the remainder of thedecrease for the 12 months ended December 31, 2006.

Other expenses contributing to the decrease in SG&Awere reduced international travel, closing of our overseas offices as well asreduced commissions and distribution expense. Travel expense decreased byapproximately $210,000 or 68% to approximately $68,000 for the 12 months ended December 31,2006, 

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compared to approximately$278,000 for the prior fiscal year. As a result of the audio division sale ofassets to SigmaTel, we closed the Taiwan Office effective as of December 31,2005, the Hong Kong Office effective as of February 28, 2006 and theJapanese Office effective as of July 21, 2006. Expenses associated withthe Hong Kong Office, net of human resources were approximately $14,000 for the12 months ended December 31, 2006, compared to approximately $130,000 forthe 12 months ended December 31 2005. The other major contributor to thedecrease in SG&A is the reduction in the distribution and commissionexpense directly related to the decrease in revenue resulting from the sale ofthe audio division to SigmaTel. Distribution and commission expense declined byapproximately $106,000 or 92% to approximately $9,000 for the twelve monthsended December 31, 2006, compared to approximately $115,000 for the 12months ended December 31, 2005.

Operating expenses areexpected to increase in the future due to additional staffing to support ourSensor and Medical Product Groups.

**Interest and OtherIncome (Expense)**

Interest income includes income from Apogee’s cash andcash equivalents. During twelve months ended December 31, 2006, wegenerated interest income of approximately $198,000 compared to interest incomeof approximately $70,000 the same period in 2005. This increase was primarilydue to interest on the net cash received of approximately $5.7 million asa result of the SigmaTel transaction. In addition, we received approximately$800,000 from the SigmaTel earn-out and early release of the escrow.

No interest expense was incurred for the 12 monthsended December 31, 2006. For the 12 months ended December 31, 2005,we incurred interest expense of approximately $38,000 as a result of loans byLaurus in August 2005 and loans by Mr. Herbert M. Stein and Mr. DavidSpiegel in May 2005.

The approximately $23,000in other expense for the 12 months ended December 31, 2006 resulted from aloss on the disposal of fixed assets and additional expenses in connection withthe SigmaTel transaction. No interest expense was incurred in 2006.

**Financing Costs**

On August 11, 2005,Apogee entered into agreements with Laurus, whereby we received $2.0 millionin gross proceeds (with net proceeds of approximately $1.8 million)through the sale of a 120 day secured term note. The note was payable by Apogeein cash during the first 120 days following the issuance of the note, and afterthe 120 day period it was payable in the amount of $62,500 per month in cash orconvertible into the common stock, $0.01 par value per share, of the Company ata fixed conversion price of $1.15 per share. Total expenses incurred inconnections with this financing was approximately $424,000 includingapproximately $107,500 for due diligence and management fees, $100,000 paid toBiscayne Capital Markets, Inc. who served as a finder for thistransactions and approximately $100,000 as a premium to Laurus with theremaining $116,500 attributed to legal, escrow and other associated costs. Thecosts associated with this agreement are expected to drop as a result of theamendment to the warrants on December 5, 2005, which removed theregistration rights associated with the securities issued in the financing. On October 5,2005 proceeds from the SigmaTel transaction were used to repay theapproximately $2.0 million owed to Laurus Master Fund, Ltd.

**Income Taxes**

Apogee incurred no stateincome taxes for the 12 months ended December 31, 2006 and approximately$20,000 for the 12 months ended December 31, 2005. There was no federalincome tax expense for either 2006 or 2005. As of December 31, 2006 and2005, we had available a federal net operating loss carryforward ofapproximately $9,796,000 and$8,454,000, respectively and a state net 

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operating loss carryforward of approximately$3,069,500and $4,037,000**,**respectively.These net operating loss carryforwards will expire at various times between2007 and 2025.

**Liquidity andCapital Resources**

Our principal source of liquidity at December 31,2006, consisted of approximately $3.1 million in cash and cash equivalentswith a working capital of approximately $2.4 million. We consider allhighly liquid investments with an original maturity of three months or less tobe cash equivalents. Substantially all of our cash is held in high qualitymoney market funds comprised of short-term, fixed income securities earninginterest at 4.94% at December 31, 2006. This compares to approximately$5.5 million in cash and cash equivalents as of December 31, 2005. Inaddition, as of December 31, 2006, we had working capital of approximately$2.4 million, compared to a working capital of approximately $5.0 millionat December 31, 2005. As of December 31, 2006 and December 31,2005 we had no debt.

Net cash used in operating activities for thetwelve-month period ended December 31, 2006 decreased to approximately$3.0 million compared to approximately $4.9 million in thetwelve-month period ended December 31, 2005. The decrease was primarilydue to a decrease in the net loss as a result of decreased spending followingthe SigmaTel transaction and the transfer of the DDX related engineering andsales staff. As of December 31, 2006, reserves for slow moving, excess andobsolete inventory was at 100% of the remaining DDX inventory. This compares toinventory, net of reserves, of approximately $1.3 million as of December 31,2005. Net accounts receivable was approximately $11,000 at December 31,2006 down from approximately $153,000 at December 31, 2005. As of December 31,2006 we had reserves against bad debt of approximately $13,000 compared to areserve of $145,000 as of December 31, 2005. Given the current accountsreceivable we believe that the remaining reserve is sufficient at this time.

Net cash provided by investing activities for thetwelve months ended December 31, 2006 was approximately $523,000, comparedto net cash provided by investing activities of $8.5 million for thetwelve months ended December 31, 2005. On October 5, 2005, Apogeecompleted a transaction with SigmaTel, whereby certain assets of the Audiodivision were sold, including the DDX technology and the associated royaltiesfrom its license agreement with ST, to SigmaTel for approximately $8.6 million,net of certain transaction costs. Pursuant to the Escrow Agreement dated October 5,2005 between SigmaTel and Apogee, $420,000 was to be held in escrow for aperiod of eighteen months for the purpose of compensating purchaser pursuant tothe indemnification.

No cash was provided by financing activities for thetwelve months ended December 31, 2006 compared to approximately $33,000provided by financing activities for the twelve months ended December 31,2005. During the twelve-month period ended December 31, 2005, we receivedthe proceeds from unsecured interest bearing loans in the amountsof $250,000 from David Spiegel, a shareholder and $250,000 from HerbertStein, Chief Executive Officer and Chairman of the Board. These loans werepayable upon demand and were not subject to any premium or penalty forprepayment. The loan interest rate is 6% per annum, payable monthly in arrearson the outstanding balance. On August 11, 2005, the Company entered intoagreements with Laurus Master Fund, Ltd., whereby we received $2.0 millionin gross proceeds (with net proceeds of approximately $1.8 million)through the sale of a 120 day secured term note. The note was payable by theCompany in cash during the first 120 days following the issuance of the note,and after a 120 day period it was payable in the amount of $62,500 per month incash or convertible into the common stock, $0.01 par value per share, of theCompany at a fixed conversion price of $1.15 per share. In connection with thefinancing, we paid certain costs and expenses of Laurus and issued an immediatelyexercisable warrant for the purchase of 85,000 shares of common stock at aprice of $1.22 per share. The warrant expires seven years after issuance. Afinder for the transaction received a fee of 5% of the gross proceeds of theoffering, together with a seven year warrant to purchase an aggregate of 8,500shares of common stock immediately exercisable at a price of $1.22 per share.This offering was conducted as a private placement pursuant to the exemptionfrom registration provided by Section 4(2) of 

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the Securities Act of1933, as amended, and the rules and regulations promulgated thereunder.With respect to the transaction with Laurus, the Company entered into anagreement to register the common stock underlying the warrants and the commonstock that may be received upon any conversion of the secured term note. On December 5,2005, the terms of the 85,000 common share warrants with Laurus were amended,whereby the registration rights associated with the warrant were terminated inconsideration of a reduced exercise price, from $1.22 to $1.15, and theinsertion of a cashless exercise provision. On October 5, 2005 proceedsfrom the SigmaTel transaction were used to repay the approximately $2.0 millionowed to Laurus Master Fund, Ltd. and the $500,000 loans to Mr. HerbertStein and Mr. David Spiegel, as well as payment of certain expensesrelated to the transaction. During the 12-month period ended December 31,2005, we raised $32,500 through the exercise of options by two employees.

We believe that cash flow from operations and thefunds received from the audio division sale, as well as amounts that may beraised from time to time in private offerings of our common stock or debtfinancings will be sufficient to support operations and fund capital equipmentrequirements at least through December 31, 2007. The Company is currently inthe process of securing funding as required by the Plan for RegainingCompliance with Sections 1003 (a) (ii) and 1003 (a) (iii) of the American StockExchange Company Guide (the “Plan”) submitted to the American Stock Exchange(“AMEX”) on November 30, 2006 with a revised and more detailed Plan submittedon December 20, 2006 pursuant to notification from AMEX on November 1, 2006that we were not in compliance with certain of the AMEX’s continued listingstandards. Subsequently, on January 12, 2007, Apogee was notified that they haddetermined that, “in accordance with Section 1009 of the Company Guide, theCompany made a reasonable demonstration of its ability to regain compliancewith the continued listing standards by the end of the plan period, which wehave determined to be no later than November 1, 2007” and that at this timeAMEX was prepared to continue the listing of Apogee subject to certainconditions. See Footnote 20 of the financial statements—Notification from theAmerican Stock Exchange.

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**RISK FACTORS**

There are a number ofimportant factors that could cause our actual results to differ materially fromthose indicated or implied by forward-looking statements. Factors that couldcause or contribute to such differences include those discussed below, as wellas those discussed elsewhere in this Form 10-KSB. We disclaim anyintention or obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise, except asmay be required by law.

**RISKS RELATED TOOUR BUSINESS**

**WE HAVE A HISTORYOF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE OR SUSTAINPROFITABILITY.**

As of December 31,2006, we had stockholders’ equity of approximately $2.9 million, an accumulateddeficit of approximately $15.7 million and working capital of approximately$2.4 million. We had a net loss of approximately $3.0 million for the twelvemonths ended December 31, 2006. In the fiscal year ended December 31,2005, we recorded an operating loss of approximately $5.5 million with a netprofit of approximately $3.0 million from a gain of approximately $8.9 million.We will need to generate revenue to sustain profitability and positive cashflow. Our ability to generate future revenue and sustain profitability dependson a number of factors, many of which are described throughout this risk factorsection, including our ability to develop and generate revenues from the salesof our sensor and medical device products, which are at a very early stage ofdevelopment. We cannot assure you when, if ever, we will generate meaningfulrevenues from the sales of these products under development. If we are unableto achieve and sustain profitability, the Company’s share price would likelydecline.

**WE NEED TO RAISEADDITIONAL CAPITAL IN ORDER TO CONTINUE TO PERFORM RESEARCH ANDDEVELOPMENT AND OPERATE OUR BUSINESS, AND SUCH TRANSACTIONS MAY NOT BEAVAILABLE TO US ON FAVORABLE TERMS, IF AT ALL.**

Because we havehistorically had losses and only a limited amount of cash has been generated fromoperations, we have funded our operating activities to date primarily from thesale of securities and the sale of certain assets to SigmaTel. In order tocontinue to fund the development of our business, we will need additionalcapital, either through the sale of securities or through the sale of assets.We cannot be certain that any such financing or asset sales will be availableon acceptable terms, or at all. Moreover, additional financing, if available,would likely be dilutive to the holders of our common stock, and debtfinancing, if available, would likely involve restrictive covenants. If we sellassets that are currently used in the conduct of our business, those assetswould no longer be available to us as a potential source of revenue generation,as was the case with our October 5, 2005 sale of assets. We have reduced,in the short-term, our operating expenses for payroll and related costs, rentsand professional fees amongst others, in order to conserve resources for theoperation of our business. We believe that our current working capital andamounts that may be raised to support operations will be sufficient to fund ourcapital and operational requirements at least through December 31, 2007. Ifwe cannot raise sufficient additional capital by that date through meansavailable to us, it would adversely affect our ability to achieve our businessobjectives and we could be required to further curtail operations.

**AS A RESULT OF THESALE OF OUR AUDIO BUSINESS OUR ABILITY TO ACHIEVE OR SUSTAIN REVENUE GROWTHCOULD BE HARMED IF WE ARE UNABLE TO COMPLETE THE DEVELOPMENT OF AND SALE OF OURMEDICAL AND SENSOR PRODUCTS.**

Apogee historicallyderived revenue from audio IC product sales, royalties pursuant to our licenseagreement with ST and others and consulting revenues from contracted audioproduct development. In 2006 we derived the majority of our revenue from ourformer audio IC business. With the sale of our audio assets to SigmaTel in October 2005,we will no longer be receiving license revenue and future audio IC 

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saleswill diminish as we sells off our remaining inventory. In 2006 we recorded$383,000 in revenue from the one-year earn-out with SigmaTel. Since theearn-out period expired on October 5, 2006, no additional earn-out will berealized. Apogee released its first sensor products in December 2005 butonly generated nominal revenue in 2006 due to the long qualification process,the time period required by our customers to design in our pressure sensor dieproducts and specific design limitations that limited adoptions of ourproducts. We may not have any revenues if we are unable to find customersand to develop our sensor products. Due to the long time required to developand approve our medical products, we do not expect to receive income in thenear future.

**WE MAY NOT BEABLE TO LICENSE OUR TECHNOLOGY OR OBTAIN DEVELOPMENT PARTNERS, IN WHICH CASE WEWILL BE SIGNIFICANTLY LIMITED IN OUR ABILITY TO GENERATE REVENUE FROM OUR DRUGDELIVERY TECHNOLOGIES**

In order to commercializeour drug delivery technologies we intend to pursue licensing, development andpartnership agreements with pharmaceutical and medical device companies, as thecost to develop and obtain regulatory approval for drug delivery products ishigh. If we are unable to complete agreements with potential partners or we areunable to raise sufficient funds to commercialize the products ourselves we maynot be able to receive a return on our investment in our drug deliverytechnologies.

**IF WE ARE UNABLE TOHIRE OR RETAIN KEY PERSONNEL, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESSSUCCESSFULLY.**

We may not besuccessful in recruiting and retaining executive officers and other keymanagement and technical personnel. The competition for employees with thenecessary high level of technical expertise to design, market and sell ourproducts is intense, particularly in eastern Massachusetts and Asia. As aresult of the October 2005 sale of certain assets to SigmaTel, we willneed to hire a number of additional technical personnel if we are to sustainthe development of new products and our ability to sell those products. Becausecompetition for highly skilled technical personnel is so intense, companies inApogee’s industry are subject from time to time to complaints brought bycompetitors alleging interference with contractual relations or wrongful hiringof employees. Such lawsuits may be costly, may divert managementattention and resources from the operation of our business, andmay therefore adversely affect our financial condition and results ofoperations. In addition, the loss of the management and technical expertise ofour senior management could seriously harm us. Our employees may also berecruited away from us by our competitors. We do not have in place employmentcontracts for members of our senior management, including the CFO, COO and ourVice President of Research and Development.

**FAILURE TO COMPLYWITH LAWS AND GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OUR ABILITY TOOPERATE OUR BUSINESS.**

Some of our activities are regulated by federal andstate statutes and government agencies. The expected manufacturing, processing,formulation, packaging, labeling, distribution and advertising of our products,and disposal of waste products arising from these activities, maybe subject toregulation by one or more federal agencies, including the FDA, the DrugEnforcement Agency, which we refer to as the (“DEA”), the Federal TradeCommission, the Consumer Product Safety Commission, the U.S. Department ofAgriculture, the Occupational Safety and Health Administration, and theEnvironmental Protection Agency (“EPA”), as well as by foreign governments incountries where we distribute some of our products.

Noncompliance with applicable FDA policies orrequirements could subject us to enforcement actions, such as suspensions ofmanufacturing or distribution, seizure of products, product recalls, fines,criminal penalties, injunctions, failure to approve pending drug productapplications or withdrawal of product marketing approvals. Similar civil orcriminal penalties could be imposed by other government 

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agencies, such as the DEA,the EPA or various agencies of states and localities. These enforcementactions, if they were to occur, could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows.

The FDA has the authorityand discretion to withdraw approvals and review the regulatory status ofmarketed products at any time. For example, the FDA may require anapproved marketing application for any drug product marketed if new informationreveals questions about a drug’s safety or efficacy. All drugs must bemanufactured in conformity with current Good Manufacturing Practices and drugproducts subject to an approved application must be manufactured, processed,packaged, held and labeled in accordance with information contained in theapproved application.

**WE DO NOT HAVEMANUFACTURING CAPABILITIES, AND AS A RESULT, WE WILL RELY ON OUTSIDEMANUFACTURERS TO PRODUCE OUR PRODUCTS.**

We have nomanufacturing capabilities to produce our products. Accordingly, we utilizeoutside manufacturers, assembly and in some cases test companies to produce andqualify our products. There are significant risks associated with our relianceon these manufacturers that can adversely affect our business, operatingresults and financial condition. These risks include:

·       theability to maintain manufacturing relationships, the failure of which couldresult in significant delays in product introduction due to the time necessaryto establish new relationships;

·       delaysin production or shortages in product delivery as a result of productionproblems at outside contractors;

·       theloss of manufacturing priority that may limit our ability to obtainproducts on schedule;

·       limitedcontrol over product quality that could result in product returns and the lossof customers;

·       inabilityto control manufacturing yield that could increase production costs, therebyreducing sales potential and operating margins; and

·       lack of access or controlover new process and manufacturing technologies to maintain productcompetitiveness in the market.

**OUR MARKETS ARESUBJECT TO RAPID TECHNOLOGICAL CHANGE; THEREFORE, OUR SUCCESS DEPENDS ON OURABILITY TO INTRODUCE NEW PRODUCTS IN A TIMELY FASHION.**

The life cycle ofthe technology and any future products developed by us may be limited bythe emergence of new products and technologies, changes in customer preferencesand other factors. Our future performance will depend on our ability toconsistently:

·       identifyemerging technological trends in our market;

·       identifychanging customer requirements;

·       developor maintain competitive technology, including new product offerings;

·       improvethe performance, features and reliability of our products, particularly inresponse to technological change and competitive offerings;

·       bringtechnology to market quickly at cost-effective prices; and

·       protectour intellectual property.

We may not succeed indeveloping and marketing new products that respond to technological andcompetitive developments and changing customer needs, and such productsmay not gain market 

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acceptanceor be incorporated into the technology or products of third parties. Anysignificant delay or failure to develop new enhanced technologies, includingnew product offerings, and any failure of the marketplace to accept any newtechnology and product offerings would have a material adverse effect on ourbusiness, financial condition and results of operations.

**WE MAY NOT BEABLE TO OBTAIN FDA OR FOREIGN REGULATORY APPROVAL FOR OUR PRODUCTS IN A TIMELYMANNER, OR AT ALL, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY TOSELL AND MARKET OUR MEDICAL PRODUCTS.**

Drug delivery systems thatwe may develop in the future cannot be sold in the United States until the FDAapproves such products for medical use. Similar foreign regulatory approvalswill be needed in order to sell any drug delivery system outside of the U.S. Wemay not or any of our potential partners may not be able to obtain FDA orforeign regulatory approval for products incorporating our technologies, in atimely manner, or at all. Delays in obtaining FDA or foreign approvals couldresult in substantial additional costs to us, and, therefore, could adverselyaffect our ability to compete with other drug delivery companies. If we do notobtain such approvals at all, our revenues may be insufficient to supportcontinuing operations.

**OUR ABILITY TOACHIEVE REVENUE GROWTH WILL BE HARMED IF WE ARE UNABLE TO MARKET OUR PRODUCTS.**

We face challenges inpersuading manufacturers and customers to adopt our products based upon newMEMS and nanotechnologies. In order to adopt our products, customers and theirdevelopment staff must understand and accept our new technology. In addition,our products may be more expensive or difficult to use for someapplications than products based on traditional technologies. For thesereasons, prospective customers may be reluctant to adopt our products.

**COMPETITION IN THESENSOR AND MEDICAL DEVICE INDUSTRIES COULD PREVENT US FROM ACHIEVINGPROFITABILITY.**

The medical and sensordevice industries are highly competitive, and we expect the intensity of thecompetition to increase. Many of our competitors have greater financial,technical, research, marketing, sales, distribution, service and otherresources than we do. Moreover, our competitors may offer broader productlines and have greater name recognition than we do, and may offerdiscounts as a competitive tactic, forcing intense pricing pressure on ourproducts. In addition, several development stage companies are currentlycreating or developing technologies and products that compete with or are beingdesigned to compete with our technologies and products. Our competitorsmay develop or market technologies or products that are more effective ormore commercially attractive than our current or future products, or thatmay render our technologies or products less competitive or obsolete.Accordingly, if competitors introduce superior technologies or products and wecannot make enhancements to our technologies and products necessary for them toremain competitive, our  competitive position, and in turn, our business,revenues and financial condition, will be seriously harmed.

**OUR COMPLIANCE WITHTHE SARBANES-OXLEY ACT AND SEC RULES CONCERNING INTERNAL**CONTROLS MAY BE TIME-CONSUMING,DIFFICULT AND COSTLY FOR US.

We expect that it will betime-consuming and costly for us to develop and implement the internal controlsand reporting procedures required by the Sarbanes-Oxley Act. We may need to hireadditional financial reporting, internal controls and other finance staff inorder to develop and implement appropriate internal controls and reportingprocedures. If we are unable to comply with the internal controls requirementsof the Sarbanes-Oxley Act, we may not be able to obtain the independentaccountant certifications that the Sarbanes-Oxley Act requires publicly-tradedcompanies to obtain.

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**OUR QUARTERLYOPERATING RESULTS MAY FLUCTUATE.**

We have changed ourprimary line of business, and, as a result, we will experience fluctuations inour quarterly operating results as we have in the past and it is likely thatthese fluctuations will continue in the future. These fluctuations are causedby many factors, including, but not limited to:

·       availabilityand pricing from our suppliers;

·       changesin the demand for our products by customers;

·       introductionor enhancements of products, or delays in the introductions or enhancements ofproducts, by us or our competitors;

·       rateand success of new customer development;

·       changesin our pricing policies or those of our competitors;

·       successin attracting, retaining and motivating qualified personnel;

·       changesin general economic conditions.

A substantial portion of our operating expenses isrelated to personnel, facilities, and sales and marketing programs and arefixed. Our expense level is based in part on our expectations of futureorders and sales, which are extremely difficult to predict. Accordingly, wemay not be able to adjust our fixed expenses quickly enough to address anysignificant shortfall in demand for our products in relation to ourexpectations.

Fluctuations in our operating results may alsoresult in fluctuations in our common stock price. In such event, the tradingprice of our common stock would likely suffer and adversely affect our abilityto raise capital and the value of your investment in the Company.

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**RISKS RELATED TOOUR INTELLECTUAL PROPERTY**

**OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS MAY BEINSUFFICIENT TO PROTECT OUR COMPETITIVE POSITION.**

Our business depends, in part, on our ability toprotect our intellectual property. We rely primarily on patent, copyright,trademark and trade secret laws to protect our proprietary technologies. Wecannot be sure that such measures will provide meaningful protection for ourproprietary technologies and processes. We have acquired a portfolio of MEMSintellectual property and the Company is presently reviewing this portfolio todetermine which of the acquired rights can be protected and will be most usefulin its business. We cannot be sure that any existing or future patents will notbe challenged, invalidated or circumvented, or that any rights grantedthereunder would provide us meaningful protection. The failure of any patentsto provide protection to our technology would make it easier for ourcompetitors to offer similar products.

We also generally enter intoconfidentiality agreements with our employees and strategic partners, andgenerally control access to and distribution of our documentation and otherproprietary information. Despite these precautions, it may be possible fora third party to copy or otherwise obtain and use our products or technologywithout authorization, develop similar technology independently or designaround our patents. In addition, effective copyright, trademark and tradesecret protection may be unavailable or limited in certain foreigncountries in which we operate.

**WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY RIGHTSDISPUTES WHICH THAT COULD DIVERT MANAGEMENT’S ATTENTION AND COULD BE COSTLY.**

The sensor and medical device industries arecharacterized by vigorous protection and pursuit of intellectual propertyrights. From time to time, we may receive notices of claims ofinfringement, misappropriation or misuse of other parties’ proprietary rights.We cannot be sure that we will prevail in these actions, or that other actionsalleging infringement by us of third-party patents, misappropriation or misuseby us of third-party trade secrets or the invalidity of one or more patentsheld by us will not be asserted or prosecuted against us, or that anyassertions of infringement, misappropriation or misuse or prosecutions seekingto establish the invalidity of our patents will not seriously harm ourbusiness. For example, in a patent or trade secret action, an injunction couldbe issued against us requiring that we withdraw particular products from themarket or necessitating that specific products offered for sale or underdevelopment be redesigned.

Irrespective of the validity or successful assertionof various claims of infringement, misappropriation or misuse of other parties’proprietary rights, we would likely incur significant costs and diversion ofour management and personnel resources with respect to the defense of suchclaims, which could seriously harm our business. If any claims or actions areasserted against us, we may seek to obtain a license under a third party’sintellectual property rights. We cannot be sure that under such circumstances alicense would be available on commercially reasonable terms, if at all.Moreover, we often incorporate the intellectual property of our strategiccustomers into our designs, and we have certain obligations with respect to thenon-use and non- disclosure of such intellectual property. We cannot be surethat the steps taken by us to prevent our or our customers’ misappropriation orinfringement of the intellectual property will be successful.

31

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**RISKS RELATED TOOUR COMMON STOCK**

**WE DO NOT CURRENTLYMEET THE LISTING REQUIREMENTS OF THE AMERICAN STOCK EXCHANGE (THE “AMEX”), ANDIF WE CONTINUE TO FAIL TO MEET SUCH REQUIREMENTS, WE MAY BE DELISTED FROMTHE AMEX.**

Our common stock is quoted on the AMEX. In order tocontinue to be included in the AMEX, we must meet the AMEX maintenance criteria.As Apogee’s shareholders’ equity was approximately $3.97 million as of June 30,2006 and $2.86 million as of this report, the Company is not in compliance withSection 1003 (a) (ii) of the Company Guide as it hasshareholders’ equity of less than $4 million and losses from continuingoperations and/or net losses in three out of its four most recent fiscal years.Apogee is also not in compliance with Section 1003 (a) (iii) ofthe Company Guide as it has shareholders’ equity of less than $6 million andlosses from continuing operations in its five most recent fiscal years.

According to the AMEX notice, Apogee submitted a planprior to December 1, 2006 and a subsequent revision on December 20,2006, advising of the action it has taken, or will take, to bring Apogee intocompliance with Sections 1003(a) (ii) and 1003(a) (iii) ofthe Company Guide within a maximum of 12 months.   Although the Plan was accepted by AMEX on January 12,2007, and although the Company is permitted to continue its listing during theplan period, the Company will be subject to periodic review to determinewhether Apogee is making progress consistent with the plan. There can be noassurance that Apogee will be able to meet all of the criteria outlined in thePlan.  See Footnote 20 of the financialstatements - Notification from the American Stock Exchange.

If our common stock weredelisted, we would trade on the Over the Counter Bulletin Board or the PinkSheets, LLC, which may have significantly less liquidity than the AMEX. Inorder to have our common stock relisted on the AMEX, we would be required tomeet the criteria for initial listing, which are more stringent than themaintenance criteria. Accordingly, we cannot assure that if we were delisted,we would be able to have our common stock relisted on the AMEX, and most likelyour common stock would be quoted on the Over the Counter Bulletin Board. Inaddition, if our common stock were delisted from the AMEX, it might become moredifficult for us to raise additional capital and accomplish our businessobjectives through the sale of our common stock or securities convertible intoour common stock, due to increased costs and potential diminished liquidity inthe market for our common stock.

**FACTORS UNRELATEDTO OUR BUSINESS COULD NEGATIVELY IMPACT THE MARKET PRICE OF OUR COMMON STOCK.**

The stock marketshave experienced extreme price and volume fluctuations that have affected andcontinue to affect the market prices of equity securities of many technologycompanies. These fluctuations often have been unrelated or disproportionate tothe operating performance of those companies. We expect that the market priceof our Common Stock will fluctuate as a result of variations in our quarterlyoperating results, or for other reasons that are not related to the performanceof our business. These fluctuations may be exaggerated if the tradingvolume of our Common Stock is low. In addition, due to the technology-intensivenature of our business, the market price for our Common Stock may rise andfall in response to various factors, including:

·       announcements oftechnological innovations or new products, or competitive developments;

·       investorperceptions and expectations regarding our or our competitors’ products;

·       acquisitionsor strategic alliances by us or our competitors; and

·       thegain or loss of a significant customer or order.

32

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In addition, marketfluctuations, as well as general economic, political and market conditions suchas recessions, interest rate changes or international currency fluctuations,may negatively impact the market price of our Common Stock.

**NEITHER OURDISCLOSURE CONTROLS AND PROCEDURES NOR OUR INTERNAL CONTROL OVER FINANCIALREPORTING CAN PREVENT ALL ERRORS OR FRAUD.**

Our management does not expect that our disclosurecontrols and procedures or our internal control over financial reporting couldprevent all errors or fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system will be attained. Furthermore, the design of acontrol system must reflect the fact that there are resource constraints andthe benefits of controls must be considered relative to their costs. Because ofthe inherent limitations in a cost-effective control system, no evaluation ofcontrols can provide absolute assurance that all misstatements due to error orfraud, if any, may occur and not be detected on a timely basis. Theseinherent limitations include the possibility that judgments in decision-makingcan be faulty and that breakdowns can occur because of errors or mistakes. Ourcontrols and procedures can also be circumvented by the individual acts of somepersons, by collusion of two or more people or by management override of thecontrols.

The design of any system of controls is based inpart on certain assumptions about the likelihood of future events andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions. Furthermore, controlsmay become inadequate because of changes in conditions or deterioration inthe degree of compliance with policies or procedures.

While we seek to designour controls and procedures to provide reasonable assurance that informationrequired to be disclosed in our periodic filings is timely disclosed, these inherentlimitations expose us to breakdowns in such controls and procedures.

**QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The Company’s financial instruments include: cash,cash equivalents, accounts receivable and accounts payable. At December 31,2006 and December 31, 2005, the carrying value of the Company’s cash, cashequivalents, accounts receivable and accounts payable approximate fair valuesgiven the short maturity of these instruments.

The Company believes that it does not have materialforeign currency exchange rate risk since any international sales will be paidin U.S. dollars and material purchases from foreign suppliers are typicallyalso denominated in U.S. dollars.  Additionally, the functional currency of theCompany’s foreign sales office is the U.S. dollar.

It is the Company’s policy not to enter intoderivative financial instruments for speculative purposes.

33

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**Item 7.**                        FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**APOGEE TECHNOLOGY,INC.Index to Financial Statements and Financial Statement Schedules**

FinancialStatements:

| Report of Independent  Registered Public Accounting Firm                                                   |   | F-1 |   |
|------------------------------------------------------------------------------------------------------------|--------|-----|--------|
| Consolidated  Balance Sheets as of December 31, 2006 and December 31, 2005                       |   | F-2 |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2006 and 2005                 |   | F-3 |   |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31, 2006  and 2005 |   | F-4 |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2006 and 2005                 |   | F-5 |   |
| Notes to Consolidated  Financial Statements                                                                |   | F-6 |   |

 

34

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**Item 8.**                        CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**Item 8a.**                 CONTROLSAND PROCEDURES

(a)           Evaluation ofDisclosure Controls and Procedures. The Company’s chief executive officer andprincipal financial officer have reviewed and evaluated the effectiveness ofthe Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13d-15(e) and 15d-15 (e)) as of the end of the period covered by thisannual report. Other than the segregation of duties, the Company’s currentdisclosure controls and procedures are adequate and effective to ensure thatmaterial information relating to the Company was made known to them by others,particularly during the period in which this Annual Report on Form 10-KSBwas being prepared.

(b)          Changesin Internal Controls. There were no changes in our internal control overfinancial reporting, identified in connection with the evaluation of suchinternal control that occurred during our last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**Item 8b.**                 OTHERINFORMATION

None.

**PART III**

**Item 9.**                        DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The information for thisitem is incorporated by reference from the Company’s proxy statement for theAnnual Meeting of Shareholders which we intend to file within 120 days afterthe Company’s fiscal year ended December 31, 2006.

**Item 10.**                 EXECUTIVECOMPENSATION

The information for thisitem is incorporated by reference from the Company’s proxy statement for theAnnual Meeting of Shareholders which we intend to file within 120 days afterthe Company’s fiscal year ended December 31, 2006.

**Item 11.**                 SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

The information for thisitem is incorporated by reference from the Company’s proxy statement for theAnnual Meeting of Shareholders which we intend to file within 120 days afterthe Company’s fiscal year ended December 31, 2006.

**Item 12.**                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

The information for thisitem is incorporated by reference from the Company’s proxy statement for theAnnual Meeting of Shareholders which we intend to file within 120 days afterthe Company’s fiscal year ended December 31, 2006.

35

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**Item 13.**                 EXHIBITS

None
| **Item 13(a)**             |   | The following  documents are filed as part of this annual report on Form 10 KSB                                                                                                                                                                                                                                          |
|----------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Item 13(a)(1)  and (2)** |   | See “Index to  Consolidated Financial Statements and Financial Statement Schedules” at Item  8 to this Annual Report on Form 10 KSB. Other financial statement schedules  have not been included because they are not applicable or the information is  included in the financial statements or notes thereto. |
| **Item 13(a)(3)**          |   | *Exhibits*                                                                                                                                                                                                                                                                                                               |

 

Thefollowing is a list of exhibits filed as part of this Annual Report on Form 10-KSB.
| Exhibit  No | ** ** | **Description**                                                                                                                                                                                                                                                                                         |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Certificate of Incorporation of Apogee  Technology, Inc., incorporated herein by reference to Exhibit 3.1  to the Registrant’s Form 10-SB, as amended (File No. 000-17053).                                                                                                    |
| 3.2         |       | Amendment of Certificate  of Incorporation of Apogee Technology, Inc., incorporated herein by  reference to Exhibit 3.2 to the Registrant’s Form 10-SB, as  amended (File No. 000-17053).                                                                                      |
| 3.3         |       | Certificate of Amendment  to Certificate of Incorporation of Apogee Technology, Inc., incorporated  herein by reference from Exhibit 3.3 to the Registrant’s Quarterly  Report on Form 10-QSB for the quarter ended June 30, 2001  (File. No. 000-30656).                 |
| 3.4         |       | Restated By-Laws of  Apogee Technology, Inc., incorporated herein by reference from  Exhibit 3.4 to the Registrant’s Quarterly Report on Form 10-QSB  for the quarter ended June 30, 2001 (File. No. 000-30656).                                                          |
| 10.1*       |       | License Agreement dated  February 2, 2001 by and between the Registrant and STMicroelectronics,  NV, incorporated herein by reference from Exhibit 10.1 to the  Registrant’s Quarterly Report on Form 10-QSB for the quarter ended  March 31, 2001. (File No. 000-30656). |
| 10.2        |       | Letter Agreement between  Laurus Master Fund and Apogee Technology, Inc., dated December 5,  2005, filed with the Current Report on Form 8-K, dated  December 7, 2005 (File No. 001-10456).                                                                                    |
| 10.3        |       | Termination of  Registration Rights Agreement, dated December 5, 2005 filed with the  Current Report on Form 8-K, dated December 7, 2005 (File  No. 001-10456).                                                                                                                     |
| 10.4        |       | Apogee  Technology, Inc. Amended and Restated Common Stock Purchase Warrant,  filed with the Current Report on Form 8-K, dated December 7,  2005 (File No. 001-10456).                                                                                                              |
| 10.5        |       | Securities Purchase  Agreement, by and between Apogee Technology, Inc. and Laurus Master  Fund, Ltd., incorporated herein by reference from Exhibit 10.1 to the  Registrant’s Form 8K as filed on August 9, 2005 (File No. 001-10456).                                    |
| 10.6        |       | Master Security  Agreement, by and between Apogee Technology, Inc. and Laurus Master  Fund, Ltd., incorporated herein by reference from Exhibit 10.2 to the  Registrant’s Form 8K as filed on August 9, 2005 (File No. 001-10456).                                        |
| 10.7        |       | Form of Laurus Master  Fund, Ltd. Warrant, incorporated herein by reference from Exhibit 10.3  to the Registrant’s Form 8K as filed on August 9, 2005 (File  No. 001-10456).                                                                                              |

36

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| 10.8   |   | Grant of Security  Interest In Patents and Trademarks, by and between Apogee  Technology, Inc. and Laurus Master Fund, Ltd., incorporated herein by  reference from Exhibit 10.4 to the Registrant’s Form 8K as filed on  August 9, 2005 (File No. 001-10456).                                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9   |   | Registration Rights  Agreement, by and between Apogee Technology, Inc. and Laurus Master Fund,  Ltd., incorporated herein by reference from Exhibit 10.5 to the  Registrant’s Form 8K as filed on August 9, 2005 (File No. 001-10456).                                                                                                                           |
| 10.10  |   | Form of Biscayne  Capital Markets, Inc. Warrant, incorporated herein by reference from  Exhibit 10.7 to the Registrant’s Form 8K as filed on August 9,  2005 (File No. 001-10456).                                                                                                                                                                          |
| 10.11  |   | Secured Convertible Term  Note, by and between Apogee Technology, Inc. and Laurus Master Fund,  Ltd., incorporated herein by reference from Exhibit 10.7 to the  Registrant’s Form 8K as filed on August 9, 2005 (File No. 001-10456).                                                                                                                           |
| 10.12  |   | Asset Purchase Agreement  dated as of October 5, 2005, by and among SigmaTel, Inc., Apogee  Technology, Inc., certain stockholders, and with respect to the  provisions of Section 8.15 only, David B. Meyers, incorporated herein by  reference from Exhibit 99.1 to the Registrant’s Form 8K as filed on  October 7, 2005 (File No. 001-10456). |
| 10.13  |   | Escrow Agreement dated  as of October 5, 2005, among SigmaTel, Inc., Apogee  Technology, Inc., and Wells Fargo Bank, N.A., incorporated herein by  reference from Exhibit 99.2 to the Registrant’s Form 8K as filed on  October 7, 2005 (File No. 001-10456).                                                                                          |
| 10.14  |   | Indemnification  Agreement dated as of October 5, 2005, among SigmaTel, Inc., Apogee  Technology, Inc., Herbert M. Stein, H.M. Stein Associates, and Sheryl B.  Stein. incorporated herein by reference from Exhibit 99.3 to the  Registrant’s Form 8K as filed on October 7, 2005 (File No. 001-10456).                                               |
| 10.15  |   | Settlement Agreement  between Apogee Technology, Inc. and National Hybrid, Inc., dated  December 31, 2005 and incorporated herein by reference from  Exhibit 10.15 to the Registrant’s Form 10-KSB for the fiscal  year ended December 31, 2005 (File No. 001-10456).                                                                                  |
| 10.16* |   | Transfer Employment and  Royalty Agreement, dated May 11, 2004 and incorporated herein by  reference from Exhibit 10.16 to the Registrant’s Form 10-KSB  for the fiscal year ended December 31, 2005 (File No. 001-10456)                                                                                                                                        |
| 14     |   | Code of Conduct and  Ethics, incorporated herein by reference to Exhibit 14 to the  Registrant’s Form 10-KSB for the year ended December 31, 2003  (File No. 000-30656).                                                                                                                                                                                              |
| 23     |   | Consent of Independent  Accountants to the incorporation by reference in the Registration Statement  on Form S-8 (Nos. 333-106316, 333-61486 and  No. 333-90558) of the consolidated financial statements which  appear in this Annual Report on Form 10-KSB.                                                                                                                   |
| 31.1   |   | Certifications pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive  Officer.                                                                                                                                                                                                                                                                                |
| 31.2   |   | Certifications pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal  Financial Officer.                                                                                                                                                                                                                                                                            |
| 32     |   | Statement pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer  and Principal Financial Officer.                                                                                                                                                                                                                                                         |

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*                    Confidentialtreatment requested as to certain portions of the document, which portions havebeen omitted and filed separately with the Securities and Exchange Commission.

37

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Where a document isincorporated by reference from a previous filing, the exhibit number of thedocument in that previous filing is indicated in parentheses after thedescription of such document.

**Item 14.**                 PRINCIPALACCOUNTANT FEES AND SERVICES

The information for this item is incorporated byreference from the Company’s proxy statement for the Annual Meeting ofShareholders which we intend to file within 120 days after the Company’s fiscalyear ended December 31, 2006.

38

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized**.**
|        |   | APOGEE TECHNOLOGY, INC. |
|--------|--------|-------------------------|
|   |   |                    |   |   |   |
|   |   |                    |   |   |   |
|   |   | By:                     | /s/ HERBERT M.  STEIN |   | Date: March 29, 2007 |
|   |   |                    | Herbert M. Stein, President |   |   |
|   |   |                    | Chief Executive Officer, |   |   |
|   |   |                    | Chairman of the Board |   |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities indicated below and on the dates indicated.
| Signatures | ** ** | ** **             | ** ** | ** **                          | **Title** | ** **           | ** ** | ** ** | **Date** | ** ** |
|------------|------------|------------------------|------------|-------------------------------------|-----------|----------------------|------------|------------|----------|------------|
|       |       |                   |       |                                |      |                 |
| By:        |       | /s/ HERBERT M. STEIN   |       | President, Chief  Executive Officer |      | March 29,  2007 |
|       |       | Herbert M. Stein       |       | and Chairman of the  Board          |      |                 |
|       |       |                   |       |                                |      |                 |
| By:        |       | /s/ PAUL J. MURPHY     |       | Chief Financial Officer             |      | March 29,  2007 |
|       |       | Paul J. Murphy         |       | Vice President of  Finance          |      |                 |
|       |       |                   |       | and Treasurer                       |      |                 |
|       |       |                   |       |                                |      |                 |
| By:        |       | /s/ CRAIG A. DUBITSKY  |       | Director                            |      | March 29,  2007 |
|       |       | Craig A. Dubitsky      |       |                                |      |                 |
|       |       |                   |       |                                |      |                 |
| By:        |       | /s/ ARTHUR S. REYNOLDS |       | Director                            |      | March 29,  2007 |
|       |       | Arthur S. Reynolds     |       |                                |      |                 |
|       |       |                   |       |                                |      |                 |
| By:        |       | /s/ SHERYL B. STEIN    |       | Director                            |      | March 29,  2007 |
|       |       | Sheryl B. Stein        |       |                                |      |                 |
|       |       |                   |       |                                |      |                 |
| By:        |       | /s/ ALAN W. TUCK       |       | Director                            |      | March 29,  2007 |
|       |       | Alan W. Tuck           |       |                                |      |                 |
|            |            |                        |            |                                     |           |                      |            |            |          |            |  |  |

 

39

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**ANNUAL REPORT ON FORM 10-KSB**

**LIST OF FINANCIALSTATEMENTSYEAR ENDED DECEMBER 31, 2006**

**APOGEETECHNOLOGY, INC.**

**NORWOOD,MASSACHUSETTS**

| Report of Independent  Registered Public Accounting Firm                                                          |   | F-1 |
|-------------------------------------------------------------------------------------------------------------------|--------|-----|
| Consolidated  Balance Sheets—December 31, 2006 and December 31, 2005                               |   | F-2 |
| Consolidated  Statements of Operations—Years Ended December 31, 2006 and 2005                           |   | F-3 |
| Consolidated  Statements of Stockholders’ Equity (Deficit)—Years ended December 31,  2006 and 2005 |   | F-4 |
| Consolidated  Statements of Cash Flows—Years Ended December 31, 2006 and 2005                           |   | F-5 |
| Notes to Consolidated  Financial Statements—December 31, 2006 and 2005                                  |   | F-6 |

 

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**Report of Independent Registered Public AccountingFirm**

Board ofDirectors and StockholdersApogee Technology, Inc.

We have audited the accompanying consolidated balancesheets of Apogee Technology, Inc. and Subsidiary as of December 31,2006 and 2005 and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the years in the two-yearperiod ended December 31, 2006. These consolidated financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Apogee Technology, Inc. and Subsidiary as of December 31,2006 and 2005 and the results of their operations and cash flows for each ofthe years in the two-year period ended December 31, 2006 in conformitywith accounting principles generally accepted in the United States of America.

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note 1 to the consolidatedfinancial statements, the Company has had recurring operating losses andnegative cash flows from operations, raising substantial doubt about itsability to continue as a going concern. Management’s plans in regard to thesematters are also discussed in Note 1. The viability of the Company is dependentupon its ability to successfully further develop and market its technology andraise sufficient funds for such purpose. The financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

/s/ MILLER WACHMAN LLP

Boston,MassachusettsMarch 22, 2007

F-1

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                  | ** ** | **December 31,  2006** | ** **  | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                  |       |                        |        |                        |       |   |   |   |   |
| **Current  assets**                                                                                                                                         |       |                        |        |                        |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                  |       |                        | $           | 3,051,420                   |       |   |   | $ | 5,512,974 |   |   |
| Accounts receivable, net of allowance for doubtful  accounts of $13,245 and $145,000, in 2006 and 2005 respectively                                         |       |                        | 11,196      |                        |       |   | 152,837 |   |   |
| Inventories, net                                                                                                                                            |       |                        | —      |                        |       |   | 1,327,964 |   |   |
| Prepaid expenses and other current assets                                                                                                                   |       |                        | 69,465      |                        |       |   | 123,462 |   |   |
| Total current assets                                                                                                                                        |       |                        | 3,132,081   |                        |       |   | 7,117,237 |   |   |
| **Property  and equipment, net**                                                                                                                            |       |                        | 117,217     |                        |       |   | 39,932 |   |   |
| **Other assets**                                                                                                                                            |       |                        |        |                        |       |   |   |   |   |
| Escrow account                                                                                                                                              |       |                        | —      |                        |       |   | 409,480 |   |   |
| Patents                                                                                                                                                     |       |                        | 208,703     |                        |       |   | 149,536 |   |   |
| Exclusive licensing, net                                                                                                                                    |       |                        | 22,574      |                        |       |   | — |   |   |
| Construction in progress                                                                                                                                    |       |                        | 90,642      |                        |       |   | — |   |   |
| ** **                                                                                                                                                  |       |                        | $           | 3,571,217                   |       |   |   | $ | 7,716,185 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                              |       |                        |        |                        |       |   |   |   |   |
| **Current  liabilities**                                                                                                                                    |       |                        |        |                        |       |   |   |   |   |
| Accounts payable and accrued expenses                                                                                                                       |       |                        | $           | 710,187                     |       |   |   | $ | 766,930 |   |   |
| Deferred distributor revenue                                                                                                                                |       |                        | —      |                        |       |   | 1,337,022 |   |   |
| Deferred contract revenue                                                                                                                                   |       |                        | —      |                        |       |   | 72,686 |   |   |
| Total current liabilities                                                                                                                                   |       |                        | 710,187     |                        |       |   | 2,176,638 |   |   |
| **Commitments and Contingencies**                                                                                                                           |       |                        | —      |                        |       |   | — |   |   |
| **Stockholders’  equity**                                                                                                                              |       |                        |        |                        |       |   |   |   |   |
| Common stock, $.01 par value; 20,000,000 shares  authorized, 11,968,332 shares issued and outstanding at December 31,  2006 and December 31, 2005 |       |                        | 119,683     |                        |       |   | 119,683 |   |   |
| Additional paid-in capital                                                                                                                                  |       |                        | 18,396,909  |                        |       |   | 18,104,423 |   |   |
| Accumulated deficit                                                                                                                                         |       |                        | (15,655,562 | )                           |       |   | (12,684,559 | ) |   |
| Total stockholders’ equity                                                                                                                             |       |                        | 2,861,030   |                        |       |   | 5,539,547 |   |   |
| ** **                                                                                                                                                  |       |                        | $           | 3,571,217                   |       |   |   | $ | 7,716,185 |   |   |

 

*The accompanying notes are an integral part of these consolidated financial statements.*

F-2

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                   | ** ** | **Years Ended December  31,** | ** **    |
|--------------------------------------------------------------|------------|---------------------------------------------------|---------------|
| ** **                                                   | ** ** | **2006**                                          | ** **    | **2005** | ** ** |
| **Revenues**                                                 | ** ** | ** **                                        | ** **    | ** ** | ** ** |
| Product sales                                                | ** ** | **$**                                             | **1,883,544** |   | $ | 4,502,333 |   |
| Royalties                                                    | ** ** | **1,250**                                         |          | 480,468 |   |
| Consulting                                                   |       | —                                            |          | 190,000 |   |
| ** **                                                   | ** ** | **1,884,784**                                     |          | 5,172,801 |   |
| **Costs and expenses**                                       | ** ** | ** **                                        | ** **    | ** ** | ** ** |
| Product sales                                                | ** ** | **1,351,309**                                     |          | 3,966,265 |   |
| Research and development                                     | ** ** | **1,724,255**                                     |          | 2,709,487 |   |
| Selling, general and administrative                          | ** ** | **2,349,465**                                     |          | 4,014,571 |   |
| ** **                                                   | ** ** | **5,425,029**                                     |          | 10,690,323 |   |
| **Operating  loss**                                          | ** ** | **(3,540,245**                                    | **)**         | (5,517,522 | ) |
| **Other income  (expense)**                                  | ** ** | ** **                                        | ** **    | ** ** | ** ** |
| Gain on sale and earn-out—SigmaTel                      | ** ** | **395,698**                                       |          | 8,862,073 |   |
| Laurus financing costs                                       |       | —                                            |          | (424,000 | ) |
| Interest/other income                                        | ** ** | **198,275**                                       |          | 70,187 |   |
| Interest expense                                             |       | —                                            |          | (38,352 | ) |
| Other expense                                                | ** ** | **(24,731**                                       | **)**         | — |   |
| ** **                                                   | ** ** | **569,242**                                       |          | 8,469,908 |   |
| **Net  income (loss)**                                       | ** ** | **(2,971,003**                                    | **)**         | 2,952,387 |   |
| **Basic income (loss) per common share**                     | ** ** | **$**                                             | **(0.25**     | **)** | $ | 0.25 |   |
| **Diluted  income (loss) per common share**                  | ** ** | **$**                                             | **(0.25**     | **)** | $ | 0.24 |   |
| **Weighted average common shares outstanding—basic**    | ** ** | **11,968,332**                                    | ** **    | **11,869,026** | ** ** |
| **Weighted average common shares  outstanding—diluted** | ** ** | **11,968,332**                                    | ** **    | **12,132,394** | ** ** |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-3

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

| ** **                                            | ** ** | ** **     | ** ** | ** **            | ** ** | **Additional** | ** ** | ** **      | ** ** | ** **     | ** ** |
|-------------------------------------------------------|------------|----------------|------------|-----------------------|------------|----------------|------------|-----------------|------------|----------------|------------|
| ** **                                            | ** ** | ** **     | ** ** | ** **            | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | ** **     | ** ** |
| ** **                                            | ** ** | **Shares**     | ** ** | **Common Stock** | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Total**      | ** ** |
| **Balance  January 1, 2005**                     | ** ** | **11,838,332** | ** ** |                  | **$**      | **118,383**    | ** ** |            | **$**      | **18,073,223** | ** ** | **$** | **(15,636,946** | **)** | **$** | **2,554,660** | ** ** |
| Net Profit                                            |       | —         |       |                  | —     | ** **     |       | —          |       | 2,952,387      |       | 2,952,387 |   |
| Issuance of stock                                     |       | 130,000        |       |                  | 1,300      | ** **     |       | 31,200          |       | —         |       | 32,500 |   |
| **Balance  at December 31, 2005**                | ** ** | **11,986,332** | ** ** |                  | **$**      | **119,683**    | ** ** |            | **$**      | **18,104,423** | ** ** | **$** | **(12,684,559** | **)** | **$** | **5,539,547** | ** ** |
| Net Loss                                              |       | —         |       |                  | —     | ** **     |       | —          |       | (2,971,003     | )          | (2,971,003 | ) |
| Stock based  compensation for employees and directors |       | —         |       |                  | —     | ** **     |       | 292,486         |       | —         |       | 292,486 |   |
| **Balance at December 31,  2006**                | ** ** | **11,968,332** | ** ** |                  | **$**      | **119,683**    | ** ** |            | **$**      | **18,396,909** | ** ** | **$** | **(15,655,562** | **)** | **$** | **2,861,030** | ** ** |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-4

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                          | ** ** | **Years Ended December 31,** | ** **     |
|---------------------------------------------------------------------|------------|----------------------------------------|----------------|
| ** **                                                          | ** ** | **2006**                               | ** **     | **2005** | ** ** |
| **Cash flows from operations**                                      | ** ** |                                   | ** **     | ** ** |   |   | ** ** | ** ** |   |
| Net income (loss)                                                   | ** ** |                                   | **$**          | **(2,971,003** | **)** |   |   | $ | 2,952,387 |   |   |
| *Adjustments  to reconcile net loss to net cash used in operations* | * *   | * *                               | * *       | ** ** | * * | * * | * * | * * | * * |
| Provision for doubtful accounts                                     | ** ** |                                   | **(131,755**   | **)** |   |   | 40,000 |   |   |
| Provision for slow moving, excess and obsolete  inventory           | ** ** |                                   | **(99,226**    | **)** |   |   | 735,538 |   |   |
| Depreciation and amortization                                       | ** ** |                                   | **19,564**     | ** ** |   |   | 70,053 |   |   |
| Gain on sale and earn-out—SigmaTel                             | ** ** |                                   | **(395,698**   | **)** |   |   | (8,862,073 | ) |   |
| Stock compensation expense for employees and  directors             | ** ** |                                   | **292,486**    | ** ** |   |   | — |   |   |
| Disposal of property and equipment                                  | ** ** |                                   | **13,201**     | ** ** |   |   | — |   |   |
| *Changes  in operating assets and liabilities:*                     | ** ** |                                   | ** **     | ** ** |   |   | ** ** | ** ** |   |
| Accounts receivable                                                 | ** ** |                                   | **273,396**    | ** ** |   |   | 340,276 |   |   |
| Inventories                                                         | ** ** |                                   | **1,427,190**  | ** ** |   |   | 661,806 |   |   |
| Prepaid expenses and other current assets                           | ** ** |                                   | **53,997**     | ** ** |   |   | 123,142 |   |   |
| Accounts payable and accrued expenses                               | ** ** |                                   | **(56,743**    | **)** |   |   | (340,181 | ) |   |
| Deferred distributor revenue                                        | ** ** |                                   | **(1,337,022** | **)** |   |   | (618,541 | ) |   |
| Deferred contract revenue                                           | ** ** |                                   | **(72,686**    | **)** |   |   | (23,102 | ) |   |
| Net cash used in operating activities                               | ** ** |                                   | **(2,984,299** | **)** |   |   | (4,920,695 | ) |   |
| **Cash  flows from investing activities**                           | ** ** |                                   | ** **     | ** ** |   |   | ** ** | ** ** |   |
| Purchases of property and equipment                                 | ** ** |                                   | **(109,068**   | **)** |   |   | (67,030 | ) |   |
| Patent costs                                                        | ** ** |                                   | **(59,169**    | **)** |   |   | (55,885 | ) |   |
| Proceeds from SigmaTel, net                                         | ** ** |                                   | **805,179**    | ** ** |   |   | 8,637,201 |   |   |
| License fee and construction in progress                            | ** ** |                                   | **(114,197**   | **)** |   |   | — |   |   |
| Net cash provided by investing activities                           | ** ** |                                   | **522,745**    | ** ** |   |   | 8,514,286 |   |   |
| **Cash flows from financing  activities**                           | ** ** |                                   | ** **     | ** ** |   |   | ** ** | ** ** |   |
| Proceeds from issuance of common stock, net of  issuance expenses   |       |                                   | —         | ** ** |   |   | 32,500 |   |   |
| Proceeds from Laurus note                                           |       |                                   | —         | ** ** |   |   | 2,000,000 |   |   |
| Repayment of Laurus note                                            |       |                                   | —         | ** ** |   |   | (2,000,000 | ) |   |
| Proceeds from officer and shareholder notes                         |       |                                   | —         | ** ** |   |   | 500,000 |   |   |
| Repayment of officer and shareholder notes                          |       |                                   | —         | ** ** |   |   | (500,000 | ) |   |
| Net cash provided by financing activities                           |       |                                   | —         | ** ** |   |   | 32,500 |   |   |
| **Increase  (decrease) in cash and cash equivalents**               | ** ** |                                   | **(2,461,554** | **)** |   |   | 3,626,091 |   |   |
| Cash and cash  equivalents—beginning                           | ** ** |                                   | **5,512,974**  | ** ** |   |   | 1,886,883 |   |   |
| **Cash and cash  equivalents—ending**                          | ** ** |                                   | **$**          | **3,051,420** | ** ** |   |   | $ | 5,512,974 |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-5

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY** NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2006 AND 2005

**1.**        The Company and Basis of Presentation

***The Company***

Apogee Technology, Inc. and Subsidiary (the “Company”or “Apogee”, “we”, “us”, or “our”) designs, develops and commercializesadvanced intradermal and dermal drug delivery and sensor solutions based uponits proprietary Micro Electromechanical Systems (“MEMS”), nano fabrication anddrug delivery technologies. Our Medical Products Group is developing advancedintradermal drug delivery systems to meet the needs of patients, healthinsurers, companies’ developing pharmaceuticals, as well as, governments andinternational health organizations. We are in preclinical development of ourPyraDermTM intradermal drug system, which we believe has significant advantagesover competitive approaches for the delivery of vaccines, high potencytherapeutic protein drugs and other active ingredients. We have evaluated thefeasibility of PyraDerm by performing in vitro tests with model drugs and areplanning to start in vivo testing in the near future, subject to regulatory approval.We are working to establish pharmaceutical industry compliant manufacturingmethods and to define regulatory strategies to support its commercialization.Our business strategy includes: (i) the licensing or selling of ourtechnologies to pharmaceutical or medical device companies, (ii) establishpartnerships with pharmaceutical and device companies to commercialize ourproducts and; (iii) develop, have made and market our own medicalproducts. Our Sensor Products Group is focused on the design, development andmarketing of proprietary MEMS/Nanotechnology based sensors for the medical,automotive, industrial and consumer markets. In December 2005, weintroduced our first sensor products, a family of miniature pressure sensordie, trademarked under the Sensilica® brand name. These devices are producedusing a novel manufacturing technology that we believe reduces size and costwhile improving reliability as compared to alternative MEMS sensor solutions.We intend to sell these sensor devices as stand-alone die to sensor integratorsand as packaged solutions directly and through independent representatives anddistributors. We have begun the sales cycle by providing customer samples ofour sensor die and packaged products and by shipping small quantities ofproduction sensor die.

From 1981 until 1995, Apogee Acoustics Incorporated (“Acoustics”)engineered, manufactured, and marketed high quality, high-end patented ribbonloudspeaker systems for use in home audio and video entertainment systems. In1987 Apogee Technology, Inc. was organized as a Delaware corporation andoperated through its wholly owned subsidiary, Acoustics. We discontinued ourloudspeaker business in 1994 and utilized our audio experience on thedevelopment of the worlds’ first all-digital, high efficiency audio amplifierICs, which we trademarked as Direct Digital Amplification or DDX®. Wetransitioned our business to take advantage of the patent we received in 1991for related technology and to pursue the market opportunity created by theindustry adoption of digital audio transmission, recording and playback. In1999, we released our first IC products in 1999, and subsequently released atotal of over 25 IC products. In addition to our IC product sales, we alsolicensed DDX technology to several IC companies, including STMicroelectronicsNV (“ST”), one of the world’s largest semiconductor companies. Under thislicensing agreement with ST, Apogee developed and provided intellectualproperty to be used in royalty bearing products produced by ST.

In May 2004, in order to expand our technologybase and to further diversify our product and market opportunities, we acquireda portfolio of MEMS and nanotechnology intellectual property, trade secrets andknow-how developed by Standard MEMS, Inc. MEMS are devices produced usinghigh volume IC manufacturing techniques that include both electrical circuitsand microscopic mechanical systems. 

F-6

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY** NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2006 AND 2005

**1.**        The Companyand Basis of Presentation (Continued)

Concurrently, we hiredemployees from the former Standard MEMS, Inc. and established a MEMSDivision that we have subsequently consolidated into our Norwood headquarters. Sincethis acquisition, we have been using this acquired know-how plus additionaltechnologies to develop MEMS and nanotechnology based medical and sensor.

October 5, 2005, we completed a transaction withSigmaTel, Inc. (“SigmaTel”) whereby we sold certain assets of our audiodivision, including the DDX technology and the associated royalties from ourlicense agreement with ST, for approximately $9.4 million plus a one-yearpotential earn-out, which we earned approximately $383,000, out of a potentialof $4.5 million. As the earn-out period has expired we are not entitled toadditional payments. As part of the transition, a significant portion of Apogee’sengineering and marketing staff related to the audio division left the Companyafter they were offered positions at SigmaTel. By the terms of a non-competewith SigmaTel, signed in connection with our sale of assets to them, we can nolonger compete in the Class D audio/amplifier business for a period of twoyears. We reorganized the Company’s remaining MEMS division into two businessgroups, the Medical Products Group and the Sensor Products Group. We alsoclosed our sales offices in China, Japan, Taiwan and Hong Kong and terminatedour agreements with our independent sales representatives and distributors thatsupported our audio IC business.  As of December 31,2006, we are carrying inventory with an original cost of approximately $1.8million and a net value of zero, after reserves for slow moving, excess andobsolete inventory. This inventory is available for sale.

In 2006, the majority ofour revenue was derived from the sale of the remaining DDX IC inventoryprimarily as a result of the recognition of all the deferred distributorrevenue. We expect that future revenue will initially be the result of sensorsales and potential licensing and development revenues resulting from the grantof rights to our intellectual property. We will need to secure additionalfunding to support operations. We plan to add direct sales staff, independentsales representatives and distributors to support our medical and sensorproducts. We outsource the manufacturing, assembly and certain testing of ourmedical and sensor products.

***Basis of Presentation***

***Consolidated Financial Statements***

The financial statementsinclude the accounts of Apogee Technology, Inc., and its wholly ownedinactive subsidiary, DUBLA, Inc. All significant intercompany transactionsand accounts have been eliminated.

***Going Concern***

The accompanying consolidated financial statementshave been prepared on a going concern basis which contemplates the realizationof assets and satisfaction of liabilities in the normal course of business. Asshown in the consolidated financial statements, we have incurred continuinglosses and negative cash flows from operations. Net losses were approximately$3.0 million and negative cash flows from operations were approximately$3.0 million for the twelve months ended December 31, 2006. Thisraises substantial doubt about the Company’s ability to continue as a goingconcern.

F-7

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY** NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2006 AND 2005

**1.**        The Companyand Basis of Presentation (Continued)

The Company sold certain tangible and intangibleassets associated with its audio business in 2005 and has approximately $3.1 millionof cash at December 31, 2006. The Company has reduced, in the short-term,its operating expenses for payroll and related costs, rents and third partyconsulting fees. The Company believes that its current working capital andamounts that may be raised to support operations will be sufficient to fund itscapital and operational requirements at least through December 31, 2007. TheCompany is currently in the process of securing funding as required by the Planfor Regaining Compliance with Sections 1003 (a) (ii) and 1003 (a) (iii) ofthe American Stock Exchange Company Guide (the “Plan”) submitted to theAmerican Stock Exchange (“AMEX”) on November 30, 2006 with a revised andmore detailed Plan submitted on December 20, 2006 pursuant to notificationfrom AMEX on November 1, 2006 that we were not in compliance with certainof the AMEX’s continued listing standards. Subsequently, on January 12,2007, Apogee was notified that they had determined that, “in accordance with Section 1009of the Company Guide, the Company made a reasonable demonstration of itsability to regain compliance with the continued listing standards by the end ofthe plan period, which we have determined to be no later than November 1,2007” and that at this time AMEX was prepared to continue the listing of Apogeesubject to certain conditions. See Footnote 20—Notification from the AmericanStock Exchange.

The long term success ofthe Company is dependent upon its ability to successfully develop and marketits sensor and medical device products which are based upon its MEMStechnology, to attain profitable operations and/or raise additional funds asneeded for such purpose. There can be no assurance, however, that the Companywill be able to become profitable or raise the funds that it needs or thatadditional funds will be available to the Company on acceptable terms, if atall.

***Use of Estimates in Financial Statements***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates, and such differencescould affect the results of operations reported in future periods and suchdifferences could be material.

***Liquidity***

On October 5, 2005, the Company receivedapproximately $8.6 million, net of expenses, from the SigmaTelTransaction. On November 30, 2006, the Company received approximately$383,000, as payment in full, pursuant to the earn-out provision of theSigmaTel Transaction. In addition, pursuant to the related Escrow Agreementdated October 5, 2005 between SigmaTel and Apogee, $420,000 was to be heldin escrow for a period of eighteen months for the purpose of compensatingpurchaser pursuant to the indemnification. SigmaTel released the $420,000principal held in escrow as well as all accrued interest on December 29,2006.

In May 2005, the Company received proceedsfrom unsecured interest-bearing loans in the amounts of $250,000 fromDavid Spiegel, a shareholder and $250,000 from Herbert Stein, Chief ExecutiveOfficer and Chairman of the Board. These loans were payable upon demand andwere not subject to any premium or penalty for prepayment. The loan interestrate was 6% per annum, payable monthly in arrears on the 

F-8

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY** NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2006 AND 2005

**1.**        The Companyand Basis of Presentation (Continued)

outstanding balance.  OnOctober 20, 2005 proceeds from the SigmaTel transaction were used to repaythe $500,000 principal as well as all accrued interest.

On August 11, 2005,the Company entered into agreements with Laurus Master Fund, Ltd. (“Laurus”),whereby the Company received $2.0 million in gross proceeds (with net proceedsof approximately $1.8 million) through the sale of a 120 day secured term note.In accordance with the terms of the note, the note was payable by the Companyin cash during the first 120 days following the issuance of the note, and afterthe 120 day period it was payable in the amount of $62,500 per month in cash orconvertible into the common stock, $0.01 par value per share, of the Company ata fixed conversion price of $1.15 per share. On October 5, 2005 proceedsfrom the SigmaTel transaction were used to repay the approximately $2.0 millionowed to Laurus Master Fund, Ltd.  Therelated warrant provides for the purchase of 85,000 shares of common stock at aprice of $1.15 per share. The warrant expires seven years after issuance. Afinder for the transaction received a fee of 5% of the gross proceeds, togetherwith a seven year warrant to purchase an aggregate of 8,500 shares of commonstock immediately exercisable at a price of $1.22 per share. This offering wasconducted as a private placement pursuant to the exemption from registrationprovided by Section 4(2) of the Securities Act of 1933, as amended,and the rules and regulations promulgated thereunder.

**2.**        Summary of Significant Accounting Policies

***Revenue Recognition***

The Company recognizes revenue in accordance withSecurities and Exchange Commission Staff Accounting Bulletin No. 104 (“SAB104”), “Revenue Recognition in Financial Statements: Revenue Recognition”,which states that revenue should be recognized when the following revenuerecognition criteria are met:  (1) persuasive evidence of anarrangement exists; (2) the product has been shipped and the customertakes ownership and assumes the risk of loss; (3) the selling price isfixed or determinable; and (4) collection of the resulting receivable isreasonably assured. The following policies apply to the Company’s major productsales categories for revenue recognition.

Sales to OEM Customers:  Revenue is recognizedunder the Company’s standard terms and conditions of sale, title and risk ofloss transfer to the customer at the time products are shipped to the customeror the customers’ representative/freight forwarder (shipping terms Ex Works).The Company has experienced minimal warranty or other returns and based uponhistorical experience has recorded a $10,000 provision for such returns.

Sales to Distributors:  At times the Companyprovides incentives such as stock rotation, price protection and otherincentives to its distributors. Therefore, under the sell through method ofrevenue recognition the Company defers recognition of revenue until such timethat the distributor sells products to its customers based upon receipt ofpoint-of-sale reports from the distributors. Distributor payments receivedbefore revenue is recognized are recorded as deferred revenue. Unsold inventoryheld at distributors is included as a component of finished goods inventory. AtSeptember 30, 2006 all deferred revenue has been recognized.  If and when material amounts of our sensor andmedical products items are shipped to the Company’s distributors, the statedRevenue Recognition Policy will be resumed.

F-9

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY** NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2006 AND 2005

**2.**       Summary ofSignificant Accounting Policies (Continued)

The Company recordsroyalty revenue when earned in accordance with the underlying agreement.Royalties are based upon sales of products commercialized from the Company’slicensed technology. Consulting revenue is recognized as services are performedin accordance with the terms of the underlying agreements.

***Loss Per Share***

Basic net income (loss)per share is computed by dividing the net profit or loss attributable to commonstockholders for the period by the weighted average number of common stockoutstanding during the period. Diluted net income (loss) per share is computedbased on the weighted average number of common stock and dilutive potentialcommon stock outstanding. The calculation of diluted net loss per shareexcluded potential common stock if the effect is anti-dilutive. Potentialcommon stock consists of incremental common stock issuable upon the exercise ofstock options and common stock issuable upon the exercise of common stockwarrants.

***Research and Development***

Costs for research anddevelopment are expensed as incurred.

***Inventories***

Inventories, including inventory held at distributors,are stated at the lower of cost on a first-in, first-out basis or market. SeeFootnote 4. This policy requires the Company to make estimates regarding themarket value of the Company’s inventory, including an assessment of excess orobsolete inventory. The Company determines excess and obsolete inventory basedon an estimate of the future demand and estimated selling prices for theCompany’s products within a specified time horizon, generally 12 to 24 months.

For the fiscal year ended December 31,2006 the Company increased its reserve for slow moving, excess and obsoleteinventory to 100% of current Apogee held inventory levels. The inventory as of December 31,2006 entirely consisting of Apogee held inventory was approximately $1.8million before the allowance for slow moving, excess and obsolete inventory. Thiscompares to inventory at December 31, 2005, net of reserves, ofapproximately $1.3 million consisting of $719,000 held at distributors with theremaining $609,000 held at Apogee.

***Inventories purchase commitment losses***

The Company accrues forestimated losses on non-cancelable purchase orders, which may occur if thefuture sales price declines below the committed purchase price. There are nooutstanding significant purchase commitments of product inventory and thereforeno provision was required at December, 31, 2006.

***Property and Equipment***

Major replacements andbetterments of equipment are capitalized. Cost of normal maintenance andrepairs is charged to expense as incurred. Depreciation is provided over theestimated useful lives of the 

F-10

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY** NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2006 AND 2005

**2.**        Summary ofSignificant Accounting Policies (Continued)

assetsusing accelerated methods. Leasehold improvements are amortized over either theterm of lease or the estimated useful life of the improvement.

***Construction in Progress***

Construction in progressconsists of costs related to the renovations and construction of a laboratoryto be used for the development of medical device products. The total cost ofthis construction is not expected to exceed $100,000.

***Patents***

Costs incurred to registerand obtain patents are capitalized and amortized on a straight-line basis overfive years, their estimated useful lives. During the fiscal year ended December 31,2006, the Company submitted five U. S. patent applications.

***Exclusive License Fee***

The Company iscapitalizing license fees paid to third parties for costs associated with theexclusive rights to their patents. The Company is amortizing these fees over aperiod of four years.

***Cash and Cash Equivalents***

The Company considers allhighly liquid investments with an original maturity of three months or less tobe cash equivalents. Substantially all of the Company’s cash is held in highquality money market funds comprised of short-term, fixed income securitiesearning interest at a thirty-day yield of at December 31, 2006 of 4.94%.

***Use of Estimates in Financial Statements***

In preparing financialstatements in conformity with generally accepted accounting principles,management is required to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of financial statements, and the reported amountsof revenues and expenses during the reporting period. Actual results coulddiffer from those estimates.

***Accounts Receivable***

The Company carries itstrade receivables from direct customers less an allowance for doubtful accountsto ensure that trade receivables are carried at net realizable value. On aperiodic basis, the Company evaluates the collectibility of its accountsreceivable on a variety of factors, including length of time receivables arepast due, indication of customer willingness to pay, significant one-timeevents and historical experience. An additional reserve for individual accountsis recorded when the Company becomes aware of a customer’s inability to meetits financial obligations, such as in the case of bankruptcy filings orsubstantial deterioration in the customer’s operating results or financialposition. If the financial condition of the Company’s customers were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required. Accounts receivable are generallyconsidered past 

F-11

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY** NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2006 AND 2005

**2.**        Summary ofSignificant Accounting Policies (Continued)

due ifany portion of the receivable balance is outstanding for more than 90 days. Ifcircumstances related to the Company’s customers change, estimates of therecoverability of receivables would be further adjusted.

***Fair value of financial instruments***

Carrying amounts ofcertain of the Company’s financial instruments, including cash and cashequivalents, accounts receivable and notes and accounts payable, approximatetheir fair values due to their relative short maturities and based uponcomparable market information available at the respective balance sheet dates.The Company does not hold or issue financial instruments for trading purposes.

***Stock Based Compensation***

The Company has a stock-based compensation plan, the1997 Employee, Director and Consultant Stock Option Plan (“Plan”), which isdescribed below. Prior to fiscal 2006, the Company accounted for the Plan underthe recognition and measurement provisions of Accounting Principles Board (APB)Opinion No. 25, “Accounting for Stock Issued to Employees”, and relatedInterpretations, as permitted by Financial Accounting Standards Board (FASB)Statement of Financial Accounting Standards (SFAS) No. 123, “Accountingfor Stock-Based Compensation” (SFAS 123). Compensation costs related to stockoptions granted at fair value under the Plan were not recognized in theconsolidated statements of income.

In December 2004, FASB issued SFAS 123 (revised2004), “Share-Based Payments” (SFAS 123(R)). Under the new standard, companiesare no longer able to account for stock-based compensation transactions usingthe intrinsic value method in accordance with APB Opinion No. 25. Insteadcompanies are required to account for such transactions using a fair-valuemethod and recognize the expense in the consolidated statement of income.

Prior to January 1, 2006, the Company had adoptedonly the disclosure provisions of SFAS 123(R). It applied APB Opinion No. 25,“Accounting For Stock Issued To Employees”, and related interpretations inaccounting for the Plan and did not recognize compensation expense for thePlan.

Effective January 1,2006, the Company adopted SFAS 123(R) using the modified-prospective-transitionmethod. Under this transition method, stock compensation costs recognizedbeginning January 1, 2006 include (a)  compensation cost for allstock-based compensation payments granted prior to, but not yet vested as of January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS 123, and (b) compensation cost for allstock-based payments granted on or subsequent to January 1, 2006, based onthe grant date fair value estimated in accordance with the provisions of SFAS123(R). Results for prior periods have not been restated.

***Recent Accounting Pronouncements***

In July 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN48”), which clarifies the accounting and disclosure for uncertainty in taxpositions, as defined. FIN 48 seeks to reduce the diversity in practiceassociated with certain aspects of the recognition and measurement related toaccounting for income taxes. This interpretation is effective for fiscal years 

F-12

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY** NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2006 AND 2005

**2.**        Summary ofSignificant Accounting Policies (Continued)

beginning after December 15,2006. We do not expect the interpretation will have a material impact on ourresults from operations or financial position.

In September 2006, the FASB issued SFAS No. 157“Fair Value Measurements” (“SFAS 157”). SFAS 157 provides a new singleauthoritative definition of fair value and provides enhanced guidance for measuringthe fair value of assets and liabilities and requires additional disclosuresrelated to the extent to which companies measure assets and liabilities at fairvalue, the information used to measure fair value, and the effect of fair valuemeasurements on earnings. SFAS 157 is effective for the Company as of January 1,2008. Our adoption of SFAS No. 157 is not expected to have a materialeffect on our consolidated financial position or results of operations.

F-13

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**NOTES TO FINANCIAL STATEMENTS (Continued)DECEMBER 31, 2006 AND 2005

**2. Summary of SignificantAccounting Policies (Continued)**

In September 2006, the FASB issued SFAS No. 158“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”).SFAS 158 requires balance sheet recognition of the overfunded orunderfunded status of pension and postretirement benefit plans. Under SFAS 158,actuarial gains and losses, prior service costs or credits, and any remainingtransition assets or obligations that have not been recognized under previousaccounting standards must be recognized as a component of accumulated othercomprehensive income (loss) within stockholders’ equity, net of tax effects,until they are amortized as a component of net periodic benefit cost. Inaddition, the measurement date and the date at which plan assets and thebenefit obligation are measured, are required to be the company’s fiscal yearend. SFAS 158 is effective for the Company as of December 31, 2006,except for the measurement date provisions, which are effective December 31,2008. Because we do not have a defined benefit pension plan or other qualifyingpost retirement plan, our adoption of SFAS No. 158 is not expected to havea material effect on our consolidated financial position or results ofoperations.

In September 2006, the SEC released StaffAccounting Bulletin No. 108 “Considering the Effects of Prior YearMisstatements When Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”). SAB 108 provides interpretative guidance on howpublic companies quantify financial statement misstatements. There have beentwo common approaches used to quantify such errors. Under an income statementapproach, the “roll-over” method, the error is quantified as the amount bywhich the current year income statement is misstated. Alternatively, under abalance sheet approach, the “iron curtain” method, the error is quantified asthe cumulative amount by which the current year balance sheet is misstated. InSAB 108, the SEC established an approach that requires quantification offinancial statement misstatements based on the effects of the misstatements oneach of the company’s financial statements and the related financial statementdisclosures. This model is commonly referred to as a “dual approach” because itrequires quantification of errors under both the roll-over and iron curtainmethods. SAB 108 is effective for the Company as of December 31, 2006. Ouradoption of SAB No. 108 is not expected to have a material effect on ourconsolidated financial position or results of operations.

In February 2007, theFASB issued SFAS No. 159 “The Fair Value Option for Financial Assets andFinancial Liabilities” (“SFAS 159”). SFAS 159 provides companies withan option to irrevocably elect to measure certain financial assets andfinancial liabilities at fair value on an instrument-by-instrument basis withthe resulting changes in fair value recorded in earnings. The objective of SFAS 159is to reduce both the complexity in accounting for financial instruments andthe volatility in earnings caused by using different measurement attributes forfinancial assets and liabilities. The Company is currently evaluating theimpact of SFAS 159 to determine the effect, if any; it will have on theconsolidated financial position and results of operations. The Company isrequired to adopt SFAS 159 as of January 1, 2008.

***Income Taxes***

Deferred tax assets andliabilities are recognized for temporary differences between the financialreporting basis and the tax basis of the Company’s assets and liabilities. Deferredtaxes are recognized for the estimated taxes ultimately payable or recoverablebased on enacted tax laws. See Footnote 15—Income Taxes and Tax LossCarryforwards.

F-14

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**NOTES TO FINANCIAL STATEMENTS (Continued)DECEMBER 31, 2006 AND 2005

**3. AccountsReceivable**

AccountsReceivable at December 31, 2006 and December 31, 2005 are comprisedof the following:

| ** **                           | ** ** | **December 31,  2006** | ** **  | **December 31,  2005** | ** ** |
|--------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| Distributor                          | ** ** |                        | **$**       | **11,162**                  |       |   |   | $ | 190,202 |   |   |
| Direct customers                     | ** ** |                        | **13,279**  |                        |       |   | 107,635 |   |   |
| ** **                           | ** ** |                        | **$**       | **24,441**                  |       |   |   | $ | 297,837 |   |   |
| Less allowance for doubtful accounts | ** ** |                        | **(13,245** | **)**                       |       |   | (145,000 | ) |   |
| Net accounts  receivable             | ** ** |                        | **$**       | **11,196**                  |       |   |   | $ | 152,837 |   |   |

 

**4. Inventories**

Inventoriesare stated at the lower of cost (first-in, first-out) or market. The majorclassifications of inventories are as follows:

| ** **                                                    | ** ** | **December 31,  2006** | ** **    | **December 31,  2005** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|---------------|-----------------------------|------------|
| Raw materials                                                 | ** ** | **$**                       | **—**    |                        | $          | — |   |
| Finished goods  held by Apogee                                | ** ** | **1,814,028**               |          | 2,297,795                   |       |
| Finished goods  held by distributors                          |       | **—**                  |          | 943,423                     |       |
| ** **                                                    | ** ** | **$**                       | **1,814,028** |                        | $          | 3,241,218 |   |
| Less allowance for slow moving, excess and obsolete inventory | ** ** | **(1,814,028**              | **)**         | (1,913,254                  | )          |
| Inventory—net                                            | ** ** | **$**                       | **—**    |                        | $          | 1,327,964 |   |

 

**5. Property and Equipment**

Propertyand equipment at December 31, 2006 and December 31, 2005 arecomprised of the following:

| ** **                    | ** ** | **December 31,  2006** | ** **  | **December 31,  2005** | ** ** |
|-------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| Equipment                     | ** ** |                        | **$**       | **136,761**                 |       |   |   | $ | 48,091 |   |   |
| Software                      | ** ** |                        | **32,943**  |                        |       |   | 32,943 |   |   |
| Furniture and  fixtures       | ** ** |                        | **22,047**  |                        |       |   | 22,515 |   |   |
| Leasehold  improvements       | ** ** |                        | **22,954**  |                        |       |   | 22,954 |   |   |
| ** **                    | ** ** |                        | **$**       | **214,715**                 |       |   |   | $ | 126,503 |   |   |
| Less accumulated depreciation | ** ** |                        | **(97,488** | **)**                       |       |   | (86,570 | ) |   |
| ** **                    | ** ** |                        | **$**       | **117,217**                 |       |   |   | $ | 39,933 |   |   |

 

Depreciation expense was $18,583 and $54,849 for theyears ended December 31, 2006 and 2005, respectively.

F-15

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**NOTES TO FINANCIAL STATEMENTS (Continued)DECEMBER 31, 2006 AND 2005

**5.Property and Equipment (Continued)**

The estimated useful livesof the classes of physical assets were as follows:

| **Description**         | ** ** | ** ** | ** **    | **Depreciable Lives** | ** ** |
|-------------------------|------------|------------|---------------|----------------------------|------------|
| Equipment               |       |       | 5  years      |                       |       |
| Software                |       |       | 3  years      |                       |       |
| Furniture and  fixtures |       |       | 7  years      |                       |       |
| Leasehold improvements  |       |       | Term of lease |                       |       |

 

**6. AccruedExpenses**

| ** **              | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Accrued audit  expenses | ** ** |                        | **$**      | **60,000**                  |       |   |   | $ | 69,000 |   |   |
| Accrued legal  expenses | ** ** |                        | **25,000** |                        |       |   | 86,000 |   |   |
| Accrued taxes           |       |                        | **—** |                        |       |   | 20,000 |   |   |
| Other accrued  expenses | ** ** |                        | **64,000** |                        |       |   | 39,000 |   |   |
| ** **              | ** ** |                        | **$**      | **149,000**                 |       |   |   | $ | 214,000 |   |   |

 

**7. Deferred ContractRevenue**

During September 2004,the Company entered into a funding agreement with United Binational IndustrialResearch and Development (“BIRD”) Foundation of Israel. This agreement was toprovide funds to the Company for industrial research and development activities.The Company has recorded $101,379 in deferred contract revenue and for the twelvemonths ended December 31, 2004 recorded $23,101 as an offset to researchand development expenses. There was no revenue recorded under this agreementfor the fiscal year ended December 31, 2005 or the six months ended June 30,2006. On July 27, 2006 Apogee refunded approximately $63,000 thussatisfying its obligation in full to the Bird Foundation under the Agreement. Theremaining $10,000 in deferred contract revenue was applied against Research andDevelopment expense. Following a BIRD Foundation audit of the project, Apogeewas refunded approximately $3,600 on December 18, 2006.

**8. Stockholders’ Equity**

***Stock Options***

The Company did not issue any common stock during thefiscal year ended December 31, 2006. During the fiscal year ended December 31,2005 the Company issued 130,000 shares of common stock for options exercised bytwo former employees at an exercise price of $0.25 per share. Proceeds from theexercise of options these options was $32,500.

On December 21, 2005,the Board of Directors of Apogee Technology, Inc. announced that as of December 22,2005, it had accelerated the vesting of certain unvested stock optionspreviously awarded to employees and non-employee members of the Board ofDirectors under the Apogee’s 1997 Employee, Director and Consultant StockOption Plan. This vesting provision for options covered approximately 880,000underlying shares of common stock has been accelerated. Approximately 665,000of the underlying 

F-16

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**NOTES TO FINANCIAL STATEMENTS (Continued)DECEMBER 31, 2006 AND 2005

**8.Stockholders’ Equity (Continued)**

shares,of the total accelerated, belong to executive officers and non-employee membersof the Board of Directors. The Board only accelerated the vesting of optionshaving exercise prices in excess of $2.00 per share and did not accelerate thevesting of any options with exercise prices below $2.00 per share.

***Other***

On August 11, 2005,the Company, in connection with a financing, issued an immediately exercisablewarrant with terms restricting exercise. The warrant provides for the purchaseof 85,000 shares of common stock at a price of $1.15 per share. The warrantexpires seven years after issuance. A finder for the transaction was alsoissued a seven year warrant to purchase an aggregate of 8,500 shares of commonstock immediately exercisable at a price of $1.22 per share.

**9. Related PartyTransactions**

The Company rents its facility from an entitycontrolled by a stockholder for $4,400 per month pursuant to a lease thatexpired December 31, 2005. Currently, the Company is renting the facilityon a month-to-month basis. Rent paid to this stockholder aggregated $52,800 peryear for 2006 and 2005.

In addition, see Footnote12—Indemnification Agreements with our Executives.

**10. License Agreement**

On February 7, 2001, the Company signed a licenseagreement with ST Microelectronics NV (“ST”). The agreement granted ST theexclusive rights to develop, manufacture, and sell products incorporatingcertain intellectual property rights owned or controlled by the Company. Inconsideration for this license, ST paid to the Company a one-time license fee of$1.6 million in cash, a $400,000 credit for future design services androyalties based upon the sale of ST products that incorporate the licensedtechnology.

Royalty income wasrecognized during the period in which the royalties were earned. Royalties werereported to us by ST on a quarterly “Royalty Schedule,” which was receivedwithin 30 days of quarter end. Royalties were determined based upon either apercentage of selling prices or a flat rate depending on the particular productitem sold in the reporting quarter. In conjunction with the SigmaTeltransaction, Apogee sold the rights to the royalties received under the licenseagreement to SigmaTel, as well as all the rights, title and interest in therelated intellectual property.

**11. Concentrations**

During the year ended December 31, 2006, theCompany derived approximately 80% of both product and total revenue as a resultof sell through by five distributors.

During the year ended December 31, 2005, theCompany derived approximately 11% of product revenue from one end user and 46%of product revenue as a result of sell through by two distributors.

F-17

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2006 AND 2005

**11. Concentrations (Continued)**

During the year ended December 31, 2005, theCompany derived approximately 40% of total revenue as a result of sell throughby two distributors.

During the year ended December 31, 2006, theCompany derived approximately 88% of both product and total revenue fromdistributors located in Asia.

During the twelve months ended December 31, 2005,the Company derived approximately 79% of its total revenue and 90% of productrevenue from end users or distributors located in Asia.

Two of the Company’s major customers accounted forapproximately 50% of the total accounts receivable balance at December 31,2006.

Five of the Company’s major customers accounted forapproximately 95% of the total accounts receivable balance at December 31,2005.

The Company maintains its cash accounts with highquality financial institutions. Balances usually exceed the maximum coverage($100,000) provided by the Federal Deposit Insurance Corporation on insureddepositor accounts.

**12. IndemnificationArrangements with our Executives**

The Company has been assuming and will continue toassume the legal costs and related expenses of Herbert M. Stein, in connectionwith the civil case in the Circuit Court of the Fifteenth Judicial Circuit inand for Palm Beach County, Florida entitled *Joseph Shamy v. Herbert M.Stein, case No.: 50 2005 CA 007719 XXXXMB.*To date we have incurredapproximately $278,000 toward this indemnification.

**13. Income (Loss) PerCommon Share**

Basic earning per common share is computed by dividingnet income by the weighted average number of common shares outstanding for theperiod. The diluted income per common share includes the potential impact ofdilutive securities, including options and warrants. The dilutive effect ofstock options and warrants is computed using the treasury stock method, whichassumes the repurchase of common shares by the Company at the average marketprice for the period. The calculation of diluted not loss per share excludespotential common stock if the effect is anti-dilutive. The weighted averagenumber of shares of common stock outstanding used to compute basic income(loss) per share for 2006 and 2005 amounted to 11,968,332 and 11,869,026,respectively. The weighted average number of shares of common stock outstandingand common stock equivalents used to compute fully diluted income per share for2005 amounted to 12,132,294.

**14. Employee Retirement401(k) Plan**

The Company sponsors a 401(k) retirement plan forthe benefit of its employees. The plan imposes no contribution requirement orliability upon the Company. Plan participation is voluntary and unconditionalto all employees over 18 and plan contributions are discretionary to the limitsallowed by the Internal Revenue Code and are immediately 100% vested. There wereno employer contributions during 2006 or 2005.

F-18

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2006 AND 2005

**15. Income Taxes and TaxLoss Carryforwards**

For the Fiscal year ended December 31, 2005, theCompany had not provided a tax provision since it would have been offset byutilization of the Company’s Net Operating Loss (NOL) carry forwards. The tablebelow reflects the Company’s estimated tax provisions:

**Estimated Tax Provision**

| ** **     | ** ** | **Year Ended December 31,** | ** **     |
|----------------|------------|--------------------------------------------|----------------|
| ** **     | ** ** | **2006**                                   | ** **     | **2005** | ** ** |
| Federal        | ** ** | **$**                                      | **(1,000,000** | **)** | $ | 909,600 |   |
| State          | ** ** | **(300,000**                               | )              | 303,200 |   |
|           |       | **(1,300,000**                             | )              | 1,212,800 |   |
| Less Allowance |       | **1,300,000**                              |           | — |   |
| ** **     | ** ** | **$**                                      | **—**     |   | $ | 1,212,800 |   |

 

The table below reflects the FY 2005 estimatedutilization of the NOL:

**Estimated Tax Provision**

| ** ** | ** ** | **Year Ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Federal    | ** ** | **$**                                      | **—** | ** ** | $ | (909,600 | ) |
| State      | ** ** | **—**                                 | ** ** | (283,500 | ) |
| ** ** | ** ** | **$**                                      | **—** | ** ** | $ | (1,193,100 | ) |

 

Company has available for Federal and state income taxpurposes, net operating loss carryforwards of approximately $9,796,600 and$3,069,500 as of December 31, 2006, expiring from 2007 through 2025.

The tax benefit of the NOL carryforward is approximately$3,500,000 and is fully reserved due to the uncertainty of realization.

Significant changes in ownership of the Company maysubstantially reduce the available carryforwards.

**16.  Supplemental Cash Flow Information**

No interest was paid during 2006. For the fiscal yearended December 31 2005 the company paid approximately $38,000 in interestexpense. Additionally, the Company paid state income taxes of approximately$20,000 in 2006.

**17.  Stock Based Compensation**

Included in the Company’s net loss for the year ended December 31,2006 was a compensation charge of approximately $292,000 due to the adoption ofSFAS 123(R). In addition, the basic and diluted loss per share wasapproximately $.02 higher for the year ended December 31, 2006 due to theadoption of SFAS 123(R).

F-19

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2006 AND 2005

**17.  Stock Based Compensation (Continued)**

Stock-based compensation costs are generally based onthe fair value calculated from the Black-Scholes option-pricing model on thedate of grant for stock options. The fair values of stock grants are amortizedas compensation expense over the options’ vesting period.

In anticipation of adopting SFAS 123(R), the Companyevaluated the assumptions used in the Black-Scholes model. The Companycontinues to calculate the expected volatility based solely on historicalvolatility. The Company believes that historical volatility provides the bestestimate of future stock price volatility.

The expected term was previously and is currentlycalculated based on an analysis of vesting periods and contractual life. TheCompany believes that this analysis provides a better estimate of option termperiods.

The Company continues to base the estimate ofrisk-free rate on the U.S. Treasury yield curve in effect at the time of grant.The Company has never paid cash dividends and does not currently intend to paycash dividends, and thus has assumed a 0% dividend yield; expected term of 7.5years, expected volatility of approximately 85% and a risk free interest rateof 4.83%.

As part of the requirements of SFAS 123(R), theCompany is required to estimate potential forfeitures of stock grants andadjust compensation cost recorded accordingly. The estimate of forfeitures willbe adjusted over the requisite service period to the extent that actualforfeitures differ, or are expected to differ, from such estimates. Changes inestimated forfeitures will be recognized through a cumulative adjustment in theperiod of change and will also impact the amount of stock compensation expenseto be recognized in future periods.

A summary of the Company’s stock compensation activitywith respect to the twelve months ended December 31, 2006 follows:

| **Stock Options**                 | ** ** | ** ** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|
| Outstanding at  December 31, 2005 |       | 2,495,060  |       | $          | 5.4939     |                                    |       | —                                               |       |   |
| Granted                                |       | 714,500    |       | 0.9259     |       |                                    | —     |                                                 |       |
| Exercised                              |       | —     |       | —     |       |                                    | —     |                                                 |       |
| Cancelled or  expired                  |       | (310,460   | )          | (3.0248    | )          |                                    |       |                                                 |       |
| Outstanding at  December 31, 2006 |       | 2,899,100  |       | $          | 4.6512     |                                    |       | 6.4563                                               |       |   |
| Vested at  December 31, 2006      |       | 2,509,900  |       | $          | 5.2150     |                                    |       | 6.0246                                               |       |   |
| Exercisable at  December 31, 2006 |       | 2,509,900  |       | $          | 5.2150     |                                    |       | 6.0246                                               |       |   |

 

F-20

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2006 AND 2005

**17.  Stock Based Compensation (Continued)**

The following tablesummarizes information about options outstanding as of December 31, 2006:

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                  | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Outstanding**              | ** ** | **Life** | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $0.25 - 1.69                                |       |                         | 975,900    |                         |       |   | 7.4965 |   |   | $ | 0.9528 |   | 586,700 |   | $ | 0.9112 |   |
| $2.71 - 6.590                               |       |                         | 1,299,200  |                         |       |   | 5.2613 |   |   | $ | 5.4017 |   | 1,299,200 |   | $ | 5.4017 |   |
| $8.45 - 12.15                               |       |                         | 624,000    |                         |       |   | 7.3175 |   |   | $ | 8.8728 |   | 624,000 |   | $ | 8.8728 |   |
| Total at  December 31, 2006            |       |                         | 2,899,100  |                         |       |   | 6.4563 |   |   | $ | 4.6512 |   | 2,509,900 |   | $ | 5.2150 |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the twelve months ended December 31, 2006,the Company granted options to purchase 714,500 shares of its common stock at aweighted average fair market value of $0.7231. No options were exercised duringthe fiscal year ended December 31, 2006. In addition, during the twelvemonths ended December 31, 2006, options to purchase 345,300 shares ofApogee common stock vested. The weighted average fair value of these optionswas $0.7905. Total stock-based compensation expense for the fiscal year ended December 31,2006 was approximately $292,000. Had we implemented SFAS 123(R) duringthe fiscal year ended December 31, 2005, our stock-based compensationexpense for such period would have been approximately $3.9 million.

**18. Commitmentsand Contingencies**

***Leases***

The Company did not haveany operating leases as of December 31, 2006.

***Employment Contract***

On June 7, 2004, the Company entered into athree-year employment contract with its chief executive officer and presidentwhereby he will receive an annual salary of $295,000. This employment contractautomatically renews for successive periods of two years unless either partynotifies the other of its intension not to renew. The Company’s board ofdirectors will annually consider granting increases in salary, as well aspotential bonuses.

**19.  Supplementary Quarterly Financial Information(Unaudited)**

Summarized quarterly financial information for the 12months ended December 31, 2006 and 2005 is as follows: (in thousands,except per share data):

| ** **                               | ** ** | **2006**          | ** ** |
|------------------------------------------|------------|-------------------|------------|
| ** **                               | ** ** | **1st Qtr.** | ** ** | **2nd Qtr** | ** ** | **3rd Qtr.** | ** ** | **4th Qtr.** | ** ** |
| Net revenue                              |       | $                 | 985        |   | $ | 341 |   | $ | 509 |   |   | $ | 50 |   |   |
| Costs and  expenses                      |       | 1,746             |       | 1,409 |   | 1,592 |   |   | 677 |   |   |
| Operating loss                           |       | (761              | )          | (1,068 | ) | (1,083 | ) |   | (628 | ) |   |
| Net loss                                 |       | (729              | )          | (932 | ) | (739 | ) |   | (571 | ) |   |
| Basic and diluted loss  per common share |       | (0.06             | )          | (0.08 | ) | (0.06 | ) |   | (0.05 | ) |   |
|                                          |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-21

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2006 AND 2005

**19.  Supplementary Quarterly Financial Information(Unaudited) (Continued)**

| ** **                                 | ** ** | **2005**          | ** ** |
|--------------------------------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **1st Qtr.** | ** ** | **2nd Qtr** | ** ** | **3rd Qtr.** | ** ** | **4th Qtr.** | ** ** |
| Net revenue                                |       | $                 | 1,115      |   | $ | 1,315 |   | $ | 1,520 |   |   | $ | 1,222 |   |   |
| Costs and  expenses                        |       | 2,558             |       | 2,912 |   | 3,066 |   |   | 2,155 |   |   |
| Operating loss                             |       | (1,443            | )          | (1,597 | ) | (1,546 | ) |   | (932 | ) |   |
| Net profit (loss)                          |       | (1,438            | )          | (1,599 | ) | (1,577 | ) |   | 7,566 |   |   |
| Basic net profit  (loss) per share         |       | (0.12             | )          | (0.14 | ) | (0.13 | ) |   | 0.63 |   |   |
| Fully diluted net profit  (loss) per share |       | (0.12             | )          | (0.14 | ) | (0.13 | ) |   | 0.62 |   |   |
|                                            |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**20.  Notification from the American Stock Exchange**

As reported on Form 8K dated January 12,2007, Apogee was notified on January 12, 2007, by the American StockExchange (“AMEX”) that AMEX has accepted the Company’s plan to regaincompliance with AMEXcontinued listing standards, and that the Company’s listing will be continuedpursuant to an extension.

The Company submitted a plan of compliance to AMEX on November 30,2006, outlining its operational plan and strategic objectives. This plan wasprepared in response to a letter received from AMEX on November 1, 2006,indicating that the Company was below certain continued listing standards as aresult of shareholders’ equity of less than $4 million and losses fromcontinuing operations and/or net losses in three out of its four most recentfiscal years, as is required in Section 1003 (a) (ii) of theCompany Guide; and because the Company was also not in compliance with Section 1003(a) (iii) of the Company Guide, as it has shareholders’ equity ofless than $6 million and losses from continuing operations in its five mostrecent fiscal years.

The Company will be subject to periodic review by AMEXStaff during the extension period, which ends on November 1, 2007. Failureto make progress consistent with the plan or to regain compliance with thecontinued listing standards by the end of the extension period could result inthe Company being delisted from the American Stock Exchange.

F-22

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