**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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FORM 10-KSB/A

**Amendment No. 2**

**(Mark One)**

**x**                               ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe fiscal year ended December 31, 2004**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from              to             .**

**Commissionfile number:  000-30656**

**APOGEE TECHNOLOGY, INC.**

*(Exact name of small businessissuer as specified in its charter)*
| **DELAWARE**                                                                | **04-3005815**                          |
|-----------------------------------------------------------------------------|-----------------------------------------|
| *(State  or other jurisdiction of incorporation or organization)*           | *(I.R.S.  Employer Identification No.)* |
| **129 MORGAN DRIVE  NORWOOD, MASSACHUSETTS**                                | **02062***(Zip Code)*                   |
| *(Address  of principal executive offices)*                                 | ** **                              |
| 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  registered pursuant to Section 12(g) of the Exchange Act: **None** |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes o   No x

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2).   Yeso   No x

For the years ended December 31, 2004 and 2003,respectively, the revenues of the Registrant were *$6.2 millionand $9.5 million, respectively.*

The aggregate market value of the registrant’s votingand non-voting common stock held by non-affiliates of the registrant on July 29,2005, based on the closing price of the Common Stock on The American StockExchange of $1.06 per share on such date was $12,548,632.

As of July 29, 2005, the registrant had11,838,332 shares of common stock outstanding.

 

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**EXPLANATORY NOTE**

This Amended Report on Form 10-KSB/A (“Form 10-KSB/A”)is being filed as Amendment No. 2 to the Company’s Annual Report on Form 10-KSBfor the fiscal year ended December 31, 2004, which was filed with theSecurities and Exchange Commission (SEC) on April 18, 2004 (the “OriginalFiling”) and Amendment No. 1, which was filed with the Securities andExchange Commission (SEC) on April 29, 2004. The Company is filing thisAmendment No. 2 to reflect restatements of its financial statements for thetwelve month periods ended December 31, 2004 and December 31, 2003(the “Restatement”). For a more detailed description of the Restatement, seeNote 17, “Restatement of Previously Reported Quarterly, Annual and TransitionPeriod Financial Information” of the Notes to Consolidated FinancialStatements.

This Form 10-KSB/A amends and restates “Item3. Legal Proceedings” of Part I; “Item 6. Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” “Item 7.Financial Statements and Supplementary Data,” and Item 8A. “Controls andProcedures” of Part II; and Item 15 “Financial Statements” of Part IVof the Original Filing, in each case, with the exception of “Item 3. LegalProceedings” of Part I, as a result of, and to reflect, the Restatement.In addition, this Form 10-KSB/A includes an additional risk factorrelated to our disclosure controls and procedures and our internal control overfinancial reporting. This Form 10-KSB/A also amends and restates theNotes to Consolidated Financial Statements. Pursuant to the rules of theSEC, Item 15 of Part IV of the Original Filing has been amended to includethe consent of our independent registered public accounting firm andcurrently-dated certifications from our principal executive officer andprincipal financial officer, as required by Sections 302 and 906 of theSarbanes-Oxley Act of 2002. The consent of our independent registered publicaccounting firm is included in this Form 10-KSB/A as Exhibit 23.1.The certifications of our principal executive officer and our principalfinancial officer are attached to this Form 10-KSB/A as Exhibits31.1, 31.2 and 32.1.

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**PART I**

**THISANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS ASDEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FOR THISPURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICALFACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THEFOREGOING, THE WORDS “BELIEVES”, “ANTICIPATES”, “PLANS”, “EXPECTS”, AND SIMILAREXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE IMPORTANTFACTORS DISCUSSED IN ITEM 1, “DESCRIPTION OF BUSINESS”, AND ITEM 7, “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”,AMONG OTHERS, COULD CAUSE ACTUAL FUTURE RESULTS TO DIFFER MATERIALLY FROM THOSEINDICATED BY FORWARD-LOOKING STATEMENTS MADE HEREIN AND PRESENTED ELSEWHERE BYMANAGEMENT FROM TIME TO TIME.**

**Item 1.**                        BUSINESS

Apogee Technology, Inc. (“Apogee” or the “Company”)designs, develops and markets silicon based products that incorporateproprietary technologies. The Company’s patented all-digital, high efficiencyDirect Digital Amplification (DDX®) integrated circuits (“ICs”) havebeen used by over 20 major consumer electronic brands in a wide range of audioproducts. The Company is developing new System-on-Chip (“SOC”) products usingits analog and digital circuit designs and Micro-Electromechanical Systems (“MEMS”)technology for the consumer, automotive, communications and medical markets. TheCompany operates a worldwide marketing and sales organization and has officesin the US, China, Hong Kong, Japan and Taiwan.

In May 2004, the Company acquired the portfolioof MEMS intellectual property, trade secrets and know-how developed by StandardMEMS, Inc. Concurrently the Company hired key employees from the formerStandard MEMS, Inc. and established a MEMS Division located in GreatRiver, New York. MEMS are devices produced using high volume IC manufacturingtechniques that include both microscopic mechanical systems and electricalcircuits. The Company intends to design, develop and market MEMS ICs to themedical, automotive, communications and consumer markets. At the appropriatetime, the Company will segment the financial reporting of the MEMS division.

Apogee was organized as a Delaware corporation on July 1,1987, and initially operated through its wholly owned subsidiary, ApogeeAcoustics, Incorporated (“Acoustics”). Apogee discontinued its loudspeakerbusiness under Acoustics in 1994 and, since that time has focused on theresearch, development and commercialization of DDX amplifier technology and,since May 2004, MEMS devices.

Apogee maintains an Internet site at *http://www.apogeeddx.com.*The information contained on theCompany’s Internet site is not incorporated by reference in this report, and itshould not be considered part of this report. The Company’s Annual Reports on Form 10-KSB,Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K, andany amendments to those reports, are available free of charge on our website assoon as reasonably practicable after they are filed with, or furnished to, theSecurities and Exchange Commission.

Unless the contextotherwise requires, the terms “we”, “our”, “Company”, and “Apogee” as usedherein refer to Apogee Technology, Inc. and its subsidiary.

***Audio Division***

The Company believes the DDX technology’s all-digitaldesign and high efficiency operation has significant commercial benefits forconsumer electronic manufacturers, as well as end users, compared totraditional audio amplifier technology. The benefits include reducing finalproduct size and cost, providing 

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true digital audioreproduction, increasing audio functionality through digital integration andextending playback time in battery applications. DDX-based IC products areintended for a range of audio applications, including home theater systems, flat-panelTVs, powered speakers, car audio, commercial audio, and PC multi-media. TheCompany markets DDX products using a worldwide network of direct sales staff,independent sales representatives and distributors.

Under a licensing agreement with STMicroelectronics,NV, one of the world’s largest semiconductor companies, the Company isproviding intellectual property to be used in royalty-bearing DDX-based ICproducts produced by STMicroelectronics. In addition, the Company andSTMicroelectronics have entered into a development agreement whereby thecompanies are developing and marketing new semiconductor products that leverageApogee’s DDX technology and STMicroelectronics’ intellectual property andsemiconductor design, development and manufacturing capability. The Company, in2004, also licensed its DDX-Controller technology to Zoran Corporation,Infra-Com Ltd., and a video IC company in order to expand market opportunitiesfor its DDX products.

The Company began the design, development andmarketing of audio amplifier ICs in 1996 based upon its DDX technology. The DDXamplifier solution is implemented by the combination of a DDX Controller and aDDX Power Device IC. The Company released its first Controller IC, the “DDX-2000”,in 1999 and since that time has released six additional Controller ICs. Thesedevices integrate from two to eight channels of DDX amplifier processing alongwith a range of digital audio processing functions. By combining DDX processingwith audio functions, such as bass/treble, the Company can provide a low cost,full system amplifier solution to consumer electronic manufacturers. Since 2001,the Company has developed and released 13 DDX power devices that canprovide up to 240 watts of audio power. These integrated switched mode powerdevices operate at two to three times the efficiency of traditional audioamplifier ICs, thereby reducing amplifier size and cost. In 2004, the Companyintroduced a new family of all in-one DDXi (“i” for integrated) amplificationsolutions that combine a DDX Controller and a DDX Power Device into a singledevice. DDXi solutions significantly reduce system cost, size and complexity byeliminating the need for a separate audio processor, digital to analogconverter and amplifier chips. The Company expects to release or introduce newDDX controller devices, DDX power solutions and DDXi Integrated all-in-onesolutions. The new ICs will extend the market opportunity for the Company’saudio technology while also providing better value for current and newapplications, including flat-panel TVs, multimedia powered speakers and hometheater systems.

In August 2004 the Company announced an agreementwith Infra-Com Ltd. to jointly develop and market ICs that will enablemanufacturers to provide pure digital wireless connectivity and amplificationto speakers. The Israel-U.S. Bi-national Industrial Research and Development(BIRD) Foundation awarded this joint program $560,000 for research anddevelopment because of its technological and marketing innovation.  The Company and Infra-Com have been workingcollaboratively in marketing and selling current chipset solutions and todesign and develop an integrated solution that combines Apogee’s DDX Controllertechnology and Infra-Com’s IrGate infra-red transmission technology.

The Company markets its products using a worldwidenetwork of direct sales staff, independent sales representatives anddistributors. The Company’s sales headquarters are located in Norwood,Massachusetts with additional offices in China, Hong Kong, Japan and Taiwan. Inaddition, the Company’s office in Great River, New York is marketing andselling its MEMS related products. The Company also utilizes salesrepresentatives in Korea and Brazil as well as independent distributors in HongKong, China, Japan, Taiwan, and Singapore.

The Company’s audio ICshave been incorporated into a range of consumer electronic products. Themajority of these products are DVD receivers, which are part of an all-in-onehome theater system that combines a DVD player, AM/FM tuner, three to eightchannels of amplification, and speakers. DDX amplifiers are also being used incombination DVD/VCR receivers, A/V receivers, powered speaker 

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systems,high-end TVs, professional audio/video equipment, commercial audio systems,communication equipment, gaming systems and automotive systems. Over 30 millionDDX IC’s have been sold to date and have been used in over 50 differentconsumer products since their release by Apogee and its partner STMicroelectronicsapproximately 3.5 years ago. Some of the consumer electronic brands using DDXtechnology include: Boston Acoustic, Daewoo, Fujitsu, Harman Kardon, Hitachi,JBL, JVC, Kenwood, LG, Magnavox, Marantz, Mustek, Philips, RCA, Samsung, Sharp,TEAC, Thomson Multimedia, Toshiba, Vestel, Xbox and Zenith.

**IndustryTrends and the DDX Advantage**

Digital technology is rapidly transforming the wayconsumers obtain, record, view and listen to content. Traditional analogformats of TV, radio, VCR and cassettes are being replaced with digitalstandards like DVDs, CDs, Digital Cable, MP3/Internet audio and digital radio,which provide better audio/video quality. The Company believes that over thenext several years most audio/video material will be distributed using digitaltechnology. Along with this transition, the consumer is demanding smaller, moreintegrated systems, such as the DVD receiver that includes a DVD/CD player,radio tuner, multi-channel amplification and speakers.

The Company believes that it is well positioned totake advantage of these market trends because the DDX technology providesdigital quality audio reproduction, reduces system cost, and is compactcompared to traditional audio amplifier solutions. These benefits are derivedfrom the system’s all-digital design and its high operational efficiency.

Existing audio products use analog audio amplifier ICsto amplify analog signals. This technology is suitable for products such asrecord players and cassette tapes that produce analog signals. However, withthe advent of digital audio playback, an additional IC, digital to analogconverter (“DAC”), is required to convert the digital signal to an analogsignal suitable for amplification. DDX’s all-digital design eliminates the costof the DAC and the potential quality losses in the conversion and transmissionof the analog signals. Thus, with DDX, consumers can enjoy true digital audioreproduction in a low-cost product. In addition, because DDX is a digitalimplementation, other audio functions such as bass/treble and volume can beintegrated easily into DDX-based ICs, thereby lowering overall system cost.

An additional problem with analog amplifier solutionsis their low operational efficiency. The goal of an analog amplifier is toproduce power to drive a speaker, but because of its poor efficiency it alsoproduces waste heat, which has to be dissipated using a large piece of metal,or heat sink. Because of the size of the heat sink, analog amplifiers arevirtually eliminated from use in compact integrated products such as a DVDreceiver.

Analog amplifiers’ poor efficiency also increases thesize and cost of the amplifier power supply. As an example, analog amplifiershave a peak efficiency of approximately 60% compared to DDX, which has a peakefficiency of 90%. A typical DVD receiver, which outputs approximately 300watts of audio power, would require a 500 watt power supply with an analogamplifier solution. A DDX-based design would only require a 330 watt powersupply to output 300 watts of audio power, which we believe would create asignificant savings for a consumer product.

The Company believes that DDX’s digital design andhigh efficiency will benefit both existing and emerging audio applications.These products include: DVD receivers, digital TVs, cable system components,and fully integrated digital-powered speaker systems. Newer technologies, suchas MP3 players, digital playback devices and Internet appliances, can be madefully digital with DDX amplifier solutions.

With the emergence of home networking, DDX can beintegrated with the network interface to provide consumers with pure digitalsound throughout their homes at a low cost. DDX allows audio 

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systems to be installed inwall or ceiling spaces without the typical thermal problems associated withanalog amplifier installations. In addition, because of DDX’s higherefficiency, more amplifiers can be powered and a higher audio output can beproduced in network applications operating from a remote power source.

DDX amplifier solutionscan also meet the requirements of many traditional audio applications. In thehome audio and PC multimedia markets, the Company expects that originalequipment manufacturers will recognize efficiencies gained through theincorporation of smaller configuration DDX amplifiers in powered speakers. DDX’ssmaller and more efficient design will enable car audio designs to deliver morepower in a smaller space. Portable audio, hand-held systems and mobilecommunication devices will also benefit from longer battery life resulting fromDDX’s greater efficiency.

**Audio Products**

TheCompany is commercializing its audio technology by developing and providingintellectual property products to its licensees, STMicroelectronics, ZoranCorporation and others, as well as marketing and selling custom semiconductorproducts to electronics manufacturers. The Company also supplies customers withcircuit boards to support the marketing and sales of its semiconductorproducts.

***a)******              Intellectual Property Products***

TheCompany has developed and delivered DDX controller core and DDX powertechnology intellectual property products to support its licensing activitieswith STMicroelectronics and other customers. DDX Controller core productsoffered by the Company include; one, two, three, four and eight channel designssome of which include audio processing functionality, interface logic and otherfunctions. The Company intends to develop new intellectual property products toexpand its licensing activities. This activity is expected to allow the Companyto increase licensing revenue while expanding the applications for its DDXpower devices. In addition, by integrating the DDX Controller core with othercomplimentary technologies the Company hopes to enable new low cost solutionsthat cannot be supported effectively by stand-alone DDX chip set solutions.

***b)******               Semiconductor Products***

The Company’s DDX amplifier solution utilizes twodifferent types of ICs. The first is a digital IC that implements DDX and otherdigital audio processing and is referred to as a “Controller”. DDX ControllerICs are manufactured utilizing standard digital IC processes. The secondcomponent or “Power Device” converts the Controller outputs into power outputsto drive a loudspeaker. DDX Power ICs are manufactured using a proprietarysemiconductor process developed by STMicroelectronics. Both a DDX Controllerand a DDX Power Device are required to implement a complete audio amplifiersolution. In November 2004, the Company released the first of a new familyof all-in-one DDXi (“i” for integrated) amplification solutions that combine aDDX Controller and a DDX Power Device in a single IC.

The following semiconductor products have beenreleased or will soon be on the market:

*DDXi-2051, 2101 &  2161  (“i”for integrated) All-in-One Integrated Amplifier:  *TheDDXi-2051, 2101 and 2161 are the world’s first fully integrated, all-digital,high power audio amplifiers that include a complete set of digital audioprocessing features. The DDXi combine a 2.1 channel DDX processor with a 40, 60or 80 watt per channel, high efficiency DDX power stage, respectively. Thisone-chip solution significantly reduces system cost, size and complexity byeliminating the need for a separate audio processor, digital to analogconverter and amplifier chips. These benefits make the DDXi ICs ideal solutionsfor Digital TVs, CD/DVD mini/micro systems, gaming systems, and multi-mediaspeakers. The DDXi-2051, 2101 & 2161 features Apogee’s new AutomodeTM. Thesedevices were released to production in February 2005.

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*DDX-2001 Controller:  *TheDDX 2001 Controller combines an advanced digital audio processor with patentedDDX processing that supports up to three channels of high efficiency DDX audioamplification. The Controller replaces analog signal processors with digitalsignal processing to provide a full complement of audio features. The DDX-2001supports the full line of high-efficiency DDX Power Devices and can beconfigured in stereo mode or in a 2.1 channel mode to support products thatinclude a separate subwoofer loudspeaker. The IC also features Apogee’sAutomodeTM preset audio processing modes. The device was released to productionin February 2005.

*DDX-8001 Controller:  *TheDDX-8001, Apogee’s fourth generation digital amplifier controller, combines anadvanced digital audio processor with Apogee’s patented DDX® processing that supports up to eight channelsof high efficiency DDX® amplification. The device was released toproduction in November 2003. The DDX-8001 features Apogee’s new AutomodeTM.The device was released to production in February 2004.

*DDX-8229 Controller:  *TheDDX-8229, Apogee’s fourth generation digital amplifier controller, is a highperformance, single-chip solution for multi-channel audio applications. Itprovides 4 channels of high-performance DDX output plus 4 channels of binaryoutput capable of driving any of Apogee’s high-efficiency output stages. TheDDX-8229 features Apogee’s new AutomodeTM. The device was released to productionin April 2004.

*DDX-8000 Controller:  *TheDDX-8000 integrates a configurable audio serial interface, specialized audioprocessing and eight channels of DDX output. The device was released toproduction in December 2002.

*DDX-8228 Controller:  *TheDDX-8228 includes a complete audio processing feature set and four channels ofDDX output. The device also includes an output mode to implement a low cost 5.1channel design utilizing only two DDX power devices. The device was released toproduction in March 2003.

*DDX-4100A Controller:  *TheDDX-4100 and the DDX-4100A integrate multiple digital audio interfaces, volume,bass/treble, dynamic compression and other digital audio functions, plus 4.1channels of DDX outputs. In January 2002 the Company released theDDX-4100A, a revised design of the original DDX-4100, with some improvedfeatures.

*DDX-2000 Controller:  *Atwo-channel DDX Controller that includes a standard audio serial interface,volume control, and a dynamic compression algorithm to reduce amplifierdistortion at high power. The device was released to production in December 2000.

*DDX-2240 Power Device:  *TheDDX-2240 is a surface mount high efficiency power IC that provides two channelsof up to 120 watts into a 6 Ohm speaker load, or 240 watts into a 4 Ohm speakerload at 10% Total Harmonic Distortion (THD) to meet the key power level forpremium products. The device was released to production in the second quarterof 2005.

*DDX-2200 Power Device:  *TheDDX-2200 is a surface mount high efficiency power IC that provides two channelsof up to 100 watts into a 8 Ohm speaker load, or 200 watts into a 4 Ohm speakerload at 10% Total Harmonic Distortion (THD) to meet the key power level forpremium products. The device was released to production in the second quarterof 2005.

*DDX-2160, 2120, 2100 Power Devices:*    TheDDX-2160, 2120, 2100 are a surface mount high efficiency power ICs thatprovides two channels of up to 80, 60 and 50 watts respectively into a 6 Ohmspeaker load, or 160, 120 and 100 watts respectively into a 3 Ohm speaker loadat 10% Total Harmonic Distortion (THD) to meet the key power level for premiumproducts. The DDX-2160 was released in December 2003,  the DDX-2120 was released in the firstquarter of 2004 and the DDX-2100 was released in April of 2002.

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*DDX-2060 Power Device:  *TheDDX-2060 is a surface mount high efficiency power IC that provides two channelsof up to 35 watts into a standard 8 Ohm speaker load, or 70 watts into a 4 Ohmspeaker load. The device was released to production in May 2001.

*DDX-2050 Power Device:  *The DDX-2050Power Device is a surface mount high efficiency power IC that provides over 25watts per channel in stereo mode and over 50 watts in mono mode. The device wasreleased to production in June 2003.

*DDX-1080, 1060, 1040 Power Devices:  *TheDDX-1080, 1060, 1040 Power Devices are surface mount high efficiency power ICsthat provides over 80, 60, 40  watts perchannel respectively in bridge mode or 40, 30, 20 watts per 1⁄2 bridge operationrespectively. These devices were released to production in April of 2004.

*ATA-120 Analog IntegratedAmplifier:  *The ATA-120 is a single-ended Class-D audioamplifier that converts analog audio input signals into PWM pulses. The devicewas released to production in August of 2004.

**Amplification Products by Application**

**HomeTheater Applications (5.1, 6.1, 7.1 Channels)**

DVD/AVReceivers, Powered Speakers, Home Theater-in-a-Box
| **Application  Total Power Range** | ** ** | ** ** | ** ** | **Controller**                                                  | ** ** | **Applicable Power Devices** |
|------------------------------------|------------|------------|------------|-----------------------------------------------------------------|------------|------------------------------|
| **<200 Watts**                  |       | DDX-8229   |       | DDX-1050, 1060, 1080,  2052, 2062, 2102                         |
| **200W - 400Watts**           |       | DDX-8001   |       | DDX-1050, 1060, 1080,  2052, 2062, 2100, 2102, 2120, 2200, 2240 |
| **400 Watts and higher**           |       | DDX-8001   |       | DDX-1050, 1060, 1080, 2100, 2120, 2160, 2200, 2240              |

 

**Stereo & Mono Applications**
| Application                                          | ** ** | ** **                                 | ** ** | **All-in-One Solution or Controller**                                 | ** ** | **Applicable Power Devices** |
|------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|
| **Flat-Panel TV 10 - 25  Watts**                |       |    DDXi-2051, 2101, ATA-120  DDX-2001 |       |    DDX-2052, 2102                                                |
| **Mini/Micro Systems 2, 2.1, 2.2 & 4** |       |                                       |       |                                                                  |
| **Powered Speakers w/ DSP 2 & 2.1**         |       |                                       |       |                                                                  |
| **Custom Install Audio 2, 2.1 & Mono** |       |                                       |       |                                                                  |
| **= 160 Watts **                                |       | DDXi-2051, 2101, 2161,  ATA-120            |       |                                                                  |
| **> 160 Watts**                                   |       | DDX-2001, 8229                             |       | DDX-1050, 1060, 1080,  2052, 2062, 2100, 2102, 2120, 2160, 2200, 2240 |
| **Powered Subwoofer Mono**                           |       | DDX-2161, ATA-120 with  FETS               |       |                                                                  |
| **Gaming (Slots, Arcade)  2 & 2.1**         |       | DDXi-2051, 2101, 2161,  ATA-120            |       |                                                                  |
| **Automotive Trunk Amps 2, 2.1**                     |       | DDX-8001, 8229                             |       | DDX-2052, 2062, 2100, 2102, 2120, 2160, 2200, 2240                    |

 

***c)******                Board Products***

The Company is developingcircuit boards for evaluation and reference purposes in order to demonstratethe application of its semiconductor products. These products are provided tocustomers to support technology and product evaluation and to support customerengineering design activities.

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**Competition**

Integrated audio amplifier ICs marketed todayprimarily consist of: (1) analog amplifiers known as Class A/Bamplifiers; (2) analog high efficiency designs, known as Class Damplifiers, and (3) digital high efficiency Class D designs like DDX.There are several companies currently marketing analog Class D amplifierproducts, including: Monolithic Power Systems, National Semiconductor Corp.,Philips Electronics, STMicroelectronics, Texas Instruments, Inc. AnalogDevices, Maxim and Tripath Technology, Inc. STMicroelectronics, under alicensing agreement with Apogee, and Texas Instruments, Inc. are currentlymarketing complete digital Class D solutions. Companies including PulsusTechnologies, Inc., Wolfson Microelectronics and NeoFidelity, Inc.are marketing digital Class D Controller solutions without an integratedpower device.

The Company believes that the competitive advantage ofits products is the level of integration and operational efficiency, as well asits low cost solution. The DDX Controller design is digital, which allows theintegration of other digital audio functions such as bass/treble, volume, andequalization, to lower overall system cost—an approach that the Companybelieves cannot be accomplished economically using analog solutions in a singleIC. DDX efficiency is also greater than analog Class A/B and analog Class Damplifiers, providing manufacturers with power supply and product savings.

The Company believes that its ability to offer both Class Dcontrollers and power devices provides a distinct competitive and marketadvantage. Some of the Company’s controller competitors currently do not offerpower devices and are utilizing Apogee’s DDX power devices.

The Company believes that the transition of productsfrom analog to digital amplifiers will continue. The Company believes that thistransition will lead to increased sales for all-digital, high efficiency amplifiersolutions.

One of the competitiveadvantages of DDX technology is that it can be readily integrated with otherdigital functions to make System on Chip, or SOC, solutions. This cannot beeasily accomplished with analog Class D technology.  This high level of IC integration enablesmanufacturers to build products with lower cost, greater simplicity, and smallersize. The Company believes the inclusion of its DDX Controller technology intoSOC solutions will enable Apogee to expand the adoption of its technology intohighly integrated products and will provide the Company the opportunity to workwith the customer to design in a DDX power device.

***MEMS/Nanotechnology Division***

In May 2004, the Company acquired the portfolioof Micro-Electro-Mechanical Systems (“MEMS”) intellectual property, tradesecrets and know-how developed by Standard MEMS, Inc. (“SMI”). Concurrentlythe Company hired key staff from the former SMI and established a MEMS Divisionin Great River, New York. The Company’s strategy is to leverage SMI’sinvestment in MEMS manufacturing technologies, product designs and marketdevelopment. SMI developed over 12 products and shipped over 50 million MEMSdevices, including pressure and gas sensors, biomedical devices, optical and RFswitches, ink jet printer heads and infra-red sensors.

The Company intends to utilize its analog and digitalcircuit designs capability to develop MEMS products for the consumer,automotive, communications and medical markets. The Company will rely on MEMSfoundry providers to produce its products, following the same business modelused by the Company’s audio semiconductor business. The MEMS marketing andsales efforts will be supported by both the Great River office and the Company’sUS and foreign sales offices. The Company intends to add additional independentdistributors and representatives to market and sell its MEMS products.

The Company’s initial MEMSdevelopment efforts are being directed towards the development of novelpressure sensor products for the industrial and automotive markets as well asthe development of 

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medicaldevices for the transdermal drug delivery (“TDD”) market. The followingprovides a summary of the Company’s MEMS products under development and theassociated market opportunities.

***MEMS Sensor Products:***

MEMS based pressure sensors are currently utilized ina wide range of markets including: automotive, industrial, medical and consumerproducts. MEMS technology was adapted for these applications because it enablessensor and electronics integration resulting in significantly lower systemscost and size compared to previous approaches, which utilized multiple machinedcomponents and separate, discrete electronics. Applications using MEMS pressuresensors include: engine control, tire pressure monitoring, pump control, bloodpressure monitoring and barometric pressure measurement. The total market sizefor pressure sensors in 2004 was approximately $2.2 billion, with the MEMSportion making up approximately $830 million according to In Stat MDR, aleading MEMS research group.

In November of 2004, the Company established apressure sensor test capability and began the evaluation of its initial productdesigns. The Company is optimizing these designs and expects to transitionthese devices to production in the second half of 2005. In parallel, theCompany has established relationships with potential automotive customers andhas established a manufacturing relationship to fabricate these products. TheCompany plans to leverage these designs to build a portfolio of pressuresensors for consumer, medical and industrial applications.

The Company believes that its pressure sensor productshave a cost and reliability advantage over existing products on the marketbecause of the unique process used to manufacture the sensors. Companiesdeveloping or marketing similar sensor products include: Delphi Corporation,Freescale Semiconductor, Inc, General Electric Company, Honeywell International, Inc.,Infineon Technologies AG, Measurement Specialties, Inc. and TexasInstruments, Inc.

In order to expand itssensor technology the Company signed a cooperative agreement, in November 2004,with The Research Foundation of State University of New York at Stony Brook andThe Center for Advanced Technology (SensorCAT), to jointly developmanufacturing technologies to produce highly accurate, low cost micro-sensors. Underthe agreement, the Company will have the option to exclusively license therights to commercialize jointly developed technology. The research activitiesare focused on combining nano-composite materials and silicon-basedmicro-fabrication processes. The agreement is for a one-year term and can berenewed by mutual agreement.

***MEMS Medical Devices***

The Company is developing a unique MEMS-based drugdelivery system targeted for use in the TDD market. This development buildsupon the intellectual property, product designs and clinical testing performedby SMI. The Company has filed a patent on the design and the applicationapproach. The Company intends to design, develop and market a drug deliverysystem to pharmaceutical and medical device manufactures.

TDD systems, commonly known as the “patch”, arenon-invasive, convenient and painless dosage method offering patient benefitssuch as steady delivery, reduced side effects and improved patient compliance.However, TDD systems have been limited to small molecule drugs because the skinis an effective barrier to the transmission of large molecule drugs into thebody. Thus, it is impractical to transdermally deliver drugs such as proteins,vaccines and most biopharmaceuticals, without the addition of a chemical orphysical method to enhance drug delivery. Research is ongoing in thedevelopment of transdermal technologies to increase drug delivery rates usingelectrical, pressure and thermal energy. Another area of research is in thecreation of micro-pores in the skin to enhance TDD. These devices includemicrostructures made of various materials such as metal, glass and silicon. Theadvantages of Apogee’s silicon based design are that it can be manufacturedusing low cost batch semiconductor process 

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techniques, and the designcan be readily combined with electronic circuits to enhance delivery rates orincrease the systems’ functionality. The Company believes this approachprovides the best solution for long-term TDD innovation.

The TDD market continues to grow as new drugs are approvedfor this application. Currently the FDA has approved over 13 specific TDD drugtypes to be administered using TDD and over 35 TDD applications for TDD systems.According to Frost and Sullivan, the U.S. market for TDD was $1.6 billion in2002 with expected growth of 300 percent through 2010. The Company believes themarket growth rate could be enhanced by the adoption of Apogee’s TDD because itcould expand the range of potential transdermal drugs. Potential applicationsfor enhanced TDD systems include: pain management therapies, anxietytherapeutics, antidepressants, sexual dysfunction, vaccines and diabetes.

In November 2004, the Company received the firstengineering samples of its silicon based drug delivery system. In order toevaluate the performance of the design, the Company became a member of the NewJersey Center for Biomaterials, a leading US testing laboratory. The Companyhas validated the effectiveness of the design and plans to establishpartnerships with pharmaceutical companies to commercialize the design. TheCompany is also investigating non-drug delivery related transdermalapplications for the device.

The Company believes thatits MEMS drug delivery design is more robust, has greater design flexibility,because it is silicon based, and has a lower cost to manufacture compared withcompetitive technologies being developed. Companies developing similar productsinclude: 3M, Johnson and Johnson , BioValve Incorporated and Procter &Gamble.

**Research and Development**

*Audio Division*

The Company’s audio research and developmentactivities are directed towards extending its patent protection for itstechnology, improving the overall performance of its technology, increasing thenumber of IC designs, and developing new product applications and expanding itstechnology base. The Company’s core technology competencies include: digitalsignal processing, digital, analog and power IC design and product systemapplications.

The Company has been granted four patents on its DDXtechnology and has three patent applications covering DDX, power supply andrelated circuit designs.

The Company significantlyincreased its IC design staff in the last 18 months to develop new DDX andnon-DDX based semiconductor products. This investment supported the release of15 new ICs in 2004. We believe that these designs extend our leadershipposition including a wider range of power options coupled with a higherperformance DDX core and new audio processing features to reduce system designcomplexity and cost. The Company expects to continue to develop new DDX andnon-DDX ICs to meet the requirements of additional market applications.

*MEMS/NanotechnologyDivision*

The Company is developing proprietary manufacturingprocesses, product designs, product test and packaging solutions. The Companyexpects the investment in MEMS/Nanotechnology research and development toincrease as the first products are released in 2005. The Company has submittedone patent application for a MEMS based product and is working on additionalapplications.

During the two years endedDecember 31, 2004 and 2003, the Company spent approximately $2.8 millionand $1.7 million, respectively, on research and development activities.

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**Marketing and Sales**

The Company relies on a direct sales force,independent sales representatives and distributors to promote its productsworldwide. The Company’s sales headquarters are located in Norwood,Massachusetts. In Asia, where most of the world’s consumer electronics productsare manufactured, the Company has opened sales and application supportlocations in China, Hong Kong, Japan and Taiwan. The Company also utilizessales representatives in Korea and Brazil and independent distributors that supportsales in Hong Kong, China, Japan, Taiwan, Singapore, Malaysia, Philippines,Thailand and India.

In October 2004 the Company hired Mr. JeffGray as Vice President of Marketing and Sales. Mr. Gray brings to Apogeeover 15 years of experience in the high technology industry primarily focusingon technology with Application and System Architecture.

The Company’s audio business sales strategy is builtaround making it easy for the customer to utilize its audio ICs and technology.The Company has developed and is providing to customers product data sheets,application information, evaluation boards reference designs and, for someproducts, complete system designs. The Company believes that this information,along with the Company’s application engineering support, will enable customersto quickly develop and bring to market high quality audio products.

The Company is promoting the DDX trademark to enhancethe value of its products to manufacturers and consumers. The DDX trademark hasbeen registered in the United States and the Company has applied to registerthe DDX trademark in nine other countries and the European Union.

The marketing and sales efforts of theMEMS/Nanotechnology Division is being supported by both the Great River Officeand the Company’s US and foreign sales offices. The Company intends to addadditional independent distributors and representatives to market and sell itsMEMS products. The Company has applied for a U.S. trademark registration of the“Sensilica” brand name for its pressure sensor products.

The Company also marketsits products by attending and exhibiting its products at key industrytradeshows, as well as through the Company’s website: *http://www.apogeeddx.com.*

**Manufacturing and Quality**

The Company currently utilizes several independentcompanies to manufacture, package and test its IC products. Independentcontract manufacturers are utilized to produce and test the Company’s circuitboard assemblies. The Company inventories and ships ICs and circuit boardproducts from its headquarters in Norwood, Massachusetts and from a warehousein Hong Kong.

OKI Semiconductor supplies the DDX-2000 device andSTMicroelectronics supplies the remaining DDX ICs. The Company receivespackaged, fully tested devices that pass the suppliers’ internal qualitycontrol from both suppliers. The Company believes that its suppliers will havethe capacity to meet Apogee’s projected requirements for 2005. The Companyadded two additional semiconductor foundries to produce new IC products andplans to contract with independent assembly and test companies to support themanufacturing of its products. The Company also has established a relationshipwith an ISO certified foundry to produce its MEMS products.

The Company alsoestablished a quality management system and procedures and expects to receiveISO certification in the first half of 2006.

**Employees**

As of December 31, 2004, the Company had 35employees, of which 34 were full-time employees, including 22 in research anddevelopment, 8 in sales and marketing and 5 in general and administration. Ofthe 8 employees in sales and marketing, two of them also support applicationsand 

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design activities throughthe Company’s Hong Kong office.  None ofthe employees are represented by a collective bargaining agreement, nor has theCompany experienced work stoppages. The Company believes that relations withits employees are good.

The following table setsforth certain information with respect to the executive officers of ApogeeTechnology as of December 31, 2004. All officers serve at the pleasure ofthe Board of Directors.

**ExecutiveOfficers of the Company**
| **Name**         | ** ** | ** ** | ** ** | **Age**                                                                  | ** ** | **Position** |
|------------------|------------|------------|------------|--------------------------------------------------------------------------|------------|--------------|
| Herbert M. Stein |       | 76         |       | President, Treasurer,  Chief Executive Officer and Chairman of the Board |
| David B. Meyers  |       | 46         |       | Chief Operating Officer                                                  |
| Andrew A. Adrian |       | 41         |       | Vice President of Engineering                                            |

 

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, has been Chairman of the Board andPresident since January 2000, and has been Treasurer since November 2003.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. 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. Prior to joining theCompany in 1996, Mr. Meyers was a principal engineer with ARINC Research Corporationand held various engineering and research positions at Northrop GrummanCorporation and Rockwell International.

Mr. Andrew A. Adrian has served as the Company’sVice President of Engineering since August 2001. From 1995 to 2001 he wasa principal engineer with the Company. Prior to joining the Company in 1995, Mr. Adrianwas a design engineer with Northrop Grumman Corporation.

In June of 2005, Mr. PaulJ. Murphy joined the Company as the role of Chief Financial Officer and VicePresident of Finance, including the responsibilities of the Company’s PrincipalAccounting Officer. Prior to joining the Company, Mr. Murphy was anindependent contractor with JH Cohn, LLP, an accounting firm, working onengagements with public companies to design, assess and test controls forSarbanes-Oxley compliance. Prior to this he worked as the Senior VicePresident, Chief Financial Officer and Treasurer of Artel Video Systems, Inc.,a video networking technology company, and as Chief Financial Officer with fourother companies, three of which were publicly traded issuers.

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**CERTAINRISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONSAND OUR COMMON STOCK PRICE**

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.

**RISKSRELATED TO OUR BUSINESS**

**WEHAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE ORSUSTAIN PROFITABILITY.**

As of December 31,2004 and December 31, 2003, we had an accumulated deficit of $15.6 millionand $12.3 million, respectively. We incurred net losses of approximately $3.4million for the fiscal year ended December 31, 2004 and $270,400 for theyear ended December 31, 2003. We may continue to incur net losses andgenerate negative cash flow in the future. We will need to continue to generaterevenue to achieve and sustain profitability and positive cash flow. Ourability to generate future revenue and achieve and sustain profitability willdepend on a number of factors, many of which are described throughout this riskfactor section, and many of which are beyond our control. If we are unable toachieve or maintain profitability, our share price would likely decline.

**WE MAY NEEDTO RAISE ADDITIONAL CAPITAL OR SELL ASSETS IN ORDER TO CONTINUE TO DEVELOP ANDOPERATE OUR BUSINESS, AND SUCH TRANSACTIONS MAY NOT BE AVAILABLE TO US ONFAVORABLE TERMS IF AT ALL.**

Because we havehistorically had losses and only a limited amount of cash has been generatedfrom operations, we have funded our operating activities to date primarily fromthe sale of securities. In order to continue to fund the development of ourbusiness, we will need additional capital, either through the sale ofsecurities or through the sale of assets. We cannot be certain that any suchfinancing or asset sales will be available on acceptable terms, or at all.Moreover, additional equity financing, if available, would likely be dilutiveto the holders of our common stock, and debt financing, if available, wouldlikely involve restrictive covenants. The report of our independent registeredpublic accounting firm, Miller Wachman LLP, on our financial statements for theyear ended December 31, 2004, includes a statement to the effect that wemay not be able to continue as a going concern. If we sell assets that arecurrently used in the conduct of our business, those assets would no longer beavailable to us as a potential source of revenue generation. If we cannot raisesufficient additional capital through means available to us, it would adverselyaffect our ability to achieve our business objectives.

**NEITHEROUR DISCLOSURE CONTROLS AND PROCEDURES NOR OUR INTERNAL CONTROL OVER FINANCIALREPORTING CAN PREVENT ALL ERRORS OR FRAUD, AND IN THE PAST THESE CONTROLS ANDPROCEDURES WERE NOT EFFECTIVE AND RESULTED IN RESTATEMENTS TO OUR FINANCIALRESULTS.**

Our management does notexpect that our disclosure controls and procedures or our internal control overfinancial reporting will prevent all errors or fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system will be attained.Furthermore, the design of a control system must reflect the fact that thereare resource constraints and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in acost-effective control system, no evaluation of controls can provide absoluteassurance that all misstatements due to error or fraud, if any, may occur andnot be detected on a timely basis. These inherent limitations include thepossibility that judgments in decision-making can be faulty and that breakdownscan occur because of errors or mistakes. Our controls and procedures can alsobe circumvented by the individuals acts of some persons, by 

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collusionof two or more people or by management override of the controls. The design ofany system of controls is based in part on certain assumptions about thelikelihood of future events and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.Furthermore, controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with policies or procedures. While weseek to design our controls and procedures to provide reasonable assurance thatinformation required to be disclosed in our periodic filings is timelydisclosed, these inherent limitations expose us to breakdowns in such controlsand procedures. For example, while our certifying officers believed that thedesign of our controls and procedures would ensure that material informationrelated to the Company would be made known to them on a timely basis, in lightof the circumstances underlying the Restatement, these controls and proceduresfor the financial statement periods covered by the Restatement were noteffective. We have made certain changes to our internal control over financialreporting that are designed to address these circumstances, although even theseimprovements to our controls and procedures cannot ensure that all errors orfraud will be prevented.

**THECOMPANY HAS ONLY A SMALL NUMBER OF CUSTOMERS, AND THE LOSS OF THESE CUSTOMERSWOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’S BUSINESS.**

The Company derivedapproximately 22% of its product revenue from one end user and 51% of itsproduct revenue as a result of sell through to end customers by two distributorsduring the twelve months ended December 31, 2004 as compared to 31% ofproduct revenue from one end user and 38% of product revenue as a result ofsell through to end customers by two distributors during the 12 months ended December 31,2003. In addition, the Company derived approximately 82% of total revenue fromtwo end users and two distributors during the 12 months ended December 31,2004 as compared to 75% of total revenue from two end users and twodistributors during the 12 months ended December 31, 2003. The loss of anyof the Company’s customers would have a material adverse effect on itsbusiness, financial condition and results of operations. The Company is workingto diversify its customer base in order to reduce its dependence on a small numberof customers. The Company may not be able to succeed in these efforts.

**OURBUSINESS IS CONCENTRATED IN A LIMITED NUMBER OF MARKETS AND ANY SIGNIFICANTCHANGE IN THESE MARKETS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’SBUSINESS.**

Substantially all of theCompany’s customer sales were to end users or distributors located in Asia andEurope for both the 12-month periods ending December 31, 2004 and December 31,2003. Significant product revenue is to manufacturers producing DVD Receivers. Thisis a relatively new consumer electronic product with a limited sales history. Althoughthe Company intends to develop new markets in order to diversify the marketapplications of its products, there is no guaranty that it will be successful.

**OURMARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND, THEREFORE, OUR SUCCESSDEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS IN A TIMELY FASHION.**

The life cycle ofthe technology and any future products developed by us may be limited by theemergence of new products and technologies, changes in consumer preferences andother factors. Our future performance will depend on our ability toconsistently:

·       identifyemerging technological trends in our market;

·       identifychanging consumer requirements;

·       developor maintain competitive technology, including new product offerings;

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·       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, or such products may notgain market acceptance and be incorporated into the technology or products ofthird parties. Any significant delay or failure to develop new enhancedtechnologies, including new product offerings, and any failure of themarketplace to accept any new technology and product offerings would have amaterial adverse effect on our business, financial condition and results ofoperations.

**OURABILITY TO ACHIEVE SUSTAINED REVENUE GROWTH WILL BE HARMED IF WE ARE UNABLE TOMAINTAIN OUR EXISTING LICENSING RELATIONSHIPS.**

Part of our businessstrategy is to expand our licensing activities with STMicroelectronics and toenter into licensing relationships with other companies in order to offerproducts to a larger customer base than could be reached through our owndevelopment and marketing efforts. We believe that such relationships canaccelerate market penetration of our products and technologies, while limitingour manufacturing exposure and sales and marketing costs. However, we may notbe able to expand or maintain our existing licensing relationships or establishnew licensing relationships on commercially reasonable terms, if at all. Anyfuture inability by us to maintain our licensing relationships or to enter intoadditional licensing relationships, or the failure of one or more of ourlicensing relationships to contribute to the development and maintenance of amarket for our products, could have a material adverse effect on our business,operating results and financial condition.

**OURQUARTERLY OPERATING RESULTS MAY FLUCTUATE.**

Wehave experienced fluctuations in our quarterly operating results in the pastand it is likely that these fluctuations will continue in the future. Thesefluctuations are caused by many factors, including, but not limited to:

·  availability and pricing from our suppliers;

·  changes in the demand for our products bycustomers;

·  introductions or enhancements of products, ordelays in the introductions or enhancements of products, by us or ourcompetitors;

·  rate and success of new customer development;

·  changes in our pricing policies or those ofour competitors;

·  success in attracting, retaining andmotivating qualified personnel;

·  changes in general economic conditions, and

·  obsolescence of our inventory.

A substantial portion ofour operating expenses are related to personnel, facilities, and sales andmarketing programs and are fixed. Our expense level is based in part on ourexpectations of future orders and sales, which are extremely difficult topredict. Accordingly, we may not be able to adjust our fixed expenses quicklyenough to address any significant shortfall in demand for our products inrelation to our expectations.

Fluctuations in ouroperating results may also result in fluctuations in our common stock price. Insuch event, the trading price of our common stock would likely suffer andadversely affect our ability to raise capital and the value of your investmentin the Company.

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**IF WEARE UNABLE TO HIRE OR RETAIN KEY PERSONNEL, WE MAY NOT BE ABLE TO OPERATEOUR BUSINESS SUCCESSFULLY.**

We may not be successfulin recruiting and retaining executive officers and other key management andtechnical personnel. The competition for employees with the necessary highlevel of technical expertise to design, market and sell our products isintense, particularly in eastern Massachusetts and Asia. We will need to hire anumber of additional technical personnel if we are to increase the rate atwhich we develop new products. Because competition for highly skilled technicalpersonnel is so intense, companies in Apogee’s industry are subject from timeto time to complaints brought by competitors alleging interference withcontractual relations or wrongful hiring of employees. Such lawsuits may becostly, may divert management attention and resources from the operation of ourbusiness, and may therefore adversely affect our financial condition andresults of operations. In addition, the loss of the management and technicalexpertise of our senior management, or the loss of employees to our competitorscould seriously harm us.  The Companydoes not have in place employment contracts for some members of its seniormanagement, including the COO and Vice President of Engineering.

**THEREIS A NEW EUROPEAN DIRECTIVE TO ELIMINATE HAZARDOUS MATERIALS IN ELECTRONICPRODUCTS AND AS SUCH WE MAY NOT BE ABLE TO TRANSITION OUR IC PRODUCTSTIMELY TO MEET CUSTOMER NEEDS AND MAY HAVE INVENTORY THAT CAN ONLY BE SOLDIN LIMITED MARKETS.**

The IC industry isresponding to the European directive of Restriction of Hazardous Substances (RoHS)that will become effective in July 2006. As a result of this directive,semiconductor companies are working to remove lead and other hazardousmaterials used in their IC products. The Company expects to transition all ofits IC products to conform to the RoHS standard during the first half of 2005.However, the Company may not be able to meet customer delivery requirements tosupport the 2005 consumer electronic design cycle. In addition, the Companycurrently has inventory to support European customers that may have to be soldin other markets. Any excess inventory may not be able to be sold on a timelybasis or at all.

**WE DONOT HAVE MANUFACTURING CAPABILITIES, AND AS A RESULT, WE RELY ON OUTSIDEFOUNDRIES TO MANUFACTURE OUR SEMICONDUCTOR PRODUCTS.**

We haveno manufacturing capabilities, nor do we have plans to establish any suchcapabilities. Accordingly, we utilize outside semiconductor foundries, assemblyand test companies to manufacture our semiconductor products. There aresignificant risks associated with our reliance on these foundries that canadversely affect our business, operating results and financial condition. Theserisks include:

·       theability to maintain foundry relationships, the failure of which could result insignificant delays in  productintroduction due to the time necessary to establish new relationships;

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

·       theloss of foundry priority that may result in limiting 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 processes and manufacturing technologies to maintain product  competitiveness in the market.

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**OURPRODUCTS USE NEW TECHNOLOGY AND MAY HAVE MANUFACTURING DEFECTS OR OTHERCHARACTERISTICS THAT ARE ONLY DETECTED AFTER INSTALLATION IN CUSTOMERAPPLICATIONS, WHICH MAY HARM OUR BUSINESS.**

Our products are based onrecently developed technology and are manufactured using state-of-the-artmanufacturing processes. Our approach to product qualification and testing maynot fully evaluate or identify product characteristics or defects that couldadversely affect the product’s ability to operate in the intended application. Ifsuch defects or characteristics are discovered after installation, productrevenue might be significantly delayed and our ability to maintain existingcustomers and to retain new customers may be seriously affected.

**OURABILITY TO ACHIEVE REVENUE GROWTH WILL BE HARMED IF WE ARE UNABLE TO PERSUADETHE MARKET TO ADOPT OUR AMPLIFIER AND MEMS TECHNOLOGIES.**

We face challenges inpersuading manufacturers to adopt our products using our DDX amplifier and MEMStechnologies. Traditional amplifiers use design approaches developed in the1930s. These approaches are still used in most amplifiers and engineers arefamiliar with these design approaches. In order to adopt our products,manufacturers and engineers must understand and accept our new technology. Inaddition, our amplifier and MEMS technologies may be more expensive for someapplications than traditional technologies. For these reasons, prospectivecustomers may be reluctant to adopt our technologies.

**INTENSECOMPETITION IN THE SEMICONDUCTOR AND MEMS INDUSTRY COULD PREVENT US FROMACHIEVING PROFITABILITY.**

The semiconductor and MEMSindustries 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 product linesand have greater name recognition than we do, and may offer discounts as acompetitive tactic. In addition, several development stage companies arecurrently creating or developing technologies and products that compete with orare being designed to compete with our technologies and products. Ourcompetitors may develop or market technologies or products that are moreeffective or more commercially attractive than our current or future products,or that may render our technologies or products less competitive or obsolete. Accordingly,if competitors introduce superior technologies or products and we cannot makeenhancements to our technologies and products necessary for them to remaincompetitive, our competitive position, and in turn, our business, revenues andfinancial condition, will be seriously harmed.

**OURBUSINESS COULD SUFFER IF WE EXPERIENCE DIFFICULTIES IN INTEGRATING ANYTECHNOLOGIES, PRODUCTS OR BUSINESSES WE ACQUIRE.**

In May 2004, theCompany acquired the intellectual property and other intangibles and hiredstaff from Standard MEMS, Inc. Acquisitions typically entail many risksand could result in difficulties in integrating the operations and personnel ofcompanies that we acquire or the technologies and products that we acquire. Ifwe are not able to successfully integrate our acquisitions, we may not obtainthe advantages that the acquisitions were intended to create, which couldadversely affect our results of operations, financial condition and cash flows.In addition, in connection with acquisitions, we could experience disruption inour business or employee base. There is also a risk that key employees ofcompanies that we acquire or key employees necessary to successfullycommercialize technologies and products that we acquire may seek employmentelsewhere, including with our competitors.

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**RISKSRELATED TO OUR INTELLECTUAL PROPERTY**

**OURINTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS MAY BE INSUFFICIENT TOPROTECT OUR COMPETITIVE POSITION.**

Our business depends, inpart, on our ability to protect our intellectual property. We rely primarily onpatent, copyright, trademark and trade secret laws to protect our proprietarytechnologies. We cannot be sure that such measures will provide meaningfulprotection for our proprietary technologies and processes. We have four issuedUnited States patents and three pending patent applications. In addition, wehave acquired a portfolio of MEMS intellectual property and the Company isreviewing this portfolio to determine which of the acquired rights will be mostuseful in its business. We cannot be sure that any existing or future patentswill not be 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 enterinto confidentiality 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 for athird 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 foreign countries inwhich we operate.

**WE MAY BESUBJECT TO INTELLECTUAL PROPERTY RIGHTS DISPUTES, WHICH COULD DIVERT MANAGEMENT’SATTENTION AND COULD BE COSTLY.**

The semiconductor and MEMSindustries are characterized by vigorous protection and pursuit of intellectualproperty rights. 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 our business.For example, in a patent or trade secret action, an injunction could be issuedagainst us requiring that we withdraw particular products from the market ornecessitating that specific products offered for sale or under development beredesigned.

Irrespective of thevalidity or successful assertion of various claims of infringement,misappropriation or misuse of other parties’ proprietary rights, we wouldlikely incur significant costs and diversion of our management and personnelresources with respect to the defense of such claims, which could seriouslyharm our business. If any claims or actions are asserted against us, we mayseek to obtain a license under a third party’s intellectual property rights. Wecannot be sure that under such circumstances a license would be available oncommercially reasonable terms, if at all. Moreover, we often incorporate theintellectual property of our strategic customers into our designs, and we havecertain obligations with respect to the non-use and non-disclosure of suchintellectual property. We cannot be sure that the steps taken by us to preventour or our customers’ misappropriation or infringement of the intellectualproperty will be successful.

**RISKSRELATING TO OUR COMMON STOCK**

**FACTORSUNRELATED TO OUR BUSINESS COULD NEGATIVELY IMPACT THE MARKET PRICE OF OURCOMMON STOCK.**

Thestock markets have experienced extreme price and volume fluctuations that haveaffected and continue to affect the market prices of equity securities of manytechnology companies. These fluctuations often have been unrelated ordisproportionate to the operating performance of those companies. We expectthat the market price of our Common Stock will fluctuate as a result of 

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variations in our quarterly operating results, or forother reasons that are not related to the performance of our business. Thesefluctuations may be exaggerated if the trading volume of our Common Stock islow. In addition, due to the technology-intensive nature of our business, themarket price for our Common Stock may rise and fall in response to variousfactors including:

·       announcementsof technological innovations or new products, or competitive developments;

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

·       acquisitionsor strategic alliances by us or our competitors; or

·       thegain or loss of a significant customer or order.

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.

**Item 2.**                        PROPERTIES

The Company leasesapproximately 5,000 square feet of office space at 129 Morgan Drive, Norwood,Massachusetts. The term of this lease expires on December 31, 2005. Seefootnote 8 to the consolidated financial statements. In addition, the Companyleases offices in Shenzhen, China, Great River, New York, Hong Kong and Taiwan.

**Item 3.**                        LEGALPROCEEDINGS

In November 2004,Apogee commenced an action against National Hybrid, Inc. (Hybrid) inthe United States District Court for the Eastern District of NewYork, claiming that as part of Hybrid’s procurement of the tangible assetsfrom the secured lien holder of the bankrupt Standard MEMS, Inc.(SMI), Hybrid had inadvertently obtained copies of files, containing inpart, the intangible assets purchased by Apogee in May of 2004 as part ofits MEMS acquisition. In November 2004, the court directed Hybrid not tosell, destroy or otherwise dispose of these files. In response, Hybrid filed acounterclaim in February 2005, stating that they were the ownerof the files. The court has delayed any further actions on thismatter until January 2006 since the parties are now working toresolve the issue. The Company believes Hybrid’s claimsare without merit. The Company expects to resolve this issue withHybrid, now held in estate due to the death of the prior owner, in 2005,and further does not believe the resolution will be material to its business.

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

Nomatters were submitted to a vote of the security holders of theCompany during the fourth quarter of the year ended December 31, 2004.

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**PART II**

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

**Market Information**

The Company’s Common Stock was listed on the NASDAQStock Market (formerly the National Association of Securities Dealers’Automated Quotation System) from July 15, 1988 to June 8, 1992 underthe symbol APGG. The Common Stock was also listed on the Boston Stock Exchangeunder the symbol APG from February 14, 1990 until December 18, 1992.

From June 9, 1992 to September 1, 1999, theCompany’s Common Stock was quoted on the Over-the-Counter Bulletin Board (the “OTCBB”)of the NASDAQ Stock Market, Inc. under the symbol APGT. From September 1,1999, the Company’s Common Stock was no longer eligible for quotation on theOTCBB due to the phase-in implementation of NASD Rule 6530 requiring allOTCBB quoted companies to report their current financial information to theSecurities and Exchange Commission. From September 1, 1999 to September 12,2000, the Company’s Common Stock was quoted on the National Quotation Bureau’sPink Sheets. On August 29, 2000, the Company’s Registration Statement on Form 10-SBto register its Common Stock under the Securities Exchange Act of 1934 wasdeclared effective by the Securities and Exchange Commission and on September 12,2000, the Common Stock resumed being quoted on the Over the Counter BulletinBoard (the “OTCBB”) under the symbol APGT. From September 14, 2001 to October 8,2003 the Common Stock was quoted on The Nasdaq SmallCap Market under the symbolAPGT. On October 5, 2003, the American Stock Exchange approved the Company’sapplication to list its securities on the American Stock Exchange under thesymbol ATA.

As previously reported, on August 2, 2005, Apogeereceived notice from the Staff of the American Stock Exchange indicating thatAMEX has 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, which is being appealed by Apogee, is beingtaken because Apogee is no longer in compliance with the AMEX’s continuinglisting standards due to the failure to file its Annual Report on Form 10-KSBfor the year ended December 31, 2004 and a Quarterly Report on Form 10-QSBfor the period ended March 31, 2005. Apogee has appealed thisdetermination by submitting an application for a written submission to the AMEXListing Qualifications Panel. During the period prior to the determination onthe written submission the Company’s stock will continue to trade on the AMEX.Apogee believes that, with the filing of the necessary reports as of the dateof filing of this Amendment No. 2 to its Annual Report on Form 10-KSB/A,it has regained compliance with applicable AMEX listing requirements.

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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 and TheNasdaq SmallCap Market, as indicated. The bid quotations represent inter-dealerprices, without adjustment for mark-ups, mark-downs or commissions and do notnecessarily represent actual transactions.  All prices listed below have been adjusted toreflect post split prices.
| ** **                                                            | ** ** | **Common Stock** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | **High**              | ** ** | **Low** | ** ** |
| **2003:**                                                             |       |                  |       |   |   |
| First Quarter (Nasdaq  Small Cap Market from September 14, 2001) |       | $                     | 4.0500     |   | $ | 3.9900 |   |
| Second Quarter                                                        |       | 5.6350                |       | 5.5250 |   |
| Third Quarter                                                         |       | 10.4950               |       | 9.8250 |   |
| Fourth Quarter (American  Stock Exchange from October 9, 2003)   |       | 11.7500               |       | 11.5000 |   |
| **2004:**                                                             |       |                  |       |   |   |
| First Quarter                                                         |       | 11.7900               |       | 8.6000 |   |
| Second Quarter                                                        |       | 9.1500                |       | 8.3000 |   |
| Third Quarter                                                         |       | 8.4000                |       | 3.7000 |   |
| Fourth Quarter                                                        |       | 4.7000                |       | 3.4500 |   |
|                                                                       |            |                       |            |  |  |  |  |

 

**Stockholders**

As of April 12, 2005,there were approximately 91 holders of record and approximately 842 beneficialholders of 11,838,332 outstanding shares of Common Stock.

**Dividends**

On August 12, 2003,the Board of Directors approved a two for one split of the Company’s CommonStock in the form of a 100% stock dividend. On December 11, 2003 eachstockholder of record as of the close of business on November 17, 2003received one share of Common Stock for each share held.

**Unregistered Sales of Securities**

Set forth in chronological order is informationregarding shares of Common Stock sold and options granted by the Company duringthe period covered by this Annual Report on Form 10-KSB and not previouslyreported on the Company’s Quarterly Reports on Form 10-QSB. Also includedis the consideration, if any, received by the Company for such shares andoptions and information relating to the section of the Securities Act of 1933,as amended, or rule of the Securities and Exchange Commission under whichexemption from registration was claimed. All of the following securities wereissued directly by the Company and there were no underwriters or selling agentsinvolved in these transactions.

On December 8, 2004, 2,000 shares of the Company’sCommon Stock were issued to investors as a result of the exercise of warrantsissued pursuant to a Stock Subscription Agreement in a private placement dated January 25,2000. The exercise price for these shares was $1.25 per share. The exemptionfrom registration relied upon was Section 4(2) of the Securities Actof 1933, as amended.

On December 14, 2004, 40,000 shares of theCompany’s Common Stock were issued to a former director as a result of theexercise of certain options pursuant to the Company’s 1997 Employee, Director,and Consultant Stock Option Plan. The exercise price for these shares was $.275per share.

From October 4, 2004to December 2, 2004, the Company granted options to purchase 87,500 sharesof Common Stock under its 1997 Employee, Director, and Consultant Stock OptionPlan to certain employees at exercise prices ranging from $3.85 to $4.04 pershare.

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**Item 6.**                        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, IN ADDITIONTO HISTORICAL STATEMENTS, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS ANDUNDERTAINTIES. THE COMPANY’S ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THERESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSEOR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE FACTORS DISCUSSED ABOVE IN THE SECTION ENTITLED“CERTAIN RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND OURCOMMON STOCK PRICE” AS WELL AS OTHER FACTORS IN THIS ANNUAL REPORT ON FORM 10-KSB.**

**Overview**

The Company designs, develops and markets siliconbased products incorporating proprietary technologies. The Company’s patentedall-digital, high efficiency Direct Digital Amplification (DDX®) technology Integrated Circuits (“ICs”) are used in arange of audio applications including: home theater systems, powered speakers, car audio, commercial audio, andPC multi-media. The Company is developing new System-on-Chip (“SOC”) productsusing its analog and digital circuit designs and Micro-ElectromechanicalSystems (“MEMS”) technology for the consumer, automotive, communications andmedical markets. At the appropriate time, the Company will segment thereporting of the MEMS division.

From 1981 until 1995, the Company was in the businessof engineering, manufacturing and marketing high quality, high-end patentedribbon loudspeaker systems for use in home audio and video entertainmentsystems. Since 1995, the Company has focused exclusively on the development andcommercialization of its proprietary amplifier technology, known as DDX®. DDX technology is an all-digital, high efficiencyamplifier technology that provides true digital audio reproduction whilelowering manufacturing cost compared to traditional analog amplifier solutions.The Company’s initial DDX development efforts were directed toward theimplementation of a digital controller design and the specifications of powerdesigns to support DDX licensing objectives. The Company signed an exclusivelicensing agreement for audio applications with STMicroelectronics in February 2001,which has been subsequently transitioned to a non-exclusive license in 2005. Underthis licensing agreement with STMicroelectronics NV (“ST”), the Companydevelops and provides intellectual property to be used in royalty bearingproducts produced by ST.  In addition,the Company is working under a development agreement with ST to develop andmarket new semiconductor products that leverage Apogee’s DDX technology and ST’sintellectual property and semiconductor design, development and manufacturingcapability. ST is currently shipping over fifteen royalty bearing DDX-basedsemiconductor products to customers.   The Company continues to support itslicensing activities with STMicroelectronics and other companies.

In 1996 the Company started the development ofDDX-based semiconductor products. The Company uses two independent suppliers toproduce its semiconductor products. The first DDX-based IC product was releasedto production in late 2000 and since that time the Company has released over 20additional IC products.  The Companymarkets and sells its semiconductor products to audio manufacturers using aworldwide sales and distribution network. The Company uses contractmanufacturers to produce circuit boards for customers who support the Company’sIC marketing activities.

At December 31, 2004, the Company had anaccumulated deficit of approximately $15.6 million, as compared to a deficit of$12.3 million as of December 31, 2003. The Company’s historical net lossesand accumulated deficit (since 1995) result primarily from the costs associatedwith the Company’s efforts to 

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develop its DDX technologyas well as costs associated with the Company’s efforts to develop new productsusing its analog and digital circuit designs and MEMS technology. The Companysells products to original equipment manufacturers and distributors. All salesare made in U.S. Dollars.

The Company outsources themanufacturing, assembly and preliminary testing of its semiconductor productsand evaluation boards. Cost of revenue includes the third-party manufacturing,testing and assembly costs as well as costs associated with shipping. Researchand development expenses consist primarily of salaries and related overheadcosts associated with engineering activities as well as other materials andrelated services used in the development of the Company’s semi-conductor chips.Selling, general and administrative expenses consist primarily of employeecompensation and overhead charges as well as expenses directly associated withthe marketing and sales of the Company’s products.

**Restatement**

On July 13, 2005 theBoard of Directors of Apogee determined, following a report by the AuditCommittee of the Board of Directors, that Apogee would restate its financialstatements for the fiscal years ended December 31, 2003 and December 31,2004 and interim quarters. The investigation by the Audit Committee intovarious accounting matters, which has not yet been completed, has determinedthat the recognition of revenue for transactions with third party distributorswas not handled in accordance with generally accepted accounting principles(GAAP), and as a result that the Company’s financial statements for the fiscalyears ended December 31, 2003 and December 31, 2004 and interimperiods were misstated. Consequently, the Company adopted a sell-throughrevenue recognition method for sales to distributors. The adoption of thesell-through revenue recognition method will be applied retroactively. Usingthe sell-through revenue recognition methodology, the Company will notrecognize sales into distribution channels until the Company’s distributorshave sold the products to their customers. The Company had previouslyrecognized revenue on sales to distributors using a sell-in methodology, pursuantto which the Company recognized revenue upon shipment to its distributors. SeeNote 19—Changein Independent Registered Public Accounting Firm of the Consolidated FinancialStatements for additional information on the Audit Committee’s investigationand the Restatement.

**Results of Operations**

Thefollowing table sets forth financial statement data expressed as a percentageof sales.
| ** **                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Product Sales                      |       | 71.20    | %          | 81.48    | %          |
| Royalties                          |       | 17.18    |       | 18.52    |       |
| Consulting/Licensing               |       | 11.62    |       | —   |       |
| Cost of Sales                      |       | 63.19    |       | 59.99    |       |
| Research and  Development          |       | 45.95    |       | 17.60    |       |
| Sales, General  and Administrative |       | 46.21    |       | 25.27    |       |
| Operating Loss                     |       | (55.35   | )%         | (2.87    | )%         |
| Other Income  (Expense)            |       | 0.38     |       | 0.02     |       |
| Net Loss                           |       | (54.98   | )%         | (2.85    | )%         |

 

**Critical Accounting Policies**

The Company 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 

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informationcurrently available. These estimates and assumptions affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the periods presented. Anyfuture changes to these estimates and assumptions could have a significantimpact on the reported amounts of revenue, expenses, assets and liabilities inour financial statements. The significant accounting policies which we believeare the most critical to aid in fully understanding and evaluating our reportedfinancial results include the following:

**Revenue Recognition**

Apogee recognizes revenue in accordance withSecurities and Exchange Commission Staff Accounting Bulletin No. 104 (“SAB104”), “Revenue Recognition in Financial Statements: Revenue Recognition, whichstates that revenue should be recognized when the following revenue recognitioncriteria are met:  (1) persuasiveevidence of an arrangement exists; (2) the product has been shipped andthe customer takes ownership and assumes the risk of loss; (3) the sellingprice is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured. The following policies apply to the Company’stwo major product sales categories for revenue recognition. Sales to end users:  Revenue is recognized under the Company’sstandard terms and conditions of sale, title and risk of loss transfer to thecustomer at the time products are shipped from the company’s warehouse ordelivered to the customer’s representative/freight forwarder. Sales toDistributors:  From time to time theCompany provides stock rotation rights, price protection and other incentivesto its Distributors. As a result of these incentives, the Company has adopted apolicy of deferring recognition of revenue until the distributor sells productsto its customers based upon receipt of point-of-sale reports from thedistributors. The Company accrues the estimated cost of post-sale obligationsincluding product warranty returns, based on historical experience. To date theCompany has experienced minimal warranty returns.

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

**Accounts Receivable**

The Company performscredit evaluations of customers and determines credit limits based upon paymenthistory, customers’ creditworthiness and other factors, as determined by ourreview of their current credit information. For a majority of our larger sales,we can require the issuance of a Letter of Credit. Smaller accounts must eitherpay via credit card or in advance of shipment. We continuously monitor collectionsand payments from our customers, and we maintain a provision for estimatedcredit losses 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 the Company’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, 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 policy requires that the Company make certainestimates regarding the market value of the inventory, including an assessmentof excess or obsolete inventory. The Company determines excess and obsoleteinventory based on an estimated future demand and estimated selling prices forthe Company’s products within a specified time frame, which is generally 12months. The estimates used for expected demand are also used for short-termcapacity planning and inventory purchasing and are consistent with revenueforecasts. In addition to 

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currentinventory of approximately $2.7 million, net of reserve, consisting of $1.2million held at Apogee and $1.5 million held at distributors, there areinventory purchase commitments of approximately $135,000 at December 31,2004. This compares to inventory, net of reserves, of approximately $2.9million consisting of $2.3 million held at distributors with the remaining $0.6million at Apogee at December 31, 2003. The current inventory level andpurchase commitments are based on expected demand and not necessarily built forfirm purchase commitments for the current customers. Due to the 13 weekdelivery lead time, it is necessary to carry a high level of inventory incomparison to past sales. Actual demand and market conditions may be differentfrom those projected by management. If the unit demand forecast is less than currentinventory value, the Company will be required to take additional excessinventory charges or write-downs to net realizable value which will decreasethe gross margin as well as the net operating results in the future. During theyears ended December 31, 2004 and 2003, the Company recorded a provisionfor excess or obsolete inventory of approximately $836,000 and $221,000resulting in total reserves at year end of approximately $1.2 million and$342,000, respectively.

**Valuation of Long-Lived Assets**

Property, plant andequipment, patents, trademarks and other intangible assets are amortized overtheir estimated useful lives. Useful lives are based on management’s estimatesover the 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.

**RestatedYear Ended December 31, 2004 Compared to Restated Year Ended December 31,2003**

**Revenue**

The Company derives its revenue from three sources: (1) productsales, which consist of merchandise sales made either directly to originalequipment manufacturers or through Point of Sale (POS) reports by distributors.All shipments are fulfilled from the Company’s warehouses in Hong Kong and/orNorwood, Massachusetts and revenue is reported net of returns; (2) royaltyrevenue, which consists of royalties paid by STMicroelectronics, Zoran andother companies under the terms of the licensing agreements and (3) consultingor licensing revenue exclusive of royalties.

The Company recognized revenue for the fiscal yearended December 31, 2004 of $6.2 million, a decrease of $3.5 million or 35% fromrestated revenue of $9.5 million in 2003. During the twelve-month period ended December 31, 2004, the Companyrecognized revenue from product sales of $4.4 million, a decrease of $3.4million or 43% from restated revenue of $7.8 million for the fiscal year ended December 31, 2003.  Product sales consisted of semiconductorproducts and evaluation boards sold directly to end users or POS revenue by theCompany’s distributors.  Several factorscontributed to the decline in the Company’s product revenue for the fiscal yearended December 31, 2004, including: unexpected weakness in demand from theCompany’s largest customers due to finished goods inventory buildup andtechnical problems related to non-DDX ICs and a reduction in average sellingprice due to increased pricing competition, especially in the DVD receiver market.  In addition, for the 12 months ended December31, 2004 the Company restated its Royalty Revenue earned under the ST LicensingAgreement by reclassifying discounts given to ST for specific customers insteadof expensing these discounts as royalty expense under SG&A. Thisreclassification had no affect on Net Income. As a consequence, Net Revenue recognized decreased by approximately$711,000 or 40% to $1.1 million from $1.8 million during the same period in 2003,and accordingly the SG&A expense was decreased by the same amount. OverallDDX unit sales increased in 2004 as the market for DVD receiver productsconsolidated to several large customers serviced by STMicroelectronics. The nonproduct revenue decrease was partially offset by an increase in 

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consulting revenue paid toApogee to support custom IC development by STMicroelectronics and other thirdparty development partners.

Revenue under the Company’s licensing agreement withSTMicroelectronics, including royalties and consulting services, was approximately$1.2 million or 20% of total revenue for the 12-month period ended December 31,2004 compared to $1.8 million or 19% for the prior fiscal year. Upon review,the Company restated the royalty revenue originally reported for the first ninemonths of 2004 netting the discounts given to ST by the Company against grossroyalties instead of expensing these discounts in SG & A. The effectof this restatement is that both royalty revenue and royalty expense under SG &A were reduced by $711,000 for the nine months ended September 30, 2004 aswell as the fiscal year ended December 31, 2004. In addition, in 2004 theCompany recognized consulting revenue of approximately $715,000. This amountincludes a $50,000 reclassification of consulting revenue originally recognizedduring the fourth quarter ended December 31, 2003. Approximately $180,000of the consulting revenue was the final utilization from design servicesperformed by STMicroelectronics as part of a $400,000 design credit inaccordance with the terms of the licensing agreement with STMicroelectronics. Duringfiscal 2003 the Company did not record consulting revenue from design servicesperformed by STMicroelectronics as part of this design credit.

Totalrevenue for the years 2004 and 2003 consisted of:
| ** **    | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|---------------|------------|-----------|------------|-----------|------------|
| Product Sales |       | $         | 4,383,912  |      | $          | 7,755,718 |   |
| Royalties     |       | 1,057,867 |       | 1,762,561 |       |
| Consulting    |       | 715,854   |       | —    |       |
| Total:        |       | $         | 6,157,633  |      | $          | 9,518,279 |   |

 

**Cost of Revenue**

Cost of revenue was $3.9million or 63% of revenue for the fiscal year ended December 31, 2004compared to $5.7 million or 60% of revenue for the restated year ended December 31,2003, a decrease of $1.8 million or 32%. Cost of revenue primarily consists ofpurchasing finished semiconductor chips and costs associated with assembly,testing and shipping of those products as well as customs and storage feesassociated with warehousing a large portion of the Company’s semiconductorproducts in Asia. Additionally, management determined that it would be prudentto establish reserves for slow moving, excess and/or obsolete inventories heldat Apogee or at distributors. These provisions are reported as part of the Costof Revenue. Increases in provisions for excess and obsolescence for the 12months ended December 31, 2004 were approximately $836,000 compared to$221,000 for the 12 months ended December 31, 2003. This decrease in costof revenue is primarily attributable to decreased sales of the Company’ssemiconductor products offset by increased reserves for excess and obsoleteinventory. For the fiscal year ended December 31, 2004, the Companyrecorded a gross margin from product revenue of approximately 11% compared to agross margin from restated product revenue of approximately 26% for the sameperiod in 2003. For the fiscal year ended December 31, 2004 the Companywrote off approximately $116,000 of obsolete inventory. No inventory write-offwas recorded for the fiscal period ended December 31, 2003. The Companyconstantly monitors its inventory and as of December 31, 2004 the Companybelieves the remainder of its inventory is salable but will re-evaluate on aquarterly basis or more frequently if market conditions warrant.

**Operating Expenses**

**Research and Development Costs**

The Company’s research and development expenses consistprimarily of salaries, depreciation associated with capital expenditures andrelated expenses in the design, development and technical support 

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of the Company’s products,technical support of current and potential customers, as well as thedevelopment of MEMS technology. Research and development expenses for the yearended December 31, 2004 were approximately $2.8 million for the year endedDecember 31, 2004 compared to $1.7 million for the year ended December 31,2003, an increase of approximately $1.1 million. Costs related to humanresources for Research and Development increased to approximately $2.1 million,an increase of approximately $600,000 or 38% from $1.5 million for the previousfiscal year. In May of 2004 the Company acquired intellectual property andother intangibles from Standard MEMS, Inc. In addition, the Company hiredseveral former key employees of Standard MEMS, Inc. This new divisionaccounted for approximately $242,000 in human resource expenditure for thefiscal year ended December 31, 2004. For the fiscal year ended December 31,2004, fees paid to vendors increased approximately $439,000 to $468,000 for thefiscal year ended December 31, 2004 from $29,000 for the previous fiscalyear. Increased support to both existing and potential customers, particularlywith regard to customized Printed Circuit Boards, accounted for this additionalexpense. In addition, for the fiscal year ended December 31, 2004,approximately $180,000 was incurred as a result of final utilization of a$400,000 design credit to STMicroelectronics offsetting $180,000 of consultingrevenue recognized during the fiscal year ended December 31, 2004. For theyear ended December 31, 2003 no consulting revenue was recognized underthis arrangement.

In order to invest for the future and with theexpansion of the IC design staff, the Company made several capital investments.These expenditures included new equipment and engineering software specificallyto support the Company’s analog design team. In addition, the Company incurredsignificant tooling and non-recurring engineering charges associated with thedevelopment of several new analog chips. Year-to-year increases in research anddevelopment costs were primarily a result of increased staffing and increaseddevelopment expenses incurred to accommodate existing and new customerrelationships and development efforts.

Net of human resources costs, the new MEMS Divisionaccounted for approximately $71,000 of research and development expenses forthe fiscal year ended December 31, 2004. The Company’s initial focus withrespect to the MEMS technology has been on the development of MEMS basedsensors and medical devices.  Towardthese ends, the Company has agreements with the University of Medicine and DentistryNew Jersey’s (UMDNJ) Laboratory for Drug Delivery, Lehigh University andCornell University in the development of the medical device and the ResearchFoundation of State University of New York University in the development ofadvanced sensors using the MEMS technology. Expenses associated with theseefforts were approximately $26,000 for the fiscal year ended December 31,2004.

Due to the technicalnature of the Company’s products, engineering and design support are criticalparts of the Company’s strategy during both the development of its products andthe support to its customers from product design to final production. Managementanticipates that it will continue to commit resources to research, developmentand design activities. The company expects these expenses to increase in fiscal2005.

**Selling,General and 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 include costs related to the Company’s Hong Kong and Taiwan salesoffices as well as a new sales office in Japan. General and administrative costsconsist primarily of executive and administrative salaries, professional feesand other associated corporate expenses. Selling, General &Administrative (“SG&A”) expenses were approximately $2.8 million for theyear ended December 31, 2004 compared to $2.4 million for the restatedyear ended December 31, 2003. This represents an increase of approximately$400,000 million or 18%.The increase in SG&A, describedbelow, was attributable principally to support for the Company’s Hong Kongoffice, 

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increased human resourcecosts including the hiring of a Japan Country Manager and increasedprofessional fees.

Human resource costs increased approximately $231,000or 23% to $1.2 million for the fiscal year ended December 31, 2004 from$992,000 for the fiscal period ended December 31, 2003. This increase wasprimarily due to higher compensation as well as increased staffing bothdomestically and in Hong Kong. Human resource costs, domestically, increasedapproximately $161,000 or 22% from $743,000 in 2003 to $904,000 for the yearended December 31, 2004. This increase was due to increased wages, fringebenefits costs and the hiring of Mr. Jeff Gray as the Company’s VicePresident of Sales and Marketing. In addition, human resource expenditures atthe Company’s Hong Kong office increased approximately $70,000 or 28% to$319,000 for the fiscal year ended December 31, 2004 from $249,000 as of December 312003. As of December 31, 2004 the Company employed a total of 35employees, 29 domestically and 6 in the Hong Kong Office. This compares to 27domestically and 6 in Hong Kong as of December 31, 2003.

Professional expenses increased approximately $287,000or 83% to $634,000 for the 12 months ended December 31, 2004 compared to$347,000 for the previous 12-month period. Of this increase approximately$135,000 was due to the addition of a sales staff in Japan and increased costsfor the sales associate in Taiwan. The Company is currently in the process ofestablishing sales offices in these areas. This increase in Taiwan and Japanexpenses was partially offset by decreases of $16,000, $37,000 and $11,000 in recruiting,investor relations and media relations expenses, respectively. This overallincrease reflects the Company’s continued expansion of its sales and marketingactivity. In addition, due to increased reporting and compliance requirements,the Company’s legal and accounting expenses increased. Legal and accountingexpense combined for the 12-month period ended December 31, 2004increased by approximately $210,000 or 83% to $342,000 from $132,000 for theprevious 12-month period. The Company expects that SG&A expenses willincrease in absolute dollars in fiscal 2005 due specifically to legal andfinancial costs associated with the Company’s restatement of its 2004 and 2003financials as well as continued compliance with the Sarbanes-Oxley Act of 2002and the expansion of its sales channels, marketing efforts and administrativeinfrastructure.

Increases in SG &A were partially offset by a decrease in commissions, royalties anddistribution expenses on products sales as a result of decreased shipments. Salesand Distribution expense for the 12 months ended December 31, 2004decreased approximately $74,000 or 36% to $130,000 for the 12 months ended December 31,2004 from $204,000 for same period in 2003.

**Interest Income**

Interest income, net ofexpense, includes income from the Company’s cash and cash equivalents and frominvestments and expenses related to its financing activities. Net interestincome for 2004 was approximately $23,200, an increase of approximately $20,900from net interest income of approximately $2,400 in 2003. This increaseresulted from increased cash investments resulting primarily from the Company’sequity financing completed in August 2004.

**Income Taxes**

The Company has notincurred any income tax expense to date. As of December 31, 2004 andrestated December 31, 2003, the Company had available a federal netoperating loss carryforward of approximately $13,107,000 and $11,775,000, respectivelyand a state net operating loss carryforward of approximately $6,867,000 and$5,561,000, respectively. These net operating loss carryforwards will expire atvarious times between 2005 and 2023.

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**Liquidity and Capital Resources**

The Company’s primary sources of liquidity are cashflows from operating activities and financing activities. As of December 31,2004, the Company had working capital of approximately $2.2 million, includingapproximately $1.9 million in cash and cash equivalents, as compared to workingcapital of approximately $3.8 million at December 31, 2003, which included$2.5 million in cash and cash equivalents. As of December 31, 2004 and December 31,2003 the Company has no debt. Cash equivalents consist of certificates ofdeposit, which are highly liquid and have original maturities of no more than90 days. Over the past few years, the Company has been financed primarily byits three principal stockholders and through the private placement of theCompany’s Common Stock to unaffiliated accredited investors.

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, President and Chairman of the Board. These loans arepayable upon demand and are not subject to any premium or penalty forprepayment. The loan interest rate is 6% per annum, payable monthly inarrears on the outstanding balance.

Net cash used in operations during the twelve-monthperiods ended December 31, 2004 and restated 2003 was approximately $2.3million and $1,0 million, respectively. Cash used in operating activitiesconsisted primarily of cash used to build inventory and for working capital. Thisincrease was primarily due to an increase in the net loss of $3.1 million aswell as an increase in inventory, partially offset by a decrease in bothaccounts receivable, accounts payable and an increase in the provision forexcess inventory. At December 31, 2004, inventory was approximately $2.7million compared to restated inventory of approximately $2.9 million as of December 31,2003. During the 12 months ended December 31, 2004 the Company increasedits provision for slow moving, excess or obsolete inventory by $836,000 ascompared to $221,000 for the restated 12-month period ended December 31,2003. During the third quarter ended September 30, 2004, substantialinventory was purchased for inclusion in the X-Box speaker system. Productionand other delays resulted in the Company not shipping at the anticipated volumelevels. Net accounts receivable was approximately $533,000 at December 31,2004, down from $1.8 million at December 31, 2003 restated. The reductionin accounts receivable was due to decreased shipments of the Company’ssemiconductor products. The Company increased its reserve against bad debts to$105,000 as of December 31, 2004 from $65,000 as of the restated December 31,2003 balance sheet. The Company constantly monitors its accounts receivablesand at this time believes this reserve is sufficient.

Net cash used in investing activities for the year endedDecember 31, 2004 totaled approximately $108,000 compared to approximately$88,000 for the restated year ended December 31, 2003. This increase wasprimarily due to amounts associated with purchase of the intellectual propertyof the former Standard MEMS Company.

Net cash provided by financing activities in 2004 wasapproximately $1.9 million compared to approximately $2.6 million for the yearended December 31, 2003. During 2004 the Company raised approximately $1.8million from a private placement of the Company’s common stock at a price of$4.75 per share. In addition, the Company raised approximately $292,000 throughthe exercise of options by employees and $12,500 through the exercise ofwarrants in connection with a 2000 private placement. During the three monthsended December 31, 2004, the Company received approximately $5,900 in cashfrom the exercise of options by one former director and one former employee.

The Company believes thatits current working capital will be sufficient to fund its capital andoperational requirements at least through June 30, 2006. See Note 20—SubsequentEvents—$2 million financing. The continuance of the Company is highly dependentupon its ability to successfully develop and market both its DDX digitalamplifier and MEMS technologies and raise additional funds for such purposes.The Company may also consider the sale of assets to raise additional funds. Therecan be no assurance, however, that the Company will be able to raise the fundsthat it needs to continue its 

30

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operationsor that additional funds will be available to the Company on acceptable terms,if at all. Except as otherwise disclosed therein, the accompanying consolidatedfinancial statements do not include any adjustments to reflect the possiblefuture effects of recoverability and classification of assets or the amountsand classification of liabilities that may result from the possible inabilityof the Company to continue as a going concern.

**Item 6a.**                 QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s financial instruments include: cash,cash equivalents, accounts receivable and accounts payable. At December 31,2004 and December 31, 2003, the carrying value of the Company’s cash, cashequivalents, accounts receivable and accounts payable approximate fair valuesgiven the short maturity of these instruments.

Although the Company’s sales are predominately tointernational markets, the Company believes that it does not have materialforeign currency exchange rate risk since international sales are in U.S.dollars and material purchases from foreign suppliers are typically alsodenominated in U.S. dollars.  Additionally, the functional currency of theCompany’s foreign sales office is the U.S. dollar.

It is the Company’s policynot to enter into derivative financial instruments for speculative purposes.

**Item7.**                        FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**APOGEE TECHNOLOGY, INC.**

Indexto Financial Statements and Financial Statement Schedules
| Financial Statements:                                                                                              |   |   |   |
|--------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Report of Independent  Registered Public Accounting Firm                                                           |   | F-1    |   |
| Consolidated Balance Sheets as of December 31,  2004 and Restated December 31, 2003                      |   | F-2    |   |
| Consolidated Statements of Operations for the Years  Ended December 31, 2004 and Restated 2003                |   | F-3    |   |
| Consolidated Statements of Stockholders’ Equity for  the Years Ended December 31, 2004 and Restated 2003 |   | F-4    |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2004 and Restated 2003                |   | F-5    |   |
| Notes to Consolidated Financial Statements                                                                         |   | F-6    |   |

 

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

As previously reported on Form 8-K dated April 19,2005, the Company received a letter on April 12, 2005 from its formerindependent registered public accountants, Anchin, Block & Anchin LLP(“Anchin”), notifying the Company that Anchin would not be able to complete itsaudit of the Company’s financial statements for the fiscal year ended December 31,2004 and was resigning from its audit engagement, effective immediately. Inaddition, the letter notified the Company that a disclosure should be made toprevent reliance on the auditor’s previously issued audit report with respectto the Company’s audited financial statements for the fiscal year ended December 31,2003 and the interim reviews of the Company’s financial statements for thefiscal quarters ended March 31, 2004, June 30, 2004 and September 30,2004.  In its letter, the auditorsadvised the Company that, based on information provided by the Company, theauditors had concluded that revenue had been improperly recognized by theCompany at December 31, 2003 and at each quarterly period thereafter withrespect to sales to one of the Company’s customers, and that the accountsreceivable from that customer had been overvalued. In addition, on April 18,2005, the 

31

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former auditors notifiedthe Company’s audit committee that there are additional transactions in 2003and 2004 that should be more closely reviewed by the Company and its newauditors to ensure that revenue was appropriately recognized.

In connection with its resignation, Anchin advised theCompany that information had come to its attention that made it unwilling torely on the Company’s management representations or to be associated with thefinancial statements prepared by management, and that the issues it had broughtto the attention of the Company’s audit committee raised concerns as to whetherthe Company has adequate internal controls necessary to develop reliablefinancial statements. In addition, Anchin advised the Company that it had notconcluded whether, and could not advise the Company as to the degree to whichthe scope of its audit would have had to be expanded to determine, whether, iffurther investigated, other sales by the Company and possibly the valuation ofthe chips that may have been returned to inventory, would have had issues thatcould have materially impacted the fairness or reliability of previously issuedaudited financial statements or the 2004 quarterly financial statements or thatmight have precluded Anchin from issuing an unqualified audit report even iffiscal 2003 financial statements were restated.

Except as described above, there were no disagreementswith Anchin on any other matter of accounting principles or practices,financial statement disclosure or auditing scope or procedure, whichdisagreements, if not resolved to the satisfaction of Anchin, would have causedAnchin to make reference to the subject matter of the disagreement(s) inconnection with its report on the Company’s financial statements for theCompany’s two most recent fiscal years or any later interim period. The auditor’sreports on the Company’s audited financial statements for either of the pasttwo years did not contain an adverse opinion or a disclaimer of opinion, andwere not qualified or modified as to uncertainty, audit scope, or accountingprinciples. Anchin had been the Company’s auditors since January 1, 2005,when it acquired the firm of Yohalem Gillman & Co. LLP, which had beenthe Company’s auditors since 1981.

As a result of the resignation of its auditors, (i) theCompany initiated a search for new auditors, (ii) the Company initiated asearch for a Chief Financial Officer, and (iii) the Company’s AuditCommittee initiated an independent investigation with the assistance ofindependent legal counsel and forensic accounting experts to investigate thematters raised by the Company’s former auditors.

On May 3, 2005, the Audit Committee of the Boardof Directors of the Company approved the engagement of Miller Wachman LLP asApogee’s new independent auditors.

On May 16, 2005, the Company announced that ithad hired Paul J. Murphy, 57, as its Chief Financial Officer and Vice Presidentof Finance effective June 1, 2005. Mr. Murphy has assumed all of theresponsibilities customarily associated with the role of Chief FinancialOfficer and Vice President of Finance, including the responsibilities of theCompany’s Principal Accounting Officer.

On July 13, 2005, the Board of Directors ofApogee determined, following a report by the Audit Committee of the Board ofDirectors, that Apogee would restate its financial statements for the fiscalyears ended December 31, 2003 and December 31, 2004 and interimquarters. The investigation by the Audit Committee into various accountingmatters, which has not yet been completed, has determined that the recognitionof revenue for transactions with third party distributors was not handled inaccordance with generally accepted accounting principles (GAAP), and as aresult that the Company’s financial statements for the fiscal years ended December 31,2003 and December 31, 2004 and interim periods were misstated.

In addition, the Board ofDirectors adopted a sell-through revenue recognition method for the Company’ssales to distributors. Using the sell-through revenue recognition methodology,the Company will not recognize sales into distribution channels until theCompany’s distributors have sold the products to their customers. The Companyhad previously recognized revenue on sales to distributors using a sell-inmethodology, pursuant to which the Company recognized revenue upon shipment toits distributors. The adoption of this methodology has been appliedretroactively to the Company’s financial statements.

32

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**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 thisquarterly report. Based on that evaluation, the chief executive officer andprincipal financial officer have concluded that 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-KSB/AAmendment No. 2 was 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.

33

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**PART III**
| **Item 8b.**               | **OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|----------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                       | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Item 9.**                | **DIRECTORS AND EXECUTIVE  OFFICERS OF THE REGISTRANT**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                       | The response to this  item was set forth in Amendment No. 1 to our Form 10-KSB for  the year ended December 31, 2004 as filed on April 29, 2005 (the  “Amendment”) and is incorporated herein by reference from such filing.  Disclosure regarding any amendments to, or waivers from, provisions of the  Code of Conduct and Ethics that apply to our principal executive and  financial officers will be included in a Current Report on Form 8-K  within four business days following the date of the amendment or waiver,  unless website posting of such amendments or waivers is permitted by the  rules of the American Stock Exchange, Inc. |
| **Item  10.**              | **EXECUTIVE COMPENSATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                       | The response to this  item is incorporated by reference from the discussion responsive thereto in  the Amendment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Item  11.**              | **SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                       | The response to this  item is incorporated by reference from the discussion responsive thereto in  the Amendment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Item  12.**              | **CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                       | The response to this  item is incorporated by reference from the discussion responsive thereto in  the Amendment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **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” atItem 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.                                                                                                                                                                                                                                                                                                                                                                     |

 

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**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          |       | Form of 1999 Stock  and Warrant Subscription Agreement, incorporated herein by reference to  Exhibit 10.1 to the Registrant’s Form 10-SB, as amended (File  No. 000-17053).                                                                                                   |
| 10.3          |       | Form of 1999  Warrant to purchase shares of Common Stock of the Registrant, incorporated  herein by reference to Exhibit 10.2 to the Registrant’s Form10-SB, as  amended (File No. 000-17053).                                                                                     |
| 10.4          |       | Form of 2000 Stock  Subscription Agreement, incorporated herein by reference to Exhibit 10.3  to the Registrant’s Form 10-SB, as amended (File No. 000-17053).                                                                                                                |
| 10.5          |       | Securities Purchase  Agreement, incorporated herein by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K, dated April 29, 2001 (File  No. 001-10456).                                                                                                 |
| 10.6          |       | Registration Rights  Agreement, incorporated herein by reference to Exhibit 10.2 to the  Registrant’s Current Report on Form 8-K, dated April 29, 2001 (File  No. 001-10456).                                                                                                 |
| 10.7          |       | Form of Warrant,  incorporated herein by reference to Exhibit 10.3 to the Registrant’s  Current Report on Form 8-K, dated April 29, 2001 (File No. 001-10456).                                                                                                           |
| 10.8          |       | Addendum to Securities  Purchase Agreement, incorporated herein by reference to Exhibit 10.4 to  the Registrant’s Current Report on Form 8-K, dated April 29, 2001  (File No. 001-10456).                                                                                     |
| 10.9          |       | Securities Purchase  Agreement, incorporated herein by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K filed on August 27, 2004  (File No. 001-10456)                                                                                               |
| 10.10         |       | Registration Rights  Agreement, incorporated herein by reference to Exhibit 10.2 to the  Registrant’s Current Report on Form 8-K filed on August 27, 2004  (File No. 001-10456)                                                                                               |
| 10.11         |       | Form of Warrant,  incorporated herein by reference to Exhibit 10.3 to the Registrant’s  Current Report on Form 8-K filed on August 27, 2004 (File  No. 001-10456)                                                                                                        |
| 10.12         |       | Addendum to Securities  Purchase Agreement, incorporated herein by reference to Exhibit 10.4 to  the Registrant’s Current Report on Form 8-K filed on August 27,  2004 (File No. 001-10456)                                                                                   |

35

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| 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 |   | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive  Officer.                                                                                                                                                                    |
| 31.2 |   | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 by 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.

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 response to this item is incorporated by referencefrom the discussion responsive thereto in the Proxy Statement to be filed forthe 2005 annual meeting of stockholders.

36

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized**.**
|        | APOGEE TECHNOLOGY, INC. |
|--------|-------------------------|
|   | By:                     |   |   | Date: August 19,  2005 |
|   |                    | 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:        |       |               |       | President, Chief  Executive Officer  |   | August 19, 2005 |
|       |       | Herbert M. Stein   |       | Chairman of the Board                |   |   |
| By:        |       |               |       | Chief Financial Officer              |   | August 19, 2005 |
|       |       | Paul J. Murphy     |       | Vice President of Finance  Treasurer |   |   |
| By:        |       |               |       | Director                             |   | August 19, 2005 |
|       |       | Craig A. Dubitsky  |       |                                 |   |   |
| By:        |       |               |       | Director                             |   | August 19, 2005 |
|       |       | Arthur S. Reynolds |       |                                 |   |   |
| By:        |       |               |       | Director                             |   | August 19, 2005 |
|       |       | Sheryl B. Stein    |       |                                 |   |   |
| By:        |       |               |       | Director                             |   | August 19, 2005 |
|       |       | Alan W. Tuck       |       |                                 |   |   |

 

 

 

37

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**ANNUAL REPORT ON FORM 10-KSB**

**LIST OF FINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2004 AND RESTATED 2003**

**APOGEE TECHNOLOGY, INC.**

**NORWOOD,MASSACHUSETTS**
| Report of Independent  Registered Public Accounting Firm                                                                  |   | F-1 |
|---------------------------------------------------------------------------------------------------------------------------|--------|-----|
| Consolidated Balance Sheet—December 31, 2004 and  restated December 31, 2003                               |   | F-2 |
| Consolidated Statements of Operations—Years Ended  December 31, 2004 and restated 2003                          |   | F-3 |
| Consolidated Statements of Stockholders’ Equity  (Deficit)—Years ended December 31, 2004 and restated 2003 |   | F-4 |
| Consolidated Statements of Cash Flows—Years Ended  December 31, 2004 and restated 2003                          |   | F-5 |
| Notes to Consolidated Financial Statements—December 31,  2004 and restated 2003                                 |   | F-6 |

 

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**Report of Independent Registered Public Accounting Firm**

To the Stockholders and Board of Directors of Apogee Technology, Inc.

We have audited the accompanying consolidated balancesheet of Apogee Technology, Inc. and Subsidiary (the “Company”) as of December31, 2004 and 2003, and the related consolidated statements of operations,stockholders’ equity and cash flows for years then ended.  These consolidated financial statements arethe 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 auditingstandards in accordance with the auditing standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements. An audit includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall consolidated 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 financialposition of Apogee Technology Inc. and Subsidiaries as of December 31, 2004 and2003, and the results of their operations, changes in their stockholders’ equityand their cash flows for the years then ended in conformity with accountingprinciples generally accepted in the United States of America. 

The accompanying financialstatements have been prepared assuming that the Company will continue as agoing concern. As discussed in Note 1 to the financial statements, the Company’srecurring losses from operations and negative cash flows raise substantialdoubt about its ability to continue as a going concern. Management’s plansconcerning these matters are also described in Note 2. The financial statementsdo not include any adjustments that might result from the outcome of thisuncertainty. 

/s/ Miller Wachman LLP 

Boston, Massachusetts August 15, 2005

F-1

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                          | ** ** | **DECEMBER 31,** | ** **      | **DECEMBER 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **2004**              | ** **      | **2003**              | ** ** |
| ** **                                                                                          | ** ** | ** **            | ** **      | **(Restated)**        | ** ** |
| **ASSETS**                                                                                          |       |                  | ** **      | ** **            |       |   | ** ** | ** ** |   |
| **Current assets**                                                                                  |       |                  | ** **      | ** **            |       |   | ** ** | ** ** |   |
| Cash and cash equivalents                                                                           | ** ** |                  | **$**           | **1,886,883**         | ** ** |   |   | **$** | **2,524,209** | ** ** |   |
| Accounts  receivable, net of allowance for doubtful                                                 |       |                  | ** **      | ** **            |       |   | ** ** | ** ** |   |
| accounts of $105,000 and $65,000, respectively                                                      | ** ** |                  | **533,113**     | ** **            |       |   | **1,818,837** | ** ** |   |
| Inventories, net                                                                                    | ** ** |                  | **2,725,308**   | ** **            |       |   | **2,869,087** | ** ** |   |
| Prepaid expenses and other current assets                                                           | ** ** |                  | **252,728**     | ** **            |       |   | **180,261** | ** ** |   |
| Total current assets                                                                                | ** ** |                  | **5,398,032**   | ** **            |       |   | **7,392,394** | ** ** |   |
| **Property and equipment, net of accumulated  depreciation of $376,951 and $391,463, respectively** | ** ** |                  | **103,189**     | ** **            |       |   | **128,831** | ** ** |   |
| **Other  assets**                                                                                   |       |                  | ** **      | ** **            |       |   | ** ** | ** ** |   |
| Patents, net of accumulated amortization of $127,442  and $103,856                                  | ** ** |                  | **211,901**     | ** **            |       |   | **87,369** | ** ** |   |
|                                                                                                | ** ** |                  | **$**           | **5,713,122**         | ** ** |   |   | **$** | **7,608,594** | ** ** |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                      |       |                  | ** **      | ** **            |       |   | ** ** | ** ** |   |
| **Current liabilities**                                                                             |       |                  | ** **      | ** **            |       |   | ** ** | ** ** |   |
| Accounts payable and accrued expenses                                                               | ** ** |                  | **$**           | **1,107,111**         | ** ** |   |   | **$** | **1,566,072** | ** ** |   |
| Deferred distributor revenue                                                                        | ** ** |                  | **1,955,563**   | ** **            |       |   | **1,959,387** | ** ** |   |
| Deferred contract revenue                                                                           | ** ** |                  | **95,788**      | ** **            |       |   | **50,000** | ** ** |   |
| Total current liabilities                                                                           | ** ** |                  | **3,158,462**   | ** **            |       |   | **3,575,459** | ** ** |   |
| **Commitments and Contingencies**                                                                   | ** ** |                  | **—**      | ** **            |       |   | **—** | ** ** |   |
| **Stockholders’  equity**                                                                      |       |                  | ** **      | ** **            |       |   | ** ** | ** ** |   |
| Common stock,  $.01 par value;                                                                      |       |                  | ** **      | ** **            |       |   | ** ** | ** ** |   |
| 20,000,000 shares  authorized, 11,838,332 and 11,327,270                                            |       |                  | ** **      | ** **            |       |   | ** ** | ** ** |   |
| issued and outstanding, respectively                                                                | ** ** |                  | **118,383**     | ** **            |       |   | **113,272** | ** ** |   |
| Additional paid-in capital                                                                          | ** ** |                  | **18,073,223**  | ** **            |       |   | **16,171,611** | ** ** |   |
| Accumulated deficit                                                                                 | ** ** |                  | **(15,636,946** | **)**                 |       |   | **(12,251,748** | **)** |   |
| Total stockholders**’**  equity                                                                | ** ** |                  | **2,554,660**   | ** **            |       |   | **4,033,135** | ** ** |   |
|                                                                                                | ** ** |                  | **$**           | **5,713,122**         | ** ** |   |   | **$** | **7,608,594** | ** ** |   |

 

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

F-2

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                                              | ** ** | **YEARS ENDED DECEMBER 31,** | ** **     |
|-------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                              | ** ** | **2004**                                    | ** **     | **2003** | ** ** |
| ** **                                                              | ** ** | ** **                                  | ** **     | **(Restated)** | ** ** |
| **Revenues**                                                            |       | ** **                                  | ** **     |   |   |
| Product sales                                                           | ** ** | **$**                                       | **4,383,912**  | ** ** | **$** | **7,755,718** | ** ** |
| Royalties                                                               | ** ** | **1,057,867**                               | ** **     | **1,762,561** | ** ** |
| Consulting                                                              | ** ** | **715,854**                                 | ** **     | **—** | ** ** |
|                                                                    | ** ** | **6,157,633**                               | ** **     | **9,518,279** | ** ** |
| **Costs  and expenses**                                                 |       | ** **                                  | ** **     |   |   |
| Product sales                                                           | ** ** | **3,890,917**                               | ** **     | **5,710,150** | ** ** |
| Research and development                                                | ** ** | **2,829,612**                               | ** **     | **1,675,625** | ** ** |
| Selling, general and administrative                                     | ** ** | **2,845,544**                               | ** **     | **2,405,294** | ** ** |
|                                                                    | ** ** | **9,566,073**                               | ** **     | **9,791,069** | ** ** |
| **Operating loss**                                                      | ** ** | **(3,408,440**                              | **)**          | **(272,790** | **)** |
| **Other  income (expense)**                                             |       | ** **                                  | ** **     |   |   |
| Interest/other income                                                   | ** ** | **23,334**                                  | ** **     | **13,344** | ** ** |
| Interest expense                                                        | ** ** | **(93**                                     | **)**          | **(10,985** | **)** |
|                                                                    | ** ** | **23,241**                                  | ** **     | **2,359** | ** ** |
| Net Loss                                                                | ** ** | **$**                                       | **(3,385,199** | **)** | **$** | **(270,431** | **)** |
| **Basic and diluted loss per common share**                             | ** ** | **$**                                       | **(0.29**      | **)** | **$** | **(0.02** | **)** |
| **Weighted  average common shares outstanding—basic  and diluted** | ** ** | **11,523,510**                              | ** **     | **10,925,612** | ** ** |

 

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

F-3

----

**APOGEETECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY**
| ** **                                                    | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in**Capital | ** ** | **Accumulated**Deficit | ** ** | **Total**  | ** **  |
|---------------------------------------------------------------|------------|------------|------------|-------------------|------------|--------------------------------|------------|------------------------|------------|------------|-------------|
| Balance at  January 1, 2003, as originally reported           |       | 5,370,585  |       | $                 | 53,706     |                           | $          | 13,599,926             |       | $          | (11,174,677 | ) | $ | 2,478,955 |   |
| Adjustments (See  Restatement Note 17)                   |       |       |       |              |       |                           |       | (806,640               | )          | (806,640   | )           |
| Balances at  January 1, 2003, as adjusted                     |       | 5,370,585  |       | $                 | 53,706     |                           | $          | 13,599,926             |       | $          | (11,981,317 | ) | $ | 1,672,315 |   |
| Net loss (See  Retatement Note 17)                  |       |       |       |              |       |                           |       | (270,431               | )          | (270,431   | )           |
| Issuances of  stock                                           |       | 293,050    |       | 2,930             |       | 2,628,321                      |       | —                 |       | 2,631,251  |        |
| 2 for 1 stock  split                                          |       | 5,663,635  |       | 56,636            |       | (56,636                        | )          | —                 |       | —     |        |
| Balances at  December 31, 2003 (See Restatement Note 17) |       | 11,327,270 |       | 113,272           |       | 16,171,611                     |       | (12,251,748            | )          | 4,033,135  |        |
| Net loss                                                      |       |       |       |              |       |                           |       | (3,385,199             | )          | (3,385,199 | )           |
| Issuances of  stock                                           |       | 511,062    |       | 5,111             |       | 1,901,613                      |       | —                 |       | 1,906,724  |        |
| Balances at December 31,  2004                           |       | 11,838,332 |       | $                 | 118,383    |                           | $          | 18,073,224             |       | $          | (15,636,947 | ) | $ | 2,554,660 |   |

 

*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,** | ** **     |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                                              | ** ** | **2004**                                    | ** **     | **2003** | ** ** |
| ** **                                                                              | ** ** | ** **                                  | ** **     | **(Restated)** | ** ** |
| **Cash flows from operations**                                                          |       |                                        |           |   |   |
| Net loss                                                                                | ** ** | **$**                                       | **(3,385,199** | **)** | **$** | **(270,431** | **)** |
| *Adjustments  to reconcile net (loss) income to net cash used in operating activities:* |       |                                        |           |   |   |
| Provision for doubtful accounts                                                         | ** ** | **40,000**                                  | ** **     | **40,000** | ** ** |
| Provision for slow moving, excess and obsolete  inventory                               | ** ** | **835,523**                                 | ** **     | **221,118** | ** ** |
| Depreciation and amortization                                                           | ** ** | **103,147**                                 | ** **     | **103,932** | ** ** |
| *Changes  in operating assets and liabilities:*                                         |       |                                        |           |   |   |
| Accounts receivable                                                                     | ** ** | **1,245,725**                               | ** **     | **(853,180** | **)** |
| Inventories                                                                             | ** ** | **(691,745**                                | **)**          | **(1,681,670** | **)** |
| Prepaid expenses and other current assets                                               | ** ** | **(72,468**                                 | **)**          | **(77,488** | **)** |
| Accounts payable and accrued expenses                                                   | ** ** | **(458,960**                                | **)**          | **546,177** | ** ** |
| Deferred product revenue                                                                | ** ** | **(3,824**                                  | **)**          | **907,750** | ** ** |
| Deferred contract revenue                                                               | ** ** | **45,788**                                  | ** **     | **50,000** | ** ** |
| Net cash used in operating activities                                                   | ** ** | **(2,342,013**                              | **)**          | **(1,013,792** | **)** |
| **Cash  flows from investing activities**                                               |       |                                        |           |   |   |
| Purchases of property and equipment                                                     | ** ** | **(53,918**                                 | **)**          | **(73,581** | **)** |
| Patent costs                                                                            | ** ** | **(148,118**                                | **)**          | **(13,964** | **)** |
| Net cash used in investing activities                                                   | ** ** | **(202,036**                                | **)**          | **(87,545** | **)** |
| **Cash  flows from financing activities**                                               |       |                                        |           |   |   |
| Proceeds from issuances of common stock, net of  issuance expenses                      | ** ** | **1,906,723**                               | ** **     | **2,631,251** | ** ** |
| Proceeds from bank line of credit                                                       | ** ** | **—**                                  | ** **     | **400,000** | ** ** |
| Repayment of bank line of credit                                                        | ** ** | **—**                                  | ** **     | **(400,000** | **)** |
| Net cash provided by financing activities                                               | ** ** | **1,906,723**                               | ** **     | **2,631,251** | ** ** |
| **Incease (decrease in cash) and cash equivalents**                                     | ** ** | **(637,326**                                | **)**          | **1,529,913** | ** ** |
| Cash and cash  equivalents—beginning                                               | ** ** | **2,524,209**                               | ** **     | **994,296** | ** ** |
| **Cash and cash equivalents—ending**                                               | ** ** | **$**                                       | **1,886,883**  | ** ** | **2,524,209** | ** ** |
|                                                                                         |            |                                             |                |  |  |  |  |

 

*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, 2004 AND RESTATED 2003**

**1.   TheCompany and Basis of Presentation**

***The Company***

Apogee Technology, Inc.and Subsidiary (the “Company” or “Apogee”) designs, develops and marketssilicon based products incorporating proprietary technologies. The Company’spatented all-digital, high efficiency Direct Digital Amplification (DDX®) technology Integrated Circuits (“ICs”) are used in arange of audio applications including: home theater systems, powered speakers, car audio, commercial audio, andPC multi-media. The Company is developing new System-on-Chip (SOC) productsusing its analog and digital circuit designs and Micro-ElectromechanicalSystems (MEMS) technology for the consumer, automotive, communications andmedical markets.

***Basis ofPresentation***

The financial statements include the accounts ofApogee Technology, Inc., and its wholly owned inactive subsidiary, DUBLA, Inc.All significant intercompany transactions and accounts have been eliminated.

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***

The Company’s consolidated financial statements havebeen prepared assuming the Company will continue as a going concern. Becausethe Company has had recurring losses, there is substantial doubt as to theCompany’s ability to continue as a going concern. The Company believes that itscurrent working capital will be sufficient to fund its capital and operationalrequirements at least through June 30, 2006. See Note 20—Subsequent Events—$2million financing.

The continuance of theCompany is highly dependent upon its ability to successfully develop and marketboth its DDX digital amplifier and MEMS technologies and raise additional fundsfor such purposes. The Company may also consider the sale of assets to raiseadditional funds. There can be no assurance, however, that the Company will beable to raise the funds that it needs to continue its operations or thatadditional funds will be available to the Company on acceptable terms, if atall. The financial statements do not include any adjustments to reflect thepossible future effects of recoverability and classification of assets or theamounts and classification of liabilities that may result from the possibleinability of the Company to continue as a going concern.

F-6

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**2.   Summary ofSignificant Accounting Policies**

***Revenue Recognition***

The Company recognizesrevenue in accordance with Securities and Exchange Commission Staff AccountingBulletin No. 104 (“SAB 104”), “Revenue Recognition in FinancialStatements: Revenue Recognition, which states that revenue should be recognizedwhen the following revenue 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 the Company’s major productsales categories for revenue recognition.

Sales to end customers:  Revenue is recognized under the Company’sstandard terms and conditions of sale, title and risk of loss transfer to thecustomer at the time products are shipped to the customer or the customers’representative/freight forwarder. The Company has experienced minimal warrantyor other returns and based upon historical experience, has recorded a $10,000provision for such returns.

Sales to Distributors: From time to time the Company provides certain incentives such as stockrotation, price protection and other incentives to its Distributors. Therefore,the Company defers recognition of revenue until such time that the distributorsells products to its customers based upon receipt of point-of-sale reportsfrom the distributors. See Note 17 on the Company’s adoption of the sellthrough method.

In addition, the Companyrecords royalty revenue when earned in accordance with the underlyingagreements. Consulting revenue is recognized as services are performed.

***Loss Per Share***

Basic loss per share iscomputed by dividing the net loss attributable to common stockholders for theperiod by the weighted average number of common stock outstanding during theperiod. Diluted net loss per share is computed based on the weighted averagenumber of common stock and dilutive potential common stock outstanding. Thecalculation of diluted net loss per share excluded potential common stock ifthe effect is anti-dilutive. Potential common stock consists of incrementalcommon stock issuable upon the exercise of stock options and common stockissuable upon the exercise of common stock warrants.

***Research and Development***

Costs for research anddevelopment are expensed as incurred.

***Inventories***

Inventories are stated atthe lower of cost on a first-in, first-out basis or market. This policyrequires the Company to make estimates regarding the market value of theCompany’s inventory, including an assessment of excess or obsolete inventory. TheCompany determines excess and obsolete inventory based on an estimate of thefuture demand and estimated selling prices for the Company’s products within aspecified time horizon, generally 12 to 24 months. The estimates the Companyuses for expected demand are also used for near-term capacity planning andinventory purchasing and are consistent with the Company’s revenue forecasts. Actualdemand and market conditions may differ from those projected by 

F-7

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

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

theCompany’s management. If the Company’s unit demand forecast is less that theCompany’s current inventory value, the Company will be required to takeadditional excess inventory charges or write-downs to net realizable valuewhich will decrease the Company’s gross margin and net operating results in thefuture. During the fiscal years ended December 31, 2004 and 2003, theCompany recorded a provision for excess inventory of approximately $836,000 and$211,000, which increased the reserve at year end to approximately $1.2millionand $342,000, respectively, to account for slow moving, excess and obsoleteinventory both at Apogee’s warehouse and inventory held by the distributors.

***Inventories purchase commitment losses***

The Company accrues forestimated losses on non-cancelable purchase orders. The estimated losses resultfrom anticipated future sale of products for sales prices less than theestimated cost to manufacture.

***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 assets using accelerated methods. Leaseholdimprovements are amortized over either the term of lease or the estimateduseful life of the improvement.

***Patents***

Costs incurred to registerand obtain patents are capitalized and amortized on a straight-line basis overfive years, their estimated useful lives.

***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.

***Cash and Cash Equivalents***

The Company considers allhighly liquid investments with an original maturity of three months or less tobe cash equivalents.

***Accounts Receivable***

The Company carries itsaccounts receivable from end customers at cost less an allowance for doubtfulaccounts to ensure that trade receivables are not overstated. On a periodicbasis, the Company evaluates the collectibility of its accounts receivable on avariety of factors, including length of time receivables are past due,indication of customer willingness to pay, significant one-time events andhistorical experience. An additional reserve for individual accounts isrecorded when the Company 

F-8

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

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

becomesaware of a customer’s inability to meet its financial obligations, such as inthe case of bankruptcy filings or substantial deterioration in the customer’soperating results or financial position. If the financial condition of theCompany’s customers were to deteriorate, resulting in an impairment of theirability to make payments, additional allowances may be required. Accountsreceivable are generally considered past due if any portion of the receivablebalance is outstanding for more than 90 days.  If circumstances related to the Company’scustomers change, estimates of the recoverability of receivables would befurther adjusted.

***Fair value of financial instruments***

Carrying amounts of certainof the Company’s financial instruments, including cash and cash equivalents,accounts receivable and accounts payable, approximate their fair values due totheir relative short maturities and based upon comparable market informationavailable at the respective balance sheet dates. The Company does not hold orissue financial instruments for trading purposes.

***Stock Options***

At December 31, 2004, the Company has anincentive stock option plan described more fully in Note 7.

The Company has adopted only the disclosure provisionsof Financial Accounting Standard No. 123, “Accounting For Stock-BasedCompensation” (FAS 123). It applies APB Opinion No. 25, “Accounting ForStock Issued To Employees”, and related interpretations in accounting for itsplan and does not recognize compensation expense for its stock-basedcompensation plan.

The Company has adopted only the disclosure provisionsof Financial Accounting Standard No. 123, “Accounting For Stock-BasedCompensation” (FAS 123). It applies APB Opinion No. 25, “Accounting ForStock Issued To Employees”, and related interpretations in accounting for itsplan and does not recognize compensation expense for its stock-basedcompensation plan.

F-9

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

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

The following tableillustrates the effect on net (loss) income and (loss) income per share if theCompany had applied the fair value recognition provisions of FAS 123 tostock-based employee compensation. The table gives effect to the stock splitdescribed in Note 7.
| ** **                                                                                                         | ** ** | **Year Ended December 31,** | ** **     |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|----------------|
| ** **                                                                                                         | ** ** | **2004**                                   | ** **     | **2003** | ** ** |
| ** **                                                                                                         | ** ** | ** **                                 | ** **     | **(Restated)** | ** ** |
| Loss as reported:                                                                                                  | ** ** | **$**                                      | **(3,385,199** | **)** | **$** | **(270,431** | **)** |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards* | ** ** | **(2,094,239**                             | **)**          | **(1,798,721** | **)** |
| Pro-forma net loss**                                                                                               | ** ** | **$**                                      | **(5,479,438** | **)** | **$** | **(2,069,152** | **)** |

 
| ** **                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
| ** **                      | ** ** | ** **                                 | ** ** | **(Restated)** | ** ** |
| Loss per share:                 | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| As reported, basic and  diluted | ** ** | **$**                                      | **(0.29**  | **)** | **$** | **(0.02** | **)** |
| Pro-forma, basic and  diluted   | ** ** | **$**                                      | **(0.48**  | **)** | **$** | **(0.18** | **)** |

----

*                   Allawards refers to awards granted, modified, or settled in fiscal periodsbeginning after December 15, 1994—awards for which the fair value wasrequired to be measured under FAS 123.

**             Forpurposes of pro forma disclosures, the estimated fair value of the options isamortized over 5 years, the options’ vesting period. Pro forma informationregarding earnings and per share information is required by Statement 123, andhas been determined as if the Company had accounted for its employee stockoptions under the fair value method of that Statement. The fair value of theseoptions was estimated at the date of grant using a Black-Scholes option pricingmodel for years subsequent to 2000 with the following weighted-averageassumptions for 2004 and 2003, respectively: risk-free interest rates ranging from 3.74% to 4.77% and 3.28% to 4.46%;no dividend yields; volatility factors of the expected market price of theCompany’s common stock of 1.2 and 1.19; and a weighted-average expected life ofthe option of approximately 7.5 years. Prior to 2001, the fair values of theoptions were valued using the minimum value method.

***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 Note 14—Tax Loss Carryforwards.

***New Accounting Pronouncements***

In January 2003, the Financial AccountingStandards Board (FASB) issued FASB Interpretation No. 46 (“FIN 46”), “Consolidationof Variable Interest Entities, and an Interpretation of ARB No. 51”. FIN46 requires certain variable interest entities to be consolidated by theprimary beneficiary of the entity 

F-10

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

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

if the equity investors inthe entity do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from other parties.FIN 46 is effective immediately for all new variable interest entities createdor acquired after January 31, 2003.

For variable interest entities created or acquiredprior to February 1, 2003, the provisions of FIN 46 must be applied forthe first interim or annual period beginning after June 15, 2003.

In May 2003, the FASB issued Statement No. 150(FAS 150), “Accounting for Certain Financial Instruments with Characteristicsof both Liabilities and Equity”. FAS 50 establishes classification andmeasurement standards for three types of freestanding financial instrumentsthat have characteristics of both liabilities and equity. Instruments withinthe scope of FAS 150 must be classified as liabilities within the Company’sConsolidated Financial Statements and be reported at settlement date value. Theprovisions of FAS 150 are effective for (1) instruments entered into ormodified after May 31, 2003, and (2) pre-existing instruments as of July 1,2003. In November 2003, through the issuance of FSP 150-3, the FASBindefinitely deferred the effective date of certain provisions of FAS 150,including mandatorily redeemable instruments as they relate to minorityinterests in consolidated finite-lived entities.

The adoption of FAS 150 as well as FIN 46 did not havea material effect on the Company’s results of operations or financial position.

In December 2003, the SEC issued Staff AccountingBulletin No. 104, “Revenue Recognition”, (“SAB104”), which codifies,revises and rescinds certain sections of SAB No. 101, Revenue Recognition,in order to make this interpretive guidance consistent with currentauthoritative accounting and auditing guidance and SEC rules andregulations.

In December 2004, the FASB issued Statement ofFinancial Accounting Standard (“SFAS”) No. 123R “Share Based Payment”. Thisstatement is a revision of SFAS Statement No. 123, “Accounting forStock-Based Compensation” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and its related implementation guidance. SFAS123R addresses all forms of share based payment (“SBP”) awards including sharesissued under employee stock purchase plans, stock options, restricted stock andstock appreciation rights. Under SFAS 123R, SBP awards result in a cost thatwill be measured at fair value on the awards’ grant date, based on theestimated number of awards that are expected to vest and will be reflected ascompensation expense in the financial statements.

This statement is effective for public entities thatfile as small business issuers as of the beginning of the first interim orannual reporting period that begins after December 15, 2005.

The Company is currently in the process of evaluatingthe effect that the adoption of this pronouncement may have on its financialstatements.

In December 2004, FASB issued Statement AccountingStandard (“SFAS”) No. 153 “Exchanges of Nonmonetary Assets”. ThisStatement amends Opinion 29 to eliminate the exception for nonmonetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange. Theprovisions of this Statement are effective for nonmonetary asset exchangesoccurring in 

F-11

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

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

fiscal periods beginningafter June 15, 2005. Earlier application is permitted for nonmonetaryasset exchanges occurring in fiscal periods beginning after December 16,2004. The provisions of this Statement should be applied prospectively.

The adoption of this pronouncement is not expected tohave a material effect on the Company’s financial statements.

In November 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 151 “Inventory Costs.”  This statement amends Accounting ResearchBulletin No. 43, Chapter 4, “Inventory Pricing” and removes the “soabnormal” criterion that under certain circumstances could have led to thecapitalization of these items. SFAS No. 151 requires that idle facilityexpense, excess spoilage, double freight and re-handling costs be recognized ascurrent-period charges regardless of whether they meet the criterion of “so abnormal.”  SFAS 151 also requires that allocation offixed asset production overhead expenses to the costs of conversion be based onthe normal capacity of the production facilities. SFAS No. 151 iseffective for all fiscal years beginning after June 15, 2005. Managementdoes not believe there will be a significant impact as a result of adoptingthis statement.

EITF Issue 04-8, “The Effect of ContingentlyConvertible Instruments on Diluted Earnings per share.”  The EITF reached a consensus that contingentlyconvertible instruments, such a contingently convertible debt, contingentlyconvertible preferred stock, and other such securities should be included indiluted earnings per share (if dilutive) regardless of whether the market pricetrigger has been met. The pronouncement is effective for reporting periodsafter December 15, 2004.

The adoption of thispronouncement is not expected to have a material effect on the Company’sfinancial statements.

**3.   Inventories**

Themajor classifications of inventories are as follows at December 31, 2004and restated 2003:
| ** **                                                   | ** ** | **2004**   | ** ** | **2003_** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-----------|------------|
| Raw materials                                                |       | $          | 24,539     |      | $          | 31,528 |   |
| Finished goods                                               |       | 2,143,530  |       | 684,784   |       |
| Finished goods  held by distributors                         |       | 1,734,955  |       | 2,494,968 |       |
|                                                         |       | $          | 3,903,024  |      | $          | 3,211,280 |   |
| Less reserve for slow moving, excess and obsolete  inventory |       | (1,177,716 | )          | (342,193  | )          |
| Net Inventory                                                |       | $          | 2,725,308  |      | $          | 2,869,087 |   |

 

F-12

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**4.   Property andEquipment**

Propertyand equipment at December 31, 2004 and 2003 are comprised of thefollowing:
| ** **                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Equipment                      |       | $        | 390,342    |     | $          | 433,753 |   |
| Software                       |       | 35,634   |       | 32,133   |       |
| Furniture and  fixtures        |       | 31,210   |       | 31,454   |       |
| Leasehold  improvements        |       | 22,954   |       | 22,954   |       |
|                           |       | 480,140  |       | 520,294  |       |
| Less accumulated  depreciation |       | 376,951  |       | 391,463  |       |
|                           |       | $        | 103,189    |     | $          | 128,831 |   |

 

Depreciation expense was $79,561 and $84,082 for theyears ended December 31, 2004 and restated 2003, respectively.

Theestimated useful lives of 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 |                       |       |

 

**5.   AccruedExpenses**
| ** **              | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Accrued Audit  Expenses |       | $        | 165,000    |     | $          | 46,000 |   |
| Accrued Legal  Expenses |       | 37,000   |       | —   |       |
| Other Accrued  Expenses |       | 10,000   |       | 34,000   |       |
|                    |       | $        | 212,000    |     | $          | 80,000 |   |

 

F-13

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**6.   Deferred ContractRevenue**

During September 2004, the Company entered into afunding agreement with the United Binational Industrial Research andDevelopment (“BIRD”) Foundation of Israel. This agreement will provide funds tothe Company for industrial research and development activities. The agreementwill provide up to a maximum of $560,000 of which the Company will receive$280,000, and another partner in the agreement will receive the remainder. TheCompany has received $101,379 in deferred contract revenue and has recognizedin revenue $5,592 with expenses as of the end of 2004.

In December 2003, theCompany recorded $50,000 in consulting revenue as a non-refundable designcommitment fee due upon signing of a contract for consulting and design assistancefor the development of an IC. Since the work was not completed in the fourthquarter, it was determined that the $50,000 should be reclassified as part ofthe restated fourth quarter and 12 months ended December 31, 2003. Duringthe first quarter of 2004 this revenue was recognized as part of therestatement of the 1st quarter ended March 2004.

**7.   Stockholders’Equity**

***Stock Split***

On August 12, 2003,the Board of Directors authorized a 2-for-1 split of the Company’scommon stock effected in the form of a 100% stock dividend. The stock dividendwas paid on December 11, 2003 to stockholders of record at the close ofbusiness on November 17, 2003. No fractional shares of common stock wereissued in connection with the stock split. Par value was not changed, andadditional paid-in capital was charged for the par value of the shares issued. Allreferences to the number of common shares and per-share amounts included in theaccompanying consolidated financial statements for the years ended 2004 and2003 have been adjusted to reflect the stock split.

***Private Placements***

In July 2003, the Company completed a privateplacement for 100,000 shares of common stock at $3.00 per share. Proceedsreceived were $300,000.

During May 2003, the Board of Directors approveda private placement of 1,000,000 shares. Pursuant to this private placement,the Company issued 200,000 shares, 75,000 shares and 25,000 shares inSeptember, October and November, respectively. The 200,000 shares wereissued at $5, and the remaining 100,000 shares were issued at $10 per share ofcommon stock. Total proceeds for these issuances were $2,000,000.

In August 2004, theCompany completed a private placement for 374,242 shares of common stock at$4.75 per share. Proceeds received were $1,577,045 net of $200,605 in expenses.In addition, the issuance of warrants were approved by the Board of Directors,pursuant to which purchasers shall have the right to acquire up to 50% of thenumber of shares of Common Stock issued as a result of the private placement. Thesewarrants are exercisable immediately upon issuance and for a term of five yearsat an exercise price of $5.70 per share. Total warrants granted during the yearended December 31, 2004 aggregated 209,578.

F-14

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

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

***Stock Options***

The Company issued 126,820and 93,100 shares of common stock during 2004 and 2003, respectively, foroptions exercised by certain employees and directors. The shares were issued atprices ranging from $0.275 to $6.81 per share in 2004 and $0.25 to $7.63 pershare in 2003. Proceeds from the exercise of options amounted to $291,678 and$202,501 in 2004 and 2003, respectively.

***Other***

In January 2000, theCompany in connection with a private placement, issued warrants to purchaseone-fifth share of common stock at $2.50 per share. The warrants expire five yearsfrom the date of the subscription. During 2004 and 2003 the Company issued10,000 and 83,000 shares warrants to purchase 40,000 shares of common stock at$5.00 per share. The warrants expire five years from the date of issuance. Noneof these warrants were exercised during 2004 or 2003.

**8.   Related PartyTransactions**

The Company rents itsfacility from an entity controlled by a stockholder for $4,400 per monthpursuant to a lease that expired December 31, 2004. Rent paid to thisstockholder aggregated $52,800 per year for 2004 and 2003. See Note 20—SubsequentEvents—relatedparty Note.

**9.   License Agreement**

On February 7, 2001, the Company signed anexclusive license agreement with ST Microelectronics NV (“ST”) of theNetherlands. The agreement calls for ST to use certain intellectual propertyrights owned or controlled by the Company to commercialize and sell relatedproducts utilizing such technology. In consideration for this license, ST paidto the Company a one-time license fee of $1.6 million in cash and a $400,000credit for future design services.

The Company will also receive royalties based oncertain formulas, as defined in the agreement. This agreement has no expirationdate; however, either party may cancel the agreement upon certain advancenotices as defined in the agreement. The $400,000 credit portion of the licensefee was associated with future development activities of the Company. When the$400,000 amount was recognized in income, it was simultaneously charged toresearch and development costs.

In prior years, theCompany recognized $220,000 of the credit for future design services. Duringthe year ended December 31, 2004, the Company recognized the remaining$180,000 of income and research and development costs.

**10.   Concentrations**

During the year ended December 31, 2004, theCompany derived approximately 22% of product revenue to one end user and 51% ofproduct revenue as a result of sell through by two distributors.

During the year ended December 31, 2004, theCompany derived approximately 47% of total revenue from two end users and 35%of total revenue as a result of sell through by two distributors.

F-15

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**10.**   Concentrations (Continued)

During the restated year ended December 31, 2003,the Company derived approximately 31% of its product revenue to one end userand 38% of product revenue as a result of sell through by two distributors.

During the restated year ended December 31, 2003,the Company derived approximately 44% of total revenue from two end users and31% of total revenue as a result of sell through by two distributors.

Two of the Company’s major customers accounted forapproximately 72% of the total accounts receivable balance at December 31,2004.

Four of the Company’s major customers accounted forapproximately 76% of the total accounts receivable balance at December 31,2003.

Substantially all of the Customer sales were to endusers or distributors located in Asia and Europe for both the 12-monthperiods ended December 31, 2004 and December 31, 2003.

One of the Company’s major vendors accounted forapproximately 96% of total purchases for the year ended December 31, 2004.

Two of the Company’s major vendors accounted forapproximately 98% of total purchases for the year ended December 31, 2003.

The Company maintainsaccounts with financial institutions. Balances usually exceed the maximumcoverage ($100,000) provided by the Federal Deposit Insurance Corporation oninsured depositor accounts.

**11.   Stock Options**

In May 1997, the Company adopted an incentivestock option plan for employees, directors and consultants. The Company’s boardof directors authorized a maximum of 600,000 shares of common stock forissuance under the plan, which in 2001 was increased to 2,100,000 shares,increased in 2002 to 3,100,000 shares and further increased in 2003 to4,100,000. Pursuant to the plan, the board may grant options to employees,directors, or consultants at its discretion. Options granted under the plan toless than 10% and greater than 10% stockholders are to be for 100% and 110%,respectively, of the fair value of the common stock on the date of the grant,and expire 10 and 5 years, respectively, from the date of the grant.

F-16

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**11.**   Stock Options (Continued)

A summary of the status ofthe Company’s stock options as of December 31, 2004 and restated 2003 andchanges during the years then ended is presented below. The data give effect tothe stock split described in Note 7.
| ** **                                                   | ** ** | ** **    | ** ** | **2004**     | ** ** | ** ** | ** ** | **2003**     | ** ** |
|--------------------------------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|--------------|------------|
| ** **                                                   | ** ** | ** **    | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                   | ** ** | ** **    | ** ** | **Average**  | ** ** | ** ** | ** ** | **Average**  | ** ** |
| ** **                                                   | ** ** | ** **    | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                                   | ** ** | **Shares**    | ** ** | **Price**    | ** ** | **Shares** | ** ** | **Price**    | ** ** |
| Outstanding—beginning  of year                          | ** ** | **2,787,600** | ** ** |         | **$**      | **4.50**   | ** ** |         | 2,022,400  |   |   | $ | 4.55 |   |   |
| Granted                                                      | ** ** | **986,000**   | ** ** |         | **8.31**   | ** ** |       | 898,300      |       |   | 4.24 |   |   |
| Exercised                                                    | ** ** | **(126,820**  | **)**      |         | **(2.30**  | **)**      |       | (93,100      | )          |   | (2.21 | ) |   |
| Cancelled                                                    | ** ** | **(328,960**  | **)**      |         | **(5.03**  | **)**      |       | (40,000      | )          |   | (6.36 | ) |   |
| Outstanding—end  of year                                | ** ** | **3,317,820** | ** ** |         | **$**      | **5.55**   | ** ** |         | 2,787,600  |   |   | $ | 4.50 |   |   |
| Weighted average fair  value of options granted during  year | ** ** | ** **    |       |         | **$**      | **4.22**   | ** ** |         |       |   |   | $ | 3.37 |   |   |

 

The Company granted a total of 986,000 and 898,300options under the 1997 Employee, Director and Consultant Stock Option Planduring 2004 and 2003, respectively, to certain directors and employees. Theoptions awarded have exercise prices ranging from $3.85 to $9.46 and $2.71 to$12.15 for 2004 and 2003, respectively.

Thefollowing table summarizes information about options outstanding as of December 31,2004 and gives effect to the stock split described in Note 7.
| ** **                                  | ** ** | **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 - 4.50                           |       |                         | 1,190,720  |                         |       |   | 5.42 |   |   |   | $ | 2.67 |   |   | 528,940 |   |   | $ | 1.44 |   |   |
| $5.25 - 12.15                          |       |                         | 2,127,100  |                         |       |   | 6.40 |   |   |   | 7.34 |   |   | 850,400 |   |   | 6.89 |   |   |
| Total at  December 31, 2004            |       |                         | 3,317,820  |                         |       |   | 6.04 |   |   |   | $ | 5.67 |   |   | 1,379,340 |   |   | $ | 4.78 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**12.   Income (Loss)Per Common Share**

Basic (loss) income percommon share is computed by dividing net (loss) income by the weighted averagenumber of common shares outstanding for the period. The diluted income percommon share includes the potential impact of dilutive securities, includingoptions and warrants. The dilutive effect of stock options and warrants iscomputed using the treasury stock method, which assumes the repurchase ofcommon shares by the Company at the average market price for the period. Theweighted average number of shares of common stock outstanding used to computebasic (loss) income per share for 2004 and restated 2003 amounted to 11,523,510and 11,944,459, respectively. The weighted average number of shares of commonstock outstanding used to compute diluted income per common share in 2003amounted to 11,944,459. The assumed exercise of outstanding stock options andwarrants for diluted loss per 

F-17

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**12.**   Income (Loss) Per Common Share (Continued)

commonshare was not applicable in 2004 because their effect was antidilutive. The2003 figures include the shares issued as a result of the stock split referredto in Note 7.

**13.   EmployeeRetirement 401(k) Plan**

The Company sponsors a 401(k) retirementplan for the benefit of its employees. The plan imposes no contributionrequirement or liability upon the Company. Plan participation is voluntary andunconditional to all employees over 18 and plan contributions are discretionaryto the limits allowed by the Internal Revenue Code and are immediately 100%vested. There were no employer contributions during 2004 or 2003.

**14.   Tax LossCarryforwards**

The Company has available for Federal and state incometax purposes, net operating loss carryforwards of approximately $13,107,000 and$6,867,000 as of December 31, 2004, expiring from 2005 through 2023.

The Company has available for Federal and state incometax purposes, net operating loss carryforwards of approximately $11,775,000 and$5,561,000 as of December 31, 2003, expiring from 2004 through 2022.

The Company’s net lossesresult in no current tax benefit. The deferred tax assets arising from netoperating loss carryforwards amounted to approximately $4,887,000 at December 31,2004 and $4,352,000 at restated December 31, 2003.and were fully offset bya valuation allowance as required by Statement of Financial Accounting StandardsNo. 109, Accounting for Income Taxes. This represents an increase of$535,000 for 2004. The valuation allowance is based on an assessment at December 31,2004 that it is more likely than not that the net operating loss carryover willnot be realized in the future. However, should the Company generate futureincome from licensing agreements and sales of products, resulting in taxableincome, then the valuation allowance will be adjusted accordingly.

**15.   SupplementalCash Flow Information**

Interest paid during 2004and 2003 amounted to $93 and $10,997, respectively.

**16.   Commitmentsand Contingencies**

***Leases***

The company leases office space under operating leasesexpiring in various years through 2007. Total rent expense for operating leasesduring 2004 and 2003 amounted to approximately $84,000 and $75,000,respectively.

F-18

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**16.   Commitmentsand Contingencies (Continued)**

Futureminimum lease payments under noncancellable operating leases as of December 31,2004 are as follows:
| **Years Ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| 2005                                         |       | $          | 81,344     |       |
| 2006                                         |       | 19,324     |       |
| 2007                                         |       | 1,548      |       |
|                                         |       | $          | 102,216    |       |

 

***Employment Contract***

On June 7, 2004, theCompany entered into a two-year employment contract with its chief executiveofficer and president whereby he will receive an annual salary of $295,000. TheCompany’s board of directors will annually consider granting increases insalary, as well as potential bonuses.

***Public Relations Contract***

The Company entered into acontract with a public relations firm from December 1, 2004 through May 31,2005, with monthly minimum fees of $6,000. Total future minimum payments in2005 are $30,000.

***Software License Agreement***

TheCompany entered into a 36-month software license agreement from September 30,2003 through September 29, 2006. The original amount of the agreement was$305,028, with quarterly payments of $25,419. Future minimum payments are asfollows:
| **Years Ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| 2005                                         |       | $          | 101,676    |       |
| 2006                                         |       | 76,257     |       |
|                                         |       | $          | 177,933    |       |

 

***Inventory Purchase Commitments***

At December 31, 2004the Company had open purchase orders for the purchase of inventory totalingapproximately $135,000. These purchase orders may only be cancelled if thefoundry has not yet started production of the wafers to which the open purchaseorders relate.

***Fair value of financial instruments***

Carrying amounts ofcertain of the Company’s financial instruments, including cash and cashequivalents, accounts receivable and accounts payable, approximate their fairvalues due to their relative short maturities and based upon comparable marketinformation available at the respective balance sheet dates. The Company doesnot hold or issue financial instruments for trading purposes.

F-19

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**17.   SupplementaryFinancial Information**

***Restatement of Previously Reported FinancialInformation***

As originally described in the Company’s CurrentReport on Form 8-K dated July 13, 2005 and filed with theSecurities and Exchange Commission on July 21, 2005 (the “Prior 8-K”),the Company’s Audit Committee conducted an internal investigation regardingvarious accounting matters. The Company has adopted a new revenue recognitionpolicy, for sales to distributors, under which the Company is required to deferrecognition of revenue until such time that the distributor sells products toits customers based upon receipt of point-of-sales reports from the distributor.

The Board of Directors of Apogee determined, followinga report by the Audit Committee of the Board of Directors, that Apogee wouldrestate its financial statements for the fiscal years ended December 31,2003 and December 31, 2004 and interim quarters. The investigation by theAudit Committee into various accounting matters, which has not yet beencompleted, has determined that the recognition of revenue for transactions withthird party distributors was not handled in accordance with generally acceptedaccounting principles (GAAP), and as a result that the Company’s financialstatements for the fiscal years ended December 31, 2003 and December 31,2004 and interim periods were misstated.

The following tablecontains unaudited adjustments to the beginning accumulated deficit at January 1,2003. These adjustments were made by management in order to more fairly presentthe restatement activity for the year 2003.

***Adjustments to January 1,2003 Accumulated Deficit***
| ** **                                                                     | ** ** | ** ** | ** ** | **January 1, 2003** | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|-------------------------------|------------|
| ** **                                                                     | ** ** | ** ** | ** ** | **(in thousands)**       | ** ** |
| Accumulated  Deficit, as Originally Reported                                   |       |       |       |                          | $          | (11,175 | **)** |   |
| Less Cumulative  Deferred Revenue  (including Distributor Accounts Receivable) |       | $          | (2,076     | )                             |       |   | ** ** |   |
| Net of Inventory  held at Distributors                                         |       | 1,391      |       |                          |       | ** ** |   |
| Less Reserve for  Excess and Obsolete Inventory                                |       | (121       | )          |                          | (806       | **)** |   |
| Accumulated  Deficit, as Restated                                              |       |       |       | ** **                    | **$**      | **(11,981** | **)** |   |
| The effect of these  adjustments on the 2002 loss per share is as follows:     |       |       |       |                          |       | ** ** |   |
| Loss per share as previously reported                                          |       |       |       | ** **                    | **$**      | **(0.10** | **)** |   |
| Loss per share as  adjusted                                                    |       |       |       | ** **                    | **$**      | **(0.18** | **)** |   |
|                                                                                |            |            |            |                               |            |  |  |  |  |

 

The following tableprovides a reconciliation of amounts previously reported in the Company’s Form 10-QSBfor the quarters ended March 31, 2003, June 30, 2003, September 30,2003, March 31, 2004, June 30, 2004 and September 30, 2004 withamounts previously adjusted for the restatement as a result of the AuditCommittee’s investigation.

F-20

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**17.**   Supplementary Financial Information (unaudited) (Continued)

Summarized quarterlyfinancial information for the 12 months ended December 31, 2004 andrestated 2003 is as follows (in thousands, except per share data):
| ** **                  | ** ** | **Restated** | ** ** |
|-----------------------------|------------|--------------|------------|
| **2004**                    | ** ** | ** **   | ** ** | **1**st Qtr. | ** ** | **2**nd Qtr. | ** ** | **3**rd Qtr. | ** ** | **4**th Qtr. | ** ** |
| Net Revenue                 |       | $            | 2,150      |   | $ | 1,337 |   | $ | 1,997 |   | $ | 675 |   |
| Costs and  Expenses         |       | 2,372        |       | 2,306 |   | 2,451 |   | 2,438 |   |
| Operating Loss              |       | (222         | )          | (969 | ) | (454 | ) | (1,763 | ) |
| Net Loss                    |       | (217         | )          | (963 | ) | (449 | ) | (1,756 | ) |
| Basic and Diluted Net  Loss |       |         |       |   |   |   |   |   |   |
| Loss per share              |       | (0.02        | )          | (0.08 | ) | (0.04 | ) | (0.15 | ) |
|                             |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **Restated** | ** ** |
|-------------------------------|------------|--------------|------------|
| **2003**                      | ** ** | ** **   | ** ** | **1**st Qtr. | ** ** | **2**nd Qtr. | ** ** | **3**rd Qtr. | ** ** | **4**th Qtr. | ** ** |
| Net Revenue                   |       | $            | 1,892      |   | $ | 2,292 |   | $ | 3,002 |   | $ | 2,333 |   |
| Costs and  Expenses           |       | 2,182        |       | 2,295 |   | 2,720 |   | 2,595 |   |
| Operating Profit  (Loss)      |       | (290         | )          | (3 | ) | 282 |   | (262 | ) |
| Net Profit (Loss)             |       | (287         | )          | (2 | ) | 278 |   | (259 | ) |
| Basic and Diluted Net  Profit |       |         |       |   |   |   |   |   |   |
| (Loss) per share              |       | (0.3         | )          | (0.00 | ) | 0.03 |   | (0.02 | ) |
|                               |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Restatement ofPreviously Reported Quarterly Financial Information***

As a result of the Company’sdecision to change the accounting method for recognizing product revenue to a sellthrough or point of sale method and the internal investigation concerning thecircumstances surrounding and appropriate accounting for product revenue, theAudit Committee of the Board of Directors determined that the Company restatecertain financial information previously reported in the Company’s Form 10-QSBfor the quarters ended March 31, 2004, June 30, 2004, September 30,2004, March 31, 2003, June 30, 2003, September 30, 2003 and December 31,2003. The restated financial information is unaudited. None of the adjustmentsset forth affect the amounts shown in the Consolidated Balance Sheet as of December 31,2004 and related Consolidated Statement of Operations, Stockholders’ Equity andCash Flows for the 12 months ended December 31, 2004. For additionaldiscussion regarding the Audit Committee’s internal investigation and thecircumstances surrounding the decision for restatement, see “Item 9. “Changesin and Disagreements with Accountants.”

The following table provides a reconciliation ofamounts previously reported in the Company’s Form 10-QSB for thequarters ended quarters ended March 31, 2004, June 30, 2004, September 30,2004, March 31, 2003, June 30, 2003, September 30, 2003 withamounts previously adjusted for the restatement as a result of the change inaccounting policy and as a result of the Audit Committee’s investigation. Inreviewing the restated Consolidated Statement of Operations, it should be takeninto consideration that the restated financial information reflects unauditedadjustments.

F-21

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**17.**   SupplementaryFinancial Information (Continued)

**BALANCE SHEETS**

**(in thousands)**
| ** **                                    | ** ** | **March 31, 2004 (Unaudited)** | ** **  | **June 30, 2004 (Unaudited)** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------|-------------|----------------------------------------------|------------|
| ** **                                    | ** ** | **Previously**                                | ** **  | **Restatement**                              | ** ** | **Restated** | ** ** | **Previously** | ** ** | **Restatement** | ** ** | **Restated** | ** ** |
| ** **                                    | ** ** | **Reported(1)**                               | ** **  | **Adjustment(2)**                            | ** ** | **Total** | ** ** | **Reported(1)** | ** ** | **Adjustment(2)** | ** ** | **Total** | ** ** |
| **ASSETS**                                    |       |                                          |        | ** **                                   |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| **Current assets**                            |       |                                          |        | ** **                                   |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Cash and cash equivalents                     | ** ** | ** **                                    | **$**       | **1,685**                                    | ** ** | ** ** | ** ** | **$** | **—  ** | ** ** | ** ** | **$** | **1,685** | ** ** | ** ** | **$** | **1,693** | ** ** | ** ** | ** ** | **$** | **—** | ** ** | ** ** | **$** | **1,693** | ** ** |
| Accounts receivable, net                      | ** ** | ** **                                    | **3,682**   | ** **                                   | ** ** | ** ** | **(2,163** | **)** | ** ** | **1,519** | ** ** | ** ** | **2,637** | ** ** | ** ** | ** ** | **(1,845** | **)** | ** ** | **792** | ** ** |
| Inventories, net                              | ** ** | ** **                                    | **602**     | ** **                                   | ** ** | ** ** | **2,248** | ** ** | ** ** | **2,850** | ** ** | ** ** | **937** | ** ** | ** ** | ** ** | **1,798** | ** ** | ** ** | **2,735** | ** ** |
| Prepaid expenses and other current assets     | ** ** | ** **                                    | **204**     | ** **                                   | ** ** | ** ** | **—** | ** ** | ** ** | **204** | ** ** | ** ** | **257** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **257** | ** ** |
| Deferred tax asset                            | ** ** | ** **                                    | **195**     | ** **                                   | ** ** | ** ** | **(195** | **)** | ** ** | **—** | ** ** | ** ** | **195** | ** ** | ** ** | ** ** | **(195** | **)** | ** ** | **—** | ** ** |
| Total current assets                          | ** ** | ** **                                    | **6,368**   | ** **                                   | ** ** | ** ** | **(110** | **)** | ** ** | **6,258** | ** ** | ** ** | **5,719** | ** ** | ** ** | ** ** | **(242** | **)** | ** ** | **5,477** | ** ** |
| **Property  and equipment, net**              | ** ** | ** **                                    | **118**     | ** **                                   | ** ** | ** ** | **0** | ** ** | ** ** | **118** | ** ** | ** ** | **121** | ** ** | ** ** | ** ** | **0** | ** ** | ** ** | **121** | ** ** |
| **Other assets**                              |       |                                          |        | ** **                                   |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Patent, net                                   | ** ** | ** **                                    | **98**      | ** **                                   | ** ** | ** ** | **—** | ** ** | ** ** | **98** | ** ** | ** ** | **107** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **107** | ** ** |
| Other intangible assets                       | ** ** | ** **                                    | **62**      | ** **                                   | ** ** | ** ** | **(59** | **)** | ** ** | **3** | ** ** | ** ** | **173** | ** ** | ** ** | ** ** | **(59** | **)** | ** ** | **114** | ** ** |
|                                          | ** ** | ** **                                    | **$**       | **6,646**                                    | ** ** | ** ** | ** ** | **$** | **(169** | **)** | ** ** | **$** | **6,477** | ** ** | ** ** | **$** | **6,120** | ** ** | ** ** | ** ** | **$** | **(301** | **)** | ** ** | **$** | **5,819** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |       |
| **Current liabilities**                       |       |                                          |        | ** **                                   |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Accounts payable and accrued expenses         | ** ** | ** **                                    | **$**       | **1,012**                                    | ** ** | ** ** | ** ** | **$** | **12** | ** ** | ** ** | **$** | **1,024** | ** ** | ** ** | **$** | **710** | ** ** | ** ** | ** ** | **$** | **11** | ** ** | ** ** | **$** | **721** | ** ** |
| Deferred distributor revenue                  | ** ** | ** **                                    | **—**  | ** **                                   | ** ** | ** ** | **1,556** | ** ** | ** ** | **1,556** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **2,012** | ** ** | ** ** | **2,012** | ** ** |
| Deferred contract revenue                     | ** ** | ** **                                    | **—**  | ** **                                   | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** |
| Deferred warranty                             | ** ** | ** **                                    | **—**  | ** **                                   | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** |
| Total current liabilities                     | ** ** | ** **                                    | **1,012**   | ** **                                   | ** ** | ** ** | **1,568** | ** ** | ** ** | **2,580** | ** ** | ** ** | **710** | ** ** | ** ** | ** ** | **2,023** | ** ** | ** ** | **2,733** | ** ** |
| **Stockholders’ equity**                 |       |                                          |        | ** **                                   |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Common stock                                  | ** ** | ** **                                    | **113**     | ** **                                   | ** ** | ** ** | **—** | ** ** | ** ** | **113** | ** ** | ** ** | **114** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **114** | ** ** |
| Additional paid-in capital                    | ** ** | ** **                                    | **16,252**  | ** **                                   | ** ** | ** ** | **—** | ** ** | ** ** | **16,252** | ** ** | ** ** | **16,403** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **16,403** | ** ** |
| Accumulated deficit                           | ** ** | ** **                                    | **(10,731** | **)**                                        | ** ** | ** ** | **(1,737** | **)** | ** ** | **(12,468** | **)** | ** ** | **(11,107** | **)** | ** ** | ** ** | **(2,324** | **)** |   |   |   |
| Total stockholders’ equity               | ** ** | ** **                                    | **5,634**   | ** **                                   | ** ** | ** ** | **(1,737** | **)** | ** ** | **3,897** | ** ** | ** ** | **5,410** | ** ** | ** ** | ** ** | **(2,324** | **)** | ** ** | **3,086** | ** ** |
|                                          | ** ** | ** **                                    | **$**       | **6,646**                                    | ** ** | ** ** | ** ** | **$** | **(169** | **)** | ** ** | **$** | **6,477** | ** ** | ** ** | **$** | **6,120** | ** ** | ** ** | ** ** | **$** | **(301** | **)** | ** ** | **$** | **5,819** | ** ** |

----

(1)          As previously reportedin the Company’s Quarterly Reports on Form 10-QSB for the quarters ended March31, 2003, June 30, 2003, September 30, 2003, December 31, 2003, March 31, 2004,June 30, 2004, September 30, 2004 and December 31, 2004.

(2)          See paragraph followingrestatement tables for a description of the restatement adjustments.

F-22

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**17.**   SupplementaryFinancial Information (Continued)

**BALANCE SHEETS**

**(in thousands)**
| ** **                                    | ** ** | ** **                                        | ** **  | **Audited**          | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------|-------------|----------------------|------------|
| ** **                                    | ** ** | **September 30, 2004 (Unaudited)** | ** **  | **4th Quarter** | ** ** |
| ** **                                    | ** ** | **Previously**                                    | ** **  | **Restatement**      | ** ** | **Restated** | ** ** | **Ended** | ** ** |
| ** **                                    | ** ** | **Reported(1)**                                   | ** **  | **Adjustment(2)**    | ** ** | **Total** | ** ** | **31-Dec-04** | ** ** |
| **ASSETS**                                    |       |                                              |        | ** **           |       |   |   | ** ** |   |   |   |   |   | ** ** |   |
| **Current assets**                            |       |                                              |        | ** **           |       |   |   | ** ** |   |   |   |   |   | ** ** |   |
| Cash and cash equivalents                     | ** ** | ** **                                        | **$**       | **2,511**            | ** ** | ** ** | ** ** | **$** | **—** | ** ** | ** ** | **$** | **2,511** | ** ** | ** ** | **$** | **1,887** | ** ** |   |
| Accounts receivable, net                      | ** ** | ** **                                        | **3,297**   | ** **           | ** ** | ** ** | **(2,247** | **)** | ** ** | **1,050** | ** ** | ** ** | **533** | ** ** |   |
| Inventories, net                              | ** ** | ** **                                        | **1,845**   | ** **           | ** ** | ** ** | **1,404** | ** ** | ** ** | **3,249** | ** ** | ** ** | **2,725** | ** ** |   |
| Prepaid expenses and other current assets     | ** ** | ** **                                        | **221**     | ** **           | ** ** | ** ** | **—** | ** ** | ** ** | **221** | ** ** | ** ** | **253** | ** ** |   |
| Deferred tax asset                            | ** ** | ** **                                        | **195**     | ** **           | ** ** | ** ** | **(195** | **)** | ** ** | **—** | ** ** | ** ** | **—** | ** ** |   |
| Total current assets                          | ** ** | ** **                                        | **8,069**   | ** **           | ** ** | ** ** | **(1,038** | **)** | ** ** | **7,031** | ** ** | ** ** | **5,398** | ** ** |   |
| **Property  and equipment, net**              | ** ** | ** **                                        | **114**     | ** **           | ** ** | ** ** | **0** | ** ** | ** ** | **114** | ** ** | ** ** | **103** | ** ** |   |
| **Other  assets**                             |       |                                              |        | ** **           |       |   |   | ** ** |   |   |   |   |   | ** ** |   |
| Patents, net                                  | ** ** | ** **                                        | **109**     | ** **           | ** ** | ** ** | **—** | ** ** | ** ** | **109** | ** ** | ** ** | **212** | ** ** |   |
| Other intangible assets                       | ** ** | ** **                                        | **173**     | ** **           | ** ** | ** ** | **(59** | **)** | ** ** | **114** | ** ** | ** ** | **—** | ** ** |   |
|                                          | ** ** | ** **                                        | **$**       | **8,465**            | ** ** | ** ** | ** ** | **$** | **(1,097** | **)** | ** ** | **$** | **7,368** | ** ** | ** ** | **$** | **5,713** | ** ** |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** | ** ** |                                              |
| **Current liabilities**                       |       |                                              |        | ** **           |       |   |   | ** ** |   |   |   |   |   | ** ** |   |
| Accounts payable and accrued expenses         | ** ** | ** **                                        | **$**       | **1,606**            | ** ** | ** ** | ** ** | **$** | **—** | ** ** | ** ** | **$** | **1,606** | ** ** | ** ** | **$** | **1,107** | ** ** |   |
| Deferred distributor revenue                  | ** ** | ** **                                        | **—**  | ** **           | ** ** | ** ** | **1,354** | ** ** | ** ** | **1,354** | ** ** | ** ** | **1,955** | ** ** |   |
| Deferred contract revenue                     | ** ** | ** **                                        | **96**      | ** **           | ** ** | ** ** | **—** | ** ** | ** ** | **96** | ** ** | ** ** | **96** | ** ** |   |
| Deferred warranty                             | ** ** | ** **                                        | **—**  | ** **           | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** |   |
| Total current liabilities                     | ** ** | ** **                                        | **1,702**   | ** **           | ** ** | ** ** | **1,354** | ** ** | ** ** | **3,056** | ** ** | ** ** | **3,158** | ** ** |   |
| **Stockholders’  equity**                |       |                                              |        | ** **           |       |   |   | ** ** |   |   |   |   |   | ** ** |   |
| Common stock                                  | ** ** | ** **                                        | **118**     | ** **           | ** ** | ** ** | **—** | ** ** | ** ** | **118** | ** ** | ** ** | **118** | ** ** |   |
| Additional paid-in capital                    | ** ** | ** **                                        | **18,074**  | ** **           | ** ** | ** ** | **—** | ** ** | ** ** | **18,074** | ** ** | ** ** | **18,073** | ** ** |   |
| Accumulated deficit                           | ** ** | ** **                                        | **(11,429** | **)**                | ** ** | ** ** | **(2,451** | **)** | ** ** | **(13,880** | **)** | ** ** | **(15,636** | **)** |   |
| Total stockholders’ equity               | ** ** | ** **                                        | **6,763**   | ** **           | ** ** | ** ** | **(2,451** | **)** | ** ** | **4,312** | ** ** | ** ** | **2,555** | ** ** |   |
|                                          | ** ** | ** **                                        | **$**       | **8,465**            | ** ** | ** ** | ** ** | **$** | **(1,097** | **)** | ** ** | **7,368** | ** ** | ** ** | **$** | **5,713** | ** ** |   |

----

(1)          As previously reportedin the Company’s Quarterly Reports on Form 10-QSB for the quarters ended March31, 2003, June 30, 2003, September 30, 2003, December 31, 2003, March 31, 2004,June 30, 2004, September 30, 2004 and December 31, 2004.

(2)          See paragraph followingrestatement tables for a description of the restatement adjustments.

F-23

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**17.**   SupplementaryFinancial Information (Continued)

**BALANCE SHEETS**

**(in thousands)**
| ** **                                    | ** ** | **March 31, 2003 (Unaudited)** | ** **  | **June 30, 2003 (Unaudited)** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------|-------------|----------------------------------------------|------------|
| ** **                                    | ** ** | **Previously**                                | ** **  | **Restatement**                              | ** ** | **Restated** | ** ** | **Previously** | ** ** | **Restatement** | ** ** | **Restated** | ** ** |
| ** **                                    | ** ** | **Reported(1)**                               | ** **  | **Adjustment(2)**                            | ** ** | **Total** | ** ** | **Reported(1)** | ** ** | **Adjustment(2)** | ** ** | **Total** | ** ** |
| **ASSETS**                                    | ** ** |                                          | ** **  | ** **                                   |       |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| **Current assets**                            |       |                                          | ** **  | ** **                                   |       |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Cash and cash equivalents                     | ** ** |                                          | **$**       | **613**                                      | ** ** |   |   | **$** | **—** | ** ** |   | **$** | **613** | ** ** |   | **$** | **871** | ** ** |   |   | **$** | **—** | ** ** |   | **$** | **871** | ** ** |
| Accounts receivable, net                      | ** ** |                                          | **2,467**   | ** **                                   |       |   | **(936** | **)** |   | **1,531** | ** ** |   | **3,307** | ** ** |   |   | **(1,979** | **)** |   | **1,328** | ** ** |
| Inventories, net                              | ** ** |                                          | **220**     | ** **                                   |       |   | **1,070** | ** ** |   | **1,290** | ** ** |   | **834** | ** ** |   |   | **1,567** | ** ** |   | **2,401** | ** ** |
| Prepaid expenses and other current assets     | ** ** |                                          | **104**     | ** **                                   |       |   | **—** | ** ** |   | **104** | ** ** |   | **162** | ** ** |   |   | **—** | ** ** |   | **162** | ** ** |
| Deferred tax asset                            | ** ** |                                          | **—**  | ** **                                   |       |   | **—** | ** ** |   | **—** | ** ** |   | **—** | ** ** |   |   | **—** | ** ** |   | **—** | ** ** |
| Total current assets                          | ** ** |                                          | **3,404**   | ** **                                   |       |   | **134** | ** ** |   | **3,538** | ** ** |   | **5,174** | ** ** |   |   | **(412** | **)** |   | **4,762** | ** ** |
| **Property  and equipment, net**              | ** ** |                                          | **135**     | ** **                                   |       |   | **—** | ** ** |   | **135** | ** ** |   | **129** | ** ** |   |   | **—** | ** ** |   | **129** | ** ** |
| **Other  assets**                             |       |                                          | ** **  | ** **                                   |       |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Patents, net                                  | ** ** |                                          | **92**      | ** **                                   |       |   | **—** | ** ** |   | **92** | ** ** |   | **90** | ** ** |   |   | **—** | ** ** |   | **90** | ** ** |
| Other intangible assets                       | ** ** |                                          | **—**  | ** **                                   |       |   | **—** | ** ** |   | **—** | ** ** |   | **—** | ** ** |   |   | **—** | ** ** |   | **—** | ** ** |
|                                          | ** ** |                                          | **$**       | **3,631**                                    | ** ** |   |   | **$** | **134** | ** ** |   | **$** | **3,765** | ** ** |   | **$** | **5,393** | ** ** |   |   | **$** | **(412** | **)** |   | **$** | **4,981** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** | ** ** |                                          |        |                                         |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| **Current liabilities**                       |       |                                          | ** **  | ** **                                   |       |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Accounts payable and accrued expenses         | ** ** |                                          | **$**       | **1,251**                                    | ** ** |   |   | **$** | **(56** | **)** |   | **$** | **1,195** | ** ** |   | **$** | **2,061** | ** ** |   |   | **$** | **—** | ** ** |   | **$** | **2,061** | ** ** |
| Bank line of credit                           | ** ** |                                          | **—**  | ** **                                   |       |   | **—** | ** ** |   | **—** | ** ** |   | **400** | ** ** |   |   | **—** | ** ** |   | **400** | ** ** |
| Deposit for common stock to be issued         | ** ** |                                          | **—**  | ** **                                   |       |   | **—** | ** ** |   | **—** | ** ** |   | **300** | ** ** |   |   | **—** | ** ** |   | **300** | ** ** |
| Deferred distributor revenue                  | ** ** |                                          | **—**  | ** **                                   |       |   | **1,144** | ** ** |   | **1,144** | ** ** |   | **—** | ** ** |   |   | **786** | ** ** |   | **786** | ** ** |
| Deferred contract revenue                     | ** ** |                                          | **—**  | ** **                                   |       |   | **—** | ** ** |   | **—** | ** ** |   | **—** | ** ** |   |   | **—** | ** ** |   | **—** | ** ** |
| Total current liabilities                     | ** ** |                                          | **1,251**   | ** **                                   |       |   | **1,088** | ** ** |   | **2,339** | ** ** |   | **2,761** | ** ** |   |   | **786** | ** ** |   | **3,547** | ** ** |
| **Stockholders’  equity**                |       |                                          | ** **  | ** **                                   |       |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Common stock                                  | ** ** |                                          | **54**      | ** **                                   |       |   | **—** | ** ** |   | **54** | ** ** |   | **54** | ** ** |   |   | **—** | ** ** |   | **54** | ** ** |
| Additional paid-in capital                    | ** ** |                                          | **13,640**  | ** **                                   |       |   | **—** | ** ** |   | **13,640** | ** ** |   | **13,650** | ** ** |   |   | **—** | ** ** |   | **13,650** | ** ** |
| Accumulated deficit                           | ** ** |                                          | **(11,314** | **)**                                        |       |   | **(954** | **)** |   | **(12,268** | **)** |   | **(11,072** | **)** |   |   | **(1,198** | **)** |   | **(12,270** | **)** |
| Total stockholders’ equity               | ** ** |                                          | **2,380**   | ** **                                   |       |   | **(954** | **)** |   | **1,426** | ** ** |   | **2,632** | ** ** |   |   | **(1,198** | **)** |   | **1,434** | ** ** |
|                                          | ** ** |                                          | **$**       | **3,631**                                    | ** ** |   |   | **$** | **134** | ** ** |   | **$** | **3,765** | ** ** |   | **$** | **5,393** | ** ** |   |   | **$** | **(412** | **)** |   | **$** | **4,981** | ** ** |

----

(1)          As previously reportedin the Company’s Quarterly Reports on Form 10-QSB for the quarters ended March31, 2003, June 30, 2003, September 30, 2003, December 31, 2003, March 31, 2004,June 30, 2004, September 30, 2004 and December 31, 2004.

(2)          See paragraph followingrestatement tables for a description of the restatement adjustments.

F-24

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**17.**   SupplementaryFinancial Information (Continued)

**BALANCE SHEETS**

**(in thousands)**
| ** **                                    | ** ** | **September 30, 2003 (Unaudited)** | ** **  | **December 31, 2003 (Audited)** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------|-------------|------------------------------------------------|------------|
| ** **                                    | ** ** | **Previously**                                    | ** **  | **Restatement**                                | ** ** | **Restated** | ** ** | **Previously** | ** ** | **Restatement** | ** ** | **Restated** | ** ** |
| ** **                                    | ** ** | **Reported(1)**                                   | ** **  | **Adjustment(2)**                              | ** ** | **Total** | ** ** | **Reported(1)** | ** ** | **Adjustment(2)** | ** ** | **Total** | ** ** |
| **ASSETS**                                    |       |                                              |        | ** **                                     |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| **Current assets**                            |       |                                              |        | ** **                                     |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Cash and cash  equivalents                    | ** ** | ** **                                        | **$**       | **988**                                        | ** ** | ** ** | ** ** | **$** | **—** | ** ** | ** ** | **$** | **988** | ** ** | ** ** | **$** | **2,524** | ** ** | ** ** | ** ** | **$** | **—** | ** ** | ** ** | **$** | **2,524** | ** ** |
| Accounts receivable, net                      | ** ** | ** **                                        | **4,008**   | ** **                                     | ** ** | ** ** | **(2,060** | **)** | ** ** | **1,948** | ** ** | ** ** | **3,523** | ** ** | ** ** | ** ** | **(1,704** | **)** | ** ** | **1,819** | ** ** |
| Inventories, net                              | ** ** | ** **                                        | **974**     | ** **                                     | ** ** | ** ** | **1,633** | ** ** | ** ** | **2,607** | ** ** | ** ** | **724** | ** ** | ** ** | ** ** | **2,145** | ** ** | ** ** | **2,869** | ** ** |
| Prepaid expenses and  other current assets    | ** ** | ** **                                        | **197**     | ** **                                     | ** ** | ** ** | **—** | ** ** | ** ** | **197** | ** ** | ** ** | **180** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **180** | ** ** |
| Deferred tax asset                            | ** ** | ** **                                        | **—**  | ** **                                     | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | **195** | ** ** | ** ** | ** ** | **(195** | **)** | ** ** | **—** | ** ** |
| Total current assets                          | ** ** | ** **                                        | **6,167**   | ** **                                     | ** ** | ** ** | **(427** | **)** | ** ** | **5,740** | ** ** | ** ** | **7,146** | ** ** | ** ** | ** ** | **246** | ** ** | ** ** | **7,392** | ** ** |
| **Property  and equipment, net**              | ** ** | ** **                                        | **126**     | ** **                                     | ** ** | ** ** | **—** | ** ** | ** ** | **126** | ** ** | ** ** | **129** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **129** | ** ** |
| **Other assets**                              |       |                                              |        | ** **                                     |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Patents, net                                  | ** ** | ** **                                        | **88**      | ** **                                     | ** ** | ** ** | **—** | ** ** | ** ** | **88** | ** ** | ** ** | **87** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **87** | ** ** |
| Other intangible assets                       | ** ** | ** **                                        | **—**  | ** **                                     | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | **37** | ** ** | ** ** | ** ** | **(37** | **)** | ** ** | **—** | ** ** |
|                                          | ** ** | ** **                                        | **$**       | **6,381**                                      | ** ** | ** ** | ** ** | **$** | **(427** | **)** | ** ** | **$** | **5,954** | ** ** | ** ** | **$** | **7,399** | ** ** | ** ** | ** ** | **$** | **209** | ** ** | ** ** | **$** | **7,608** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |       |                                              |        |                                           |       | ** ** |   |   |   | ** ** |   |   |   |
| **Current liabilities**                       |       |                                              |        | ** **                                     |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Accounts payable and  accrued expenses        | ** ** | ** **                                        | **$**       | **1,622**                                      | ** ** | ** ** | ** ** | **$** | **—** | ** ** | ** ** | **$** | **1,622** | ** ** | ** ** | **$** | **1,532** | ** ** | ** ** | ** ** | **$** | **34** | ** ** | ** ** | **$** | **1,566** | ** ** |
| Bank line of credit                           | ** ** | ** **                                        | **400**     | ** **                                     | ** ** | ** ** | **—** | ** ** | ** ** | **400** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** |
| Deposit for common stock  to be issued        | ** ** | ** **                                        | **—**  | ** **                                     | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** |
| Deferred distributor  revenue                 | ** ** | ** **                                        | **—**  | ** **                                     | ** ** | ** ** | **818** | ** ** | ** ** | **818** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **1,958** | ** ** | ** ** | **1,958** | ** ** |
| Deferred contract  revenue                    | ** ** | ** **                                        | **—**  | ** **                                     | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **50** | ** ** | ** ** | **50** | ** ** |
| Total current  liabilities                    | ** ** | ** **                                        | **2,022**   | ** **                                     | ** ** | ** ** | **818** | ** ** | ** ** | **2,840** | ** ** | ** ** | **1,532** | ** ** | ** ** | ** ** | **2,042** | ** ** | ** ** | **3,574** | ** ** |
| **Stockholders’ equity**                 |       |                                              |        | ** **                                     |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Common stock                                  | ** ** | ** **                                        | **56**      | ** **                                     | ** ** | ** ** | **—** | ** ** | ** ** | **56** | ** ** | ** ** | **113** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **113** | ** ** |
| Additional paid-in  capital                   | ** ** | ** **                                        | **15,050**  | ** **                                     | ** ** | ** ** | **—** | ** ** | ** ** | **15,050** | ** ** | ** ** | **16,172** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **16,172** | ** ** |
| Accumulated deficit                           | ** ** | ** **                                        | **(10,747** | **)**                                          | ** ** | ** ** | **(1,245** | **)** | ** ** | **(11,992** | **)** | ** ** | **(10,418** | **)** | ** ** | ** ** | **(1,833** | **)** | ** ** | **(12,251** | **)** |
| Total stockholders’  equity              | ** ** | ** **                                        | **4,359**   | ** **                                     | ** ** | ** ** | **(1,245** | **)** | ** ** | **3,114** | ** ** | ** ** | **5,867** | ** ** | ** ** | ** ** | **(1,833** | **)** | ** ** | **4,034** | ** ** |
|                                          | ** ** | ** **                                        | **$**       | **6,381**                                      | ** ** | ** ** | ** ** | **$** | **(427** | **)** | ** ** | **$** | **5,954** | ** ** | ** ** | **$** | **7,399** | ** ** | ** ** | ** ** | **$** | **209** | ** ** | ** ** | **$** | **7,608** | ** ** |

----

(1)          As previously reported inthe Company’s Quarterly Reports on Form 10-QSB for the quarters ended March 31,2003, June 30, 2003, September 30, 2003, December 31, 2003, March 31, 2004,June 30, 2004, September 30, 2004 and December 31, 2004.

(2)          See paragraph followingrestatement tables for a description of the restatement adjustments.

F-25

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**17.**   SupplementaryFinancial Information (unaudited) (Continued)

**CONSOLIDATEDSTATEMENT OF OPERATIONS**

**(inthousands, except per share data)**
| ** **                                                             | ** ** | **Three Months Ended March 31, 2004  (Unaudited)** | ** **  | **Three Months Ended June 30, 2004  (Unaudited)** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|-------------|----------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **Previously**                                                              | ** **  | **Restatement**                                                            | ** ** | **Restated** | ** ** | **Previously** | ** ** | **Restatement** | ** ** | **Restated** | ** ** |
| ** **                                                             | ** ** | **Reported(1)**                                                             | ** **  | **Adjustment(2)**                                                          | ** ** | **Total** | ** ** | **Reported(1)** | ** ** | **Adjustment(2)** | ** ** | **Total** | ** ** |
| **Revenues**                                                           |       |                                                                        |        | ** **                                                                 |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Product sales                                                          | ** ** | ** **                                                                  | **$**       | **1,697**                                                                  | ** ** | ** ** | ** ** | **$** | **(57** | **)** | ** ** | **$** | **1,640** | ** ** | ** ** | **$** | **1,036** | ** ** | ** ** | ** ** | **$** | **(137** | **)** | ** ** | **$** | **899** | ** ** |
| Royalties                                                              | ** ** | ** **                                                                  | **375**     | ** **                                                                 | ** ** | ** ** | **(169** | **)** | ** ** | **206** | ** ** | ** ** | **436** | ** ** | ** ** | ** ** | **(198** | **)** | ** ** | **238** | ** ** |
| Consulting                                                             | ** ** | ** **                                                                  | **254**     | ** **                                                                 | ** ** | ** ** | **50** | ** ** | ** ** | **304** | ** ** | ** ** | **200** | ** ** |   |   | — | ** ** | ** ** | **200** | ** ** |
|                                                                   | ** ** | ** **                                                                  | **2,326**   | ** **                                                                 | ** ** | ** ** | **(176** | **)** | ** ** | **2,150** | ** ** | ** ** | **1,672** | ** ** | ** ** | ** ** | **(335** | **)** | ** ** | **1,337** | ** ** |
| **Costs  and expenses**                                                |       |                                                                        |        | ** **                                                                 |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Product sales                                                          | ** ** | ** **                                                                  | **1,114**   | ** **                                                                 | ** ** | ** ** | **(103** | **)** | ** ** | **1,011** | ** ** | ** ** | **626** | ** ** | ** ** | ** ** | **451** | ** ** | ** ** | **1,077** | ** ** |
| Research and development                                               | ** ** | ** **                                                                  | **711**     | ** **                                                                 | ** ** | ** ** | **—** | ** ** | ** ** | **711** | ** ** | ** ** | **606** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **606** | ** ** |
| Selling, general and administrative                                    | ** ** | ** **                                                                  | **819**     | ** **                                                                 | ** ** | ** ** | **(169** | **)** | ** ** | **650** | ** ** | ** ** | **821** | ** ** | ** ** | ** ** | **(198** | **)** | ** ** | **623** | ** ** |
|                                                                   | ** ** | ** **                                                                  | **2,644**   | ** **                                                                 | ** ** | ** ** | **(272** | **)** | ** ** | **2,372** | ** ** | ** ** | **2,053** | ** ** | ** ** | ** ** | **253** | ** ** | ** ** | **2,306** | ** ** |
| **Operating loss**                                                     | ** ** | ** **                                                                  | **(318**    | **)**                                                                      | ** ** | ** ** | **96** | ** ** | ** ** | **(222** | **)** | ** ** | **(381** | **)** | ** ** | ** ** | **(588** | **)** | ** ** | **(969** | **)** |
| **Other  (expense) income**                                            |       |                                                                        |        | ** **                                                                 |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Interest expense                                                       | ** ** | ** **                                                                  | **—**  | ** **                                                                 | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** |
| Interest income                                                        | ** ** | ** **                                                                  | **5**       | ** **                                                                 | ** ** | ** ** | **—** | ** ** | ** ** | **5** | ** ** | ** ** | **6** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **6** | ** ** |
|                                                                   | ** ** | ** **                                                                  | **5**       | ** **                                                                 | ** ** | ** ** | **—** | ** ** | ** ** | **5** | ** ** | ** ** | **6** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **6** | ** ** |
| **Net Income (Loss) before Taxes**                                     | ** ** | ** **                                                                  | **(313**    | **)**                                                                      | ** ** | ** ** | **96** | ** ** | ** ** | **(217** | **)** | ** ** | **(375** | **)** | ** ** | ** ** | **(588** | **)** | ** ** | **(963** | **)** |
| **Income  Tax Benefit**                                                | ** ** | ** **                                                                  | **—**  | ** **                                                                 | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** |
| **Net (Loss) Income**                                                  | ** ** | ** **                                                                  | **(313**    | **)**                                                                      | ** ** | ** ** | **96** | ** ** | ** ** | **(217** | **)** | ** ** | **(375** | **)** | ** ** | ** ** | **(588** | **)** | ** ** | **(963** | **)** |
| Accumulated  deficit—beginning                                    | ** ** | ** **                                                                  | **(10,418** | **)**                                                                      | ** ** | ** ** | **(1,833** | **)** | ** ** | **(12,251** | **)** | ** ** | **(10,731** | **)** | ** ** | ** ** | **(1,737** | **)** | ** ** | **(12,468** | **)** |
| **Accumulated  deficit—ending**                                   | ** ** | ** **                                                                  | **$**       | **(10,731**                                                                | **)**      | ** ** | ** ** | **$** | **(1,737** | **)** | ** ** | **$** | **(12,468** | **)** | ** ** | **$** | **(11,107** | **)** | ** ** | ** ** | **$** | **(2,325** | **)** | ** ** | **$** | **(13,431** | **)** |
| **Basic  and diluted loss per common share**                           | ** ** | ** **                                                                  | **$**       | **(0.03**                                                                  | **)**      | ** ** | ** ** | **$** | **0.01** | ** ** | ** ** | **$** | **(0.02** | **)** | ** ** | **$** | **(0.03** | **)** | ** ** | ** ** | **$** | **(0.05** | **)** | ** ** | **$** | **(0.08** | **)** |
| **Weighted average common shares outstanding—basic and  diluted** |       | ** **                                                                  | **11,338**  | ** **                                                                 |       |   |   | ** ** |   |   | ** ** | ** ** | **11,381** | ** ** |   |   |   | ** ** |   |   |   |

----

(1)          As previously reportedin the Company’s Quarterly Reports on Form 10-QSB for the quarters ended March31, 2003, June 30, 2003, September 30, 2003, December 31, 2003, March 31, 2004,June 30, 2004, September 30, 2004 and December 31, 2004. 

(2)          See paragraph followingrestatement tables for a description of the restatement adjustments.

F-26

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**17.**   SupplementaryFinancial Information (unaudited) (Continued)

**CONSOLIDATEDSTATEMENT OF OPERATIONS**

**(inthousands, except per share data)**
| ** **                                                             | ** ** | **Three Months Ended September 30, 2004  (Unaudited)** | ** **  | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|-------------|----------------------------------|------------|
| ** **                                                             | ** ** | **Previously**                                                                  | ** **  | **Restatement**                  | ** ** | **Restated** | ** ** | **December 31, 2004** | ** ** |
| ** **                                                             | ** ** | **Reported(1)**                                                                 | ** **  | **Adjustment(2)**                | ** ** | **Total** | ** ** | **Audited** | ** ** |
| **Revenues**                                                           | ** ** |                                                                            | ** **  | ** **                       |       |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Product sales                                                          | ** ** |                                                                            | **$**       | **1,133**                        | ** ** |   |   | **$** | **257** | ** ** |   | **$** | **1,390** | ** ** |   | **$** | **458** | ** ** |   |
| Royalties                                                              | ** ** |                                                                            | **790**     | ** **                       |       |   | **(344** | **)** |   | **446** | ** ** |   | **167** | ** ** |   |
| Consulting                                                             | ** ** |                                                                            | **161**     | ** **                       |       |   | — | ** ** |   | **161** | ** ** |   | **50** | ** ** |   |
| ** **                                                             | ** ** |                                                                            | **2,084**   | ** **                       |       |   | **(87** | **)** |   | **1,997** | ** ** |   | **675** | ** ** |   |
| **Costs and  expenses**                                                | ** ** |                                                                            | ** **  | ** **                       |       |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Product sales                                                          | ** ** |                                                                            | **760**     | ** **                       |       |   | **394** | ** ** |   | **1,154** | ** ** |   | **651** | ** ** |   |
| Research and development                                               | ** ** |                                                                            | **664**     | ** **                       |       |   | **—** | ** ** |   | **664** | ** ** |   | **847** | ** ** |   |
| Selling, general and administrative                                    | ** ** |                                                                            | **988**     | ** **                       |       |   | **(355** | **)** |   | **633** | ** ** |   | **940** | ** ** |   |
| ** **                                                             | ** ** |                                                                            | **2,412**   | ** **                       |       |   | **39** | ** ** |   | **2,451** | ** ** |   | **2,438** | ** ** |   |
| **Operating loss**                                                     | ** ** |                                                                            | **(328**    | **)**                            |       |   | **(126** | **)** |   | **(454** | **)** |   | **(1,763** | **)** |   |
| **Other  (expense) income**                                            | ** ** |                                                                            | ** **  | ** **                       |       |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Interest expense                                                       | ** ** |                                                                            | **—**  | ** **                       |       |   | **—** | ** ** |   | **—** | ** ** |   | **—** | ** ** |   |
| Interest income                                                        | ** ** |                                                                            | **5**       | ** **                       |       |   | **—** | ** ** |   | **5** | ** ** |   | **7** | ** ** |   |
|                                                                   | ** ** |                                                                            | **5**       | ** **                       |       |   | **—** | ** ** |   | **5** | ** ** |   | **7** | ** ** |   |
| **Net Income (Loss) before Taxes**                                     | ** ** |                                                                            | **(323**    | **)**                            |       |   | **(126** | **)** |   | **(449** | **)** |   | **(1,756** | **)** |   |
| **Income  Tax Benefit**                                                | ** ** |                                                                            | **—**  | ** **                       |       |   | **—** | ** ** |   | **—** | ** ** |   | **—** | ** ** |   |
| **Net (Loss) Income**                                                  | ** ** |                                                                            | **(323**    | **)**                            |       |   | **(126** | **)** |   | **(449** | **)** |   | **(1,756** | **)** |   |
| Accumulated  deficit—beginning                                    | ** ** |                                                                            | **(11,107** | **)**                            |       |   | **(2,324** | **)** |   | **(13,431** | **)** |   | **(13,880** | **)** |   |
| **Accumulated  deficit—ending**                                   | ** ** |                                                                            | **$**       | **(11,429**                      | **)**      |   |   | **$** | **(2,450** | **)** |   | **$** | **(13,880** | **)** |   | **$** | **(15,636** | **)** |   |
| **Basic  and diluted loss per common share**                           | ** ** |                                                                            | **$**       | **(0.03**                        | **)**      |   |   | **$** | **(0.03** | **)** |   | **$** | **(0.06** | **)** |   | **$** | **(0.15** | **)** |   |
| **Weighted average common shares  outstanding—basic and diluted** | ** ** |                                                                            | **11,566**  | ** **                       |       |   | ** ** | ** ** |   | ** ** | ** ** |   | **11,524** | ** ** |   |

----

(1)   Aspreviously reported in the Company’s Quarterly Reports on Form 10-QSBfor the quarters ended March 31, 2003, June 30, 2003, September 30,2003, December 31, 2003, March 31, 2004, June 30, 2004, September 30,2004 and December 31, 2004.

(2)   See paragraph following restatement tables for a description ofthe restatement adjustments.

F-27

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**17.**   SupplementaryFinancial Information (Continued)

**CONSOLIDATEDSTATEMENT OF OPERATIONS**

**(inthousands, except per share data)**
| ** **                                     | ** ** | **Three Months Ended March 31, 2003  (Unaudited)** | ** **  | **Three Months Ended June 30,  2003 (Unaudited)** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------------|-------------|-----------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Previously**                                                              | ** **  | **Restatement**                                                       | ** ** | **Restated** | ** ** | **Previously** | ** ** | **Restatement** | ** ** | **Restated** | ** ** |
| ** **                                     | ** ** | **Reported(1)**                                                             | ** **  | **Adjustment(2)**                                                     | ** ** | **Total** | ** ** | **Reported(1)** | ** ** | **Adjustment(2)** | ** ** | **Total** | ** ** |
| **Revenues**                                   |       |                                                                        |        | ** **                                                            |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Product sales                                  | ** ** | ** **                                                                  | **$**       | **1,520**                                                             | ** ** | ** ** | ** ** | **$** | **52** | ** ** | ** ** | **$** | **1,572** | ** ** | ** ** | **$** | **2,685** | ** ** | ** ** | ** ** | **$** | **(740** | **)** | ** ** | **$** | **1,945** | ** ** |
| Royalties                                      | ** ** | ** **                                                                  | **320**     | ** **                                                            | ** ** | ** ** | **—** | ** ** | ** ** | **320** | ** ** | ** ** | **347** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **347** | ** ** |
| Consulting                                     | ** ** | ** **                                                                  | **—**  | ** **                                                            | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** |
|                                           | ** ** | ** **                                                                  | **1,840**   | ** **                                                            | ** ** | ** ** | **52** | ** ** | ** ** | **1,892** | ** ** | ** ** | **3,032** | ** ** | ** ** | ** ** | **(740** | **)** | ** ** | **2,292** | ** ** |
| **Costs and expenses**                         |       |                                                                        |        | ** **                                                            |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Product sales                                  | ** ** | ** **                                                                  | **1,068**   | ** **                                                            | ** ** | ** ** | **200** | ** ** | ** ** | **1,268** | ** ** | ** ** | **1,865** | ** ** | ** ** | ** ** | **(496** | **)** | ** ** | **1,369** | ** ** |
| Research and development                       | ** ** | ** **                                                                  | **357**     | ** **                                                            | ** ** | ** ** | **—** | ** ** | ** ** | **357** | ** ** | ** ** | **379** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **379** | ** ** |
| Selling, general and  administrative           | ** ** | ** **                                                                  | **557**     | ** **                                                            | ** ** | ** ** | **—** | ** ** | ** ** | **557** | ** ** | ** ** | **547** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **547** | ** ** |
|                                           | ** ** | ** **                                                                  | **1,982**   | ** **                                                            | ** ** | ** ** | **200** | ** ** | ** ** | **2,182** | ** ** | ** ** | **2,791** | ** ** | ** ** | ** ** | **(496** | **)** | ** ** | **2,295** | ** ** |
| **Operating  loss**                            | ** ** | ** **                                                                  | **(142**    | **)**                                                                 | ** ** | ** ** | **(148** | **)** | ** ** | **(290** | **)** | ** ** | **241** | ** ** | ** ** | ** ** | **(244** | **)** | ** ** | **(3** | **)** |
| **Other (expense) income**                     |       |                                                                        |        | ** **                                                            |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| Interest expense                               | ** ** | ** **                                                                  | **—**  | ** **                                                            | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** |
| Interest income                                | ** ** | ** **                                                                  | **3**       | ** **                                                            | ** ** | ** ** | **—** | ** ** | ** ** | **3** | ** ** | ** ** | **1** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **1** | ** ** |
|                                           | ** ** | ** **                                                                  | **3**       | ** **                                                            | ** ** | ** ** | **—** | ** ** | ** ** | **3** | ** ** | ** ** | **1** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **1** | ** ** |
| **Net  Income (Loss) before Taxes**            | ** ** | ** **                                                                  | **(139**    | **)**                                                                 | ** ** | ** ** | **(148** | **)** | ** ** | **(287** | **)** | ** ** | **242** | ** ** | ** ** | ** ** | **(244** | **)** | ** ** | **(2** | **)** |
| **Income Tax Benefit**                         | ** ** | ** **                                                                  | **—**  | ** **                                                            | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **—** | ** ** |
| **Net (Loss) Income**                          | ** ** | ** **                                                                  | **(139**    | **)**                                                                 | ** ** | ** ** | **(148** | **)** | ** ** | **(287** | **)** | ** ** | **242** | ** ** | ** ** | ** ** | **(244** | **)** | ** ** | **(2** | **)** |
| Accumulated deficit—beginning             | ** ** | ** **                                                                  | **(11,175** | **)**                                                                 | ** ** | ** ** | **(806** | **)** | ** ** | **(11,981** | **)** | ** ** | **(11,314** | **)** | ** ** | ** ** | **(954** | **)** | ** ** | **(12,268** | **)** |
| **Accumulated deficit—ending**            | ** ** | ** **                                                                  | **$**       | **(11,314**                                                           | **)**      | ** ** | ** ** | **$** | **(954** | **)** | ** ** | **$** | **(12,268** | **)** | ** ** | **$** | **(11,072** | **)** | ** ** | ** ** | **$** | **(1,198** | **)** | ** ** | **$** | **(12,270** | **)** |
| **Income (loss) per common share**             |       |                                                                        |        | ** **                                                            |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| **Basic**                                      | ** ** | ** **                                                                  | **$**       | **(0.01**                                                             | **)**      | ** ** | ** ** | **$** | **(0.02** | **)** | ** ** | **$** | **(0.03** | **)** | ** ** | **$** | **0.02** | ** ** | ** ** | ** ** | **$** | **(0.02** | **)** | ** ** | **$** | **(0.00** | **)** |
| **Diluted**                                    | ** ** | ** **                                                                  | **$**       | **(0.01**                                                             | **)**      | ** ** | ** ** | **$** | **(0.02** | **)** | ** ** | **$** | **(0.03** | **)** | ** ** | **$** | **0.02** | ** ** | ** ** | ** ** | **$** | **(0.02** | **)** | ** ** | **$** | **(0.00** | **)** |
| **Weighted average common shares outstanding** |       |                                                                        |        | ** **                                                            |       |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   |
| **Basic**                                      | ** ** | ** **                                                                  | **10,750**  | ** **                                                            |       |   |   | ** ** |   |   | ** ** | ** ** | **10,752** | ** ** |   |   |   | ** ** |   |   |   |
| **Diluted**                                    | ** ** | ** **                                                                  | **10,750**  | ** **                                                            |       |   |   | ** ** |   |   | ** ** | ** ** | **10,752** | ** ** |   |   |   | ** ** |   |   |   |

----

(1)          As previously reportedin the Company’s Quarterly Reports on Form 10-QSB for the quarters ended March31, 2003, June 30, 2003, September 30, 2003, December 31, 2003, March 31, 2004,June 30, 2004, September 30, 2004 and December 31, 2004. 

(2)          See paragraph followingrestatement tables for a description of the restatement adjustments.

F-28

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**17.**   SupplementaryFinancial Information (Continued)

**CONSOLIDATEDSTATEMENT OF OPERATIONS**

**(inthousands, except per share data)**
| ** **                                      | ** ** | **Three Months Ended September 30, 2003  (Unaudited)** | ** **  | **Three Months Ended December 31, 2003  (Audited)** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------------------------|-------------|------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Previously**                                                                  | ** **  | **Restatement**                                                              | ** ** | **Restated** | ** ** | **Previously** | ** ** | **Restatement** | ** ** | **Restated** | ** ** |
| ** **                                      | ** ** | **Reported(1)**                                                                 | ** **  | **Adjustment(2)**                                                            | ** ** | **Total** | ** ** | **Reported(1)** | ** ** | **Adjustment(2)** | ** ** | **Total** | ** ** |
| **Revenues**                                    |       |                                                                            | ** **  | ** **                                                                   |       |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Product sales                                   |       |                                                                            | **$**       | **2,626**                                                                    | ** ** |   |   | **$** | **(113** | **)** |   | **$** | **2,513** | ** ** |   | **$** | **2,491** | ** ** |   |   | **$** | **(764** | **)** |   | **$** | **1,727** | ** ** |
| Royalties                                       |       |                                                                            | **489**     | ** **                                                                   |       |   | **—** | ** ** |   | **489** |   |   | **606** | ** ** |   |   | **—** | ** ** |   | **606** | ** ** |
| Consulting                                      |       |                                                                            | **—**  | ** **                                                                   |       |   | **—** | ** ** |   | **—** |   |   | **50** | ** ** |   |   | **(50** | **)** |   | **—** | ** ** |
|                                            |       |                                                                            | **3,115**   | ** **                                                                   |       |   | **(113** | **)** |   | **3,002** |   |   | **3,147** | ** ** |   |   | **(814** | **)** |   | **2,333** | ** ** |
| **Costs  and expenses**                         |       |                                                                            | ** **  | ** **                                                                   |       |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Product sales                                   |       |                                                                            | **1,858**   | ** **                                                                   |       |   | **(66** | **)** |   | **1,792** |   |   | **1,802** | ** ** |   |   | **(520** | **)** |   | **1,282** | ** ** |
| Research and development                        |       |                                                                            | **434**     | ** **                                                                   |       |   | **—** | ** ** |   | **434** |   |   | **512** | ** ** |   |   | **—** | ** ** |   | **512** | ** ** |
| Selling, general and administrative             |       |                                                                            | **494**     | ** **                                                                   |       |   | **—** | ** ** |   | **494** |   |   | **702** | ** ** |   |   | **99** | ** ** |   | **801** | ** ** |
|                                            |       |                                                                            | **2,786**   | ** **                                                                   |       |   | **(66** | **)** |   | **2,720** |   |   | **3,016** | ** ** |   |   | **(421** | **)** |   | **2,595** | ** ** |
| **Operating loss**                              |       |                                                                            | **329**     | ** **                                                                   |       |   | **(47** | **)** |   | **282** |   |   | **131** | ** ** |   |   | **(393** | **)** |   | **(262** | **)** |
| **Other  (expense) income**                     |       |                                                                            | ** **  | ** **                                                                   |       |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Interest expense                                |       |                                                                            | **(7**      | **)**                                                                        |       |   | **—** | ** ** |   | **(7** | **)** |   | **(2** | **)** |   |   | **—** | ** ** |   | **(2** | **)** |
| Interest income                                 |       |                                                                            | **3**       | ** **                                                                   |       |   | **—** | ** ** |   | **3** |   |   | **5** | ** ** |   |   | **—** | ** ** |   | **5** | ** ** |
|                                            |       |                                                                            | **(4**      | **)**                                                                        |       |   | **—** | ** ** |   | **(4** | **)** |   | **3** | ** ** |   |   | **—** | ** ** |   | **3** | ** ** |
| **Net  Income (Loss) before Taxes**             |       |                                                                            | **325**     | ** **                                                                   |       |   | **(47** | **)** |   | **278** |   |   | **134** | ** ** |   |   | **(393** | **)** |   | **(259** | **)** |
| **Income  Tax Benefit**                         |       |                                                                            | **—**  | ** **                                                                   |       |   | **—** | ** ** |   | **—** |   |   | **195** | ** ** |   |   | **(195** | **)** |   | **—** | ** ** |
| **Net  (Loss) Income**                          |       |                                                                            | **325**     | ** **                                                                   |       |   | **(47** | **)** |   | **278** |   |   | **329** | ** ** |   |   | **(588** | **)** |   | **(259** | **)** |
| Accumulated  deficit—beginning             |       |                                                                            | **(11,072** | **)**                                                                        |       |   | **(1,198** | **)** |   | **(12,270** | **)** |   | **(10,747** | **)** |   |   | **(1,245** | **)** |   | **(11,992** | **)** |
| **Accumulated  deficit—ending**            |       |                                                                            | **$**       | **(10,747**                                                                  | **)**      |   |   | **$** | **(1,245** | **)** |   | **$** | **(11,992** | **)** |   | **$** | **(10,418** | **)** |   |   | **$** | **(1,833** | **)** |   | **$** | **(12,251** | **)** |
| **Income  (loss) per common share**             |       |                                                                            | ** **  | ** **                                                                   |       |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| **Basic**                                       |       |                                                                            | **$**       | **0.03**                                                                     | ** ** |   |   | **$** | **(0.00** | **)** |   | **$** | **0.03** | ** ** |   | **$** | **0.07** | ** ** |   |   | **$** | **(0.09** | **)** |   | **$   (0.02** | **)** |
| **Diluted**                                     |       |                                                                            | **$**       | **0.03**                                                                     | ** ** |   |   | **$** | **(0.00** | **)** |   | **$** | **0.03** | ** ** |   | **$** | **0.06** | ** ** |   |   | **$** | **(0.08** | **)** |   | **$   (0.02** | **)** |
| **Weighted  average common shares outstanding** |       |                                                                            | ** **  | ** **                                                                   |       |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| **Basic**                                       |       |                                                                            | **10,828**  | ** **                                                                   |       |   | ** ** | ** ** |   | ** ** |   |   | **10,926** | ** ** |   |   | ** ** | ** ** |   | **10,926** | ** ** |
| **Diluted**                                     |       |                                                                            | **10,828**  | ** **                                                                   |       |   | ** ** | ** ** |   | ** ** |   |   | **11,944** | ** ** |   |   | ** ** | ** ** |   | **10,926** | ** ** |

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(1)          As previously reportedin the Company’s Quarterly Reports on Form 10-QSB for the quarters ended March31, 2003, June 30, 2003, September 30, 2003, December 31, 2003, March 31, 2004,June 30, 2004, September 30, 2004 and December 31, 2004.

F-29

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**17.**   SupplementaryFinancial Information (Continued)

**CONSOLIDATEDSTATEMENT OF OPERATIONS**

**(inthousands, except per share data)**
| ** **                                      | ** ** | **Twelve Months Ended December 31, 2003 (Audited)** | ** **  |
|-------------------------------------------------|------------|-----------------------------------------------------------------------------------|-------------|
| ** **                                      | ** ** | **Previously**                                                                    | ** **  | **Restatement** | ** ** | **Restated** | ** ** |
| ** **                                      | ** ** | **Reported(1)**                                                                   | ** **  | **Adjustment(2)** | ** ** | **Total** | ** ** |
| **Revenues**                                    |       |                                                                              |        | ** ** |   |   |   | ** ** |   |   |   |
| Product sales                                   | ** ** | ** **                                                                        | **$**       | **9,322** | ** ** | ** ** | ** ** | **$** | **(1,565** | **)** | ** ** | **$** | **7,757** | ** ** |
| Royalties                                       | ** ** | ** **                                                                        | **1,763**   | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **1,763** | ** ** |
| Consulting                                      | ** ** | ** **                                                                        | **50**      | ** ** | ** ** | ** ** | **(50** | **)** | ** ** | **—** | ** ** |
|                                            | ** ** | ** **                                                                        | **11,135**  | ** ** | ** ** | ** ** | **(1,615** | **)** | ** ** | **9,520** | ** ** |
| **Costs  and expenses**                         |       |                                                                              |        | ** ** |   |   |   | ** ** |   |   |   |
| Product sales                                   | ** ** | ** **                                                                        | **6,593**   | ** ** | ** ** | ** ** | **(883** | **)** | ** ** | **5,710** | ** ** |
| Research and development                        | ** ** | ** **                                                                        | **1,676**   | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **1,676** | ** ** |
| Selling, general and administrative             | ** ** | ** **                                                                        | **2,307**   | ** ** | ** ** | ** ** | **98** | ** ** | ** ** | **2,405** | ** ** |
|                                            | ** ** | ** **                                                                        | **10,576**  | ** ** | ** ** | ** ** | **(785** | **)** | ** ** | **9,791** | ** ** |
| **Operating loss**                              | ** ** | ** **                                                                        | **559**     | ** ** | ** ** | ** ** | **(830** | **)** | ** ** | **(271** | **)** |
| **Other  (expense) income**                     |       |                                                                              |        | ** ** |   |   |   | ** ** |   |   |   |
| Interest expense                                | ** ** | ** **                                                                        | **(10**     | **)** | ** ** | ** ** | **—** | ** ** | ** ** | **(10** | **)** |
| Interest income                                 | ** ** | ** **                                                                        | **13**      | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **13** | ** ** |
|                                            | ** ** | ** **                                                                        | **3**       | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | **3** | ** ** |
| **Net  Income (Loss) before Taxes**             | ** ** | ** **                                                                        | **562**     | ** ** | ** ** | ** ** | **(830** | **)** | ** ** | **(268** | **)** |
| **Income  Tax Benefit**                         | ** ** | ** **                                                                        | **195**     | ** ** | ** ** | ** ** | **(195** | **)** | ** ** | **—** | ** ** |
| **Net  (Loss) Income**                          | ** ** | ** **                                                                        | **757**     | ** ** | ** ** | ** ** | **(1,025** | **)** | ** ** | **(268** | **)** |
| Accumulated  deficit—beginning             | ** ** | ** **                                                                        | **(11,175** | **)** | ** ** | ** ** | **(806** | **)** | ** ** | **(11,981** | **)** |
| **Accumulated  deficit—ending**            | ** ** | ** **                                                                        | **$**       | **(10,418** | **)** | ** ** | ** ** | **$** | **(1,831** | **)** | ** ** | **$** | **(12,249** | **)** |
| **Income  (loss) per common share**             |       |                                                                              |        | ** ** |   |   |   | ** ** |   |   |   |
| **Basic**                                       | ** ** | ** **                                                                        | **$**       | **0.07** | ** ** | ** ** | ** ** | **$** | **(0.09** | **)** | ** ** | **$** | **(0.02** | **)** |
| **Diluted**                                     | ** ** | ** **                                                                        | **$**       | **0.06** | ** ** | ** ** | ** ** | **$** | **(0.08** | **)** | ** ** | **$** | **(0.02** | **)** |
| **Weighted  average common shares outstanding** |       |                                                                              |        | ** ** |   |   |   | ** ** |   |   |   |
| **Basic**                                       | ** ** | ** **                                                                        | **10,926**  | ** ** |   |   |   | ** ** | ** ** | **10,926** | ** ** |
| **Diluted**                                     | ** ** | ** **                                                                        | **11,944**  | ** ** |   |   |   | ** ** | ** ** | **10,926** | ** ** |

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(1)          As previously reportedin the Company’s Quarterly Reports on Form 10-KSB for the period ended December31, 2003.

(2)          See paragraph followingrestatement tables for a description of the restatement adjustments.

F-30

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**17.**                               SupplementaryFinancial Information (Continued)

The restated numbersreflect the change in recognition of reporting of distributor revenue to a sellthrough or point of sale method of accounting. Based on reports from theCompany’s distributors, the restated balance sheet reflects the inventory heldat distributors and related shipments are now reported as deferred distributorrevenue. The related trade receivable was also adjusted to reflect this change.Since it was determined that the restated fiscal year ended December 31,2004 was not profitable the deferred tax asset was no longer applicable. Therestated balance sheet reflects this change.  As part of the overall review by management,it was determined that the original AMEX listing fee should be expensed and notcarried on the book as an “Other Intangible Asset”. This adjustment isreflected in the restated balance sheets for FY 2004. Royalties received fromSTMicroelectronics have been adjusted to reflect the net effect of the variousdiscounts given to ST for specific customers originally reported under SG&A.Consulting revenue has been adjusted to reflect completion of actual work asopposed to when funds were received. Lastly Apogee determined that inventoryreserves should be maintained and as such the restated income statementreflects reserves for both Apogee held inventory and inventory held at thedistributors.

**18.**                               Litigation

In November 2004,Apogee commenced an action against National Hybrid, Inc. (Hybrid) inthe United States District Court for the Eastern District of NewYork, claiming that as part of Hybrid’s procurement of the tangible assetsfrom the secured lien holder of the bankrupt Standard MEMS, Inc.(SMI), Hybrid had inadvertently obtained copies of files, containing inpart, the intangible assets purchased by Apogee in May of 2004 as part ofits MEMS acquisition. In November 2004, the court directed Hybrid not tosell, destroy or otherwise dispose of these files. In response, Hybrid filed acounterclaim in February 2005, stating that they were the ownerof the files. The court has delayed any further actions on thismatter until January 2006 since the parties are now working toresolve the issue. The Company believes Hybrid’s claimsare without merit. The Company expects to resolve this issue withHybrid, now held in estate due to the death of the prior owner, in 2005,and further does not believe the resolution will be material to its business.

**19.**                               Changesin Independent Registered Public Accounting Firm

As previously reported on Form 8-K dated April 19,2005, the Company received a letter on April 12, 2005 from its formerindependent registered public accountants, Anchin, Block & Anchin LLP(“Anchin”), notifying the Company that Anchin would not be able to complete itsaudit of the Company’s financial statements for the fiscal year ended December 31,2004 and was resigning from its audit engagement, effective immediately. Inaddition, the letter notified the Company that a disclosure should be made toprevent reliance on the auditor’s previously issued audit report with respectto the Company’s audited financial statements for the fiscal year ended December 31,2003 and the interim reviews of the Company’s financial statements for thefiscal quarters ended March 31, 2004, June 30, 2004 and September 30,2004.  In its letter, the auditorsadvised the Company that, based on information provided by the Company, theauditors had concluded that revenue had been improperly recognized by theCompany at December 31, 2003 and at each quarterly period thereafter withrespect to sales to one ofthe Company’s customers, and that the accountsreceivable from that customer had been overvalued. In addition, on April 18,2005, the former auditors notified the Company’s audit committee that 

F-31

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**19.**                               Changes in Independent Registered Public Accounting Firm(Continued)

thereare additional transactions in 2003 and 2004 that should be more closelyreviewed by the Company and its new auditors to ensure that revenue wasappropriately recognized.

In connection with its resignation, Anchin advised theCompany that information had come to its attention that made it unwilling torely on the Company’s management representations or to be associated with thefinancial statements prepared by management, and that the issues it had broughtto the attention of the Company’s audit committee raised concerns as to whetherthe Company has adequate internal controls necessary to develop reliablefinancial statements. In addition, Anchin advised the Company that it had notconcluded whether, and could not advise the Company as to the degree to whichthe scope of its audit would have had to be expanded to determine, whether, iffurther investigated, other sales by the Company and possibly the valuation ofthe chips that may have been returned to inventory, would have had issues thatcould have materially impacted the fairness or reliability of previously issuedaudited financial statements or the 2004 quarterly financial statements or thatmight have precluded Anchin from issuing an unqualified audit report even iffiscal 2003 financial statements were restated.

Except as described above,there have been no disagreements with Anchin on any other matter of accountingprinciples or practices, financial statement disclosure or auditing scope orprocedure, which disagreements, if not resolved to the satisfaction of Anchin,would have caused Anchin to make reference to the subject matter of thedisagreement(s) in connection with its report on the Company’s financialstatements for the Company’s two most recent fiscal years or any later interimperiod. The auditor’s reports on the Company’s audited financial statements foreither of the past two years did not contain an adverse opinion or a disclaimerof opinion, and were not qualified or modified as to uncertainty, audit scope,or accounting principles. Anchin had been the Company’s auditors since January 1,2005, when it acquired the firm of Yohalem Gillman & Co. LLP, whichhad been the Company’s auditors since 1981.

**20.**                               SubsequentEvents

In May of 2005, the Company receivedunsecured interest bearing loans in the amounts of $250,000 from DavidSpiegel and $250,000 from Herbert Stein. These loans arepayable upon demand and are not subject to any premium or penalty forprepayment. The loan interest rate is 6% per annum, payable monthly inarrears on the outstanding balance.

On July 22, 2005, the Company signed aconsulting agreement with a semiconductor company to perform audio productdevelopment and related marketing and sales activities.  Under the agreement, the Company willreceive payments of $205,000 per month for specific deliverables. Theconsulting fees paid to the Company under the agreement are subjectto reimbursement and thus will be recorded as a cashadvance until such reimbursement conditions becomedefinitive. The initial term of the consulting agreement is onemonth and can be extended by mutual consent.

On August 11, 2005, the Company entered intoagreements with Laurus Master Fund, Ltd. (“Laurus”), whereby the Companyreceived $2.0 million in gross proceeds (with net proceeds of approximately$1.8 million)****through the sale of a 120 daysecured term note. In accordance with the terms of the note, the note ispayable by the Company in cash during the first 120 days following the issuanceof the note, and after the 120 day period it is payable in the amount of$62,500 per month in cash or convertible into the common stock, $0.01 par valueper share, of the Company at a fixed conversion 

F-32

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2004 AND RESTATED 2003**

**20.          Subsequent Events (Continued)**

price of $1.05 per share.In connection with the financing, the Company is paying certain costs andexpenses of Laurus and has issued an immediately exercisable warrant with termsrestricting exercise. The Laurus warrant provides for the purchase of 85,000shares of common stock at a price of $1.22 per share. The warrant expires sevenyears after issuance. A finder for the transaction, will receive a fee of 5% ofthe gross proceeds of the offering, together with a seven year warrant topurchase an aggregate of 8,500 shares of common stock immediately exercisableat a price of $1.22 per share. This offering was conducted as a privateplacement pursuant to the exemption from registration provided by Section 4(2) ofthe Securities Act of 1933, as amended, and the rules and regulationspromulgated thereunder. With respect to the transaction with Laurus, theCompany has entered into an agreement to register the common stock underlyingthe warrants and the common stock that may be received upon any conversion ofthe secured term note.

F-33

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