**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-KSB**

| **(Mark One)** | ** **                                                                                                                                                                                                                                                                                                                                                                       |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| x              | **ANNUAL REPORT UNDER SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                    |
| ** **     | **For the fiscal year ended December 31, 2005**                                                                                                                                                                                                                                                                                                                             |
| ** **     | **OR**                                                                                                                                                                                                                                                                                                                                                                           |
| o              | **TRANSITION REPORT UNDER TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                             |
| ** **     | **For the transition period from                               to                              .** |

 

**APOGEE TECHNOLOGY, INC.**

(Exact name of registrant as specified in its charter)

Commission File No: 000-30656

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

 

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

Securities registered pursuant to Section 12(b) ofthe Exchange Act:

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

 

Securitiesregistered pursuant to Section 12(g) of the Exchange Act:  None

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

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

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

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

State issuer’s revenue for the most recentyear:  $5.2 million

The aggregate market value of the voting and non-votingcommon equity held by non-affiliates computed by reference to the average bidand asked price of such common equity as of March 10, 2006 was $8,736,882.

The number of outstanding shares of the registrant’sCommon Stock, $.01 par value, as of March 10, 2006 was 11,968,331.

**DOCUMENTS INCORPORATED BY REFERENCE**

The following documents (or parts thereof) are incorporatedby reference into the following parts of this Form 10-KSB: Certaininformation required in Part III of this Annual Report on Form 10-KSBis incorporated from the Registrant’s Proxy Statement for the Annual Meeting ofStockholders to be held on  May 25,2006.

TransitionSmall Business Disclosure Format: Yes o   Nox

 

----

**INDEX**
| **PART I**   |   |                                                                                                                            |   |   |
|-------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.           |   | Description of Business.                                                                                                        |   | 3      |
| Item 1A.          |   | Risk Factors                                                                                                                    |   | 12     |
| Item 2.           |   | Description of Property.                                                                                                        |   | 20     |
| Item 3.           |   | Legal Proceedings.                                                                                                              |   | 20     |
| Item 4.           |   | Submission of  Matters to a Vote of Security Holders.                                                                           |   | 20     |
| **PART II**  |   |                                                                                                                            |   |   |
| Item 5.           |   | Market for  Registrant’s Common Equity and Related Stockholder Matters.                                                    |   | 21     |
| Item 6.           |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operation.       |   | 24     |
| Item 6A.          |   | Quantitative  and Qualitative Disclosures about Market Risk.                                                                    |   | 33     |
| Item 7.           |   | Financial  Statements.                                                                                                          |   | 33     |
| Item 8.           |   | Changes In and  Disagreements With Accountants on Accounting and Financial Disclosure.                      |   | 34     |
| Item 8A.          |   | Controls and  Procedures.                                                                                                       |   | 35     |
| Item 8B.          |   | Other Information.                                                                                                              |   | 35     |
| **PART III** |   |                                                                                                                            |   |   |
| Item 9.           |   | Directors,  Executive Officers, Promoters and Control Persons; Compliance with  Section 16(a) of the Exchange Act.    |   | 35     |
| Item 10.          |   | Executive  Compensation.                                                                                                        |   | 36     |
| Item 11.          |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters.                     |   | 36     |
| Item 12.          |   | Certain  Relationships and Related Transactions.                                                                                |   | 36     |
| Item 13.          |   | Exhibits.                                                                                                                       |   | 36     |
| Item 14.          |   | Principal  Accountant Fees and Services.                                                                                        |   | 38     |

 

2

----

**PART I**

**THIS ANNUAL REPORT ON FORM 10-KSB CONTAINSFORWARD-LOOKING STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACTOF 1995. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOTSTATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKINGSTATEMENTS. WITHOUT LIMITING THE FOREGOING, THE WORDS “BELIEVES”, “ANTICIPATES”,“PLANS”, “EXPECTS”, AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFYFORWARD-LOOKING STATEMENTS. THE IMPORTANT FACTORS DISCUSSED IN ITEM 1, “DESCRIPTIONOF BUSINESS”, AND ITEM 6, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS”, AMONG OTHERS, COULD CAUSE ACTUAL FUTURERESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY FORWARD-LOOKING STATEMENTSMADE HEREIN AND PRESENTED ELSEWHERE BY MANAGEMENT FROM TIME TO TIME.**

**Item 1.**                     BUSINESS

Apogee Technology, Inc. (“Apogee”, the “Company”,“we”, “us” or “our”) has traditionally focused on the design, development andmarketing of audio amplifier integrated circuits (“ICs”) that incorporated  its proprietary Direct Digital Amplification(“DDX”) technology. As in prior years, the Company generated revenue from thesale of its audio IC’s and related products to consumer electronicmanufacturers, consulting work for third parties, as well as, royalties andlicense fees earned under its agreement with STMicroelectronics  NV (“ST”) and other IC companies.

In May 2004, in order to expand our technologybase and to further diversify our product and market opportunities, Apogeeacquired a portfolio of Micro-Electromechanical Systems (“MEMS”) intellectualproperty, trade secrets and know-how developed by Standard MEMS, Inc. Thisportfolio of intellectual property has certain rights and royalty obligationsassociated with it and in the exhibit attached to this filing. Concurrently,Apogee hired key employees from the former Standard MEMS, Inc. andestablished a MEMS Division. MEMS are devices produced using high volume ICmanufacturing techniques that include both electrical circuits and microscopicmechanical systems. Since the formation of the MEMS division, Apogee has beendeveloping MEMS-based sensor and medical products.

On October 5, 2005, Apogee completed atransaction with SigmaTel, Inc. (“SigmaTel”), in which certain assets ofour audio division were sold to SigmaTel, including the DDX® patents, related technology and the associatedroyalties from its license agreement with ST for approximately $9.4 millionplus a one-year earn-out of potentially up to $4.5 million (“SigmaTelTransaction”). No assurance can be given that this earn-out will be realizedand based on our reports received to date, the revenue generated from thisearn-out is likely to be minimal, if anything at all. The Asset PurchaseAgreement associated with the transaction provides for the payment of $420,000of the purchase price into an escrow to be held for a period of eighteen (18)months in the event of a breach by us or any of our principal stockholders, ofany representation or warranty made in connection with the transaction. Inconnection with the transaction, we agreed to indemnify SigmaTel upon theoccurrence of certain events, as more fully described in the purchase agreement.The Company and certain of the principal stockholders also entered into an additionalindemnification agreement. Apogee is authorized to indemnify the principalstockholders, who were signatories to the agreements, in the event any one ormore of them has to satisfy any obligations thereunder. The SigmaTelTransaction has effectively ended our participation in the audio market and weexpect to fully discontinue our audio business upon the completion of the saleof our remaining audio division inventory. We anticipate that these final salesmay take some time, as this business line is no longer a focus of ours, but weare hopeful that the sales will occur on a reasonable schedule.

We reorganized the Company’s remaining MEMS divisionafter the ending of our audio division into two business groups, the SensorsProducts Group and the Medical Products Group. The Sensor Products 

3

----

Group will focus on thedesign, development and marketing of proprietary MEMS/Nanotechnology basedsensors for the consumer, industrial and automotive markets. In December 2005,we introduced our first sensor products, a family of miniature pressuresensors, trademarked under the SensilicaTM brand name. These sensors arepresently being sampled to potential customers. We intend to sell these sensordevices as stand-alone die and as packaged solutions in a similar manner asemployed in the marketing and sale of our former audio IC products. The MedicalProducts Group is currently focused on the design, development and marketing ofMEMS based devices to provide enhanced delivery of a range of therapies throughthe skin, or transdermally. We have demonstrated the feasibility of oursolution by performing efficacy tests with model drugs and have performedrelated testing to support the commercialization of our transdermal deliverydevice. Depending upon the results of our technology and product developmentactivities, we may: (i) license our technology to third party medicaldevice or pharmaceutical companies, (ii) develop, have made and marketthrough distributors our own medical products, or (iii) partner with thirdparty pharmaceutical companies to commercialize our products.

For some period of time a meaningful portion of ourrevenues will result from the residual revenues of our remaining audioinventory. Until the sensor and medical products business lines reachcommercialization, and sufficient sales are made, we may have little revenue duringthis transition. We expect that our future revenues will initially be a resultof sensor sales, potential licensing revenues resulting from the grant rightsto its intellectual property, and consulting work from product or intellectualproperty development for third parties. It is likely that our MEMS-basedmedical products will take longer to commercialize, but the same business modelwill likely apply. Although the sales and marketing staff is not the same, weplan to leverage our past experience with a worldwide network of direct salesstaff, independent sales representatives and distributors to support our SensorProducts Group and in conjunction with this we also intend to add new saleschannels for our emerging medical products as appropriate. Also building on ourpast experience of contracting third party manufacturers to produce our ICproducts, we plan to continue to outsource the manufacturing of our sensor andmedical products.

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, on its MEMS technology.

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

**Our New Businesses**

**Sensor Products Group and Market**

The sensor industry is a highly diversified businesswith a wide range of applications and a broad range of markets, including consumer,automotive, medical, industrial and defense. We believe that this wide range ofapplications and large number of potential markets provides sensor providers,such as ourselves, the opportunity for good margins, nominal selling priceerosion and the ability to defend market position. In addition, it is our viewthat many of the markets are relatively stable, which create long product lifecycles compared to our traditional consumer audio markets. However, we areaware that these market benefits have attracted a large number of companiestargeting many niche and some high volume applications, especially in theautomotive market and therefore competition is increasing.

4

----

An array of technologieshave recently been developed and employed in sensor applications. MEMStechnology was adapted for sensor applications because it enables theintegration of the sensor element and supporting electronics significantly loweringsystems cost and size compared to previous approaches, which utilized multiplemachined components and separate, discrete electronics. In addition, MEMSsensors can be produced at a relatively low cost because they can be producedusing batch manufacturing methods built upon the infrastructure developed bythe IC industry. One of the first MEMS devices developed were pressure sensorsin the mid 1960’s. Since that time, MEMS technology has been applied to amultitude of applications including the measurement or sensing of flow,displacement, force, humidity, biological and chemical substances. According toa leading research firm, the global market size for sensors is forecasted togrow to over $12 billion by 2009. The current pressure sensor market size isapproximately $2.2 billion, with the MEMS portion making up approximately $830million of the total. Applications using MEMS pressure sensors include enginecontrol, tire pressure monitoring, pump control, blood pressure monitoring andbarometric pressure measurement.

***Our Sensor Products***

In December 2005,we introduced the SensilicaTM family of pressure sensor die, which supportpressure measurement up to 1000 pounds per square inch (“PSI”). The productdesignation and potential applications for these devices are summarized in thetable below. We initiated development of these devices in late 2004 and arecurrently sampling the products to potential customers. The qualificationrelease of the sensors is expected to be completed in the first half of 2006.

| **SensilicaTM Products**                    | ** ** | **Potential Applications**                                                                              | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| **ATA0015A**                                         |       | Low Pressure (15 PSI)  Altimeters, Barometric, Blood Pressure, HVAC                                          |       |
| **ATA0045A  ATA0060A  ATA0075A  ATA0100A**           |       | Medium Pressure (15 PSI to 100 PSI)  Engine Control, Tire Pressure, Scuba,  Industrial Process Control (IPC) |       |
| **ATA0200A  ATA0300A  ATA0500A  ATA0750A  ATA1000A** |       | High Pressure (100 to 1000 PSI)  IPC, Diesel Engine Control, Natural Gas                                     |       |

 

Sensilica pressure sensors are extremely small (0.8mmx 0.8mm x 0.4mm) MEMS-based piezoresistive pressure sensing die designed tosupport a range of sensing applications. We believe that the advantages ofSensilica sensors are derived from the novel manufacturing approach thatcreates a buried cavity within the silicon, yielding an extremely small,sensitive “All-Silicon” device. This simplified “All-Silicon” approacheliminates the need to bond wafers to create a pressure cavity therebysignificantly reducing manufacturing cost and improving overall reliability.Most importantly, we believe, it reduces sensor size by a factor of four ormore compared to traditional designs, providing significant cost advantages. Asset forth in the chart above, Sensilica sensors are ideal for high volumeapplications where cost and performance are critical factors, such as tirepressure monitoring and disposable pressure sensing.

Our strategy is to market our Sensilica pressure dieto manufacturers producing packaged sensors, transducers or other finalproducts. In parallel with this effort we are developing packaged sensorproducts in order to provide end customers with a turnkey solution for pressuremeasurement. We also intend to add compensation electronics and otherelectronics, such as connectivity, to enhance our sensor product offerings andmeet our customer demands. We expect to introduce packaged pressure sensorproducts in 

5

----

the second half of 2006. Basedupon progress to date, we believe that the Sensor Products Group will be thefirst of our new product groups to generate revenue.

In order to expand oursensor product offerings, we entered into a cooperative agreement with TheResearch Foundation of State University of New York at Stony Brook and TheCenter for Advanced Technology (SensorCAT), to develop manufacturing methodsand other new sensor technology to produce highly accurate, low costmicro-sensors. Under the agreement signed in November 2004, we will havethe option to exclusively license the rights to commercialize technologyjointly developed under this agreement. The primary research efforts arefocused on combining nano-composite materials and silicon-basedmicro-fabrication processes to produce gas and chemical sensors.

***Competition in the Sensor Products Industry***

As discussed above webelieve that the market for MEMS-based pressure sensors is robust enough thatalthough there are companies that have greater market experience and substantiallygreater resources there are either applications or niche markets which existwhere we can effectively compete. Any market advantage that we might be able tocreate, even in special applications or niche markets, could be quickly usurpedby a larger, more experienced and financially able company. There is minimalintellectual property protection in the Sensor Products Group. To manage thishighly competitive industry we are relying on a proprietary manufacturingprocesses, the advanced state of our technology, the breadth of the marketplaceand the large number of potential applications for the MEMS based pressuresensors to serve as a buffer from our competitors. Companies developing ormarketing pressure sensor products include All Sensors Corporation, DelphiCorporation, Endevco Corporation, Freescale Semiconductor, Inc, GeneralElectric Company, Honeywell International, Inc., Infineon Technologies AG,Measurement Specialties, Inc., Silicon Microstructure Inc. and TexasInstruments, Inc.

**Medical Products Group and Market**

We are developing a proprietary MEMS-based device toenhance the delivery of drugs and other compounds through the skin. We havefiled a patent on our MEMS-based device and we are working to commercializethis device in order to purse the rapidly growing transdermal drug delivery (“TDD”)market.

Historically, the delivery of drugs through the skin,or transdermally, has been done with a “patch”, which is a passive deviceapproved by the U.S. Food and Drug Administration (“FDA”), to provide atherapeutic effect when applied to the skin. The advantage of a transdermalpatch is that it offers patients a convenient, non-invasive, painless drugdelivery with added benefits of steady delivery and potentially reduced sideeffects. Transdermal drug delivery solutions have been historically restrictedto small molecule drugs because the skin is an effective barrier to thetransmission of large molecule drugs into the body. Thus, it is impractical totransdermally deliver large molecule compounds such as proteins, vaccines andmost biopharmaceuticals, without the addition of a chemical or physical methodto enhance delivery. Research is ongoing in the development of technologies toincrease drug delivery rates through the skin using electrical, pressure andthermal energy. Another area of research is in the creation of micro-pores inthe skin to enhance TDD using microstructures, or micro-needles, made ofvarious materials such as metal, glass and silicon. We are currently pursing amicro-needles based approach built upon our MEMS/Nanotechnology intellectualproperty.

We believe that thetransdermal drug delivery market growth rate could be expanded to capture alarger percentage of the $550 billon dollar total drug market, with theadoption of new technologies that allow for the delivery of a broader range oftherapies. Currently, the FDA has approved over 13 specific drug types and over35 transdermal patches. According to a leading independent researchorganization, the worldwide market for TDD was $12.7 billion in 2005 withexpected growth to $21.5 billion by 2010. 

6

----

Potentialapplications for enhanced TDD systems include the delivery of pain managementtherapies, anxiety therapeutics, antidepressants, treatments relating to sexualdysfunction, vaccines and therapies for diabetes.

***Our Medical Products and Regulation***

We are working to commercialize a device that webelieve provides enhanced delivery of drugs and other therapeutic compoundsthrough the skin. Our initial efforts have been directed toward the definitionand protection of our intellectual property (“IP”), the design and developmentof the micro-needle device, validation of the device’s efficacy, selection of atarget application tied to specific market needs, establishment of manufacturingsupport to produce our products, and the definition of a plan to obtain FDA orother regulatory approval of our products. We summarize these activities below.

We filed a patent application on our micro-needletechnology in 2005 and are working on additional patent applications. We arealso pursuing licensing activities with leading academic institutions to expandour intellectual property position. In order to support these efforts, we haveretained a patent firm that specializes in drug delivery technologies.

We have developed a low cost manufacturing process toproduce our silicon-based micro-needles and have retained a qualified MEMSfoundry to support production.  We havealso retained the services of a certified medical device manufacturer to produceour patch prototypes for clinical testing and market development. Both of thesemanufacturers have the capability of supporting end product production. We arealso developing proprietary manufacturing methods to apply and combine variousdrugs and other compounds into our products.

In order to validate the effectiveness of our medicalproducts, we are working under development and service agreements with leadingacademic institutions. Apogee, in conjunction with the New Jersey Center forBiomaterials, has demonstrated significantly improved drug delivery rates intocadaver skin using two small molecule drugs. We have also demonstrated, inconjunction with Stony Brook University, the delivery of large moleculeproteins into a living skin model. We have also developed protocols to supportfuture in-vivo testing of our TDD system.

In order to determine the most appropriate therapeuticapplication of our TDD system, we are performing an in-depth market analysiswith the support of third party consultants specializing in the drug delivery,as well as non-FDA regulated applications. As part of this selection process,we are reviewing the basic unmet therapeutic market needs, size, productdevelopment costs, development schedule, approval requirements, competitiveposition and other factors. We expect to complete the application selection inthe first half of 2006 and to add the resources to pursue the timelydevelopment of the selected TDD product applications.

Our TDD products may require FDA approval before theycan be sold. The FDA administers the Federal Food, Drug and Cosmetic Act (“FFDCA”)and has adopted regulations to administer the FFDCA. These regulations includepolicies that: i) govern the introduction of new medical devices; ii) requireobserving certain standards and practices in the manufacture and labeling ofmedical devices; and iii) require medical device companies to maintain certainrecords and report device-related deaths, serious injuries and certainmalfunctions to the FDA. The FDA approval process is lengthy and can lastseveral years before a product can be marketed and sold. In recognition of therequirements of this process and FDA application strategy, we have retainedexperienced consultants. The initial outline of a plan has been defined and wehave begun our first biocompatibility tests. If FDA approval is required forour products, our progress on our Medical Products will be slowed substantiallyand our need for capital will be increased.

7

----

***Competition in the Medical Products Industry***

We believe that ourtransdermal drug delivery solution is more robust, has greater designflexibility, can address a broader range of therapies compared to competitivetechnologies. As a result of these market advantages and potential IPprotection, which cannot be assured, we believe that we will be well positionedto compete effectively. However, despite our perceived advantages, ourcompetitors are substantially larger, have been in this field longer and havefinancial resources significantly greater than our own. This is a highlycompetitive industry that requires significant capital and thus our businessstrategy with our medical products will accordingly be different than thestrategy employed with our sensor products. It is more likely that we will workquickly towards strategic partnerships, especially to the extent our potentialproducts cannot be realized without significant regulatory involvement.Companies developing similar products include 3M, Alza Corporation, BioValveIncorporated, NanoPass Technologies Limited, and Procter & Gamble.

**Our Former Business**

**Former Audio IC Business**

Apogee developed DDX technology as an all-digital,high efficiency audio amplifier solution to take advantage of the marketopportunity created by the industry transition to digital audio transmission,recording and playback. The successful sale of over 35 million DDX ICs over thelast five years validated the commercial benefits to consumer electronicmanufacturers, which include reduced product size and cost, digital audioreproduction, increased audio functionality and extending playback time inbattery applications. DDX ICs have been sold by and are continuing to be soldby ST, and in the future will be sold by SigmaTel, to manufacturers of hometheater systems, flat-panel TVs, powered speakers, car audio, commercial audio,and PC multi-media.

We began the design, development and marketing ofaudio amplifier ICs in 1996 based upon our DDX technology and until the sale toSigmaTel, had released 25 different ICs. The DDX amplifier solution isimplemented by the combination of a DDX Controller and a DDX Power Device IC. Wereleased our first Controller IC, the “DDX-2000”, in 1999 and since thattime have released six additional Controller ICs. These devices integrate fromtwo to eight channels of DDX amplifier processing along with a range of digitalaudio processing functions. Since inception, the Company has developed andreleased 13DDXpower devices that can provide up to 240 watts of audio power. These integratedswitched mode power devices operate at two to three times the efficiency oftraditional audio amplifier ICs, thereby reducing amplifier size and cost. In2004, we introduced a new family of all-in-one DDXi (“i” for integrated)amplification solutions that combine a DDX Controller and DDX Power Device intoa single device reducing system cost, size and complexity. In addition to ICproduct sales, Apogee also previously licensed its DDX technology. Under anagreement with ST, one of the world’s largest semiconductor companies, weprovided intellectual property to be used in royalty-bearing DDX-based ICproducts produced by ST. In addition, the Apogee and ST entered into adevelopment agreement whereby the companies developed and marketed new ICproducts that leverage the DDX technology, ST’s intellectual property and IC design,development and manufacturing capability. The license and developmentagreements with ST are still in place, but we will not be developing new DDXproducts primarily due to a two-year non-compete agreement with SigmaTel. Royaltiesdue Apogee under the ST license agreement have also been assigned and will bepaid to SigmaTel.

In 2004, we licensed our DDX-Controller technology toZoran Corporation, Infra-Com Ltd., and a video IC company in order to expandmarket opportunities for its DDX products. We completed the delivery of our DDXController technology to these companies and have received the bulk of thepotential revenue under these agreements. We may receive some nominal revenuesin the future under the agreements.

8

----

In August 2004, Apogee 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. Apogee andInfra-Com had worked together to design and develop an integrated solution thatcombines Apogee’s DDX Controller technology and Infra-Com’s IrGate infra-redtransmission technology. We have completed our primary obligations under theagreement and have in place a license agreement whereby we will receive nominalroyalties from the sales of Infra-Com/DDX products upon the successfuldevelopment and sale of these products.

Our sales headquarters arelocated in Norwood, Massachusetts. With the sale of the audio business toSigmaTel, we closed our offices in China, Taiwan and Hong Kong. We continue tomaintain an office in Japan and a warehouse in Hong Kong to support our ongoingAsian operations. We traditionally utilized sales representatives in Korea andBrazil as well as independent distributors in Hong Kong, China, Japan, Taiwan,and Singapore. These contracts have been terminated for the audio businessactivities and are being transitioned to support our emerging sensor products. Wehope to leverage our past relationships for the benefit of our new businesses.

***CurrentBusiness Operations***

**Research and Development**

*Sensor and MedicalProduct Groups*

We are making significantinvestment in research and development to support our sensor and medicalproducts business growth. Our new development staff has expertise in the MEMSdesign, manufacturing process, product testing, and verification and packagingsolutions. To the extent it becomes necessary to support our emerging medicalproducts, we plan to retain staff to support clinical trials and to worktowards FDA and relevant regulatory compliance for our products. We expect thatour investment in research and development will increase in 2006 as we addthese additional resources. We have submitted one patent application for ourmedical products and we are working on additional applications.

*Former AudioBusiness*

Our previous research and development activities wereprimarily directed towards extending our patent protection for our audiotechnology, improving the overall performance of our technology, increasing thenumber of IC designs, and developing new product applications and expanding ourtechnology base. Apogee’s core technology competencies included digital signalprocessing, digital, analog and power IC design and product systemapplications.

We were granted four patents on our DDX technology andhad three patent applications covering DDX, power supply and related circuitdesigns. We sold our DDX patents to SigmaTel in October 2005, retained a patentapplication related to our power supply technology.

During the two years endedDecember 31, 2005 and 2004, Apogee spent approximately $2.7 million and$2.8 million, respectively, on research and development activities. Weanticipate that in the short term we will reduce R&D expenditures but inthe medium to long term we will meet or exceed these levels to support oursensor and medical products over time.

**Marketing and Sales**

We will continue to rely on a direct sales force,independent sales representatives and distributors to promote and sell ourproducts worldwide. Our sales headquarters continue to be located in Norwood,Massachusetts.

9

----

The marketing and sales effort of the Sensor andMedical Groups are currently being supported from our U.S. and Japan offices. Weintend to add additional independent distributors and representatives to marketand sell our sensor and medical products. We have applied for trademarkregistration of the “Sensilica” brand name for its pressure sensor products.

In Asia, where most of the world’s consumerelectronics products are manufactured and in order to support our audiobusiness, we operated sales and application support locations in China, HongKong, Japan and Taiwan. In addition, Apogee utilized sales representatives inKorea and Brazil and independent distributors in Hong Kong, China, Japan,Taiwan, Singapore, Malaysia, Philippines, Thailand and India. With the sale ofour audio business to SigmaTel, we consolidated our marketing and salesoperations and closed the offices in China, Hong Kong and Taiwan. We havemaintained our office in Japan to support future Asian sales from our emergingsensor business and to facilitate the remaining audio inventory sales. We areimplementing new distributor and representative agreements with certain of ourprevious partners to support our sensor business.

Our audio business sales strategy was built aroundmaking it easy for the customer to utilize our products and technology. Wedeveloped and provided customers with data sheets, application information andevaluation board reference designs. We believe that this information, alongwith our application engineering support, enabled its customers to quicklyadopt and develop demand for our former products. Apogee plans to apply thissame strategic philosophy to our emerging sensor and medical product salesefforts.

Among other assets we soldour DDX trademark, as part of the SigmaTel Transaction. It is our intention tohave Sensilica become as similar recognizable mark of quality. We also marketour products by attending and exhibiting our products at key industrytradeshows, as well as through our website. We sold our former website, http://www.apogeeddx.com**to SigmaTel and our current website is at http://www.apogeemems.com.

**Manufacturing and Quality**

We use ST, an ISOcertified manufacturer and the company with which we have had a longrelationship during our participation in the audio business, to produce ourpressure sensor die. ST provides many services along with production includingquality inspection, which greatly enhances our quality control capabilities. Weare in a position to provide final test and inspection of the pressure sensordevices. The MEMS based drug delivery device prototypes are currently producedby an independent MEMS fabrication facility and a qualified medical devicemanufacturer. We believe that our suppliers will have the capacity to meet ourprojected production requirements for 2006 and beyond.  We inventory and ship our product offeringsfrom our headquarters in Norwood, Massachusetts and from a warehouse in HongKong.

*Former AudioBusiness*

ST manufactured themajority of the DDX ICs with the exception of our DDX-2000 device, whichwas manufactured and supplied by OKI Semiconductor. We received fully testedand packaged devices that had passed the suppliers’ internal quality control atboth ST and OKI.

**Employees**

As of December 31, 2005, Apogee had 12 employees,of which 11 were full-time employees, including 4 in research and development,2 in sales and marketing and 6 in general and administration. Prior to the saleof the audio business to SigmaTel in October 2005, we had 36 employees. Noneof our employees are represented by a collective bargaining agreement, nor havewe experienced work stoppages. It is our belief that relations with ouremployees are good.

10

----

The following table setsforth certain information with respect to the executive officers of ApogeeTechnology as of December 31, 2005. All officers serve at the pleasure ofthe Board of Directors.

**ExecutiveOfficers of the Company**
| Name             | ** ** | ** ** | ** ** | **Age**                                                       | ** ** | **Position** |
|------------------|------------|------------|------------|---------------------------------------------------------------|------------|--------------|
| Herbert M. Stein |       | 77         |       | President, Chief  Executive Officer and Chairman of the Board |
| Paul J. Murphy   |       | 58         |       | Chief Financial Officer  and Vice President of Finance        |
| David B. Meyers  |       | 47         |       | Chief Operating Officer                                       |

 

Mr.  Herbert M.Stein has served as the Company’s Chief Executive Officer since January 2001.Mr. Stein has been a Director of the Company since 1996, has been Chairmanof the Board and President since January 2000, and has been Treasurersince November 2003. Mr. Stein was Chairman of the Board of Directorsof Organogenesis Inc. from 1991 through 1999 and was Chief Executive Officer ofOrganogenesis from 1987 through 1999.

Mr.  Paul J.Murphy joined the Company in June 2005 in the role of Chief FinancialOfficer and Vice President of Finance, including the responsibilities of theCompany’s Principal Accounting Officer. Prior to joining the Company, Mr. Murphywas an independent 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.

Mr.  David B.Meyers was appointed the Company’s Chief Operating Officer in February 2001.From January 2000 until February 2001 he was the Company’sVice-President, Business Development. Since 1996 he has served under variousresearch, engineering and development roles at Apogee and is one of theinventors of the DDX technology. Prior to joining the Company, Mr. Meyerswas a principal engineer with Arinc Research Corporation and held engineeringand research positions at Northrop Grumman Corporation and RockwellInternational performing systems analysis and MEMS sensordevelopment.

11

----

**Item 1A.**   RISK FACTORS

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

**RISKS RELATED TO OUR BUSINESS**

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

As of December 31,2005, we had stockholders’ equity of approximately $5.5 million, an accumulateddeficit of approximately $12.7 million and working capital of approximately$5.0 million. This compares to stockholders’ equity of approximately $2.6million, an accumulated deficit of approximately $15.4 million and workingcapital of approximately $2.2 million for the period December 31, 2004. Inthe fiscal year ended December 31, 2005, we recorded an operating loss ofapproximately $5.5 million with a net profit of approximately $3.0 million froma gain of approximately $8.9 million. This net profit resulted from the sale ofthe DDX Division to SigmaTel, Inc. on October 5, 2005, forapproximately $9.4 million, plus a one-year earn-out of potentially up to $4.5million. No assurance can be given that this earn-out will be realized andbased on our reports received to date the revenue generated from this earn-outis likely to be minimal, of anything at all. Our results in the fiscal yearended December 31, 2005 compare to an operating loss of approximately $3.4million and a net loss of approximately $3.4 million for the fiscal year ended December 31,2004. We will need to generate revenue to sustain profitability and positivecash flow. Our ability to generate future revenue and sustain profitabilitywill depend on a number of factors, many of which are described throughout thisrisk factor section. If we are unable to achieve and sustain profitability, theCompany’s share price would likely decline.

**WEWILL NEED TO RAISE ADDITIONAL CAPITAL OR SELL ASSETS IN ORDER TO CONTINUE TOPERFORM RESEARCH AND DEVELOPMENT AND OPERATE OUR BUSINESS, AND SUCHTRANSACTIONS MAY NOT BE AVAILABLE TO US ON FAVORABLE 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. If we sell assets that are currently usedin the conduct of our business, those assets would no longer be available to usas a potential source of revenue generation, as is the case with the October 5,2005 sale of assets. If we cannot raise sufficient additional capital throughmeans available to us, it would adversely affect our ability to achieve ourbusiness objectives.

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

We have traditionallyderived approximately 11% of our product revenue from one end user and 47% ofour product revenue as a result of sell through to end customers by twodistributors during the twelve months ended December 31, 2005 as comparedto 20% of product revenue from one end user and 49% of product revenue as aresult of sell through to end customers by two distributors during the 12months ended December 31, 2004. In addition, we derived approximately 40%of total revenue from two distributors during the 12 months ended December 31,2005, as compared to 70% of total revenue from 

12

----

two endusers and two distributors during the 12 months ended December 31, 2004. Theloss of any of our customers would have a material adverse effect on ourbusiness, financial condition and results of operations. With the sale of theaudio business, Apogee’s traditional consumer electronic customer will not besupported with audio products after the sale of its remaining inventory.  We are working to develop new customers forour sensor and medical products but we can not guarantee that we will be ableto succeed in these efforts.

**AS ARESULT OF THE SALE OF OUR AUDIO BUSINESS THE COMPANY WILL NOT RECEIVE ROYALTIESFROM ST AND AUDIO PRODUCT REVENUE WILL END. AS A RESULT OUR ABILITY TO ACHIEVEOR SUSTAIN REVENUE GROWTH WILL BE HARMED IF WE ARE UNABLE TO FIND CUSTOMERS ANDSELL OUR SENSOR AND MEDICAL PRODUCTS.**

Apogeehistorically derived revenue from audio IC product sales, royalties pursuant toour license agreement with ST and others and consulting revenues fromcontracted audio product development. With the sale of our audio assets toSigmaTel in October 2005, we will no longer be receiving license revenueand future audio IC sales will diminish as we sells off our remaining inventory.The revenues from the earn-out with SigmaTel appear unlikely to materialize. Apogeereleased new sensor products in December 2005 and expects to generaterevenue from the sale of these products in 2006. However, we may not have anyrevenues if we are unable to find customers and sell our sensor products.

**THEREIS A NEW EUROPEAN-BASED ENVIRONMENTAL DIRECTIVE TO ELIMINATE HAZARDOUSMATERIALS IN ELECTRONIC PRODUCTS, AND AS SUCH, WE MAY NOT BE ABLE TO SELLOUR INVENTORY AND MAY HAVE INVENTORY THAT CAN ONLY BE SOLD IN LIMITEDMARKETS.**

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. Apogee transitioned our IC products toconform to the RoHS standard during the first half of 2005. However, we havesignificant inventory that does not comply with this standard. Consequently,this inventory may not be sold timely or at all, although management hasprovided reserves for this possibility.

**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.**

Approximately 79% of ourtotal revenue and 90% of the our product revenue for the twelve months ended December 31,2005 were a result of revenue and product revenue to customers in Asia,respectively. This compares to approximately 67% and 20% of our total revenueto customers in Asia and Europe, respectively, and approximately 95% of productrevenue to customers in Asia for the 12 months ended December 31, 2004. Allof our revenue was generated in the audio business. Prior to the sale ofcertain of its assets to SigmaTel, Inc., a significant percentage of ourproduct revenue was to manufacturers producing DVD Receivers. We have enteredinto a non-compete in connection with the sale of assets to SigmaTel, Inc.,except for permissible sales of inventory. This non-compete agreement meansthat we will not be allowed to return to historical areas of revenue generationfor a number of years. We will need to develop new markets and look to newsales channels in order to effectively market the new sensor and medicalproducts. * *

13

----

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

Thelife cycle of the technology and any future products developed by us may belimited by the emergence of new products and technologies, changes in customerpreferences and other factors. Our future performance will depend on ourability to consistently:

·       identifyemerging technological trends in our market;

·       identifychanging customer requirements;

·       developor maintain competitive technology, including new product offerings;

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

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

·       protectour intellectual property.

We may not succeed indeveloping and marketing new products that respond to technological andcompetitive developments and changing customer needs, and such products may notgain market acceptance or 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.

**FAILURETO COMPLY WITH LAWS AND GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OURABILITY TO OPERATE OUR BUSINESS.**

Some of our activities areregulated by federal and state statutes and government agencies. The expectedmanufacturing, processing, formulation, packaging, labeling, distribution andadvertising of our products, and disposal of waste products arising from theseactivities, are subject to regulation by one or more federal agencies,including the FDA, the Drug Enforcement Agency, which we refer to as the “DEA,”the Federal Trade Commission, the Consumer Product Safety Commission, the U.S.Department of Agriculture, the Occupational Safety and Health Administration,and the Environmental Protection Agency (“EPA,”), as well as by foreigngovernments in countries where we distribute some of our products.

Noncompliance with applicableFDA policies or requirements could subject us to enforcement actions, such assuspensions of manufacturing or distribution, seizure of products, productrecalls, fines, criminal penalties, injunctions, failure to approve pendingdrug product applications or withdrawal of product marketing approvals. Similarcivil or criminal penalties could be imposed by other government agencies, suchas the DEA, the EPA or various agencies of the states and localities. Theseenforcement actions, if they were to occur, could have a material adverseeffect on our business, financial condition, results of operations and cashflows.

The FDA has the authorityand discretion to withdraw approvals and review the regulatory status ofmarketed products at any time. For example, the FDA may require an approvedmarketing application for any drug product marketed if new information revealsquestions about a drug’s safety or efficacy. All drugs must be manufactured inconformity with current Good Manufacturing Practices and drug products subjectto an approved application must be manufactured, processed, packaged, held andlabeled in accordance with information contained in the approved application.

14

----

**WEHAVE RECENTLY REDUCED OUR WORKFORCE CONSIDERABLY; IF WE ARE UNABLE TO HIRE ORRETAIN KEY PERSONNEL, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESSSUCCESSFULLY.**

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. As a result of the October 2005sale of certain assets to SigmaTel, we will need to hire a number of additionaltechnical personnel if we are to sustain the development of new products andour ability to sell those products. Because competition for highly skilledtechnical personnel is so intense, companies in Apogee’s industry are subjectfrom time to time to complaints brought by competitors alleging interferencewith contractual relations or wrongful hiring of employees. Such lawsuits maybe costly, may divert management attention and resources from the operation ofour business, and may therefore adversely affect our financial condition andresults of operations. In addition, the loss of the management and technicalexpertise of our senior management could seriously harm us. Our employees mayalso be recruited away from us by our competitors. We do not have in placeemployment contracts for members of our senior management, including the CFOand COO.

**WE DONOT HAVE MANUFACTURING CAPABILITIES, AND AS A RESULT, WE WILL RELY ON OUTSIDE MANUFACTURERSTO PRODUCE OUR PRODUCTS.**

We have nomanufacturing capabilities, nor do we have plans to establish any suchcapabilities. Accordingly, we utilize outside manufacturers and assembly andtest companies to produce our products. There are significant risks associatedwith our reliance on these manufacturers that can adversely affect ourbusiness, operating results and financial condition. These risks include:

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

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

·       theloss of manufacturing priority that may limit our ability to obtain products onschedule;

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

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

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

**OUR PRODUCTS USE NEW TECHNOLOGY AND MAY HAVEMANUFACTURING DEFECTS OR OTHER CHARACTERISTICS THAT ARE ONLY DETECTED AFTERINSTALLATION IN CUSTOMER APPLICATIONS, 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.

15

----

**OURABILITY TO ACHIEVE REVENUE GROWTH WILL BE HARMED IF WE ARE UNABLE TO PERSUADETHE MARKET TO ADOPT OUR PRODUCTS.**

We face challenges inpersuading manufacturers to adopt our products based upon newMEMS/Nanotechnologies. In order to adopt our products, manufacturers andengineers must understand and accept our new technology. In addition, ourproducts may be more expensive or difficult to implement for some applicationsthan products based on traditional technologies. For these reasons, prospectivecustomers may be reluctant to adopt our products.

**COMPETITIONIN THE SENSOR AND MEDICAL INDUSTRY COULD PREVENT US FROM ACHIEVINGPROFITABILITY.**

The sensor and medical device industries are highlycompetitive, and we expect the intensity of the competition to increase. Manyof our competitors have greater financial, technical, research, marketing,sales, distribution, service and other resources than we do. Moreover, ourcompetitors may offer broader product lines and have greater name recognitionthan we do, and may offer discounts as a competitive tactic, forcing intensepricing pressure on our products. In addition, several development stagecompanies are currently creating or developing technologies and products thatcompete with or are being designed to compete with our technologies andproducts. Our competitors may develop or market technologies or products thatare more effective or more commercially attractive than our current or futureproducts, or that may render our technologies or products less competitive orobsolete. Accordingly, if competitors introduce superior technologies orproducts and we cannot make enhancements to our technologies and productsnecessary for them to remain competitive, our competitive position, and inturn, our business, revenues and financial condition, will be seriously harmed.

**OUR BUSINESS WILL SUFFER IF WE EXPERIENCE DIFFICULTIESIN INTEGRATING ANY TECHNOLOGIES, 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.

**OURQUARTERLY OPERATING RESULTS MAY FLUCTUATE.**

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

·       availabilityand pricing from our suppliers;

·       changesin the demand for our products by customers;

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

·       rateand success of new customer development;

·       changesin our pricing policies or those of our competitors;

16

----

·       successin attracting, retaining and motivating qualified personnel;

·       changesin general economic conditions; and

·       obsolescenceof inventory.

A substantial portion of our operating expenses isrelated to personnel, facilities, and sales and marketing programs and arefixed. Our expense level is based in part on our expectations of future ordersand sales, which are extremely difficult to predict. Accordingly, we may not beable to adjust our fixed expenses quickly enough to address any significantshortfall in demand for our products in relation 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.

17

----

**RISKS RELATED TOOUR INTELLECTUAL PROPERTY**

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

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

We also generally 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 THAT COULD DIVERTMANAGEMENT’S ATTENTION AND COULD BE COSTLY.**

The sensor and medical device industries arecharacterized by vigorous protection and pursuit of intellectual propertyrights. From time to time, we may receive notices of claims of infringement,misappropriation or misuse of other parties’ proprietary rights. We cannot besure that we will prevail in these actions, or that other actions alleginginfringement by us of third-party patents, misappropriation or misuse by us ofthird-party trade secrets or the invalidity of one or more patents held by uswill not be asserted or prosecuted against us, or that any assertions ofinfringement, misappropriation or misuse or prosecutions seeking to establishthe invalidity of our patents will not seriously harm our business. Forexample, in a patent or trade secret action, an injunction could be issued againstus 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, misappropriationor misuse of other parties’ proprietary rights, we would likely incursignificant costs and diversion of our management and personnel resources withrespect to the defense of such claims, which could seriously harm our business.If any claims or actions are asserted against us, we may seek to obtain alicense under a third party’s intellectual property rights. We cannot be surethat under such circumstances a license would be available on commerciallyreasonable terms, if at all. Moreover, we often incorporate the intellectualproperty of our strategic customers into our designs, and we have certainobligations 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.

18

----

**RISKS RELATING TOOUR COMMON STOCK**

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

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

·       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.

**NEITHER OUR DISCLOSURE CONTROLS ANDPROCEDURES NOR OUR INTERNAL CONTROL OVER FINANCIAL REPORTING CAN PREVENT ALLERRORS OR FRAUD, AND IN THE PAST THESE CONTROLS AND PROCEDURES WERE NOTEFFECTIVE AND RESULTED IN RESTATEMENTS TO OUR FINANCIAL RESULTS.**

Our management does not expect that our disclosure controlsand procedures or our internal control over financial reporting will preventall errors or fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system will be attained. Furthermore, the design of acontrol system must reflect the fact that there are resource constraints andthe benefits of controls must be considered relative to their costs. Because ofthe inherent limitations in a cost-effective control system, no evaluation ofcontrols can provide absolute assurance that all misstatements due to error orfraud, if any, may occur and not be detected on a timely basis. These inherentlimitations include the possibility that judgments in decision-making can befaulty and that breakdowns can occur because of errors or mistakes. Ourcontrols and procedures can also be circumvented by the individual acts of somepersons, by collusion of two or more people or by management override of thecontrols. The design of any system of controls is based in part on certainassumptions about the likelihood of future events and there can be no assurancethat any design will succeed in achieving its stated goals under all potentialfuture conditions. Furthermore, controls may become inadequate because ofchanges in conditions or deterioration in the degree of compliance withpolicies or procedures. While we seek to design our controls and procedures toprovide reasonable assurance that information required to be disclosed in ourperiodic filings is timely disclosed, these inherent limitations expose us tobreakdowns in such controls and procedures. For example, while our certifyingofficers believed that the design of our controls and procedures would ensurethat material information related to the Company would be made known to them ona timely basis, in light of the circumstances underlying the restatement, thesecontrols and procedures for the financial statement periods covered by the restatementwere not effective. We have made certain changes to our internal control overfinancial reporting that are designed to address these circumstances, althougheven these improvements to our controls and procedures cannot ensure that allerrors or fraud will be prevented.

19

----

**Item 2.**                        PROPERTIES

Apogee rents approximately5,000 square feet of office space at 129 Morgan Drive, Norwood, Massachusettsfrom an entity controlled by a major stockholder. See Note 9 to theconsolidated financial statements. This lease expired on December 31,2005. Currently, Apogee is renting this facility on a month-to-month basis andbelieves that this rent is at a below market rate. In addition, the Companyleases offices in Great River, New York and Hong Kong. Effective March 1,2006, we closed the Great River, Long Island and Hong Kong offices.

**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. Hybridhad inadvertently obtained copies of files, containing in part, the intangibleassets purchased by Apogee in May of 2004 as part of its MEMS acquisition.On December 31, 2005 a settlement agreement was completed whereby allclaims by each party have been withdrawn and no further legal action will bepursued by any of the parties involved. Please see the exhibit attached to thisfiling for additional detail regarding the settlement.

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

The Annual Meetingof Shareholders of the Company was held on November 9, 2005. The followingmatters were voted upon:

(1)         Mr. Craig A.Dubitsky was elected by a plurality of the shares entitled to vote at themeeting to serve as our Director and to hold office until our annual meeting in2008. This proposal was approved with 10,596,737 votes for the proposal, 88,700votes against the proposal and no abstentions.

(2)         Mr. Alan W. Tuck waselected by a plurality of the shares entitled to vote at the meeting to serveas our Director and to hold office until the annual meeting in 2008. Thisproposal was approved with 10,596,737 votes for the proposal, 88,700 votesagainst the proposal and no abstentions.

(3)         The proposal regarding anincrease in the 1997 Employee, Director and Consultant Stock Option Plan wasnot approved with 3,141,051 approved votes for the proposal, 2,940,237 againstthe proposal and 292,700 abstentions.

(4)         The shareholders ratifiedthe appointment of Miller Wachman, LLP as the independent public accountantsfor the Company for the fiscal year ending December 31, 2005. Thisproposal was approved with 10,658,787 votes for the proposal, 10,650 votesagainst the proposal, and 6,000 abstentions and no broker non-votes.

Following the annual meeting, Apogee’s Board ofDirectors consisted of:  Mr. CraigA. Dubitsky, Mr. Arthur S. Reynolds, Mr. Herbert M. Stein, Ms. SherylB. Stein and Mr. Alan W. Tuck.

20

----

**PART II**

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

**Market Information**

Apogee’s Common Stock was originally listed on theNASDAQ Stock 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,Apogee’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 our Common Stock was no longer eligible for quotation on the OTCBBdue to the phase-in implementation of NASD Rule 6530 requiring all OTCBBquoted companies to report their current financial information to theSecurities and Exchange Commission. From September 1, 1999 to September 12,2000, the Apogee’s Common Stock was quoted on the National Quotation Bureau’sPink Sheets. On August 29, 2000, the Apogee’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 Apogee’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 that AMEXhas determined to proceed with an application to the Securities and ExchangeCommission to remove the common stock of Apogee from listing and registrationon AMEX. This action was taken because Apogee was no longer in compliance withthe AMEX’s continuing listing standards due to the failure to file its AnnualReport on Form 10-KSB for the year ended December 31, 2004 anda Quarterly Report on Form 10-QSB for the period ended March 31,2005. On August 31, 2005 the American Stock Exchange notified the Companythat it had completed the submission of all required periodic financial reportswith the Securities and Exchange Commission, thereby regaining compliance withSections 134 and 1101 of the Amex Company Guide. Subsequently, the Company wasadvised that the staff of the Amex recommended to the Hearings Department thatthe hearing related to the Company’s non-compliance be cancelled and the matterclosed. Apogee remains on Amex and has had no further interaction with the Amexto date.

21

----

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

| ** **     | ** ** | **Common Stock** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **High**              | ** ** | **Low** | ** ** |
| **2004:**      |       |                  |       |   |   |
| First Quarter  |       | 11.79                 |       | 8.60 |   |
| Second Quarter |       | 9.15                  |       | 8.30 |   |
| Third Quarter  |       | 8.40                  |       | 3.70 |   |
| Fourth Quarter |       | 4.70                  |       | 3.45 |   |
| **2005:**      |       |                  |       |   |   |
| First Quarter  |       | 4.49                  |       | 1.95 |   |
| Second Quarter |       | 2.13                  |       | 1.00 |   |
| Third Quarter  |       | 1.22                  |       | 0.88 |   |
| Fourth Quarter |       | 1.09                  |       | 0.70 |   |

 

**Stockholders**

As of March 15, 2006,there were approximately 72 registered holders and approximately 1,114beneficial holders of 11,968,332 outstanding shares of Common Stock.

**Dividends**

On August 12, 2003, the Board of Directorsapproved a two for one split of the Company’s Common Stock in the form of a100% stock dividend. On December 11, 2003 each stockholder of record as ofthe close of business on November 17, 2003 received one share of CommonStock for each share held.

It is the presentintention of management to not pay any dividends and retain any earnings toprovide funds for the operation and expansion of the Company’s business.   Any future determination to pay dividendswill be at the discretion of our board of directors and will depend on theCompany’s results of operations, financial conditions, contractual and legalrestrictions and other factors the board of directors deems relevant.

**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 notpreviously reported on the Company’s Quarterly Reports on Form 10-QSB.Also included is the consideration, if any, received by the Company for suchshares and options and information relating to the section of the SecuritiesAct of 1933, as amended, or rule of the Securities and Exchange Commissionunder which exemption from registration was claimed. All of the followingsecurities were issued directly by Apogee and there were no underwriters orselling agents involved in these transactions.

As disclosed in the Company’s Current Reports on Form 8-K,on August 9, 2005, Apogee entered into agreements with Laurus Master Fund,Ltd. (“Laurus”), whereby the Company received $2,000,000 in gross proceedsthrough the sale of a secured convertible term note. The transaction closed on August 11,2005. In accordance with the terms of the note, the note was payable by Apogeein cash during the first 120 days following the issuance of the note, and afterthe 120 day period it was payable in cash or convertible into the commonstock, $0.01 par value per share, of Apogee at a fixed conversion price of$1.05 per share. In connection with the financing, the Apogee paid certaincosts and expenses of Laurus and issued an 

22

----

immediately exercisablewarrant with terms restricting exercise. The Laurus warrant provided for thepurchase of 85,000 shares of common stock at a price of $1.22 per share. Thewarrant expired seven years after issuance.

Biscayne Capital Markets, Inc. served as a finderfor the transaction, and received a fee of 5% of the gross proceeds of theoffering, together with a seven year warrant to purchase an aggregate of 8,500shares of common stock immediately exercisable at a price of $1.22 per share.

On December 5, 2005, we amended the terms of the85,000 common share warrants with Laurus, whereby the registration rightsassociated with the warrant were terminated in consideration of a reducedexercise price, from $1.22 to $1.15, and the insertion of a cashless exerciseprovision.

The summaries of the material terms of the agreementsdiscussed herein are qualified in their entirety by reference to the text ofthose agreements incorporated by reference herewith. The offering was conductedas a private placement pursuant to the exemption from registration provided by Section 4(2) ofthe Securities Act of 1933, as amended, and the rules and regulationspromulgated thereunder.

23

----

**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, INADDITION TO HISTORICAL STATEMENTS, FORWARD-LOOKING STATEMENTS THAT INVOLVERISKS AND UNDERTAINTIES. THE COMPANY’S ACTUAL RESULTS COULD DIFFER SIGNIFICANTLYFROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THATCOULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE FACTORS DISCUSSED ABOVEIN THE SECTION ENTITLED “RISK FACTORS” AS WELL AS OTHER FACTORS IN THISANNUAL REPORT ON FORM 10-KSB.**

**OVERVIEW**

Apogee has traditionally designed, developed, andmarketed integrated circuit (“IC”) products incorporating our proprietary DDX® audio amplifier technology to the consumermarket. In addition, under a licensing agreement with STMicroelectronics NV (“ST”),we developed intellectual property for use in royalty bearing audio IC productsproduced by ST.   Apogee is currently inthe final stages of the process of evolving from an audio focused enterprise toa provider of sensors and medical device products based upon its acquiredMicro-Electromechanical Systems (“MEMS”) MEMS/Nanotechnologies. We released ourfirst sensor products in December 2005 targeted for the consumer,automotive and industrial markets and we are currently developing a MEMS baseddevice for transdermal drug delivery for the medical market.

From 1981 until 1995, Apogee was in the business ofengineering, manufacturing and marketing high quality, high-end patented ribbonloudspeaker systems for use in home audio and video entertainment systems.Since 1995, we have focused on the development and commercialization of ourproprietary amplifier technology, known as DDX® .DDX technology is an all-digital, high efficiency amplifier technology thatprovides true digital audio reproduction while lowering manufacturing costcompared to traditional analog amplifier solutions. Our initial DDX developmentefforts were directed toward the implementation of a digital controller designand the specifications of power designs to support DDX licensing objectives.Apogee signed an exclusive licensing agreement for audio applications with STin February 2001, which was subsequently transitioned to a non-exclusivelicense in 2005. Under this licensing agreement with ST, Apogee developed andprovided intellectual property to be used in royalty bearing products producedby ST.

In 1996 Apogee started the development of DDX-basedsemiconductor products. The first DDX-based IC product was released toproduction in late 2000 and since that time we have released over 20 additionalIC products.  Apogee marketed and soldits semiconductor products to audio manufacturers using a worldwide sales anddistribution network. We utilized two independent suppliers to produce oursemiconductor products and contract manufacturers to produce circuit boards forcustomers who support the Company’s IC marketing activities. Apogee hasmarketed and intends to market our products using a worldwide network of directsales staff, independent sales representatives and distributors.

As described above and set forth in our Current Reporton Form 8-K as filed on October 11, 2005, on October 5,2005, we completed a transaction with SigmaTel, Inc. (“SigmaTel”), wherebycertain assets of our audio division were sold, including the DDX technologyand the associated royalties from our license agreement with ST, to SigmaTelfor approximately $9.4 million plus a one-year earn-out of potentially up to$4.5 million. And as a result of the transaction, we agreed to discontinue ouraudio division after completing the sale of our remaining audio division assets.No assurance can be given that this earn-out 

24

----

will be realized, andbased on our reports received to date, the revenue generated from this earn-outis likely to be minimal, if anything at all. In addition, as part of thetransition a significant portion of Apogee’s engineering and marketing staffrelated to the audio division left the Company after they were offeredpositions at SigmaTel.

**As discussed, we have now chosen toevolve into a sensor and medical device provider based upon our MEMS andnanotechnologies. We have chosen to exit the audio space and by the terms of anon-compete with SigmaTel, signed in connection with our sale of assets tothem, we can no longer compete in the Class D audio/amplifier business fora period two years.**

At December 31, 2005, Apogee had an accumulateddeficit of approximately $12.7 million, as compared to a deficit of $15.6million as of December 31, 2004. Our historical net losses and accumulateddeficit (since 1995) result primarily from the costs associated with the Apogee’sefforts to design, develop and market its DDX technology as well as costsassociated with our efforts to develop new products using our analog anddigital circuit designs and MEMS technology.

In our former businesses,we outsourced the manufacturing, assembly and preliminary testing of itssemiconductor products and evaluation boards. We intend to follow the samebusiness model with respect to our sensor and medical products businesses. Ourcost of revenue includes the third-party manufacturing, testing and assemblycosts as well as costs associated with shipping. Research and developmentexpenses consist primarily of salaries and related overhead costs associatedwith engineering activities as well as other materials and related servicesused in the development of our semi-conductor chips. Selling, general andadministrative expenses consist primarily of employee compensation and overheadcharges as well as expenses directly associated with the marketing our past andpotential products. We expect our business structure to remain largely thesame.

**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 interim quarters. The investigation by the Audit Committee into variousaccounting matters, has determined that the recognition of revenue fortransactions with third party distributors was not handled in accordance withgenerally accepted accounting principles (GAAP), and as a result that Apogee’sfinancial statements for the fiscal years ended December 31, 2003 and December 31,2004 interim periods were misstated. Consequently, Apogee adopted asell-through revenue recognition method for sales to distributors. See Note 2—Summaryof Significant Accounting Policies—of the Consolidated Financial Statements.The adoption of the sell-through revenue recognition method was appliedretroactively. Using the sell-through revenue recognition methodology, Apogeedoes not recognize sales into distribution channels until our distributors havesold the products to their customers. We had previously recognized revenue onsales to distributors using a sell-in methodology, pursuant to which the Apogeerecognized revenue upon shipment to its distributors. See Note 19 - Change inIndependent Registered Public Accounting Firm - of the Consolidated FinancialStatements for additional information on the Audit Committee’s investigationand the Restatement.

25

----

**Results of Operations**

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

| ** **                         | ** ** | **2005** | ** ** | **2004** | ** ** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|------------|
| Product Sales                      |       | 87.04    | %          | 71.20    | %          |       |
| Royalties                          |       | 9.29     |       | 17.18    |       |       |
| Consulting/Licensing               |       | 3.67     |       | 11.62    |       |       |
| Cost of Sales                      |       | 76.68    |       | 63.19    |       |       |
| Research and  Development          |       | 52.38    |       | 45.95    |       |       |
| Sales, General  and Administrative |       | 77.61    |       | 46.21    |       |       |
| Operating Loss                     |       | (106.67  | )%         | (55.35   | )%         |       |
| Other Income*                      |       | 163.74   |       | 0.38     |       |       |
| Net Income (loss)                  |       | 57.07    | %          | (54.97   | )%         |       |

 

----

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

**Critical Accounting Policies**

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

**Revenue Recognition**

Apogee recognizes 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(OEM):  Revenue is recognized under theCompany’s standard terms and conditions of sale, title and risk of losstransfer to the customer at the time products are shipped from the company’swarehouse or delivered to the customer’s representative/freight forwarder. Salesto Distributors:  From time to time theCompany provides stock rotation rights, price protection and other incentivesto its Distributors. See Note 2—Summary of Significant Accounting Policies ofthe Consolidated Financial Statements. As a result of these incentives, theCompany has adopted a policy of deferring recognition of revenue until thedistributor sells products to its customers based upon receipt of point-of-salereports from the distributors. The Company accrues the estimated cost ofpost-sale obligations including product warranty returns, based on historicalexperience. To date the Company has experienced minimal warranty returns.

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

26

----

**Accounts Receivable**

Apogee performs creditevaluations 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 monitorcollections and payments from our customers, and we maintain a provision forestimated credit losses based upon our historical experience and any specificcustomer collection 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 Companymake certain estimates regarding the market value of the inventory, includingan assessment of excess or obsolete inventory. Apogee determines excess andobsolete inventory based on an estimated future demand and estimated sellingprices for our 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 current inventory of approximately $1.3 million, netof reserve, consisting of $609,000 held at Apogee and $719,000 held atdistributors. This compares to inventory, net of reserves, of approximately$2.7 million consisting of $1.5 million held at distributors with the remaining$1.2 million and an additional $135,000 in purchase commitments at December 31,2004. The current inventory level is based on expected demand prior to theSigmaTel Transaction and not necessarily built for firm purchase commitmentsfor the current customers.   If we areunable to sell the inventory in a relatively short period of time it, we willbe required to take additional excess inventory charges or write-downs to netrealizable value which will decrease the gross margin as well as the netoperating results in the future. During the years ended December 31, 2005and 2004, Apogee recorded a provision for excess or obsolete inventory ofapproximately $736,000 and $836,000, 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 an impairmentcharge in the future.

**YearEnded December 31, 2005 Compared to Year Ended December 31, 2004**

**Revenue**

On October 5, 2005, Apogee completed atransaction with SigmaTel, Inc. whereby certain assets of the audiodivision were sold, including the DDX® technology and the associated royalties fromits license agreement with ST for approximately $9.4 million, resulting in again of approximately $8.9 million, plus a one-year earn-out of potentially upto $4.5 million and as a result will discontinue its audio division after 

27

----

completing the sale of itsremaining audio division assets. Based on our experience to date, it isunlikely that any of the earn-out will be received and if any is received itwill be a minimal amount. Prior to the sale, the Company derived its revenuefrom three sources: (1) product sales, which consist of merchandise salesmade either directly to original equipment manufacturers or sell through pointof sale (“POS”) by distributors. All shipments are fulfilled from the Company’swarehouses in Hong Kong and/or Norwood, Massachusetts and revenue is reportednet of returns; (2) royalty revenue, which consists of royalties paid bySTMicroelectronics under the terms of the licensing agreement signed in February 2001and (3) consulting income related to the development of custom ICs forSTMicroelectronics and other third parties who are developing DDX and non-DDXbased solutions. See Note 2 of the consolidated financial statements—RevenueRecognition.

Apogee recognized revenue for the fiscal year ended December 31,2005 of $5.2 million, a decrease of $1.0 million or 16% from revenue recognizedin 2004 of approximately $6.2 million. During the twelve-month period ended December 31,2005, we recognized revenue from product sales of $4.5 million, an increase ofapproximately $118,000 or 3% from product revenue recognized of approximately$4.4 million for the fiscal year ended December 31, 2004. Productsales consisted of semiconductor products, evaluation boards and referenceboards sold directly to end users or POS revenue by tour distributors. Thisnominal increase in product revenue was the result of increased revenuerecognized as a result of sell through of inventory by our distributors. As of December 31,2005, Apogee recognized substantially all of the deferred revenue,approximately $479,000, related to two of our former distributors. At December 31,2005, we formally terminated these distributor contracts and as a result expectno continuing involvement with these two distributors as it related to theaudio business. In connection with the sale of the audio business, weterminated our remaining distributors but does anticipate continuinginvolvement with these distributors and anticipates being able to leveragethese relationships in the new business lines.

Revenue from non-product related items of accountedfor approximately $670,000 or 13% of total revenue for the twelve months ended December 31,2005, compared to revenue from non-product related items of approximately $1.8million or 29% of total revenue for the twelve months ended December 31,2004. During the twelve months ended December 31, 2005, net royaltyrevenue recognized under the ST Licensing Agreement decreased by approximately$600,000 or 57% to $480,000 from $1.1 million during the same period in 2004. Thisdecrease was partially due to royalty rate reductions granted ST. With theSigmaTel Transaction, the Company no longer recognizes royalties under the STLicensing Agreement. As a result, no royalty revenue was recorded for the threemonths ended December 31, 2005. In addition, in 2005 the Companyrecognized consulting revenue of approximately $190,000, compared toapproximately $716,000 for the twelve months ended December 31, 2004. Asof December 31, 2004, approximately $180,000 of the consulting revenue wasthe final utilization from design services performed by STMicroelectronics aspart of a $400,000 design credit in accordance with the terms of the licensingagreement with STMicroelectronics. Also included in the consulting revenue forthe fiscal period ended December 31, 2004 was a $50,000 reclassificationof consulting revenue originally recognized during the fourth quarter ended December 31,2003.

Totalrevenue for the years 2005 and 2004 consisted of:

| ** **    | ** ** | **2005** | ** ** | **2004**  | ** ** |
|---------------|------------|----------|------------|-----------|------------|
| Product Sales |       | $        | 4,502,333  |      | $          | 4,383,912 |   |
| Royalties     |       | 480,468  |       | 1,057,867 |       |
| Consulting    |       | 190,000  |       | 715,854   |       |
| Total:        |       | $        | 5,172,802  |      | $          | 6,157,633 |   |

 

28

----

**Cost of Revenue**

Cost of revenue was $4.0 millionor 77% of revenue for the fiscal year ended December 31, 2005 compared to$3.9 million or 63% of revenue for the year ended December 31, 2004,a minimal increase of approximately $100,000. Cost of revenue primarilyconsists of purchasing finished semiconductor chips and costs associated withassembly, testing and shipping of those products as well as customs and storagefees associated with warehousing a large portion of the Company’s semiconductorproducts in Asia. Additionally, from an analysis of sales to inventory on handand/or on order management determined that it was necessary to establishreserves for slow moving, excess and/or obsolete inventories held at Apogee orat distributors. These provisions are reported as part of the cost of revenue. Provisionsfor excess and obsolescence for the 12 months ended December 31, 2005 wereapproximately $736,000 compared to $836,000 for the 12 months ended December 31,2004. This increase in cost of revenue was primarily attributable to a slightincrease in product sales of the Company’s semiconductor products offset by adecrease in reserves for excess and obsolete inventory. For the fiscal yearended December 31, 2005, the Company recorded a gross margin from productsales of approximately 12%, compared to a gross margin from product revenue ofapproximately 11% for the same period in 2004. For the fiscal years ended December 31,2005 and 2004, the Company wrote off approximately $44,000 and $116,000,respectively, of obsolete inventory. The Company constantly monitors itsinventory and as of December 31, 2005 the Company believes the remainderof its inventory is appropriately valued and will continue to re-evaluate thison a quarterly basis or more frequently if market conditions warrant.

**Operating Expenses**

**Research and Development Costs**

The Company’s research and development (“R&D”)expenses consist primarily of salaries and related expenses in the design,development and technical support of the Company’s products as well as directsupport to current and potential customers. Research and development expensesdecreased by approximately $100,000 or 4% to approximately $2.7 millionfor the twelve months ended December 31, 2005, compared to approximately$2.8 million for the prior fiscal year.  In May of 2004 the Company acquiredintellectual property and other intangibles from Standard MEMS, Inc. Inaddition, the Company hired several former employees of Standard MEMS, Inc.Total R&D costs associated with the MEMS division increased byapproximately $687,000 or 219%, to approximately $1.1 million for the 12months ended December 31, 2005 compared to $313,000 for the same period in2004. Costs related to human resources for R&D were approximately $1.8 millionfor the twelve months ended December 31, 2005, compared to approximately$2.5 million for the prior fiscal year. This decrease of approximately$700,000 or 11% was the result of the SigmaTel Transaction and the transfer ofthe R&D staff to SigmaTel. Human Resource costs related to the audiodivision decreased by approximately $500,000 or 11% to approximately $1.3 millionfor the twelve months ended December 31, 2005, compared to approximately$1.8 million for the prior fiscal year. The MEMS division accounted for approximately$497,000 in human resource expenditure for the fiscal year ended December 31,2005, compared to approximately $242,000 for the fiscal year ended December 31,2004, an increase of $255,000 or over 100%.

Net of human resources costs, the MEMS Divisionaccounted for approximately $552,000 of research and development expenses forthe fiscal year ended December 31, 2005. This represented an increase ofapproximately $482,000 from $70,000 for the previous fiscal year.  Company’s initial focus with respect to theMEMS technology has been on the development of MEMS based sensors and medicaldevices. In addition to third party consultants, the Company has agreementswith the University of Medicine and Dentistry New Jersey’s (UMDNJ) Laboratoryfor Drug Delivery, Lehigh University and Cornell University in the developmentof the medical device and the Research Foundation of State University of NewYork University in the development of advanced sensors. Expenses associatedwith these efforts were 

29

----

approximately $257,000 forthe fiscal year ended December 31, 2005, compared to $26,000 for thefiscal year ended December 31, 2004, an increase of $231,000.

During the twelve monthsended December 31, 2005, the Company introduced two IC products and ninesensor products. The Company continues to invest in the development of itssensor and medical device products.  Dueto the technical nature of the Company’s products, engineering and designsupport are critical parts of the Company’s strategy during both the developmentof its products and the support to its customers from product design to finalproduction. Management anticipates that it will continue to commit resources toresearch and development activities, but with the divestiture of the Company’s audiodivision in October 2005, R&D costs are expected to be reduced atleast for the short term.

**Selling,General and Administrative Costs**

Selling expenses consist primarily of salaries andrelated expenses for personnel engaged in the marketing and selling of the Company’sproducts, as well as costs related to trade shows, product literature, traveland other promotional support costs. In addition, selling expenses includecosts related to the Company’s Hong Kong, Taiwan and Japan (2005) sales offices.General and administrative costs consist primarily of executive andadministrative salaries, professional fees and other associated corporateexpenses. Selling, General & Administrative (“SG&A”) expenses wereapproximately $4.0 million for the year ended December 31, 2005compared to $2.8 million for the year ended December 31, 2004. Thisrepresents an increase of approximately $1.2 million or 41%.The increase in SG&A,described below, was attributable primarily to increased legal and accountingfees as well as increased human resource costs.

Human resource costs increased approximately $81,000or 6% to $1.43 million for the fiscal year ended December 31, 2005from $1.35 million for the fiscal period ended December 31, 2004. Thisincrease was primarily due to additional staffing as well as highercompensation both domestically and in Japan, partially offset by a reduction instaffing at the Hong Kong Office. Human resource costs, domestically, increasedapproximately $96,000 or 13% from $904,000 in 2004 to $1.0 million for theyear ended December 31, 2005. This increase was primarily due to thehiring of Mr. Paul J. Murphy as the Company’s Vice President ofFinance and Chief Financial Officer in June 2005, as well as increasedwages and fringe benefits costs. In addition, human resource expenditures atthe Company’s Japanese Office increased approximately $13,000 or 10% to$140,000 for the fiscal year ended December 31, 2005 from $127,000 as of December 312004. Human Resources at the Company’s Hong Kong Office decrease by approximately$50,000 or 16%, from $319,000 as of December 31, 2004 to $269,000 as of December 31,2005. This decrease reflects the reduction in staffing at the Hong Kong office asa result of the sale of the Audio Division to SigmaTel, Inc. in October 2005.As of December 31, 2005, the Company employed a total of 12 employees, 10domestically and 1 each located in the Hong Kong and Japanese Offices. Prior tothe sale of the audio business to SigmaTel, Inc. in October 2005, theCompany had 36 employees. This compares to 29 domestically and 6 in Hong Kongand 1 in Japan as of December 31, 2004.

Professional expenses increased approximately $946,000or 187% to approximately $1.5 million for the twelve months ended December 31,2005, compared to $507,000 (net of approximately $140,000 for the JapaneseConsultant reclassed under human resources), for the previous 12-monthperiod. Of this increase approximately $672,000 and $200,000, were as due tolegal and accounting expenses, respectively, associated with the AuditCommittee’s investigation and subsequent restatement of the Company’s financialstatements. These expenses are expected to be non-recurring.   Legal expenses increased to approximately$789,000 for the 12-month period ended December 31, 2005, comparedto approximately $117,000 for the previous 12-month period. In addition,accounting expenses increased to approximately $424,000 for the current 12-monthperiod, compared to approximately $225,000 for the 12-month period ended December 31,2004. The Company expects legal and accounting expenses will decrease now thatit has become current with its SEC filings. Investor relations, publicrelations, recruiting and director fees accounted for a majority of theremaining increase in professional fees.

30

----

Other expenses contributing to the increase in SG&Awere travel, opening the Taiwan office, as well as printing and filing expensesassociated with the Company’s becoming compliant with the reportingrequirements of the Securities and Exchange Commission (the “SEC”). Travelexpense increased by approximately $22,000 or 10% to approximately $244,000 forthe twelve months ended December 31, 2005 compared to approximately$222,000 for the previous 12-month period. In December 2004 theCompany opened an office in Taiwan. Rent for this facility was approximately$18,000 for the fiscal year ended December 31, 2005. As a result of the audiodivision sale of assets to SigmaTel, this facility was closed effective as of December 31,2005. As a result of restatement of our year ended December 31, 2003 andbecoming compliant with the SEC for the fiscal year ended December 31, 2004,printing and filing fees for document submission to the SEC increased byapproximately $20,000 or 81% to approximately $45,000 for the 12 months ended December 31,2005 compared to $20,000 for the 12 months ended December 31, 2004.

Increases in SG&A werepartially offset by a decrease in commissions, royalties and distributionexpenses on products sales as a result of decreased shipments. Sales andDistribution expense for the 12 months ended December 31, 2005 decreasedapproximately $15,000 or 11% to $115,000 for the 12 months ended December 31,2005 from $130,000 for same period in 2004. Operating expenses are expected tobe reduced over the next few quarters due to a reduction of staffing and otherdeductions as a result of the SigmaTel Transaction. This trend is expected tocontinue until such time as staffing and other spending increases inconjunction with building the sensor and medical device business.

**Interest Income (Expense)**

Interest income includesincome from the Company’s cash and cash equivalents and from investments andexpenses related to its financing activities. During the twelve months ended December 31,2005, the Company generated interest income of approximately $70,000 comparedto interest income of approximately $23,000 during the same period in 2004. Asa result of the loans by Laurus in August 2005 and loans by Mr. HerbertM. Stein and Mr. David Spiegel in May 2005, the Company incurredinterest expense of approximately $38,000 for twelve months ended December 31,2005. This increase in interest income for the twelve months ended December 31,2005 was primarily due to interest on the net cash received of approximately$5.7 million as a result of the SigmaTel Transaction.

**Financing Costs**

On August 11, 2005,the Company entered into agreements with Laurus whereby the Company received$2.0 million in gross proceeds (with net proceeds of approximately $1.8 million)through the sale of a 120 day secured term note. In accordance with the termsof the note, the note was payable by the Company in cash during the first 120days following the issuance of the note, and after the 120 day period it waspayable in the amount of $62,500 per month in cash or convertible into thecommon stock, $0.01 par value per share, of the Company at a fixed conversionprice of $1.05 per share. In connection with the financing, the Company paid certaincosts and expenses of Laurus. Total expenses incurred in connections with thisfinancing was approximately $424,000 including approximately $107,500 for duediligence and management fees, $100,000 paid to Biscayne Capital Markets, Inc.who served as a finder for this transactions and approximately $100,000 as apremium to Laurus with the remaining $116,500 attributed to legal, escrow and other associated costs. Thecosts associated with this agreement are expected to drop as a result of theamendment to the warrants on December 5, 2005, which removed theregistration rights associated with the securities issued in the financing.

**Income Taxes**

The Company has incurredstate franchise taxes of approximately $20,000 and no income tax expenses todate. As of December 31, 2005 and 2004, the Company had available afederal net operating loss 

31

----

carryforwardof approximately $8,454,000 and $13,107,000, respectively and a state netoperating loss carryforward of approximately $4,037,000 and $6,867,000,respectively. These net operating loss carryforwards will expire at varioustimes between 2006 and 2024.

**Liquidity and Capital Resources**

The Company’s principal sources of liquidity are saleof the audio division and cash flows from operating activities, financing andinvesting activities. As of December 31, 2005, the Company had workingcapital of approximately $4.9 million, including approximately $5.5 millionin cash and cash equivalents, as compared to working capital of approximately$2.2 million at December 31, 2004, which included $1.9 millionin cash and cash equivalents. As of the years ended December 31, 2005 and December 31,2004 the Company had no debt. Cash equivalents consist of certificates ofdeposit, which are highly liquid and have original maturities of no more than90 days.  This increase in cash was theresult of the SigmaTel Transaction. See Note 1 to the consolidated financialstatements—Liquidity Section on Basis of Presentation.

Net cash used in operations during the twelve-monthperiod ended December 31, 2005 increased to approximately $4.9 millioncompared to approximately $2.3 million in the twelve-month period ended December 31,2004. This increase was mainly due to an increase in the operating lossincurred as a result of increased spending on professional fees.   As of December 31, 2005, inventory, netof reserves, was approximately $1.3 million compared to inventory, net ofreserves, of approximately $2.7 million as of December 31, 2004. Netaccounts receivable was approximately $153,000 at December 31, 2005, downfrom approximately $533,000 at December 31, 2004. As of December 31,2005, five customers accounted for approximately 95% of the total accountsreceivable balance. The Company had reserves against bad debts at $145,000 asof December 31, 2005 compared to a reserve of $105,000 as of December 31,2004. The Company believes this reserve is sufficient at this time. As of December 31,2005 the Company recorded a gain on the SigmaTel Transaction, net of expensesof approximately $8.9 million resulting in approximately $3.0 millionin net income for the 12 months ended December 31, 2005.

Net cash provided by investing activities for thetwelve months ended December 31, 2005 was approximately $8.5 million,compared to net cash used in investing activities of approximately $202,000 forthe twelve months ended December 31, 2004.  On October 5, 2005, Apogee completed atransaction with SigmaTel, whereby certain assets of the Audio division weresold, including the DDX technology and the associated royalties from itslicense agreement with ST, to SigmaTel for approximately $8.6 million, netof certain transaction costs. Pursuant to the Escrow Agreement dated October 5,2005 between SigmaTel and Apogee, $420,000 is to be held in escrow for a periodof eighteen months for the purpose of compensating purchaser pursuant to theindemnification.

Net cash provided by financing activities for thetwelve months ended December 31, 2005 was approximately $32,000, comparednet cash provided by financing of approximately $1.9 million for the yearended December 31, 2004. Company raised $32,500 through the exercise ofoptions by two employees.

On August 24, 2004 the Company completed aprivate placement to accredited third party investors under Section 4(2) ofthe Securities Act and Regulation D, Rule 506, promulgated thereunder. Inconnection with the private placement, the Company issued 374,242 shares at aprice of $4.75 per share. The Company received net proceeds of $1,648,177 fromthe sale**.**During the three-monthperiod ended September 30, 2004, the Company received $58,820 in cash fromthe exercise of options by one former employee and one former director.

The Company believes thatcash flow from operations as well as the funds from the audio division sale, aswell as, amounts that may be raised from time to time in private offerings ofits common stock as well as the amounts received in debt financings will besufficient to support operations and fund capital equipment requirements atleast through 2006.

32

----

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

The Company’s financial instruments include: cash,cash equivalents, accounts receivable and accounts payable. At December 31,2005 and December 31, 2004, 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.

**Item 7.**                        FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

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

Financial Statements:

| Report of Independent Registered Public Accounting  Firm                                                  |   | F-1 |   |
|-----------------------------------------------------------------------------------------------------------|--------|-----|--------|
| Consolidated  Balance Sheets as of December 31, 2005 and December 31, 2004                      |   | F-2 |   |
| Consolidated Statements of Operations for the Years  Ended December 31, 2005 and 2004                |   | F-3 |   |
| Consolidated Statements of Stockholders’ Equity for  the Years Ended December 31, 2005 and 2004 |   | F-4 |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2005 and 2004                |   | F-5 |   |
| Notes to Consolidated Financial Statements                                                                |   | F-6 |   |

 

33

----

**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 former auditors notified the Company’s audit committee that there areadditional transactions in 2003 and 2004 that should be more closely reviewedby the Company and its new auditors to ensure that revenue was appropriatelyrecognized. The retroactive adoption of the sell through method of revenuerecognition discussed below corrected these transactions.

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.

There were no disagreements with Anchin on any matterof accounting principles or practices, financial statement disclosure orauditing scope or procedure, which disagreements, if not resolved to thesatisfaction of Anchin, would have caused Anchin to make reference to thesubject matter of the disagreement(s) in connection with its report on theCompany’s financial statements for the Company’s two most recent fiscal yearsor any later interim period. The auditor’s reports on the Company’s auditedfinancial statements for either of the past two years did not contain anadverse opinion or a disclaimer of opinion, and were not qualified or modifiedas to uncertainty, audit scope, or accounting principles. Anchin had been theCompany’s auditors since January 1, 2005, when it acquired the firm ofYohalem Gillman & Co. LLP, which had been the Company’s auditors since1981.

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, as its Chief Financial Officer and Vice President ofFinance effective June 1, 2005. Mr. Murphy assumed all of the 

34

----

responsibilitiescustomarily associated with the role of Chief Financial Officer and VicePresident of Finance, including the responsibilities of the Company’s PrincipalAccounting 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 was completed in November 2005, determined that therecognition of revenue for transactions with third party distributors was nothandled in accordance with generally accepted accounting principles (GAAP), andas a result 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 and, accordingly, addressedthe improper revenue recognition discussed in the preceding paragraphs.

**Item 8a.**                 CONTROLSAND PROCEDURES

(a)           Evaluation ofDisclosure Controls and Procedures. The Company’s chief executive officer andprincipal financial officer have reviewed and evaluated the effectiveness ofthe Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13d-15(e) and 15d-15 (e)) as of the end of the period covered by thisannual report. 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-KSBwas being prepared.

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

**PART III**

**Item 8b.**                 OTHERINFORMATION

None.

**Item 9.**                        DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

The response to this item is incorporated by referencefrom the discussion responsive thereto under the captions “Management,” “Compliancewith Section 16(a) of the Securities Exchange Act of 1934,” and “Codeof Conduct and Ethics” in the Company’s Proxy Statement for the 2006 AnnualMeeting of Stockholders to be held May 25, 2006.

Disclosure regarding anyamendments to, or waivers from, provisions of the Code of Conduct and Ethicsthat apply to our principal executive and financial officers will be includedin a Current Report on Form 8-K within four business days followingthe date of the amendment or waiver, unless website posting of such amendmentsor waivers is permitted by the rules of the American Stock Exchange, Inc.

35

----

**Item 10.**                 EXECUTIVECOMPENSATION

The response to this itemis incorporated by reference from the discussion responsive thereto under thecaptions “Management,” “Compliance with Section 16(a) of theSecurities Exchange Act of 1934,” and “Code of Conduct and Ethics” in theCompany’s Proxy Statement for the 2006 Annual Meeting of Stockholders to beheld May 25, 2006.  Disclosureregarding any amendments to, or waivers from, provisions of the Code of Conductand Ethics that apply to our principal executive and financial officers will beincluded in a Current Report on Form 8-K within five business daysfollowing the date of the amendment or waiver, unless website posting of suchamendments or waivers is permitted by the rules of the American StockExchange, Inc.

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

The response to this itemis incorporated by reference from the discussion responsive thereto under the caption“Share Ownership” in the Company’s Proxy Statement for the 2006 Annual Meetingof Stockholders to be held May 25, 2006.

**Item 12.**                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

The response to this itemis incorporated by reference from the discussion responsive thereto under thecaptions “Certain Relationships and Related Transactions” and “ExecutiveCompensation—Employment Agreements, Termination of Employment and Change ofControl Arrangements” in the Company’s Proxy Statement for the 2006 Annual Meetingof Stockholders, to be held on May 25, 2006.

**Item 13.**                 EXHIBITS

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

 

Thefollowing is a list of exhibits filed as part of this Annual Report on Form 10-KSB.
| Exhibit  No | ** ** | **Description**                                                                                                                                                                                                                                                                        | ** ** |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 3.1         |       | Certificate of Incorporation of Apogee  Technology, Inc., incorporated herein by reference to Exhibit 3.1  to the Registrant’s Form 10-SB, as amended (File No. 000-17053).                                                                                   |       |
| 3.2         |       | Amendment of Certificate of Incorporation of Apogee  Technology, Inc., incorporated herein by reference to Exhibit 3.2  to the Registrant’s Form 10-SB, as amended (File No. 000-17053).                                                                      |       |
| 3.3         |       | Certificate of Amendment to Certificate of  Incorporation of Apogee Technology, Inc., incorporated herein by  reference from Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-QSB  for the quarter ended June 30, 2001 (File. No. 000-30656). |       |
| 3.4         |       | Restated By-Laws of Apogee Technology, Inc.,  incorporated herein by reference from Exhibit 3.4 to the Registrant’s  Quarterly Report on Form 10-QSB for the quarter ended  June 30, 2001 (File. No. 000-30656).                                         |       |

36

----

 
| 10.1* |   | License Agreement dated February 2, 2001 by and  between the Registrant and STMicroelectronics, NV, incorporated herein by  reference from Exhibit 10.1 to the Registrant’s Quarterly Report on  Form 10-QSB for the quarter ended March 31, 2001. (File  No. 000-30656).                                                                                   |   |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.2  |   | Letter Agreement between Laurus Master Fund and  Apogee Technology, Inc., dated December 5, 2005, filed with the Current  Report on Form 8-K, dated December 7, 2005 (File  No. 001-10456).                                                                                                                                                                           |   |
| 10.3  |   | Termination of Registration Rights Agreement, dated December 5,  2005 filed with the Current Report on Form 8-K, dated December 7,  2005 (File No. 001-10456).                                                                                                                                                                                                        |   |
| 10.4  |   | Apogee Technology, Inc. Amended and Restated Common  Stock Purchase Warrant, filed with the Current Report on Form 8-K, dated  December 7, 2005 (File No. 001-10456).                                                                                                                                                                                                      |   |
| 10.5  |   | Securities Purchase Agreement, by and between Apogee  Technology, Inc. and Laurus Master Fund, Ltd., incorporated herein by  reference from Exhibit 10.1 to the Registrant’s Form 8K as filed on  August 9, 2005 (File No. 001-10456).                                                                                                                           |   |
| 10.6  |   | Master Security Agreement, by and between Apogee  Technology, Inc. and Laurus Master Fund, Ltd., incorporated herein by  reference from Exhibit 10.2 to the Registrant’s Form 8K as filed on  August 9, 2005 (File No. 001-10456).                                                                                                                               |   |
| 10.7  |   | Form of Laurus Master Fund, Ltd. Warrant,  incorporated herein by reference from Exhibit 10.3 to the Registrant’s  Form 8Kas filed on August 9, 2005 (File No. 001-10456).                                                                                                                                                                                  |   |
| 10.8  |   | Grant of Security Interest In Patents and Trademarks,  by and between Apogee Technology, Inc. and Laurus Master Fund, Ltd., incorporated  herein by reference to Exhibit 10.4 to the Registrant’s Form 8K as  filed on August 9, 2005 (File No. 001-10456).                                                                                                      |   |
| 10.9  |   | Registration Rights Agreement, by and between Apogee  Technology, Inc. and Laurus Master Fund, Ltd., incorporated herein by  reference from Exhibit 10.5 to the Registrant’s Form 8K as filed on  August 9, 2005 (File No. 001-10456).                                                                                                                           |   |
| 10.10 |   | Form of Biscayne Capital Markets, Inc. Warrant,  incorporated herein by reference from Exhibit 10.7 to the Registrant’s  Form 8K as filed on August 9, 2005 (File No. 001-10456).                                                                                                                                                                           |   |
| 10.11 |   | Secured Convertible Term Note, by and between Apogee  Technology, Inc. and Laurus Master Fund, Ltd., incorporated herein by  reference from Exhibit 10.7 to the Registrant’s Form 8K as filed on  August 9, 2005 (File No. 001-10456).                                                                                                                           |   |
| 10.12 |   | Asset Purchase Agreement dated as of October 5,  2005, by and among SigmaTel, Inc., Apogee Technology, Inc., certain  stockholders, and with respect to the provisions of Section 8.15 only,  David B. Meyers, incorporated herein by reference from Exhibit 99.1  to the Registrant’s Form 8K as filed on October 7, 2005 (File  No. 001-10456). |   |
| 10.13 |   | Escrow Agreement dated as of October 5, 2005,  among SigmaTel, Inc., Apogee Technology, Inc. and Wells Fargo Bank, N.A.,  incorporated herein by reference from Exhibit 99.2 to the Registrant’s  Form 8K as filed on October 7, 2005 (File No. 001-10456).                                                                                                 |   |
| 10.14 |   | Indemnification Agreement dated as of  October 5, 2005, among SigmaTel, Inc., Apogee Technology, Inc.,  Herbert M. Stein, H.M. Stein Associates, and Sheryl B. Stein,  incorporated herein by reference from Exhibit 99.3 to the Registrant’s  Form 8K as filed on October 7, 2005 (File No. 001-10456).                                          |   |
| 10.15 |   | Settlement Agreement between Apogee Technology, Inc.  and National Hybrid, Inc., dated December 31, 2005.                                                                                                                                                                                                                                                                            |   |

37

----

 
| 10.16* |   | Transfer Employment and Royalty Agreement, dated  May 11, 2004.                                                                                                                                                                                                         |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 14     |   | Code of Conduct and Ethics, incorporated herein by  reference to Exhibit 14 to the Registrant’s Form 10-KSB for  the year ended December 31, 2003 (File No. 000-30656).                                                                             |   |
| 23     |   | Consent of Independent Accountants to the  incorporation by reference in the Registration Statement on Form S-8  (Nos. 333-106316, 333-61486 and No. 333-90558) of the  consolidated financial statements which appear in this Annual Report on  Form 10-KSB. |   |
| 31.1   |   | Certifications pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.                                                                                                                                                               |   |
| 31.2   |   | Certifications pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 by the Principal Financial Officer.                                                                                                                                                           |   |
| 32     |   | Statement  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief  Executive Officer and Principal Financial Officer.                                                                                                                                       |   |

----

*                    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 under the caption “Independent PublicAccountants” in the Company’s Proxy Statement for the 2006 Annual Meeting ofStockholders, to be held on May 25, 2006.

38

----

**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:                     |   | /s/ HERBERT M.  STEIN       |   | Date: March 31, 2006 |
|   |   |                    |   | Herbert M. Stein, President |   |   |
|   |   |                    |   | Chief Executive Officer,    |   |   |
|   |   |                    |   | Chairman of the Board       |   |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities indicated below and on the dates indicated.
| Signatures | ** **             | ** ** | ** **                           |        | **Title**                | ** ** | ** ** |  | **Date** | ** ** |
|------------|------------------------|------------|--------------------------------------|--------|--------------------------|------------|------------|--|----------|------------|
|       |                   |       |                                 |   |                     |
| By:        | /s/ HERBERT M. STEIN   |       | President, Chief  Executive Officer  |   | March 31, 2006 |
|       | Herbert M. Stein       |       | Treasurer and Chairman  of the Board |   |                     |
|       |                   |       |                                 |   |                     |
| By:        | /s/ PAUL J. MURPHY     |       | Chief Financial Officer              |   | March 31, 2006 |
|       | Paul J. Murphy         |       | Vice President of  Finance           |   |                     |
|       |                   |       | Treasurer                            |   |                     |
|       |                   |       |                                 |   |                     |
| By:        | /s/ CRAIG A. DUBITSKY  |       | Director                             |   | March 31, 2006 |
|       | Craig A. Dubitsky      |       |                                 |   |                     |
|       |                   |       |                                 |   |                     |
| By:        | /s/ ARTHUR S. REYNOLDS |       | Director                             |   | March 31, 2006 |
|       | Arthur S. Reynolds     |       |                                 |   |                     |
|       |                   |       |                                 |   |                     |
| By:        | /s/ SHERYL B. STEIN    |       | Director                             |   | March 31, 2006 |
|       | Sheryl B. Stein        |       |                                 |   |                     |
|       |                   |       |                                 |   |                     |
| By:        | /s/ ALAN W. TUCK       |       | Director                             |   | March 31, 2006 |
|       | Alan W. Tuck           |       |                                 |   |                     |
|            |                        |            |                                      |        |                          |            |            |  |          |            |  |

 

 

39

----

**ANNUAL REPORT ON FORM 10-KSB**

**LIST OF FINANCIAL STATEMENTSYEAR ENDED DECEMBER 31, 2005**

**APOGEETECHNOLOGY, INC.**

**NORWOOD,MASSACHUSETTS**

| Report of Independent  Registered Public Accounting Firm.                                                        |   | F-1 |   |
|------------------------------------------------------------------------------------------------------------------|--------|-----|--------|
| Consolidated  Balance Sheets—December 31, 2005 and December 31, 2004                              |   | F-2 |   |
| Consolidated Statements of Operations—Years Ended  December 31, 2005 and 2004                          |   | F-3 |   |
| Consolidated Statements of Stockholders’ Equity  (Deficit)—Years ended December 31, 2005 and 2004 |   | F-4 |   |
| Consolidated Statements of Cash Flows—Years Ended  December 31, 2005 and 2004                          |   | F-5 |   |
| Notes to Consolidated Financial Statements—December 31,  2005 and 2004                                 |   | F-6 |   |

 

----

**Reportof Independent Registered Public Accounting Firm**

Board of Directors andStockholdersApogee Technology, Inc.

We have audited the accompanying consolidated balancesheets of Apogee Technology, Inc. and Subsidiary as of December 31,2005 and 2004 and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the years in the two-yearperiod ended December 31, 2005. These consolidated financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

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

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Apogee Technology, Inc. and Subsidiary as of December 31,2005 and 2004 and the results of their operations and cash flows for each ofthe years in the two-year period ended December 31, 2005 in conformitywith accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statementshave been prepared assuming that the Company will continue as a going concern. Asdiscussed in Note 1 to the consolidated financial statements, the Company hashad recurring operating losses and negative cash flows from operations, raisingsubstantial doubt about its ability to continue as a going concern. Management’splans in regard to these matters are also discussed in Note 1. The viability ofthe Company is dependent upon its ability to successfully further develop andmarket its technology and raise sufficient funds for such purpose. Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

/s/ MILLERWACHMAN, LLP

Boston, MassachusettsMarch 22, 2006

F-1

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                      | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                      |       |                        |       |                        |       |
| **Current  assets**                                                                                                                                             |       |                        |       |                        |       |
| Cash and cash  equivalents                                                                                                                                      | ** ** | $                           | 5,512,974  |                        | $          | 1,886,883 | ** ** |
| Accounts receivable, net of allowance for doubtful  accounts of $145,000 and $105,000, in 2005 and 2004 respectively                                            | ** ** | 152,837                     |       | 533,113                     | ** ** |
| Inventories, net                                                                                                                                                | ** ** | 1,327,964                   |       | 2,725,308                   | ** ** |
| Prepaid expenses and other current assets                                                                                                                       | ** ** | 123,462                     |       | 252,728                     | ** ** |
| Total current assets                                                                                                                                            | ** ** | 7,117,237                   |       | 5,398,032                   | ** ** |
| **Property  and equipment, net**                                                                                                                                | ** ** | 39,932                      |       | 103,189                     | ** ** |
| **Other assets**                                                                                                                                                |       |                        |       |                        |       |
| Escrow account                                                                                                                                                  | ** ** | 409,480                     |       | —                      | ** ** |
| Patents, net of accumulated amortization of $-0- and  $127,442, in 2005 and 2004 respectively                                                                   | ** ** | 149,536                     |       | 211,901                     | ** ** |
| ** **                                                                                                                                                      | ** ** | $                           | 7,716,185  |                        | $          | 5,713,122 | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                  |       |                        |       |                        |       |
| **Current  liabilities**                                                                                                                                        |       |                        |       |                        |       |
| Accounts payable and accrued expenses                                                                                                                           | ** ** | $                           | 766,930    |                        | $          | 1,107,111 | ** ** |
| Deferred distributor revenue                                                                                                                                    | ** ** | 1,337,022                   |       | 1,955,563                   | ** ** |
| Deferred contract revenue                                                                                                                                       | ** ** | 72,686                      |       | 95,788                      | ** ** |
| Total current liabilities                                                                                                                                       | ** ** | 2,176,638                   |       | 3,158,462                   | ** ** |
| **Commitments and Contingencies**                                                                                                                               | ** ** | —                      |       | —                      | ** ** |
| **Stockholders’  equity**                                                                                                                                  |       |                        |       |                        |       |
| Common stock, $.01 par value; 20,000,000 shares  authorized, 11,968,332 and 11,838,332 issued and outstanding at December 31,  2005 and 2004, respectively | ** ** | 119,683                     |       | 118,383                     | ** ** |
| Additional paid-in capital                                                                                                                                      | ** ** | 18,104,423                  |       | 18,073,223                  | ** ** |
| Accumulated deficit                                                                                                                                             | ** ** | (12,684,559                 | )          | (15,636,946                 | **)**      |
| Total stockholders’ equity                                                                                                                                 | ** ** | 5,539,547                   |       | 2,554,660                   | ** ** |
| ** **                                                                                                                                                      | ** ** | $                           | 7,716,185  |                        | $          | 5,713,122 | ** ** |

 

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

F-2

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTSOF OPERATIONS**

| ** **                                               | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| **Revenues**                                             |       |                                   |       |   |   |
| Product sales                                            |       | $                                      | 4,502,333  |   | $ | 4,383,912 |   |
| Royalties                                                |       | 480,468                                |       | 1,057,867 |   |
| Consulting                                               |       | 190,000                                |       | 715,854 |   |
| ** **                                               |       | 5,172,801                              |       | 6,157,633 |   |
| **Costs and expenses**                                   |       |                                   |       |   |   |
| Product sales                                            |       | 3,966,265                              |       | 3,890,917 |   |
| Research and development                                 |       | 2,709,487                              |       | 2,829,612 |   |
| Selling, general and administrative                      |       | 4,014,571                              |       | 2,845,544 |   |
| ** **                                               |       | 10,690,323                             |       | 9,566,073 |   |
| **Operating  loss**                                      |       | (5,517,522                             | )          | (3,408,440 | ) |
| **Other  income (expense)**                              |       |                                   |       |   |   |
| Gain on sale to SigmaTel                                 |       | 8,862,073                              |       | — |   |
| Laurus financing costs                                   |       | (424,000                               | )          | — |   |
| Interest/other income                                    |       | 70,187                                 |       | 23,334 |   |
| Interest expense                                         |       | (38,352                                | )          | (93 | ) |
| ** **                                               |       | 8,469,908                              |       | 23,241 |   |
| **Net  income (loss)**                                   |       | $                                      | 2,952,387  |   | $ | (3,385,199 | ) |
| Basic income (loss) per common share                     |       | $                                      | 0.25       |   | $ | (0.29 | ) |
| Diluted income  (loss) per common share                  |       | $                                      | 0.24       |   | $ | (0.29 | ) |
| Weighted average common shares outstanding—basic    |       | 11,869,026                             |       | 11,523,510 |   |
| Weighted average common  shares outstanding—diluted |       | 12,132,394                             |       | 11,523,510 |   |

 

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

F-3

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY**

| ** **                          | ** ** | **Shares** | ** ** | **Common Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total**  | ** ** |
|-------------------------------------|------------|------------|------------|-----------------------|------------|----------------------------------|------------|--------------------------|------------|------------|------------|
| Balances at  January 1, 2004   |       | 11,327,270 |       |                  | $          | 113,272                          |       |                     | $          | 16,171,611 |       | $ | (12,251,747 | ) | $ | 4,033,136 |   |
| Net loss                            |       |       |       |                  |       |                             |       |                     |       | (3,385,199 | )          | (3,385,199 | ) |
| Issuances of  stock                 |       | 511,062    |       |                  | 5,111      |                             |       | 1,901,612                |       | —     |       | 1,906,723 |   |
| Balances at  December 31, 2004 |       | 11,838,332 |       |                  | $          | 118,383                          |       |                     | $          | 18,073,223 |       | $ | (15,636,946 | ) | $ | 2,554,660 |   |
| Net profit                          |       |       |       |                  |       |                             |       |                     |       | 2,952,387  |       | 2,952,387 |   |
| Issuances of  stock                 |       | 130,000    |       |                  | 1,300      |                             |       | 31,200                   |       | —     |       | 32,500 |   |
| Balances at  December 31, 2005 |       | 11,968,332 |       |                  | $          | 119,683                          |       |                     | $          | 18,104,423 |       | $ | (12,684,559 | ) | $ | 5,539,547 |   |

 

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

F-4

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTSOF CASH FLOWS**

| ** **                                                                             | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| **Cash flows from operations**                                                         |       |                                   |       |   |   |
| Net income (loss)                                                                      |       | $                                      | 2,952,387  |   | $ | (3,385,199 | ) |
| *Adjustments  to reconcile net income (loss)to net cash used in operating activities:* |       |                                   |       |   |   |
| Provision for doubtful accounts                                                        |       | 40,000                                 |       | 40,000 |   |
| Provision for slow moving, excess and obsolete  inventory                              |       | 735,538                                |       | 835,523 |   |
| Depreciation and amortization                                                          |       | 70,053                                 |       | 103,147 |   |
| Gain on sale to SigmaTel, net of escrow                                                |       | (8,862,073                             | )          | — |   |
| *Changes  in operating assets and liabilities:*                                        |       |                                   |       |   |   |
| Accounts receivable                                                                    |       | 340,276                                |       | 1,245,725 |   |
| Inventories                                                                            |       | 661,806                                |       | (691,745 | ) |
| Prepaid expenses and other current assets                                              |       | 123,142                                |       | (72,468 | ) |
| Accounts payable and accrued expenses                                                  |       | (340,181                               | )          | (458,960 | ) |
| Deferred distributor revenue                                                           |       | (618,541                               | )          | (3,824 | ) |
| Deferred contract revenue                                                              |       | (23,102                                | )          | 45,788 |   |
| Net cash (used) in operating activities                                                |       | (4,920,695                             | )          | (2,342,013 | ) |
| **Cash flows from investing  activities**                                              |       |                                   |       |   |   |
| Purchases of property and equipment                                                    |       | (67,030                                | )          | (53,918 | ) |
| Patent costs                                                                           |       | (55,885                                | )          | (148,118 | ) |
| Proceeds from SigmaTel, net                                                            |       | 8,637,201                              |       | — |   |
| Net cash provided by (used in) investing activities                                    |       | 8,514,286                              |       | (202,036 | ) |
| **Cash flows from financing  activities**                                              |       |                                   |       |   |   |
| Proceeds from issuances of common stock, net of  issuance expenses                     |       | 32,500                                 |       | 1,906,723 |   |
| Proceeds from Laurus note                                                              |       | 2,000,000                              |       | — |   |
| Repayment of Laurus note                                                               |       | (2,000,000                             | )          | — |   |
| Proceeds from officer and shareholder notes                                            |       | 500,000                                |       | — |   |
| Repayment of officer and shareholder notes                                             |       | (500,000                               | )          | — |   |
| Net cash provided by financing activities                                              |       | 32,500                                 |       | 1,906,723 |   |
| **Incease  (decrease) in cash and cash equivalents**                                   |       | 3,626,091                              |       | (637,326 | ) |
| Cash and cash  equivalents—beginning                                              |       | 1,886,883                              |       | 2,524,209 |   |
| **Cash and cash  equivalents—ending**                                             |       | $                                      | 5,512,974  |   | $ | 1,886,883 |   |

 

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

F-5

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS December 31, 2005 AND 2004**

**1.**   TheCompany and Basis of Presentation

***The Company***

Apogee Technology, Inc. and Subsidiary (the “Company”or “Apogee”) designs, develops and markets silicon based products incorporatingproprietary technologies. The Company historically owned, developed andmarketed patented all-digital, high efficiency Direct Digital Amplification(DDX®) technology Integrated Circuits (“ICs”) which are used in a range ofaudio applications, including:  hometheater systems, powered speakers, car audio, commercial audio, and PCmulti-media.

On October 5, 2005, Apogee completed atransaction with SigmaTel, Inc. (“SigmaTel”), whereby certain assets ofthe audio division were sold, including the DDX technology and the associatedroyalties from its license agreement with STMicroelectronics (“ST”), toSigmaTel for approximately $9.4 million, resulting in a gain of approximately$8.9 million plus a one-year earn-out of potentially up to $4.5 million (the “SigmaTelTransaction”). No assurance can be given that any of this earn-out will berealized. The Company and certain of the Principal Stockholders also enteredinto an Indemnification Agreement if certain terms of the Agreement areviolated. The Company is authorized to indemnify the Principal Stockholders inthe event any one or more of them has to satisfy any obligations thereunder. Inaddition, the Company’s engineering and marketing staff related to the audiodivision were offered positions at SigmaTel as a part of the Transaction.

The Company received approximately $8.6 million, netof expenses from the Transaction and used proceeds to repay approximately $2.0million owed to Laurus Master Fund, Ltd., pursuant to the Company’s SecuredConvertible Note and the related Securities Purchase Agreement dated as of August 9,2005 and to pay certain expenses related to the Transaction. Additionally, on October 20,2005, proceeds from the Transaction were used to repay the $250,000 loan fromDavid Spiegel, a shareholder and the $250,000 loan from Herbert Stein, ChiefExecutive Officer, President and Chairman of the Board as well as all accruedinterest. The Company intends to use the remaining proceeds to design, developand market its emerging line of MEMS-based sensor and medical products.

Although the Company retained some of its audiodivision related agreements (with the exception of the royalty rights from thelicense agreement with ST) and its audio IC inventory, the Company intends tocease the operations of its audio division upon completing the sale of theseremaining assets.

The Company is developingnew sensor and medical device products using its analog and digital circuitdesigns and MEMS technology for the consumer, automotive, industrial andmedical markets.

***Basis of Presentation***

***Consolidated Financial Statements***

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

***Going Concern***

The accompanying consolidated financial statementshave been prepared on a going concern basis which contemplates the realizationof assets and satisfaction of liabilities in the normal course of business. 

F-6

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

**1.**   The Company and Basisof Presentation (Continued)

As shown in theconsolidated financial statements, we have incurred continuing losses andnegative cash flows from operations. Operating losses were approximately $5.5million and negative cash flows from operations were approximately $4.9 millionin 2005.

The Company sold certain tangible and intangibleassets associated with its DDX audio business in 2005 and has approximately$5.5 million of cash at December 31, 2005. The Company has reduced, in theshort-term, its operating expenses for payroll and related costs, rents andprofessional fees amongst others. The Company believes that its current workingcapital will be sufficient to fund its capital and operational requirements atleast through December 31, 2006.

The long term success ofthe Company is dependent upon its ability to successfully develop and marketits sensor and medical device products based upon its MEMS technology, toattain profitable operations and/or raise additional funds as needed for suchpurpose. There can be no assurance, however, that the Company will be able tobecome profitable or raise the funds that it needs or that additional fundswill be available to the Company on acceptable terms, if at all.

***Estimates***

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

***Liquidity***

On October 5, 2005, the Company receivedapproximately $8.6 million, net of expenses, from the SigmaTel Transaction.

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 were payable upondemand and were not subject to any premium or penalty for prepayment. The loaninterest rate was 6% per annum, payable monthly in arrears on the outstandingbalance.  On October 20, 2005 proceeds from the SigmaTel transactionwere used to repay the $500,000 principal as well as all accrued interest.

On August 11, 2005,the Company entered into agreements with Laurus Master Fund, Ltd. (“Laurus”),whereby the Company received $2.0 million in gross proceeds (with net proceedsof approximately $1.8 million) through the sale of a 120 day secured term note.In accordance with the terms of the note, the note was payable by the Companyin cash during the first 120 days following the issuance of the note, and afterthe 120 day period it was payable in the amount of $62,500 per month in cash orconvertible into the common stock, $0.01 par value per share, of the Company ata fixed conversion price of $1.05 per share. In connection with the financing,the Company paid certain costs and expenses of Laurus and has issued animmediately exercisable warrant with terms restricting exercise. The Lauruswarrant provides for the purchase of 85,000 shares of common stock at a priceof $1.05 per share. The 

F-7

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

**1.**   The Company and Basisof Presentation (Continued)

warrantexpires seven years after issuance. A finder for the transaction received a feeof 5% of the gross proceeds of the offering, together with a seven year warrantto purchase an aggregate of 8,500 shares of common stock immediatelyexercisable at a price of $1.22 per share. This offering was conducted as aprivate placement pursuant to the exemption from registration provided by Section 4(2) ofthe Securities Act of 1933, as amended, and the rules and regulationspromulgated thereunder.

**2.**   Summaryof Significant 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 berecognized when 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 OEM 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 (shipping terms Ex Works). The Company hasexperienced minimal warranty or other returns and based upon historicalexperience has recorded a $10,000 provision for such returns.

Sales to Distributors: At times the Company provides incentives such as stock rotation, priceprotection and other incentives to its distributors. Therefore, under the sellthrough method of revenue recognition the Company defers recognition of revenueuntil such time that the distributor sells products to its customers based uponreceipt of point-of-sale reports from the distributors. Distributor paymentsreceived before revenue is recognized are recorded as deferred revenue. Unsoldinventory held at distributors is included as a component of finished goodsinventory.

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

***Earnings Per Share***

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

F-8

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

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

***Research and Development***

Costs for research anddevelopment are expensed as incurred.

***Inventories***

Inventories, including inventory held at distributors(See Note 4) are stated at the lower of cost on a first-in, first-out basis ormarket. This policy requires the Company to make estimates regarding the marketvalue of the Company’s inventory, including an assessment of excess or obsoleteinventory. The Company determines excess and obsolete inventory based on anestimate of the future demand and estimated selling prices for the Company’sproducts within a specified time horizon, generally 12 to 24 months. Theestimates the Company uses for expected demand are also used for near-termcapacity planning and inventory purchasing and are consistent with the Company’srevenue forecasts. Actual demand and market conditions may differ from thoseprojected by the Company’s management.

If the Company’s unitdemand forecast is less than the Company’s current inventory value, the Companywill record additional excess inventory charges or write-downs to netrealizable value which will decrease the Company’s gross margin and netoperating results in the future. During the fiscal years ended December 31,2005 and 2004, the Company recorded a provision for excess inventory ofapproximately $736,000 and $836,000, respectively to account for slow moving,excess and obsolete inventory both at Apogee’s warehouse and inventory held bythe 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 thecommitted purchase price. Upon completion of the SigmaTel Transaction, anagreement was reached between Apogee and STMicroelectronics Asia canceling allremaining backlog except for approximately $349,000, in order to fulfillcommitted backlog. Therefore, no provision was required at December 31,2005.

***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, managementis required to make estimates and assumptions that affect the reported amountsof assets and 

F-9

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

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

liabilitiesand disclosure of contingent assets and liabilities at the date of financialstatements, and the reported amounts of revenues and expenses during thereporting period. Actual results could differ 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. Substantially all of the Company’s cash is held in highquality money market funds comprised of short-term, fixed income securitiesearning interest at 3.82% at December 31, 2005.

***Accounts Receivable***

The Company carries its trade receivables from directcustomers less an allowance for doubtful accounts to ensure that tradereceivables are carried at net realizable value. On a periodic basis, theCompany evaluates the collectibility of its accounts receivable on a variety offactors, including length of time receivables are past due, indication ofcustomer willingness to pay, significant one-time events and historicalexperience. An additional reserve for individual accounts is recorded when theCompany becomes aware of a customer’s inability to meet its financialobligations, such as in the case of bankruptcy filings or substantialdeterioration in the customer’s operating results or financial position. If thefinancial condition of the Company’s customers were to deteriorate, resultingin an impairment of their ability to make payments, additional allowances maybe required. Accounts receivable are generally considered past due if anyportion of the receivable balance 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 ofcertain of the Company’s financial instruments, including cash and cashequivalents, accounts receivable and notes and accounts payable, approximatetheir fair values due to their relative short maturities and based uponcomparable market information available at the respective balance sheet dates.The Company does not hold or issue financial instruments for trading purposes.

***Stock Options***

At December 31, 2005, the Company has anincentive stock option plan described more fully in Note 8. 

The Company has adopted only the disclosure provisionsof Financial Accounting Standard No. 123(R), “Accounting For Stock-BasedCompensation” (FAS 123(R)). 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-10

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

**2.**   Summaryof Significant Accounting Policies (Continued)

Thefollowing table illustrates the effect on net income (loss) and income (loss)per share if the Company had applied the fair value recognition provisions ofFAS 123(R) to stock-based employee compensation. 

| ** **                                                                                                              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Net income  (loss), as reported                                                                                         | ** ** | $                                          | 2,952,387  |   | $ | (3,385,199 | ) |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards* | ** ** | (3,905,515                                 | )          | (2,094,239 | ) |
| Pro-forma net income  (loss)**                                                                                          | ** ** | $                                          | (953,128   | ) | $ | (5,479,438 | ) |

 

| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Income (loss) per share: | ** ** |                                       | ** ** |   | ** ** |
| As reported, basic       | ** ** | $                                          | 0.25       |   | $ | (0.29 | ) |
| As reported, diluted     | ** ** | $                                          | 0.24       |   | $ | (0.29 | ) |
| Pro-forma, basic         | ** ** | $                                          | (0.08      | ) | $ | (0.48 | ) |
| Pro-forma, diluted       | ** ** | $                                          | (0.08      | ) | $ | (0.48 | ) |

----

*                    All awardsrefers to awards granted, modified, or settled in fiscal periods beginningafter December 15, 1994—awards for which the fair value was required to bemeasured 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(R),and has 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 2005 and 2004, respectively: risk-free interest rates ranging from 3.63% to 3.97% and 3.74% to 4.77%;no dividend yields; volatility factors of the expected market price of theCompany’s common stock ranging from 59.5% to 81.06%; and a weighted-averageexpected life of the option of approximately 5 years. Prior to 2001, the fairvalues of the options were valued using the minimum value method.

On December 21, 2005, the Board of Directors ofApogee Technology, Inc. announced that as of December 22, 2005, it hadaccelerated the vesting of certain unvested stock options previously awarded toemployees and non-employee members of the Board of Directors under the Apogee’s1997 Employee, Director and Consultant Stock Option Plan. This vestingprovision for options covered approximately 880,000 underlying shares of commonstock has been accelerated. Approximately 665,000 of the underlying shares, ofthe total accelerated, belong to executive officers and non-employee members ofthe Board of Directors. The Board only accelerated the vesting of optionshaving exercise prices in excess of $2.00 per share and did not accelerate thevesting of any options with exercise prices below $2.00 per share.

The effect of this acceleration is an additionalexpense to the proforma earnings of approximately $2,360,000 for the year endedDecember 31, 2005.

F-11

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

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

***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 15—Income Taxes and Tax Loss Carryforwards.

***New Accounting Pronouncements***

On December 16, 2004, the FASB issued FASBStatement No. 123 (revised 2004), Share-Based Payment, which is a revisionof FASB Statement No. 123, *Accountingfor Stock-Based Compensation*(‘SFAS 123(R)). SFAS 123(R) supersedesAPB No. 25 and amends FASB Statement No. 95, *Statement of Cash Flows*. However, SFAS 123(R) *requires*all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure is no longeran alternative. 

SFAS 123(R) must be adopted by small businessissuers in the first annual period beginning after December 15, 2005. Earlyadoption will be permitted in periods in which financial statements have notyet been issued. The Company expects to adopt SFAS 123(R) on January 1,2006. 

SFAS 123(R) permits public companies to adopt itsrequirements using one of two methods: 

1.                A “modifiedprospective” method in which compensation cost is recognized beginning with theeffective date (a) based on the requirements of SFAS 123(R) for allshare-based payments granted after the effective date and (b) based on therequirements of SFAS 123 for all awards granted to employees prior to theeffective date of SFAS 123(R) that remain unvested on the effective date. 

2.                A “modifiedretrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under SFAS 123 for purposes of pro formadisclosures either (a) all prior periods presented or (b) priorinterim periods of the year of adoption. 

The Company will adopt SFAS 123 using the modifiedprospective method as of January 1, 2006. FAS 123R sets accountingrequirements for “share-based” compensation to employees, requiring companiesto recognize in the income statement the grant-date fair value of stock optionsand other equity-based compensation issued to employees and disallows the useof the Black Scholes value method of accounting for stock compensation.Accordingly, the adoption of SFAS 123R’s fair value method could have asignificant impact on the Company’s results of operations, although it willhave no impact on the Company’s overall financial position. The impact ofadoption of SFAS 123R cannot be predicted at this time because it will dependon levels of share-based payments granted in the future. 

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections—areplacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”).This Statement replaces APB Opinion No. 20, Accounting Changes, and FASBStatement No. 3, Reporting Accounting Changes in Interim FinancialStatements, and changes the requirements for the accounting for and reportingof a change in accounting principle. SFAS 154 requires retrospectiveapplication to prior periods’ financial 

F-12

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

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

statementsof a voluntary change in accounting principle unless it is impractical todetermine period specific changes. This statement is effective for fiscalperiods beginning after December 15, 2005 and is not expected to have asignificant impact on the Company’s financial statements. 

**3.**   AccountsReceivable

AccountsReceivable at December 31, 2005 and 2004 are comprised of the following:

| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Distributors                          | ** ** | $        | 190,202    |     | $          | — |   |
| Direct Customers                      | ** ** | 107,635  |       | 638,113  |       |
|                                  | ** ** | $        | 297,837    |     | $          | 638,113 |   |
| Less allowance for  doubtful accounts | ** ** | (145,000 | )          | (105,000 | )          |
| Net accounts receivable               | ** ** | $        | 152,837    |     | $          | 533,113 |   |

 

**4.**   Inventories

Themajor classifications of inventories at December 31, 2005 and 2004 are asfollows:

| ** **                                                     | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------|------------|
| Raw materials                                                  |       | $          | —     |       | $          | 24,539 |   |
| Finished goods held by  Apogee                                 |       | 2,297,795  |       | 2,143,530  |       |
| Finished goods held by  distributors                           |       | 943,423    |       | 1,734,955  |       |
|                                                           |       | $          | 3,241,218  |       | $          | 3,903,024 |   |
| Less allowance for slow  moving, excess and obsolete inventory |       | (1,913,254 | )          | (1,177,716 | )          |
| Inventory—net                                             |       | $          | 1,327,964  |       | $          | 2,725,308 |   |

 

**5.**   Propertyand Equipment

Property and equipment at December 31, 2005 and2004 are comprised of the following:

| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Equipment                      |       | $        | 48,091     |     | $          | 390,342 |   |
| Software                       |       | 32,943   |       | 35,634   |       |
| Furniture and  fixtures        |       | 22,515   |       | 31,210   |       |
| Leasehold  improvements        |       | 22,954   |       | 22,954   |       |
|                           |       | $        | 126,503    |     | $          | 480,140 |   |
| Less accumulated  depreciation |       | (86,570  | )          | (376,951 | )          |
|                           |       | $        | 39,933     |     | $          | 103,189 |   |

 

Depreciation expense was $54,849 and $79,561 for theyears ended December 31, 2005 and 2004, respectively.

F-13

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

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

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

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

 

**6.**   AccruedExpenses

Accruedexpenses at December 31, 2005 and 2004 are as follows:

| ** **              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Accrued audit  expenses | ** ** | $        | 69,000     |     | $          | 165,000 | ** ** |
| Accrued legal  expenses | ** ** | 86,000   |       | 37,000   | ** ** |
| Other accrued  expenses | ** ** | 59,000   |       | 10,000   | ** ** |
| ** **              | ** ** | $        | 214,000    |     | $          | 212,000 | ** ** |

 

**7.**   DeferredContract Revenue

During September 2004,the Company entered into a funding agreement with United Binational IndustrialResearch and Development (“BIRD”) Foundation of Israel. This agreement willprovide funds to the Company for industrial research and development activities.The agreement will provide up to a maximum of $560,000 of which the Company mayreceive $280,000, and another partner in the agreement will receive theremainder. The Company has recorded $101,379 in deferred contract revenue andfor the twelve months ended December 31, 2004 recorded $23,101 as anoffset to research and development expenses. There was no revenue recordedunder this agreement for the fiscal year ended December 31, 2005.

**8.**   Stockholders’Equity

***Private Placements***

In August 2004, the Company completed a privateplacement for 374,242 shares of common stock at $4.75 per share. Proceeds receivedwere $1,577,045 net of $200,605 in expenses. In addition, the issuance ofwarrants were approved by the Board of Directors, pursuant to which purchasersshall have the right to acquire up to 50% of the number of shares of CommonStock issued as a result of the private placement. These warrants areexercisable immediately upon issuance and for a term of five years at anexercise price of $5.70 per share. Total warrants granted during the year endedDecember 31, 2004 aggregated 209,578.

F-14

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

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

***Stock Options***

The Company issued 130,000 and 126,800 shares ofcommon stock during 2005 and 2004, respectively, for options exercised bycertain employees and directors. The shares were issued at and exercise priceof $0.25 per share in 2005 and prices ranging from $0.275 to $6.81 per share in2004. Proceeds from the exercise of options were $32,500 and $291,700 in 2005and 2004, respectively.

On December 21, 2005,the Board of Directors of Apogee Technology, Inc. announced that as of December 22,2005, it had accelerated the vesting of certain unvested stock optionspreviously awarded to employees and non-employee members of the Board ofDirectors under the Apogee’s 1997 Employee, Director and Consultant StockOption Plan. This vesting provision for options covered approximately 880,000underlying shares of common stock has been accelerated. Approximately 665,000of the underlying shares, of the total accelerated, belong to executiveofficers and non-employee members of the Board of Directors. The Board onlyaccelerated the vesting of options having exercise prices in excess of $2.00per share and did not accelerate the vesting of any options with exerciseprices below $2.00 per share.

***Other***

On August 11, 2005, the Company, in connectionwith a financing, issued an immediately exercisable warrant with termsrestricting exercise. The warrant provides for the purchase of 85,000 shares ofcommon stock at a price of $1.05 per share. The warrant expires seven yearsafter issuance. A finder for the transaction was also issued a seven yearwarrant to purchase an aggregate of 8,500 shares of common stock immediatelyexercisable at a price of $1.05 per share. 

During 2004 the Companyissued 10,000 warrants to purchase 40,000 shares of common stock at $5.00 pershare. The warrants expire five years from the date of issuance. None of thesewarrants were exercised during 2005 or 2004.

**9.**   RelatedParty Transactions

The Company rents itsfacility from an entity controlled by a stockholder for $4,400 per monthpursuant to a lease that expired December 31, 2005. Currently, the Companyis renting on a month-to-month basis. Rent paid to this stockholder aggregated$52,800 per year for 2005 and 2004. See Note 1—The Company and Basis ofPresentation—liquidity. 

**10. 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.

Royalties are earned based upon shipments by ST ofcommercialized products which incorporate technology licensed to ST by us. Royaltyincome is recognized during the period in which the royalties are earned. Shipmentsare reported to us using a “Royalty Schedule,” which is received within 30 daysof 

F-15

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

**10. LicenseAgreement (Continued)**

quarter end. Royalties aredetermined based upon either a percentage of selling prices or a flat ratedepending on the particular product item. 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 license fee wasassociated with future development activities of the Company. When the $400,000amount was recognized in income, it was simultaneously charged to research anddevelopment costs. In prior years, the Company recognized $220,000 of thecredit for future design services. During the year ended December 31,2004, the Company recognized the remaining $180,000 of income and research anddevelopment costs.

In conjunction with theSigmaTel Transaction, Apogee sold all of the rights, title and interest in andrights granted to ST including related intellectual property. 

**11. Concentrations**

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

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

During the year ended December 31, 2004, theCompany derived approximately 22% of its product revenue from one end user and51% of product 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.

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

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

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

During the twelve months ended December 31, 2004,the Company derived approximately 67% and 20% of its total revenue from endusers or distributors located in Asia and Europe, respectively.

During the twelve months ended December 31, 2004,the Company derived approximately 93% of its product revenue from end users ordistributors located in Asia.

Three of the Company’s major vendors accounted forapproximately 96% of total purchases for the year ended December 31, 2005.

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

F-16

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

**11. Concentrations(Continued)**

The Company maintains itscash accounts with high quality financial institutions. Balances usually exceedthe maximum coverage ($100,000) provided by the Federal Deposit InsuranceCorporation on insured depositor accounts.

**12. 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 for issuanceunder the plan, which in 2001 was increased to 2,100,000 shares, increased in2002 to 3,100,000 shares and further increased in 2003 to 4,100,000. Pursuantto the plan, the board may grant options to employees, directors, orconsultants at its discretion. Options granted under the plan to less than 10%and greater than 10% stockholders are to be for 100% and 110%, respectively, ofthe fair value of the common stock on the date of the grant, and expire 10 and5 years, respectively, from the date of the grant.

Asummary of the status of the Company’s stock options as of December 31,2005 and 2004 and changes during the years then ended is presented below. 

| ** **                                                        | ** ** | **Shares**     | ** ** | **2005  Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **2004  Weighted  Average  Exercise  Price** | ** ** |
|-------------------------------------------------------------------|------------|----------------|------------|----------------------------------------------|------------|------------|------------|----------------------------------------------|------------|
| Outstanding—beginning  of year                               | ** ** | **3,317,820**  | ** ** |                                         | **$**      | **5.55**   |       |                                         | 2,787,600  |   |   | $ | 4.50 |   |   |
| Granted                                                           | ** ** | **391,000**    | ** ** |                                         | **1.53**   |       |       | 986,000                                      |       |   | 8.31 |   |   |
| Exercised                                                         | ** ** | **(130,000**   | **)**      |                                         | **(0.25**  | **)**      |       | (126,820                                     | )          |   | (2.30 | ) |   |
| Cancelled                                                         | ** ** | **(1,083,760** | **)**      |                                         | **(5.15**  | **)**      |       | (328,960                                     | )          |   | (5.03 | ) |   |
| Outstanding—end  of year                                     | ** ** | **2,495,060**  | ** ** |                                         | **$**      | **5.52**   |       |                                         | 3,317,820  |   |   | $ | 5.55 |   |   |
| Weighted average fair  value of options granted during year  | ** ** | ** **     | ** ** |                                         | **$**      | **0.82**   |       |                                         |       |   |   | $ | 4.22 |   |   |

 

The Company granted a total of 391,000 and 986,000options under the 1997 Employee, Director and Consultant Stock Option Plan during2005 and 2004, respectively, to certain directors and employees. The optionsawarded have exercise prices ranging from $1.08 to $4.46 and $3.85 to $9.46 for2005 and 2004, respectively.

Thefollowing table summarizes information about options outstanding as of December 31,2005

| ** **                              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | ** **                   | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.25 - 4.50                            |       |                         | 895,060    |                         |       | 2 to  10 years |   |   | $ | 2.32 |   |   | 699,560 |   |   | $ | 2.60 |   |   |
| $5.25 - 12.15                           |       |                         | 1,600,000  |                         |       | 7 to  8 years |   |   | 7.31 |   |   | 1,600,000 |   |   | 7.31 |   |   |
| Total at  December 31, 2005        |       |                         | 2,495,060  |                         |       | 2 to 10 years |   |   | $ | 5.52 |   |   | 2,299,560 |   |   | $ | 5.88 |   |   |
|                                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-17

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

**13. Income (Loss) PerCommon 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 income (loss) per share for 2005 and 2004 amounted to 11,869,026 and11,523,510, respectively. The weighted average number of shares of common stockoutstanding and common stock equivalents used to compute fully diluted incomeper share for 2005 amounted to 12,132,294. The assumed exercise of outstandingstock options and warrants for diluted loss per common share was not applicablein 2004 because their effect was antidilutive. 

**14. Employee Retirement401(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 2005 or 2004.

**15. Income Taxes and TaxLoss Carryforwards**

The Company has not provided a tax provision since itwould have been offset by utilization of the Company’s Net Operating Loss (NOL)carry forwards. The table below reflects the Company’s estimated taxprovisions:

Estimated Tax Provision

| ** ** | ** ** | **Year Ended  December 31,  2005** | ** **  |
|------------|------------|----------------------------------------------|-------------|
| Federal    | ** ** |                                         | **$**       | **909,600** | ** ** |   |
| State      | ** ** |                                         | **303,200** | ** ** |   |
|       | ** ** |                                         | **$**       | **1,212,800** | ** ** |   |

 

The table below reflects the estimated utilization ofthe NOL:

Estimated NOL Utilization

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

 

Company has available forFederal and state income tax purposes, net operating loss carryforwards ofapproximately $8,455,000 and $4,047,000 as of December 31, 2005, expiringfrom 2006 through 2024.

F-18

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

**16. Supplemental CashFlow Information**

Interest paid during 2005and 2004 amounted to approximately $38,000 and $100, respectively. 

**17. Commitmentsand Contingencies**

***Leases***

The company leased office space under operating leasesexpiring in various years through 2006. Total rent expense for operating leasesduring 2005 and 2004 amounted to approximately $112,000 and $84,000,respectively.

In November 2005 theCompany terminated the Shenzhen, China office lease. The only liabilityassociated with termination of the lease was a one-time termination fee of$2,200. In December 2005 the Company terminated the Taiwan office lease.  In order to terminate the Taiwan office lease,the Company forfeited its security deposit. No additional liability wasincurred with for either lease termination. The Hong Kong office landlord wasnotified that Apogee would be terminating its lease as of February 28,2006.  It was determined in December thatthe facility was to be closed and at that time expensed the security deposit. Nosubsequent liability was incurred by the Company other than rent and managementfees for January and February 2006 of approximately $3,000.  The Company is currently renting the facilityon a month-to-month basis.

***Employment Contract***

On June 7, 2004, the Companyentered into a two-year employment contract with its chief executive officerand president whereby he will receive an annual salary of $295,000. The Company’sboard of directors will annually consider granting increases in salary, as wellas potential bonuses. 

***Software License Agreement***

The Company entered into a36-month software license agreement from September 30, 2003 through September 29,2006. The original amount of the agreement was $305,028, with quarterlypayments of $25,419.  As this softwarelicense was required for the development of certain semiconductor products, thebalance of the software license agreement was assumed by SigmaTel, Inc. inOctober 2005. 

***Inventory Purchase Commitments***

Upon completion of theSigmaTel Transaction, an agreement was reached between Apogee andSTMicroelectronics canceling all remaining orders except for approximately$349,000 in inventory purchases required to fulfill committed orders and at December 31,2005 the Company did not have outstanding purchase commitments. 

***Royalty Commitment***

In May 2004, Apogeeacquired a portfolio of Micro-Electromechanical Systems (“MEMS”) intellectualproperty, trade secrets and know-how developed by Standard MEMS, Inc. orSMI. This portfolio of intellectual property has certain rights and royaltyobligations associated with it. 

F-19

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

**18. Litigation(Settled)**

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. On December 31, 2005 a settlement agreement wascompleted whereby all claims by each party have been withdrawn and no furtherlegal action will be pursued by any of the parties involved. 

**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 the fiscalquarters 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 the Companyat December 31, 2003 and at each quarterly period thereafter with respectto sales to one of the Company’s customers, and that the accounts receivablefrom that customer had been overvalued. In addition, on April 18, 2005,the former auditors notified the Company’s audit committee that there areadditional transactions in 2003 and 2004 that should be more closely reviewedby the Company and its new auditors to ensure that revenue was appropriatelyrecognized. The retroactive adoption of the sell through method of revenuerecognition discussed in Note 20 corrected these transactions.

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.

There have been no disagreements with Anchin on anymatter of accounting principles or practices, financial statement disclosure orauditing scope or procedure, which disagreements, if not resolved to thesatisfaction of Anchin, would have caused Anchin to make reference to thesubject matter of the 

F-20

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

**19. Changesin Independent Registered Public Accounting Firm (Continued)**

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.

On May 3, 2005, theCompany’s Audit Committee appointed Miller Wachman LLP (“Miller Wachman”) asApogee’s new independent auditors. .

**20. SupplementaryQuarterly Financial Information (Unaudited)**

Summarizedquarterly financial information for the 12 months ended December 31, 2005and 2004 is as follows: (in thousands, except per share data):

| ** **                                | ** ** | **2005**          | ** ** |
|-------------------------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **1**st Qtr. | ** ** | **2**nd Qtr. | ** ** | **3**rd Qtr. | ** ** | **4**th Qtr. | ** ** |
| Net Revenue                               |       | $                 | 1,115      |   | $ | 1,315 |   | $ | 1,520 |   |   | $ | 1,222 |   |   |
| Costs and  Expenses                       |       | 2,558             |       | 2,912 |   | 3,066 |   |   | 2,066 |   |   |
| Operating Profit  (Loss)                  |       | (1,443            | )          | (1,597 | ) | (1,546) |   |   | (844 | ) |   |
| Net Profit (Loss)                         |       | (1,438            | )          | (1.599 | ) | (1,577 | ) |   | 7,566 |   |   |
| Basic Net Profit  (loss) per share        |       | (0.12             | )          | (0.14 | ) | (0.13 | ) |   | 0.61 |   |   |
| Fully Diluted Net Profit  Loss) per share |       | (0.12             | )          | (0.14 | ) | (0.13 | ) |   | 0.62 |   |   |
|                                           |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                  | ** ** | **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 | ) |
|                             |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Restatement of Previously Reported Quarterly FinancialInformation***

As a result of the Company’s decision to change theaccounting method for recognizing product revenue to a sell through or point ofsale method and the internal investigation concerning the circumstancessurrounding and appropriate accounting for product revenue, the Audit Committeeof the Board of Directors determined that the Company restate certain financialinformation previously reported in the Company’s Forms 10-QSB for thequarters ended March 31, 2004, June 30, 2004 and September 30,2004. 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, 

F-21

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 2005 AND 2004**

**20. SupplementaryQuarterly Financial Information (Unaudited) (Continued)**

2004. For additionaldiscussion regarding the Audit Committee’s internal investigation and thecircumstances surrounding the decision for restatement, see “Item 8. “Changesin and Disagreements with Accountants.”

The following provided a reconciliation of amountspreviously reported in the Company’s Forms 10-QSB for the quarters ended March 31,2004, June 30, 2004 and September 30, 2004 with amounts adjusted forthe restatement as a result of the change in accounting policy and as a resultof the Audit Committee’s investigation.

F-22

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2005 AND 2004**

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

**APOGEETECHNOLOGY, INC. AND SUBSIDIARYRESTATED CONSOLIDATED BALANCE SHEETS(in thousands)**

| ** **                                     | ** ** | **March 31, 2004 ** | ** ** | **June 30, 2004** | ** ** |
|------------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **Previously  Reported(1)**        | ** ** | **Restatement  Adjustment** | ** ** | **Restated  Total** | ** ** | **Previously  Reported(1)** | ** ** | **Restatement  Adjustment** | ** ** | **Restated  Total** | ** ** |
| **ASSETS**                                     | ** ** |                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| **Current assets**                             | ** ** |                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| Cash and cash  equivalents                     | ** ** |                               | $          | 1,685                       |       |   |   | $ | — |   |   | $ | 1,685 |   |   | $ | 1,693 |   |   |   | $ | — |   |   | $ | 1,693 | ** ** |
| Accounts  receivable, net(2)                   | ** ** |                               | 3,682      |                        |       |   | (2,163 | ) |   | 1,519 |   |   | 2,637 |   |   |   | (1,845 | ) |   | 792 | ** ** |
| Inventories,  net(3)                           | ** ** |                               | 602        |                        |       |   | 2,248 |   |   | 2,850 |   |   | 937 |   |   |   | 1,798 |   |   | 2,735 | ** ** |
| Prepaid expenses  and other current assets     | ** ** |                               | 204        |                        |       |   | — |   |   | 204 |   |   | 257 |   |   |   | — |   |   | 257 | ** ** |
| Deferred tax  asset(4)                         | ** ** |                               | 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(5)                    | ** ** |                               | 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(6)      | ** ** |                               | $          | 1,012                       |       |   |   | $ | 12 |   |   | $ | 1,024 |   |   | $ | 710 |   |   |   | $ | 11 |   |   | $ | 721 | ** ** |
| Deferred  distributor revenue(7)               | ** ** |                               | —     |                        |       |   | 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 | ) |   | (13,431 | ) |
| 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.

(2)          AccountsReceivable:  Restatement for March 31,2004 and June 30, 2004 consists of $2,163 million and $1.845 million,respectively, reduction associated with the deferred revenue utilizing the sellthrough method.

F-23

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2005 AND 2004**

**20. SupplementaryQuarterly Financial Information (Unaudited) (Continued)**

(3)          Inventory:  Restatement for March 31, 2004 and June 30,2004 represents an increase of $2.577 million and $2.290 million, respectively,for finished goods inventory held at distributors. Amounts were adjusted by$329K and $492K of reserves against inventory held at distributors andin-house.

(4)          Deferred Tax Asset: The$195K originally recorded for the fiscal year ended December 31, 2003 wasdeemed no longer applicable based upon restatement of the Fiscal Year ended December 31,2003.

(5)          Other Intangible Assets:The $59K adjustment reflects the expensing of various items previously beingamortized.

(6)          Accounts Payable andAccrued Expenses: Restatement consists of reclassifying expenses to periods inwhich these incurred.

(7)          DeferredDistributor Revenue:  The restatementreflects the change in recognition of reporting distributor revenue to a sellthrough or point of sale method of accounting revenue. This number is based onPOS reports received by the Company’s distributors.

F-24

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2005 AND 2004**

**20. Supplementary Quarterly FinancialInformation (Unaudited) (Continued)**

**APOGEETECHNOLOGY, INC. AND SUBSIDIARYRESTATED CONSOLIDATED BALANCE SHEET(in thousands)**

| ** **                                 | ** ** | **September 30, 2004** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **Previously  Reported(1)**      | ** ** | **Restatement  Adjustment** | ** ** | **Restated  Total** | ** ** |
| **ASSETS**                                 |       |                             |       |   |   |   |   |   |   |   |   |
| **Current assets**                         |       |                             |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                 |       |                             | $          | 2,511 |   |   |   | $ | — |   |   | $ | 2,511 |   |
| Accounts  receivable, net(2)               |       |                             | 3,297      |   |   |   | (2,247 | ) |   | 1,050 |   |
| Inventories,  net(3)                       |       |                             | 1,845      |   |   |   | 1,404 |   |   | 3,249 |   |
| Prepaid expenses  and other current assets |       |                             | 221        |   |   |   | — |   |   | 221 |   |
| Deferred tax  asset (4)                    |       |                             | 195        |   |   |   | (195 | ) |   | — |   |
| Total current  assets                      |       |                             | 8,069      |   |   |   | (1,038 | ) |   | 7,031 |   |
| **Property  and equipment, net**           |       |                             | 114        |   |   |   | 0 |   |   | 114 |   |
| **Other assets**                           |       |                             |       |   |   |   |   |   |   |   |   |
| Patents, net                               |       |                             | 109        |   |   |   | — |   |   | 109 |   |
| Other intangible  assets(5)                |       |                             | 173        |   |   |   | (59 | ) |   | 114 |   |
|                                       |       |                             | $          | 8,465 |   |   |   | $ | (1,097 | ) |   | $ | 7,368 |   |
| **Current liabilities**                    |       |                             |       |   |   |   |   |   |   |   |   |
| Accounts payable  and accrued expenses     |       |                             | $          | 1,606 |   |   |   | $ | — |   |   | $ | 1,606 |   |
| Deferred  distributor revenue(6)           |       |                             | —     |   |   |   | 1,354 |   |   | 1,354 |   |
| Deferred contract  revenue                 |       |                             | 96         |   |   |   | — |   |   | 96 |   |
| Deferred warranty                          |       |                             | —     |   |   |   | — |   |   | — |   |
| Total current  liabilities                 |       |                             | 1,702      |   |   |   | 1,354 |   |   | 3,056 |   |
| **Stockholders’ equity**              |       |                             |       |   |   |   |   |   |   |   |   |
| Common stock                               |       |                             | 118        |   |   |   | — |   |   | 118 |   |
| Additional  paid-in capital                |       |                             | 18,074     |   |   |   | — |   |   | 18,074 |   |
| Accumulated  deficit                       |       |                             | (11,429    | ) |   |   | (2,451 | ) |   | (13,880 | ) |
| Total  stockholders’ equity           |       |                             | 6,763      |   |   |   | (2,451 | ) |   | 4,312 |   |
|                                       |       |                             | $          | 8,465 |   |   |   | $ | (1,097 | ) |   | 7,368 |   |

----

(1)          As previously reportedin the Company’s Quarterly Reports on Form 10-QSB.

(2)          AccountsReceivable:  Restatement for September 30,2004 consists of $2.247 million reduction associated with the deferred revenueutilizing the sell through method.

(3)          Inventory:  Restatement for September 30, 2004 representsan increased of $2.174 million for finished goods inventory held atdistributors. This amount was adjusted by $770K of reserves against inventoryheld at distributors and in-house.

(4)          Deferred Tax Asset: The$195K originally recorded for the fiscal year ended December 31, 2003 wasdeemed no longer applicable based upon restatement of the Fiscal Year ended December 31,2003.

F-25

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2005 AND 2004**

**20. SupplementaryQuarterly Financial Information (Unaudited) (Continued)**

(5)          Other Intangible Assets:The $59K adjustment reflects the expensing of various items previously beingamortized.

(6)          Deferred DistributorRevenue:  The restatement reflects thechange in recognition of reporting distributor revenue to a sell through orpoint of sale method of accounting revenue. This number is based on POS reportsreceived by the Company’s distributors.

F-26

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2005 AND 2004**

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

**APOGEETECHNOLOGY, INC. AND SUBSIDIARYRESTATED CONSOLIDATED STATEMENT OF OPERATIONS(in thousands, except per share data)**

| ** **                                                         | ** ** | **Three Months Ended March 31, 2004** | ** ** | **Three Months Ended June 30, 2004** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Previously**                                                 | ** ** | **Restatement**                                               | ** ** | **Restated** | ** ** | **Previously** | ** ** | **Restatement** | ** ** | **Restated** | ** ** |
| ** **                                                         | ** ** | **Reported(1)**                                                | ** ** | **Adjustment**                                                | ** ** | **Total** | ** ** | **Reported(1)** | ** ** | **Adjustment** | ** ** | **Total** | ** ** |
| **Revenues**                                                       |       |                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales(2)                                                   | ** ** | ** **                                                     | $          | 1,697                                                         |       |   |   | $ | (57 | ) |   | $ | 1,640 |   |   | $ | 1,036 |   |   |   | $ | (137 | ) |   | $ | 899 |   |
| Royalties(3)                                                       | ** ** | ** **                                                     | 375        |                                                          |       |   | (169 | ) |   | 206 |   |   | 436 |   |   |   | (198 | ) |   | 238 |   |
| Consulting(4)                                                      | ** ** | ** **                                                     | 254        |                                                          |       |   | 50 |   |   | 304 |   |   | 200 |   |   |   | — |   |   | 200 |   |
| ** **                                                         | ** ** | ** **                                                     | 2,326      |                                                          |       |   | (176 | ) |   | 2,150 |   |   | 1,672 |   |   |   | (335 | ) |   | 1,337 |   |
| **Costs and expenses**                                             |       |                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales(5)                                                   | ** ** | ** **                                                     | 1,114      |                                                          |       |   | (103 | ) |   | 1,011 |   |   | 626 |   |   |   | 451 |   |   | 1,077 |   |
| Research and  development                                          | ** ** | ** **                                                     | 711        |                                                          |       |   | — |   |   | 711 |   |   | 606 |   |   |   | — |   |   | 606 |   |
| Selling, general  and administrative(6)                            | ** ** | ** **                                                     | 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.

(2)          Product Sales:  The restated number reflect the change inrecognition of reporting of distributor revenue to a sell through or point ofsale method of accounting and is based on reports from the Company’sdistributors. This change translated into a net reduction of product revenue of$57K and $137K for the three months ended March 31, 2004 and June 30,2004, respectively.

F-27

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2005 AND 2004**

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

(3)          Royalty Revenue:  The restated royalty revenue reflects the neteffect of the discount given to ST for specific customers of $169K and $198Kfor the three months ended March 31, 2004 and June 30, 2004,respectively.  These discounts wereoriginally recorded in SG & A as a royalty expense.

(4)          Consulting revenue:   The restatement reflects thereclassification of $50K of consulting revenue to reflect when this revenue wasearned as opposed to when funds were received.  This revenue was originally recorded for thethree months ended December 31, 2003.

(5)          Cost of ProductSales:  The restated numbers reflect thechange in the cost of goods sold based on the change in recognition ofreporting of distributor revenue to a sell through or point of sale method ofaccounting.

(6)          Selling,General and Administrative:  The $169Kand $198K restatement were the result of the restatement of the royalty revenuefor both the three months ended March 31, 2004 and June 30, 2004.

F-28

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2005 AND 2004**

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

**APOGEETECHNOLOGY, INC. AND SUBSIDIARYRESTATED CONSOLIDATED STATEMENT OF OPERATIONS(in thousands, except per share data)**

| ** **                                                             | ** ** | **Three Months Ended September 30, 2004** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **Previously**                                                     | ** ** | **Restatement** | ** ** | **Restated** | ** ** |
| ** **                                                             | ** ** | **Reported(1)**                                                    | ** ** | **Adjustment** | ** ** | **Total** | ** ** |
| **Revenues**                                                           | ** ** |                                                               | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Product sales(2)                                                       | ** ** |                                                               | $          | 1,133 |   |   |   | $ | 257 |   |   | $ | 1,390 | ** ** |
| Royalties(3)                                                           | ** ** |                                                               | 790        |   |   |   | (344 | ) |   | 446 | ** ** |
| Consulting                                                             | ** ** |                                                               | 161        |   |   |   | — |   |   | 161 | ** ** |
| ** **                                                             | ** ** |                                                               | 2,084      |   |   |   | (87 | ) |   | 1,997 | ** ** |
| **Costs  and expenses**                                                | ** ** |                                                               |       |   |   |   |   |   |   |   | ** ** |
| Product sales(4)                                                       | ** ** |                                                               | 760        |   |   |   | 394 |   |   | 1,154 | ** ** |
| Research and  development                                              | ** ** |                                                               | 664        |   |   |   | — |   |   | 664 | ** ** |
| Selling, general  and administrative(5)                                | ** ** |                                                               | 988        |   |   |   | (355 | ) |   | 633 | ** ** |
| ** **                                                             | ** ** |                                                               | 2,412      |   |   |   | 39 |   |   | 2,451 | ** ** |
| **Operating  loss**                                                    | ** ** |                                                               | (328       | ) |   |   | (126 | ) |   | (454 | **)** |
| **Other  (expense) income**                                            | ** ** |                                                               |       |   |   |   |   |   |   |   | ** ** |
| Interest expense                                                       | ** ** |                                                               | —     |   |   |   | — |   |   | — | ** ** |
| Interest income                                                        | ** ** |                                                               | 5          |   |   |   | — |   |   | 5 | ** ** |
|                                                                   | ** ** |                                                               | 5          |   |   |   | — |   |   | 5 | ** ** |
| **Net  Income (Loss) before Taxes**                                    | ** ** |                                                               | (323       | ) |   |   | (126 | ) |   | (449 | **)** |
| **Income  Tax Benefit**                                                | ** ** |                                                               | —     |   |   |   | — |   |   | — | ** ** |
| **Net  (Loss) Income**                                                 | ** ** |                                                               | (323       | ) |   |   | (126 | ) |   | (449 | **)** |
| Accumulated  deficit—beginning                                    | ** ** |                                                               | (11,107    | ) |   |   | (2,324 | ) |   | (13,431 | **)** |
| **Accumulated  deficit—ending**                                   | ** ** |                                                               | $          | (11,429 | ) |   |   | $ | (2,450 | ) |   | $ | (13,880 | **)** |
| **Basic  and diluted loss per common share**                           | ** ** |                                                               | $          | (0.03 | ) |   |   | $ | (0.03 | ) |   | $ | (0.06 | **)** |
| **Weighted average common shares  outstanding—basic and diluted** | ** ** |                                                               | 11,566     |   |   |   |   |   |   |   | ** ** |

----

(1)          As previously reportedin the Company’s Quarterly Reports on Form 10-QSB.

(2)          Product Sales:  The restated number reflect the change inrecognition of reporting of distributor revenue to a sell through or point ofsale method of accounting and is based on reports from the Company’sdistributors. This change translated into a net increase of $257K for the threemonths ended September 30, 2004.

(3)          Royalty Revenue:  The restated royalty revenue reflects the neteffect of the discount given to STMicroelectronics for specific customers of$344K for the three months ended September 30, 2004.  These discounts were originally recorded in SG &A as a royalty expense.

F-29

----

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2005 AND 2004**

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

(4)          Cost of ProductSales:  The restated numbers reflect thechange in the cost of goods sold based on the change in recognition ofreporting of distributor revenue to a sell through or point of sale method ofaccounting.

(5)          Selling, General andAdministrative:  The $355K reduction inSG& A was the result of the restatement of the royalty expense associatedwith discounts given to STMicroelectronics for specific customer. Thesediscounts have been restated against royalty revenue for the three months endedSeptember 30, 2004. In addition there was a reduction of $11K as a resultof the recording of these commissions in a prior quarter.

Reports on Form 10-QSB.

F-30

----