**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

**(Mark One)**
| **x**                                                  | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                             | ** **                                                                                              |
| **For  the quarterly period ended September 30, 2007** |
| ** **                                             | ** **                                                                                              |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition periodfrom                   to**

 

**Commissionfile number 001-10456**

 

**APOGEETECHNOLOGY, INC.**

(Exact name of smallbusiness issuer as specified in its charter)

 

| **DELAWARE**                     | ** ** | **04-3005815**      |
|----------------------------------|------------|---------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer    |
| incorporation or  organization)  |       | Identification No.) |

 

**129MORGAN DRIVE, NORWOOD, MASSACHUSETTS 02062**

(Address of principalexecutive offices)

 

**(781)551-9450**

(Issuer’s telephone number,including area code)

 

**NOTAPPLICABLE**

(Former name, formeraddress and former fiscal year,

if changed since lastreport)

 

Check whether the issuer: (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes   x  No   o

 

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

 

State the number of shares outstanding of each of the Issuer’s classesof common equity, as of the latest practicable date:  As of November 1,2007, there 12,033,332 shares of Common Stock, $.01 par value per share,outstanding.

 

Transitional Small Business Disclosure Format (Checkone):  Yes o    No x

 

 

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**APOGEETECHNOLOGY, INC.**

 

**INDEX OFINFORMATION CONTAINED IN FORM 10-QSB FOR THE**

 

**PERIODSENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006**

 
| **PART I - FINANCIAL INFORMATION** |                                                                                                                                                      |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                    |                                                                                                                                                      |   |
| Item 1 -                                | Financial  Statements                                                                                                                                     |   |
|                                    | Consolidated  Balance Sheets at September 30, 2007 (unaudited) and December 31, 2006  (audited)                                                      |   |
|                                    | Consolidated  Statements of Operations and Accumulated Deficit for the Three and Nine  Months Ended September 30, 2007 and September 30, 2006 (unaudited) |   |
|                                    |                                                                                                                                                      |   |
|                                    |  Consolidated Statements of Cash Flows for  the Nine Months Ended September 30, 2007 and September 30, 2006 (unaudited)                              |   |
|                                    |                                                                                                                                                      |   |
|                                    | Notes  to Consolidated Financial Statements (unaudited)                                                                                                   |   |
|                                    |                                                                                                                                                      |   |
| Item 2 -                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                               |   |
|                                    |                                                                                                                                                      |   |
| Item 3 -                                | Controls and  Procedures                                                                                                                                  |   |
|                                    |                                                                                                                                                      |   |
| **PART II - OTHER  INFORMATION**   |                                                                                                                                                      |
|                                    |                                                                                                                                                      |   |
| Item 1 -                                | Legal Proceedings                                                                                                                                         |   |
|                                    |                                                                                                                                                      |   |
| Item 2 -                                | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                              |   |
|                                    |                                                                                                                                                      |   |
| Item 3 -                                | Defaults Upon  Senior Securities                                                                                                                          |   |
|                                    |                                                                                                                                                      |   |
| Item 4 -                                | Submission  of Matters to a Vote of Security Holders                                                                                                      |   |
|                                    |                                                                                                                                                      |   |
| Item 5 -                                | Other Information                                                                                                                                         |   |
|                                    |                                                                                                                                                      |   |
| Item 6 -                                | Exhibits                                                                                                                                                  |   |
|                                    |                                                                                                                                                      |   |
| Signatures                              |                                                                                                                                                      |   |

 

2

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**PART I **               **FINANCIAL INFORMATION**

 

** Item 1****                    Financial Statements**

 

**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

 **CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                       | ** ** | **SEPTEMBER 30,  2007** | ** **    | **DECEMBER 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                       | ** ** | **(Unaudited)**              | ** **    | **(Audited)**               | ** ** |
| **ASSETS**                                                                                                                                                                                                       |       |                         |          |                        |       |
| ** **                                                                                                                                                                                                       | ** ** | ** **                   | ** **    | ** **                  | ** ** |
| **Current  assets**                                                                                                                                                                                              |       |                         |          |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                       | ** ** | **$**                        | **793,533**   | ** **                  | **$**      | **3,051,420** | ** ** |
| Accounts  receivable, net of allowance for doubtful accounts of $11,320 in 2007 and  $13,245 in 2006, respectively                                                                                               | ** ** | **4,994**                    | ** **    | **11,196**                  | ** ** |
| Inventories, net                                                                                                                                                                                                 | ** ** | **—**                   | ** **    | **—**                  | ** ** |
| Prepaid expenses  and other current assets                                                                                                                                                                       | ** ** | **59,016**                   | ** **    | **69,465**                  | ** ** |
|                                                                                                                                                                                                             |       |                         |          |                        |       |
| Total current  assets                                                                                                                                                                                            | ** ** | **857,543**                  | ** **    | **3,132,081**               | ** ** |
|                                                                                                                                                                                                             |       |                         |          |                        |       |
| **Property  and equipment, net**                                                                                                                                                                                 | ** ** | **192,265**                  | ** **    | **117,217**                 | ** ** |
|                                                                                                                                                                                                             |       |                         |          |                        |       |
| **Other  assets**                                                                                                                                                                                                |       |                         |          |                        |       |
| Patents                                                                                                                                                                                                          | ** ** | **294,344**                  | ** **    | **208,703**                 | ** ** |
| Exclusive  licensing, net                                                                                                                                                                                        | ** ** | **28,218**                   | ** **    | **22,574**                  | ** ** |
| Construction in  progress                                                                                                                                                                                        | ** ** | **—**                   | ** **    | **90,642**                  | ** ** |
| ** **                                                                                                                                                                                                       | ** ** | ** **                   | ** **    | ** **                  | ** ** |
| ** **                                                                                                                                                                                                       | ** ** | **$**                        | **1,372,370** | ** **                  | **$**      | **3,571,217** | ** ** |
|                                                                                                                                                                                                             |       |                         |          |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                   |       |                         |          |                        |       |
|                                                                                                                                                                                                             |       |                         |          |                        |       |
| **Current  liabilities**                                                                                                                                                                                         |       |                         |          |                        |       |
| Accounts payable  and accrued expenses                                                                                                                                                                           | ** ** | **$**                        | **598,697**   | ** **                  | **$**      | **710,187** | ** ** |
|                                                                                                                                                                                                             |       |                         |          |                        |       |
| Total current  liabilities                                                                                                                                                                                       | ** ** | **598,697**                  | ** **    | **710,187**                 | ** ** |
|                                                                                                                                                                                                             |       |                         |          |                        |       |
| **Commitments  and Contingencies**                                                                                                                                                                               | ** ** | **—**                   | ** **    | **—**                  | ** ** |
| ** **                                                                                                                                                                                                       | ** ** | ** **                   | ** **    | ** **                  | ** ** |
| **Stockholders’  equity**                                                                                                                                                                                   |       |                         |          |                        |       |
| Preferred stock,  par value $0.0001 per share; 5,000,000 shares authorized, none issued and  outstanding.                                                                                                        | ** ** | ** **                   | ** **    | ** **                  | ** ** |
| Common stock,  $.01 par value; 40,000,000 shares authorized, 12,033,332 issued and  outstanding at September 30, 2007 and 20,000,000 shares authorized,  11,968,332 issued and outstanding at December 31, 2006. | ** ** | **120,333**                  | ** **    | **119,683**                 | ** ** |
| Additional  paid-in capital                                                                                                                                                                                      | ** ** | **18,509,598**               | ** **    | **18,396,909**              | ** ** |
| Accumulated  deficit                                                                                                                                                                                             | ** ** | **(17,856,258**              | **)**         | **(15,655,562**             | **)**      |
|                                                                                                                                                                                                             |       |                         |          |                        |       |
| Total  stockholders’ equity                                                                                                                                                                                 | ** ** | **773,673**                  | ** **    | **2,861,030**               | ** ** |
| ** **                                                                                                                                                                                                       | ** ** | **$**                        | **1,372,370** | ** **                  | **$**      | **3,571,217** | ** ** |
|                                                                                                                                                                                                                  |            |                              |               |                             |            |  |  |  |  |

 

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

 

3

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF INCOME**

 

**(UNAUDITED)**

** **
| ** **                                                          | ** ** | **THREE MONTHS ENDED  September 30,** | ** **      | **NINE MONTHS ENDED  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|-----------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                                             | ** **      | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                        | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                                                       | ** ** | **$**                                                | **13,601**      |                                                | $          | 509,015 | ** ** | **$** | **132,268** |   | $ | 1,833,961 |   |
| Royalties                                                           |       | —                                               |            | —                                              |       | — |   | 1,250 |   |
|                                                                |       |                                                 |            |                                                |       |   |   |   |   |
| ** **                                                          |       | **13,601**                                           | ** **      | 509,015                                             |       | **132,268** |   | 1,835,211 |   |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Costs  and expenses**                                             | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                                                       | ** ** | **12**                                               |            | 354,160                                             | ** ** | **1,427** |   | 1,351,248 |   |
| Research and  development                                           | ** ** | **304,899**                                          |            | 421,189                                             | ** ** | **924,404** |   | 1,421,501 |   |
| Selling, general  and administrative                                | ** ** | **489,022**                                          |            | 816,508                                             | ** ** | **1,530,893** |   | 1,975,102 |   |
|                                                                |       |                                                 |            |                                                |       |   |   |   |   |
| ** **                                                          |       | **793,933**                                          | ** **      | 1,591,857                                           |       | **2,456,724** |   | 4,747,851 |   |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  loss**                                                 | ** ** | **(780,332**                                         | **)**           | (1,082,842                                          | )          | **(2,324,456** | **)** | (2,912,640 | ) |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other (expense)  income**                                         | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                |       |                                                 |            |                                                |       |   |   |   |   |
| SigmaTel  earn-out                                                  |       | —                                               |            | 299,090                                             |       | — |   | 383,198 |   |
| Interest/other  expense                                             |       | —                                               |            | (1,754                                              | )          | — |   | (24,205 | ) |
| Interest income                                                     | ** ** | **67,825**                                           |            | 46,346                                              | ** ** | **123,760** |   | 153,852 |   |
|                                                                |       |                                                 |            |                                                |       |   |   |   |   |
| ** **                                                          |       | **67,825**                                           | ** **      | 343,682                                             |       | **123,760** |   | 512,845 |   |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  loss**                                                       | ** ** | **(712,507**                                         | **)**           | (739,160                                            | )          | **(2,200,696** | **)** | (2,399,795 | ) |
|                                                                |       |                                                 |            |                                                |       |   |   |   |   |
| Accumulated  deficit - beginning                                    | ** ** | **(17,143,751**                                      | **)**           | (14,345,194                                         | )          | **(15,655,562** | **)** | (12,684,559 | ) |
|                                                                |       |                                                 |            |                                                |       |   |   |   |   |
| **Accumulated  deficit - ending**                                   | ** ** | **$**                                                | **(17,856,258** | **)**                                               | $          | (15,084,354 | ) | **$** | **(17,856,258** | **)** | $ | (15,084,354 | ) |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          |       | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted loss per common share**                        | ** ** | **$**                                                | **(0.06**       | **)**                                               | $          | (0.06 | ) | **$** | **(0.18** | **)** | $ | (0.20 | ) |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Weighted  average common shares outstanding - basic and diluted** | ** ** | **11,993,060**                                       |            | 11,968,332                                          | ** ** | **11,976,665** |   | 11,968,332 |   |

 

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

 

4

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**
| ** **                                                                             | ** ** | **NINE MONTHS ENDED SEPTEMBER 30,** | ** **     |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------|----------------|
| ** **                                                                             | ** ** | **2007**                                                | ** **     | **2006** | ** ** |
|                                                                                   |       |                                                    |           |   |   |
| **Cash  flows from operations**                                                        | ** ** | ** **                                              | ** **     | ** ** | ** ** |
| Net loss                                                                               | ** ** | **$**                                                   | **(2,200,696** | **)** | $ | (2,399,795 | ) |
| *Adjustments  to reconcile net income (loss)to net cash used in operating activities:* |       |                                                    | ** **     |   |   |
| Provision for  doubtful accounts                                                       | ** ** | **(1,925**                                              | **)**          | (131,755 | ) |
| Provision for  slow moving, excess and obsolete inventory                              | ** ** | **(136,327**                                            | **)**          | (27,504 | ) |
| Depreciation and  amortization                                                         | ** ** | **57,108**                                              | ** **     | 12,894 |   |
| Stock  compensation expense                                                            | ** ** | **77,592**                                              | ** **     | 348,698 |   |
| Disposal of  property and equipment                                                    |       | —                                                  | ** **     | 13,201 |   |
| *Changes  in operating assets and liabilities:*                                        | * *   | * *                                                | *** ***   | * * | * * |
| Accounts  receivable                                                                   | ** ** | **8,127**                                               | ** **     | (136,278 | ) |
| Inventories                                                                            | ** ** | **136,327**                                             | ** **     | 1,355,468 |   |
| Prepaid expenses  and other current assets                                             | ** ** | **46,197**                                              | ** **     | 100,854 |   |
| Accounts payable  and accrued expenses                                                 | ** ** | **(111,491**                                            | **)**          | (188,501 | ) |
| Deferred  distributor revenue                                                          | ** ** | **—**                                              | ** **     | (1,337,022 | ) |
| Deferred  contract revenue                                                             | ** ** | **—**                                              | ** **     | (72,686 | ) |
|                                                                                   |       |                                                    | ** **     |   |   |
| Net cash used in  operating activities                                                 | ** ** | **(2,125,088**                                          | **)**          | (2,462,426 | ) |
|                                                                                   |       |                                                    | ** **     |   |   |
| **Cash  flows from investing activities**                                              | ** ** | ** **                                              | ** **     | ** ** | ** ** |
| Purchases of  property and equipment                                                   | ** ** | **(33,130**                                             | **)**          | (36,851 | ) |
| Patent costs                                                                           | ** ** | **(85,641**                                             | **)**          | (22,065 | ) |
| Leasehold  improvements                                                                | ** ** | **(2,250**                                              | **)**          | **—** | ** ** |
| License fee                                                                            | ** ** | **(11,778**                                             | **)**          | **—** | ** ** |
|                                                                                   |       |                                                    | ** **     |   |   |
| Net cash used in  investing activities                                                 | ** ** | **(132,799**                                            | **)**          | (58,916 | ) |
|                                                                                   |       |                                                    | ** **     |   |   |
| **Cash  flows from financing activities**                                              | ** ** | ** **                                              | ** **     | ** ** | ** ** |
|                                                                                   |       | —                                                  | ** **     | — |   |
|                                                                                   |       |                                                    | ** **     |   |   |
| Net cash  provided by financing activities                                             |       | —                                                  | ** **     | — |   |
|                                                                                   |       |                                                    | ** **     |   |   |
| **Decrease  in cash and cash equivalents**                                             | ** ** | **(2,257,887**                                          | **)**          | (2,521,342 | ) |
|                                                                                   |       |                                                    | ** **     |   |   |
| Cash and cash  equivalents—beginning                                              | ** ** | **3,051,420**                                           | ** **     | 5,512,974 |   |
|                                                                                   |       |                                                    | ** **     |   |   |
| **Cash  and cash equivalents—ending**                                             | ** ** | **$**                                                   | **793,533**    | ** ** | $ | 2,991,632 |   |
|                                                                                   |       |                                                    | ** **     |   |   |
| **Non  cash investing and financing activities**                                       |       |                                                    | ** **     |   |   |
| Issuance of  65,000 shares of Common Stock for services                                | ** ** | **(35,750**                                             | **)**          | — |   |

 

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

 

5

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

 **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**SEPTEMBER30, 2007 AND SEPTEMBER 30, 2006 (UNAUDITED)**

 

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

 

***The Company***

 

ApogeeTechnology, Inc. and Subsidiary (the “Company” or “Apogee”, “we”, “us”, or“our”) designs, develops and commercializes advanced drug delivery and sensordevices and systems. Our Medical Products Group is developing PyraDermTM anadvanced intradermal drug delivery system to meet the needs of patients, healthinsurers, companies’ developing pharmaceuticals, as well as, governments andinternational health organizations. We believe PyraDermTM has advantages overcompetitive approaches for the delivery of vaccines, high potency therapeuticprotein drugs and other pharmaceuticals. We have evaluated the feasibility ofPyraDerm by performing in vitro tests with model drugs and have started in vivotesting to complement positive in vivo results already obtained with vaccinesby third party researchers using our delivery technology.  We are workingto establish pharmaceutical industry compliant manufacturing methods and todefine regulatory strategies to support its commercialization. Our businessstrategy includes: (i) the licensing or selling of our technologies topharmaceutical or medical device companies; (ii) establish partnerships withpharmaceutical and device companies to commercialize our products; and (iii)developing, producing and marketing our own medical products. Our Sensor ProductsGroup is developing and marketing -proprietary Micro-Electromechanical Systems(“MEMS”) and Nanotechnology based pressure sensors for the medical, automotive,industrial and consumer markets under the Sensilica® brand name.  Thesedevices are produced using a novel manufacturing technology that we believereduces size and cost while improving reliability as compared to alternativeMEMS sensor designs. In August 2007, we announced an expansion of our sensorbusiness to include the development of IntellaPALTM, an innovative sensor basedmonitoring system designed to improve the security, independence and quality oflife for the elderly and their families. IntellaPALTM will utilize a wirelesssensor module and advanced software processing to continuously measure a rangeof health characteristics and automatically notify responders when specifiedconditions are detected. In addition, the system will provide monitored dataonline so that approved caregivers will be able to assist in the earlyidentification of certain health characteristics. The Company believes itsdevelopment strategy will support the introduction of IntellaPALTM homemonitoring products and services during the second half of 2008.

 

From 1981 until 1995,Apogee Acoustics Incorporated (“Acoustics”) engineered, manufactured, andmarketed high quality, patented ribbon loudspeaker systems for use in homeaudio and video entertainment systems. In 1987 Apogee Technology, Inc. wasorganized as a Delaware corporation and operated through its wholly ownedsubsidiary, Acoustics. We discontinued our loudspeaker business in 1994 andutilized our audio experience on the development of the worlds’ firstall-digital, high efficiency audio amplifier integrated circuits (“IC”), whichwe trademarked as Direct Digital Amplification or DDX®. We transitioned ourbusiness to take advantage of the patent we received in 1991 for relatedtechnology and to pursue the market opportunity created by the industryadoption of digital audio transmission, recording and playback. In 1999, wereleased our first IC products, and subsequently released a total of over 25 ICproducts. In addition to our IC product sales, we also licensed DDX technologyto several IC companies, including STMicroelectronics NV (“ST”), one of theworld’s largest semiconductor companies. Under this licensing agreement withST, Apogee developed and provided intellectual property to be used in royaltybearing products produced by ST.

 

In May 2004, in order toexpand our technology base and to further diversify our product and marketopportunities, we acquired a portfolio of MEMS and nanotechnology intellectualproperty, trade secrets and know-how developed by Standard MEMS, Inc. MEMS aredevices produced using high volume IC manufacturing techniques that includeboth electrical circuits and microscopic mechanical systems. Concurrently, wehired employees from the former Standard MEMS, Inc. and established a MEMSDivision that we have subsequently consolidated into our Norwoodheadquarters.  Since this acquisition, we have been using this acquiredknow-how plus additional technologies to develop MEMS and nanotechnology baseddrug delivery and sensor systems.

 

On October 5, 2005, wecompleted a transaction with SigmaTel, Inc. (“SigmaTel”) whereby we soldcertain assets of our audio division, including the DDX technology and theassociated royalties from our license agreement with ST, for approximately$9.78 million. As part of the transition, a significant portion of Apogee’sengineering and marketing staff related to the audio division left Apogee afterthey were offered positions at SigmaTel. We reorganized our remaining MEMSdivision into two business groups, the Medical Products Group and the SensorProducts Group. We also closed our sales offices in China, Japan, Taiwan andHong Kong and terminated our agreements with our independent salesrepresentatives and distributors that supported our audio ICbusiness.   As of September 30, 2007, we are carrying inventorywith an original cost of approximately $1.68 million and a net value of zero,after reserves for slow moving, excess and obsolete inventory.  Thisinventory is available for sale.

 

6

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***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 accompanyingconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and satisfaction of liabilities inthe normal course of business. As shown in the consolidated financialstatements, we have incurred continuing losses and negative cash flows fromoperations. Net losses were approximately $2.2 million and negative cash flowsfrom operations were approximately $2.2 million for the nine months endedSeptember 30, 2007. Given our net losses and negative cash flows fromoperations, we will not be able to continue as a going concern without raisingadditional capital.

 

We have approximately$794,000 of cash at September 30, 2007. We have reduced, in theshort-term, our operating expenses for payroll and related costs, rents andthird party consulting fees. We believe that our current working capital andamounts that may be raised to support operations will be sufficient to fund ourcapital and operational requirements through December 31, 2007. We are actively pursuing various options for additional funding. Also seeFootnote 10 — Notification from the American Stock Exchange.

 

The long-term success ofApogee is dependent upon our ability to successfully develop and market ourmedical device products which are based upon our MEMS technology, to attainprofitable operations and to raise additional funds as needed for suchpurposes. There can be no assurance, however, that we will be able to generatesufficient revenue, become profitable or that additional funds will beavailable to us on acceptable terms, if at all.

 

The consolidated balancesheet as of September 30, 2007 and the consolidated statements of income andcash flow for the three and nine months ended September 30, 2007 and 2006 areunaudited. The unaudited interim financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesand in accordance with the instructions for Form 10-QSB. Such financialstatements do not include all of the information and disclosures required foraudited financial statements. In the opinion of our management, the unauditedinterim financial statements have been prepared on the same basis as ouraudited financial statements and include all adjustments, consisting of normalrecurring adjustments, necessary for the fair presentation of our balancesheet, results of operations and cash flows for the periods presented. Theresults of operations for the interim periods are not necessarily indicative ofthe results that can be expected for any other interim period or any fiscalyear.

 

**2.        Summary of Significant Accounting Policies**

 

***Revenue Recognition***

 

Apogee recognizes revenuein accordance with Securities and Exchange Commission Staff Accounting BulletinNo. 104 (“SAB 104”), “Revenue Recognition in Financial Statements: RevenueRecognition”, which states that revenue should be recognized when the followingrevenue recognition criteria are met:  (1) persuasive evidence of anarrangement exists; (2) the product has been shipped and the customertakes ownership and assumes the risk of loss; (3) the selling price isfixed or determinable; and (4) collection of the resulting receivable isreasonably assured. The following policies apply to our major product salescategories for revenue recognition.

 

Sales to OEMCustomers:  Revenue is recognized under Apogee’s standard terms andconditions of sale, title and risk of loss transfer to the customer at the timeproducts are shipped to the customer or the customers’ representative/freightforwarder (shipping terms Ex Works). We have experienced minimal warranty orother returns and based upon historical experience we have recorded a $10,000provision for such returns.

 

Apogee records royaltyrevenue when earned in accordance with the underlying agreement. Royalties arebased upon sales of products commercialized from our licensed technology.Consulting revenue is recognized as services are performed in accordance withthe terms of the underlying agreements.

 

7

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***Loss Per Share***

 

Basic net loss per shareis computed by dividing the net loss attributable to common stockholders forthe period by the weighted average number of common stock outstanding duringthe period.  Diluted net loss per share is computed based on the weightedaverage number of common stock and dilutive potential common stockoutstanding.  The calculation of diluted net loss per share excludedpotential common stock if the effect is anti-dilutive.  Potential commonstock consists of incremental common stock issuable upon the exercise of stockoptions and common stock issuable upon the exercise of common stock warrants.

 

***Research and Development***

 

Costs for research anddevelopment are expensed as incurred.

 

***Inventories***

 

Inventories are stated atthe lower of cost on a first-in, first-out basis or market. See Footnote 4 tothe financial statements.  This policy requires Apogee to make estimatesregarding the market value of our inventory, including an assessment of excessor obsolete inventory. We determine excess and obsolete inventory based on anestimate of the future demand and estimated selling prices for our productswithin a specified time horizon, generally 12 to 24 months.

 

During the nine monthsended September 30, 2007, we recorded a recovery of previously reservedprovisions for slow moving, excess and obsolete inventory of approximately$136,000 to adjust for current inventory levels.  The inventory as ofSeptember 30, 2007, consisting entirely of Apogee held inventory, wasapproximately $1.68 million before reserves of approximately $1.68 million, theallowance for slow moving, excess and obsolete inventory.  This comparesto inventory at December 31, 2006, net of reserves, of approximately $1.81million.

 

 ***Purchase commitment losses***

 

We accrue for estimatedlosses on non-cancelable purchase orders of products, which may occur ifthe future sale price declines below the committed purchase price. There are nooutstanding purchase commitments of product inventory and therefore noprovision was required at September 30, 2007.

 

***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.

 

***Leasehold Improvements/Construction in Progress***

 

Construction in progressconsists of costs related to the renovations and construction of a laboratoryto be used for the development of medical device products.  On January 3,2007 we announced the completion of an analytical and formulation laboratory atour headquarters.  Subsequently, all costs previously recorded asConstruction in Progress were reclassified to Leasehold Improvements and arebeing amortized on a straight-line basis over a three-year period.

 

***Patents***

 

Costs incurred toregister and obtain patents will be capitalized and amortized on a straight-linebasis over their estimated useful lives, once a patent has been approved andplaced into service.  During the fiscal year ended December 31, 2006, wesubmitted five U. S. patent applications. In July 2007 we submitted twoadditional U. S. patent applications.

 

***License Fees***

 

License fees paid tothird parties for costs associated with the exclusive rights to their patentsare capitalized and are amortized over a four-year period.

 

***Cash and Cash Equivalents***

 

We consider all highlyliquid investments with an original maturity of three months or less to be cashequivalents. Substantially all of our cash is held in high quality money marketfunds comprised of short-term, fixed income securities earning interest at4.97% at September 30, 2007.

 

8

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

 

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

 

***Accounts Receivable***

 

We carry our tradereceivables from direct customers less an allowance for doubtful accounts toensure that trade receivables are carried at net realizable value.  On aperiodic basis, we evaluate the collectibility of our accounts receivable on avariety of factors, including length of time receivables are past due,indication of customers’ willingness to pay, significant one-time events andhistorical experience. An additional reserve for individual accounts isrecorded when we become 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 a customer were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.  Accounts receivable are generally considered past due if anyportion of the receivable balance is outstanding for more than 90 days. If circumstances related to our customers change, estimates of therecoverability of receivables would be further adjusted.

 

***Fair value of financial instruments***

 

Carrying amounts ofcertain of our financial instruments, including cash and cash equivalents,accounts receivable and notes and accounts payable, approximate their fairvalues due to their relative short maturities and based upon comparable marketinformation available at the respective balance sheet dates. We do not hold orissue financial instruments for trading purposes.

 

***Stock Based Compensation***

 

Apogee had a stock-basedcompensation plan, the 1997 Employee, Director and Consultant Stock Option Plan(the “1997 Plan”), which is described below. This 1997 Plan expired as of May14, 2007. At our Annual Meeting held on August 28, 2007, the shareholdersapproved the adoption of a new stock-based compensation plan, the 2007Employee, Director and Consultant Stock Plan (the “2007 Plan”). Prior to fiscal2006, we accounted for the 1997 Plan under the recognition and measurementprovisions of Accounting Principles Board (APB) Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related Interpretations, as permitted byFinancial Accounting Standards Board (FASB) Statement of Financial AccountingStandards (SFAS) No. 123, “Accounting for Stock-Based Compensation” (SFAS123). Compensation costs related to stock options granted at fair value underthe 1997 Plan were not recognized in the consolidated statements of income.

 

In December 2004,FASB issued SFAS 123 (revised 2004), “Share-Based Payments” (SFAS 123(R)).Under the new standard, companies are no longer able to account for stock-basedcompensation transactions using the intrinsic value method in accordance withAPB Opinion No. 25. Instead companies are required to account for suchtransactions using a fair-value method and recognize the expense in theconsolidated statement of income.

 

Prior to January 1,2006, we adopted only the disclosure provisions of SFAS 123(R). It applied APBOpinion No. 25, “Accounting For Stock Issued To Employees”, and relatedinterpretations in accounting for the 1997 Plan and did not recognizecompensation expense for the 1997 Plan.

 

EffectiveJanuary 1, 2006, we adopted SFAS 123(R) using themodified-prospective-transition method. Under this transition method, stockcompensation costs recognized beginning January 1, 2006 include (a)compensation cost for all stock-based compensation payments granted prior to,but not yet vested as of January 1, 2006, based on the grant date fairvalue estimated in accordance with the original provisions of SFAS 123, and(b) compensation cost for all stock-based payments granted on orsubsequent to January 1, 2006, based on the grant date fair valueestimated in accordance with the provisions of SFAS 123(R). Results for priorperiods have not been restated.

 

Due to the adoption ofSFAS 123(R), included in our net loss for the three and nine months endedSeptember 30, 2007 were compensation charges of approximately $24,000 and$78,000, respectively. This compares to approximately $251,000 and $349,000 forsame periods in 2006.

 

***Accounting for Stock Compensation***

 

Stock-based compensationcosts are generally based on the fair value calculated from the Black-Scholesoption-pricing model on the date of grant for stock options.  The fairvalues of stock grants are amortized as compensation expense over the options’vesting period. Compensation expense recognized is shown in the operatingactivities section of the consolidated statements of cash flow.

 

9

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In anticipation ofadopting SFAS 123(R), we evaluated the assumptions used in the Black-Scholesmodel. Apogee continues to calculate the expected volatility based solely onhistorical volatility. We believe that historical volatility provides the bestestimate of future stock price volatility.

 

The expected term waspreviously and is currently calculated based on an analysis of vesting periodsand contractual life. We believe that this analysis provides a better estimateof option term periods.

 

Apogee continues to basethe estimate of risk-free rate on the U.S. Treasury yield curve in effect atthe time of grant. We have never paid cash dividends and do not currentlyintend to pay cash dividends, and thus we have assumed a 0% dividend yield.

 

As part of therequirements of SFAS 123(R), we are required to estimate potential forfeituresof stock grants and adjust compensation cost recorded accordingly. The estimateof forfeitures will be adjusted over the requisite service period to the extentthat actual forfeitures differ, or are expected to differ, from such estimates.Changes in estimated forfeitures will be recognized through a cumulativecatch-up adjustment in the period of change and will also impact the amount ofstock compensation expense to be recognized in future periods.

 

During the nine-monthperiod ended September 30, 2007, the stock option activity under our 1997 Planand 2007 Plan are summarized below:

 
| **Stock Options**                      | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  December 31, 2006 |       | 2,899,100  |       | $                                       | 4.6512     |                                                 |       |                            |       |   |
| Granted                                     |       | 110,000    |       | 1.0831                                  |       |                                                 |       |                            |       |
| Exercised                                   |       | -0-        |       |                                    |       |                                                 |       |                            |       |
| Cancelled or  expired                       |       | (150,000   | )          | 1.6797                                  |       |                                                 |       |                            |       |
| Outstanding at  September 30, 2007          |       | 2,859,100  |       | $                                       | 4.6698     |                                                 | 6.0764     |                            | $          | 13,351,491 |   |
|                                        |       |       |       |                                    |       |                                                 |       |                            |       |
| Vested at  September 30, 2007               |       | 2,456,500  |       | $                                       | 5.2670     |                                                 | 5.6341     |                            | $          | 12,938,479 |   |
|                                        |       |       |       |                                    |       |                                                 |       |                            |       |
| Exercisable at  September 30, 2007          |       | 2,456,500  |       | $                                       | 5.2670     |                                                 | 5.6341     |                            | $          | 12,938,479 |   |

 

The following tablesummarizes information about stock options outstanding at September 30, 2007:

 
| ** **                                  | ** ** | **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** | ** ** |
| $0.625 — 1.69                          |       | 960,900                      |       | 7.8828                                              |       | $ | 1.0506 |   | 558,300 |   | $ | 1.0685 |   |
| $2.71 — 6.590                          |       | 1,299,200                    |       | 4.5139                                              |       | $ | 5.4017 |   | 1,299,200 |   | $ | 5.4017 |   |
| $8.45 — 12.15                          |       | 599,000                      |       | 6.5675                                              |       | $ | 8.8883 |   | 599,000 |   | $ | 8.8883 |   |
|                                        |       |                         |       |                                                |       |   |   |   |   |   |   |
| Total at September  30, 2007 |       | 2,859,100                    |       | 6.0764                                              |       | $ | 4.6698 |   | 2,456,500 |   | $ | 5.2671 |   |

 

During the nine monthsended September 30, 2007, Apogee granted options to purchase 110,000 shares ofits common stock at a weighted average fair market value of $0.7470. During the nine months ended September 30, 2007, options to purchase 114,000shares of Apogee common stock expired. No options were exercised during thenine months ended September 30, 2007.  During the nine months endedSeptember 30, 2007, options to purchase 89,100 shares of Apogee common stockvested. ** **  The weighted average fair value of theseoptions was $0.8494.  Total stock-based compensation expense for the ninemonths ended September 30, 2007 was approximately $78,000, compared toapproximately $349,000 for the nine months ended September 30, 2006.

 

10

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***Recent Accounting Pronouncements***

 

Management does notbelieve there are any recently issued but not yet effective accountingpronouncements that will have a material effect on our financial statements.

 

**3.        Accounts Receivable**

 

Accounts Receivable atSeptember 30, 2007 and December 31, 2006 are comprised of the following:

 
| ** **                            | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|---------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                            | ** ** | **2007**               | ** **  | **2006**              | ** ** |
| ** **                            | ** ** | **(Unaudited)**        | ** **  | **(Audited)**         | ** ** |
| Distributor                           | ** ** | **$**                  | **7,178**   |                  | $          | 11,162 |   |
| Direct customers                      | ** ** | **9,136**              |        | 13,279                |       |
| ** **                            |       | **$**                  | **16,314**  |                  | $          | 24,441 |   |
|                                  |       |                   |        |                  |       |
| Less allowance  for doubtful accounts | ** ** | **$**                  | **(11,320** | **)**                 | (13,245    | ) |
|                                  |       |                   |        |                  |       |
| Net accounts  receivable              | ** ** | **$**                  | **4,994**   |                  | $          | 11,196 |   |

 

**4.        Inventories**

 

Inventories are stated atthe lower of cost (first-in, first-out) or market. The major classifications ofinventories are as follows:

 
| ** **                                                     | ** ** | **September 30,** | ** **    | **December 31,** | ** ** |
|----------------------------------------------------------------|------------|------------------------|---------------|-----------------------|------------|
| ** **                                                     | ** ** | **2007**               | ** **    | **2006**              | ** ** |
| ** **                                                     | ** ** | **(Unaudited)**        | ** **    | **(Audited)**         | ** ** |
|                                                           |       |                   |          |                  |       |
| Raw materials                                                  | ** ** | **$**                  | **—**    | ** **            | **$**      | **—** | ** ** |
| Finished goods  held by Apogee                                 | ** ** | **1,677,700**          |          | 1,814,028             |       |
| Finished goods  held by distributors                           | ** ** | **—**             | ** **    | **—**            | ** ** |
|                                                           |       |                   |          |                  |       |
| ** **                                                     |       | **$**                  | **1,677,700** |                  | $          | 1,814,028 |   |
| Less allowance  for slow moving, excess and obsolete inventory | ** ** | **(1,677,700**         | **)**         | (1,814,028            | )          |
|                                                           |       |                   |          |                  |       |
| Inventory—net                                             | ** ** | **$**                  | **—**    | ** **            | **$**      | **—** | ** ** |

 

**5.        Property and Equipment**

 

Property and equipment atSeptember 30, 2007 and December 31, 2006 are comprised of the following:

 
| ** **                     | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|--------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                     | ** ** | **2007**               | ** **  | **2006**              | ** ** |
| ** **                     | ** ** | **(Unaudited)**        | ** **  | **(Audited)**         | ** ** |
|                           |       |                   |        |                  |       |
| Equipment                      | ** ** | **$**                  | **169,891** |                  | $          | 136,761 |   |
| Software                       | ** ** | **32,943**             |        | 32,943                |       |
| Furniture and  fixtures        | ** ** | **22,047**             |        | 22,047                |       |
| Leasehold  improvements        | ** ** | **92,892**             |        | 22,954                |       |
|                           |       |                   |        |                  |       |
| ** **                     |       | **$**                  | **317,773** |                  | $          | 214,715 |   |
|                           |       |                   |        |                  |       |
| Less accumulated  depreciation | ** ** | **(125,508**           | **)**       | (97,488               | )          |
|                           |       |                   |        |                  |       |
| ** **                     |       | **$**                  | **192,265** |                  | $          | 117,217 |   |

 

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Depreciation expense wasapproximately $10,000 and $28,000 for the three and nine months ended September30, 2007.

 

The estimated usefullives of the classes of physical assets were as follows:

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

 

**6.        Accrued Expenses**

** **
| ** **              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **              | ** ** | **(Unaudited)**        | ** ** | **(Audited)**         | ** ** |
|                    |       |                   |       |                  |       |
| Accrued audit  expenses | ** ** | **$**                  | **49,500** |                  | $          | 60,000 |   |
| Accrued legal  expenses | ** ** | **—**             |       | 25,000                |       |
| Accrued taxes           | ** ** | **—**             | ** ** | **—**            | ** ** |
| Other accrued  expenses | ** ** | **12,400**             |       | 64,000                |       |
|                    |       |                   |       |                  |       |
| ** **              |       | **$**                  | **61,900** |                  | $          | 149,000 |   |

 

**7.        Stockholders’ Equity**

 

***Stock Options***

 

During the three monthsended September 30, 2007, we awarded certain of our employees’ options topurchase 26,000 shares, in the aggregate, at an exercise price of $0.74 pershare.   These options were grantedunder the 2007 Plan. The options granted to these employees vest over fiveyears beginning at the first anniversary of the date of grant.

 

***CommonStock***

 

On July 26, 2007, wesigned a consulting agreement pursuant to which we issued 65,000 shares of ourcommon stock in a private transaction, exempt from registration under section4(2) of the Securities Act of 1933, as amended, (the “Securities Act”) as anupfront non-refundable retainer as partial compensation to a financial advisorand exclusive placement agent in connection with a possible financingtransaction.

 

**8.        Related Party Transactions**

 

We rent our facility froman entity controlled by a stockholder for $4,400 per month pursuant to a leasethat expired December 31, 2005. Currently, we are renting the facility ona month-to-month basis.  In addition, see Footnote 9 — IndemnificationAgreements with our Executives.

 

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**9.      Indemnification Arrangements with our Executives**

 

Apogee has been assumingand will continue to assume the legal costs and related expenses of Herbert M.Stein, in connection with the civil case in the Circuit Court of the FifteenthJudicial Circuit in and for Palm Beach County, Florida entitled*  Joseph Shamyv. Herbert M. Stein, case No.: 50 2005 CA 007719 XXXXMB.*   Todate we have incurred approximately $460,000 toward this indemnification.

 

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

 

As reported on our reporton Form 8-K dated January 12, 2007, Apogee was notified onJanuary 12, 2007, by the American Stock Exchange (“AMEX”) that AMEXaccepted our plan to regain compliance with AMEX continued listing standards,and that Apogee’s listing will be continued pursuant to an extension.

 

We submitted a plan ofcompliance to AMEX on November 30, 2006, as amended on December20, 2006, which outlined our operational plan and strategic objectivestowards regaining compliance with certain of the AMEX continued listingstandards (the “AMEX Plan”). The AMEX Plan was prepared in response to a letterreceived from AMEX on November 1, 2006, indicating that we no longer metcertain continued listing standards.  We continue to not meet the standardsas a result of having shareholders’ equity of less than $4 million and lossesfrom continuing operations and/or net losses in three out of its four mostrecent fiscal years, as is required in Section 1003 (a) (ii) ofthe Company Guide; because we are also not in compliance with Section 1003(a) (iii) of the Company Guide, as we have shareholders’ equity ofless than $6 million and losses from continuing operations in our five mostrecent fiscal years; and on September 26, 2007 we were notified that we did notmeet Section 1003(a)(i), of the AMEX Company Guide due to the fact that we hadshareholders’ equity of less than $2,000,000 and losses from continuingoperations and/or net losses in two of our three most recent fiscal years. Becausewe were already subject to 1009 of the Company Guide, the AMEX did not imposeany new requirements, nor were we required to take any additional steps inconnection with our efforts to address non-compliance with the continuedlisting standards related to stockholders’ equity.

 

As reported on our report on Form 8-K dated November8, 2007, we were notified by a letter from the American Stock Exchange onNovember 2, 2007 that the AMEX PLAN period had expired without our havingregained compliance with the relevant continued listing standards. As a result,the staff of the AMEX notified us of their intent to remove our common stockfrom the AMEX by filing a delisting application with the Securities andExchange Commission (the “SEC”) pursuant to Section 1009(d) of the AMEX CompanyGuide (the “Company Guide”), and Rule 12d2-2 of the Securities Exchange Act of1934, as amended.

 

We are actively exploring alternatives to accomplishour funding goals to demonstrate to AMEX that we can regain and maintaincompliance with the relevant continued listing standards in the Company Guide. Inaddition, we have appealed the determination by the staff of the AMEX andrequested an oral hearing in accordance with Sections 1203 and 1009(d) of theCompany Guide. At the discretion of the AMEX, our common stock will continue totrade on the AMEX during the appeal period.

 

**11.     Settlement of Complaint by Former Employee**

 

On March 29, 2007 Apogeereceived a complaint, which had been filed at the Superior Court in NorfolkCounty, Massachusetts, entitled*Michael S.Danielson v. Apogee Technology, Case No. 0700512*.  A formerApogee employee initiated the complaint alleging, among other things, thatApogee failed to pay certain bonuses and retirement contributions in connectionwith a compensatory arrangement concerning the development of certain digitalamplifier technology.  The former employee had claimed unpaid compensationof approximately $155,000 and the request for relief asked for the amount to betrebled, and include costs and attorneys’ fees. On September 13, 2007 wereached a settlement with the former employee for total compensation of $40,000to the former employee, consisting of $25,000 unpaid compensation and $15,000for attorney fees.

 

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

 

**GENERAL**

 

The following Management’sDiscussion and Analysis of the Company’s Financial Condition and Results ofOperations for the three-and nine-month periods ended September 30, 2007 andSeptember 30, 2006 should be read in conjunction with the Company’s FinancialStatements and related Notes included elsewhere in this Quarterly Report onForm 10-QSB. This discussion contains, in addition to historicalstatements, forward-looking statements that involve risks and uncertainties.Our actual results could differ significantly from the results discussed in theforward-looking statements. Factors that could cause or contribute to suchdifferences include the factors discussed in the section titled “CertainRisk Factors That May Affect Future Results of Operations And Our CommonStock Price” as well as other factors described in our Annual Report onForm 10-KSB for the year ended December 31, 2006, as amended.

 

**OVERVIEW**

 

We design, develop andcommercialize advanced drug delivery and sensor systems based upon itsproprietary Micro Electromechanical Systems (“MEMS”), nano fabrication and drugdelivery technologies. Our Medical Products Group is developing PyraDermTM anadvanced intradermal drug delivery system to meet the needs of patients, healthinsurers, companies’ developing pharmaceuticals, as well as, governments andinternational health organizations. We believe PyraDermTM has advantages overcompetitive approaches for the delivery of vaccines, high potency therapeuticprotein drugs and other pharmaceuticals. We have evaluated the feasibility ofPyraDerm by performing in vitro tests with model drugs and have started in vivotesting to complement positive in vivo results already obtained with vaccinesby third party researchers using our delivery technology.  We are workingto establish pharmaceutical industry compliant manufacturing methods and todefine regulatory strategies to support its commercialization. Our businessstrategy includes: (i) the licensing or selling of our technologies topharmaceutical or medical device companies; (ii) establish partnerships withpharmaceutical and device companies to commercialize our products; and (iii)developing, producing and marketing our own medical products. Our SensorProducts Group is developing and marketing proprietary Micro-ElectromechanicalSystems (“MEMS”) and Nanotechnology based pressure sensors for the medical,automotive, industrial and consumer markets under the Sensilica® brandname.  These devices are produced using a novel manufacturing technologythat we believe reduces size and cost while improving reliability as comparedto alternative MEMS sensor designs. In August 2007, we announced an expansionof our sensor business to include the development of IntellaPALTM, an innovativesensor based monitoring system designed to improve the security, independenceand quality of life for the elderly and their families. IntellaPALTM will utilizea wireless sensor module and advanced software processing to continuouslymeasure a range of health characteristics and automatically notify responderswhen specified conditions are detected. In addition, the system will providemonitored data online so that approved caregivers will be able to assist in theearly identification of certain health characteristics. The Company believesits development strategy will support the introduction of IntellaPALTM homemonitoring products and services during the second half of 2008.

 

During the three and ninemonths ended September 30, 2007, virtually all of our revenue was derived fromthe sale of our remaining audio IC inventory.  We expect that futurerevenue will initially be the result of potential licensing and developmentrevenues resulting from the grant of rights to our intellectual property.****In order to supportour operations and regain full compliance with all sections of the Amex CompanyGuide in order to have our common stock relisted on the AMEX, we intend tosecure additional funding in by the end of 2007. We plan to add a network ofdirect sales staff, independent sales representatives and distributors tosupport our medical and sensor products. We currently outsource themanufacturing, assembly and certain testing of our medical and sensor products.

 

At September 30, 2007, wehad an accumulated deficit of approximately $17.9 million, as compared to adeficit of $15.7 million as of December 31, 2006. Our historical netlosses and accumulated deficit (since 1995) result primarily from the costsassociated with our efforts to design, develop and market our DDX technology aswell as costs associated with our efforts to develop new medical and sensorproduct. Since October 5, 2005 our net losses result primarily from theresearch and development in our two current business lines.

 

Due to enhanced researchand development efforts, as of September 30, 2007 we had 14 employees comparedto 11 as of September 30, 2006.

 

During the three- andnine-month periods ended September 30, 2007, we derived approximately 81% and61% our revenue as a result of sales to two customers and one customer,respectively.  As of September 30, 2006, Apogee recognized all of thedeferred revenue related to six of our former distributors. AtDecember 31, 2005, we had formally terminated these distributor contracts.At September 30, 2006 it was determined that we would have no continuinginvolvement, under the terms of a distributor agreement, with thesedistributors as they related to the audio business. All of the revenue wasattributable to the former audio IC division.

 

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**SELECTEDCONSOLIDATED FINANCIAL DATA**

 

The following selectedfinancial data for the three- and nine-month periods ended September 30, 2007and 2006 have been derived from our unaudited financial statements. Any trendsreflected by the following table may not be indicative of future results.

 
| ** **                                | ** ** | **For the Three-Month Period  Ended  September 30,** | ** ** | **For the Nine-Month Period  Ended  September 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                                                 | ** ** | **2006**                                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | ** **                                                               | ** ** | ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statement of  Operations Data:            |       |                                                                     |       |                                                                    |       |   |   |   |   |
| Revenue                                   |       | $                                                                        | 13,601     |                                                                    | $          | 509,015 |   | $ | 132,268 |   | $ | 1,835,211 |   |
| Costs and  expenses                       |       | (793,933                                                                 | )          | (1,591,857                                                              | )          | (2,456,724 | ) | (4,747,851 | ) |
| Other Income  (expenses)                  |       | 67,825                                                                   |       | 343,682                                                                 |       | 123,760 |   | 512,845 |   |
| Net Loss                                  |       | $                                                                        | (712,507   | )                                                                       | $          | (739,160 | ) | $ | (2,200,696 | ) | $ | (2,399,795 | ) |
|                                      |       |                                                                     |       |                                                                    |       |   |   |   |   |
| Shares  Outstanding                       |       | 12,033,332                                                               |       | 11,968,332                                                              |       | 12,033,332 |   | 11,968,332 |   |
|                                      |       |                                                                     |       |                                                                    |       |   |   |   |   |
| Balance Sheet  Data:                      |       |                                                                     |       |                                                                    |       |   |   |   |   |
| Total Assets                              |       | $                                                                        | 1,372,370  |                                                                    | $          | 4,047,799 |   | $ | 1,372,370 |   | $ | 4,047,799 |   |
| Stockholders’  equity (deficiency)   |       | $                                                                        | 773,673    |                                                                    | $          | 3,488,450 |   | $ | 773,673 |   | $ | 3,488,450 |   |
| Loss per share  (basic and fully diluted) |       | $                                                                        | (0.06      | )                                                                       | $          | (0.06 | ) | $ | (0.18 | ) | $ | (0.20 | ) |

 

 **RESULTS OF OPERATIONS OF THE COMPANY**

 

**Revenue**

 

We have traditionallyderived our revenue from three sources: (1) product sales, which consistof merchandise sales made either directly to original equipment manufacturersor sell through point of sale (“POS”) by distributors. All such shipments arefulfilled from our contracted warehouse in Hong Kong or from our Norwood,Massachusetts office and are reported net of returns; (2) royalty revenue,which formerly consisted of royalties paid by STMicroelectronics, which havenow been sold as part of the transaction with SigmaTel and(3) consulting income related to contractual services or developmentactivities for third parties. We may, in the future, receive royaltiesunder its remaining audio licensing agreements and from new agreementscontemplated under its two new business groups. See Footnote 2 of the financialstatements.  We anticipate that future revenue streams will come from bothour sensor and medical device businesses, generally in the form of strategicalliances or arrangements with development or marketing partners, directproduct sales and distribution arrangements.  We envision the future ofour medical devices as (i) licensing or selling our technologies topharmaceutical or medical device companies; (ii) establishing partnerships withpharmaceutical and device companies to commercialize our products; and (iii)developing, producing and marketing our own medical products. Whereas thefuture of our sensor business will be to develop, produce and market our ownsensor products.

 

Total revenue declined byapproximately $495,000 or 97% to approximately $14,000 for the three monthsended September 30, 2007 from approximately $509,000 for the three months endedSeptember 30, 2006.  Total revenue declined by approximately $1.703million or 93% to approximately $132,000 for the nine months ended September30, 2007, compared to approximately $1.835 million for the nine months endedSeptember 30, 2006. During the three and nine months ended September  30, 2007 and September 30, 2006substantially all revenue recorded was from the sale of remaining inventoryrelated to our former audio IC business.

 

Nominal revenue from thesale of products related to the former audio IC business is expected tocontinue over the short term as the remaining inventory is sold.  Weexpect that the decline in our revenues will continue until such time as we areable to generate revenues from the sale of our medical and sensor products.

 

**Cost ofRevenue**

 

Since substantially allof the revenue recorded was from products related our former audio IC businessand had previously been fully reserved at 100%, virtually no cost of revenuewas recorded for the three months ended September 30, 2007. For the nine monthsended September 30, 2007 cost of revenue decreased as a result of reducedproduct revenue by approximately $1.350 million or 100% to $1,427. Thiscompared to approximately $354,000 and $1.351 million for the three and ninemonths ended September 30, 2006. Cost of revenue from our former audio ICbusiness primarily consists of purchased finished semiconductor chips andstorage fees associated with warehousing a large portion of our semiconductorproducts in Asia.  The nominal cost of goods for the nine months endedSeptember 30, 2007 is a result of our having previously reserved 100% of theremaining from the audio IC business inventory.

 

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** **

**OperatingExpenses**

 

**Researchand Development (“R&D”) Expenses**

 

Our research anddevelopment (“R&D”) expenses consist primarily of salaries, developmentmaterial costs, external consulting and service costs related to the design ofnew products and the refinement of existing products. Research and developmentexpenses were reduced to approximately $305,000 and $924,000 for the three andnine months ended September 30, 2007, respectively, compared to approximately$421,000 and $1.4 million for the three and nine months ended September30, 2006. This decrease of approximately $116,000 or 28% and approximately$497,000 or 35%, respectively, was the result of reduced utilization of thirdparty consultants as well as a reduction in business development expenses andthe expensing of development wafers and development mask costs related to oursensor business in 2006.  These decreases were partially offset byincreases in human resource and depreciation and amortization expense associatedwith the amortization of exclusive patent license fees and depreciation of ournew laboratory and related equipment. For the three and nine months endedSeptember 30, 2007, expenses incurred from utilization of third partyconsultants decreased by approximately $130,000 or 74% and $273,000 or 67% toapproximately $45,000 and $135,000, compared to approximately $175,000 and$408,000 for the same periods in 2006.

 

In addition to thereduction in the use of third party consultants, expense reductions indevelopment costs related to the sensor group, less travel and entertainmentexpense, fewer software expenditures, we also closed its facility in LongIsland and a laboratory located in Connecticut, which contributed to theoverall decrease in R&D expenses. For the three and nine months endedSeptember 30, 2006, we expensed approximately $17,000 and $146,000,respectively, in wafers related to our sensor business as well as approximately$64,000 in developmental mask costs for the three and nine months ended September30, 2006. In addition, during the three and nine months ended September 30,2007 we incurred minimal business development expenses. This compares toapproximately $6,000 and $90,000 for the same periods in 2006.

 

For the three and ninemonth ended September 30, 2007, human resource costs increased by approximately$37,000 or 20% and $77,000 or 14% to approximately $218,000 and $625,000,respectively, compared to approximately $181,000 and $548,000 for the sameperiods in 2006. Depreciation and amortization expense increased approximately$15,000 and $45,000 to approximately $18,000 and $54,000 for the three and ninemonths ended September 30, 2007, respectively, from approximately $3,000 and$9,000 for the same periods in 2006. For the three and nine months endedSeptember 30, 2007, we incurred approximately $24,000 in expense to support invivo immunization studies performed by a prominent organization. We anticipatethat we will continue to commit resources to research and developmentactivities as our financial position allows, and as a result, R&D costs areexpected to increase substantially in the future.

 

**Selling,General and Administrative (“SG&A”) Expenses**

 

Selling expenses consistprimarily of salaries and related expenses for personnel engaged in themarketing and selling of our products, as well as costs related to trade shows,product literature, travel and other promotional support costs. In addition,selling expenses had included costs related to the operation of Apogee’s HongKong and Japan sales offices. Subsequent to the SigmaTel transaction, theTaiwan and China offices were closed. In February 2006 we closed our HongKong office and in July 2006 we closed our Japanese office.  Generaland Administrative costs consist primarily of executive and administrativesalaries, professional fees and other associated corporate expenses. Generaland administrative costs consist primarily of executive and administrativesalaries, professional fees and other associated corporate expenses. Selling,General and Administrative (“SG&A”) expenses were approximately $489,000and $1.5 million for the three and nine months ended September 30, 2007,compared to approximately $817,000 and $2.0 million for the three and ninemonths ended September 30, 2006. This represents a decrease of approximately$327,000 or 40% and $444,000 or 22% for the respective periods. The decrease inSG&A was attributable primarily to the closing of the Hong Kong andJapanese offices as well as decreased human resource costs, business developmentand travel and entertainment costs partially offset by increases inprofessional fees and corporate insurance.

 

Human resource costsdecreased approximately $260,000 or 54% and $415,000 or 38% to approximately$218,000 and $677,000 for the three and nine months ended September 30, 2007compared to approximately $478,000 and $1.092 million for the same periods in2006. This decrease reflects the reduction in staffing and subsequent closingof the Hong Kong and Japanese offices as well as a reduction in the stockcompensation expense for the three and nine months ended September 30,2007.  For the three and nine months ended September 30, 2007, stockcompensation expense decreased approximately $231,000 or 96% and $247,000 or88% to approximately $10,000 and $34,000, respectively, compared toapproximately $241,000 and $281,000 for the same periods in 2006. As ofSeptember 30, 2007, we employed a total of 14 employees all located in Norwood,Massachusetts.  As of September 30, 2006, we employed a total of 11employees, 1 located in New York and 10 located in Norwood, Massachusetts.

 

Professional expensesdecreased by approximately $89,000 or 35% to approximately $168,000  for the three months ended September 30,2007, compared to approximately $257,000 for the three months ended September30, 2006. For the nine months ended September 30, 2007, professional expensesincreased approximately $26,000 or 5% to approximately

 

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$525,000 for the ninemonths ended September 30, 2007, compared to approximately $499,000 for thesame period in 2006. Legal and accounting expenses decreased for both the threeand nine months ended September 30, 2007 compared to the same periods in 2006. Forthe three and nine months ended September 30, 2007, legal expenses decreased byapproximately $110,000 or 53% and $28,000 or 8%, to approximately $96,000 and$346,000, respectively, compared to approximately $206,000 and $374,000 for thesame periods in 2006. For the three and nine months ended September 30, 2007legal expenses incurred as a result of costs increased to approximately $60,000and $181,000, respectively, compared to approximately $55,000 and $157,000,respectively, for the same periods in 2006. See Footnote 9 of the financialstatements—Indemnification Arrangements with our Executives.

 

Despite the overalldecrease in legal costs during the quarter ended September 30, 2007, legalcosts may rise significantly in the future. We have been informedthat an investigation by the SEC, which began during the period ofour restatement, is ongoing.  We continue to cooperate with theinvestigation and comply with requests as they arise. However, there is noassurance that the concerns of the SEC can be resolved in a fashionacceptable to us.  See Risk Factors—Risks Related to Our Business.

 

Decreases in our legaland accounting expenses were partially offset by cost increases in investorrelations and Sarbanes Oxley consultants. Costs associated with investorrelations and Sarbanes Oxley consultants were approximately $30,000 and $9,000,respectively, for the three months ended September 30, 2007. For the threemonths ended September 30, 2006, costs associated with Sarbanes OxleyConsultants were approximately $13,000 with no expense incurred in investorrelations. For the nine months ended September 30, 2007, investor relations andSarbanes Oxley consultants were approximately $59,000 and $47,000, respectively.For the nine months ended September 30, 2006, costs associated with SarbanesOxley Consultants were approximately $15,000 with no expense incurred ininvestor relations.

 

In addition, nominalreductions in corporate taxes, travel and entertainment media relations andcommunications expense, partially offset by an increase in corporate insuranceas a result of our obtaining Directors’ and Officers’ insurance effective as ofNovember 27, 2006, contributed to the overall decrease in SG&A. For thethree and nine months ended September 30, 2007, Directors’ and Officers’insurance expense was approximately $18,000 and $55,000, respectively.

 

Operating expenses areexpected to increase over the next few quarters to support our Medical Productand Sensor groups.

 

**InterestIncome (Expense)**

 

Interest income includesincome from our cash and cash equivalents and from investments and expensesrelated to its financing activities. During the three and nine months endedSeptember 30, 2007, we generated interest income of approximately $14,000and $69, 000, respectively, compared to interest income of approximately$46,000 and $154,000 during the same periods in 2006. This decrease in interestincome for the three and nine months ended September 30, 2007 wasprimarily due to reduced interest on reduced cash balances as of September 30,2007. In addition, during the three and nine months ended September 30, 2006 werecorded approximately $299,000 and $383,000, respectively, of income as aresult of the earn-out in connection with the SigmaTel transaction. Finally, during the three months and nine months ended September 30, 2007 werecorded miscellaneous income of approximately $54,000 consisting ofapproximately $47,000 as a result of our recognizing an unclaimed depositcustomer deposit held over two year. Attempts to refund the money to this Asiancompany failed and subsequently the company was sold. In addition,approximately $5,600 tax refunds received from Massachusetts and New York taxagencies.

 

No interest expense wasincurred for the three and nine months ended September 30, 2007 and2006.  For the three and nine months ended September 30, 2006, we incurredapproximately $2,000 and $22,000, respectively, in other expense which resultedfrom a loss on the disposal of fixed assets and additional expenses inconnection with the SigmaTel transaction.

 

**Net Loss**

 

Our net loss for thethree months ended September 30, 2007 was approximately $713,000 or $0.06 perbasic and diluted common share, compared to a net loss of approximately$739,000 or $0.06 per basic and diluted common share for the three months endedSeptember 30, 2006. For the nine months ended September 30, 2007 wereported a loss of approximately $2.2 million or $0.18 per basic and dilutedcommon share, compared to a net loss of approximately $2.4 million or $0.20 perbasic and diluted common share for the nine months ended September 30,2006.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

Our principal source ofliquidity at September 30, 2007, consisted of approximately $794,000 in cashand cash equivalents. We consider all highly liquid investments with anoriginal maturity of three months or less to be cash equivalents. Substantiallyall of our cash is held in high quality money market funds comprised ofshort-term, fixed income securities earning interest at 4.97% at September30, 2007. This compares to approximately $3.1 million in cash andcash equivalents as of December 31, 2006. In addition, as ofSeptember 30, 2007, we had working capital of approximately $259,000 compared toworking capital of approximately $2.8 million at September 30, 2006. As of September 30, 2007 and September 30, 2006 we had no debt.

 

Net cash used inoperating activities for the nine-month period ended September 30, 2007decreased to approximately $2.2 million compared to approximately $2.5 millionin the nine-month period ended September 30, 2006. The decrease wasprimarily due to a decrease operating expenses as a result of decreasedspending following the closing of the Hong Kong and Japanese offices.

 

As of September 30, 2007and September 30, 2006, reserves for slow moving, excess and obsolete inventorywas at 100% of the remaining inventory related to the former audio IC business.Net accounts receivable was approximately $5,000 at September 30, 2007, downfrom approximately $389,000 at September 30, 2006.  As of September30, 2007 we had reserves against bad debt of approximately $11,000compared to a reserve of $13,000 as of September 30, 2006. Given the qualityand amount of current accounts receivable, we believe that the remainingreserve is sufficient at this time.

 

Net cash used ininvesting activities for the nine months ended September 30, 2007 wasapproximately $133,000, compared to approximately $59,000 for the nine monthsended September 30, 2006.  As previously reported, onJanuary 3, 2007 we announced the completion of our state-of-the-artlaboratory to be used to develop advanced drug delivery systems.  Alongwith the laboratory we completed renovations to the entire facility. Inaddition, during the nine-month period ended September 30, 2007, we supportedthe filing and prosecution of our existing patent applications,  as well as, the filing of two new patentapplications in July 2007, all of which related to our medical device group.

 

No cash was provided byfinancing activities for the nine months ended September 30, 2007 andSeptember 30, 2006. On July 26, 2007, we signed a consulting agreement pursuantto which we issued 65,000 shares of our common stock in a private transaction,exempt from registration under the Securities Act as an upfront non-refundableretainer as partial compensation to a financial advisor and exclusive placementagent in connection with a possible financing transaction.

 

We believe that cash flowfrom operations as well as the funds from the audio division sale will besufficient to support operation and fund its capital requirements throughDecember 31, 2007.  Apogee requires additional funding and weare currently reviewing our capital needs and actively exploring alternativesto accomplish our funding goals.  We will require additional capital toconduct the research and development activity needed to support our medicaldevice and sensor businesses.  Also see Footnote 10 of the financialstatements—Notification from the American Stock Exchange.

 

**RevenueRecognition**

 

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

 

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

 

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**AccountsReceivable**

 

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 our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required. Since our accountsreceivable are highly concentrated in a small number of customers, asignificant change in the liquidity or financial position of any one of thesecustomers could have a material adverse impact on the collectibility of ouraccounts receivable, our liquidity or our future results of operations.

 

**Inventory**

 

Apogee states itsinventory at the lower of cost (first-in, first-out) or market. This policyrequires that we make certain estimates regarding the market value of theinventory, including an assessment of excess or obsolete inventory. In therecent past, Apogee had determined excess and obsolete inventory based onestimated future demands and estimated selling prices for our products within aspecified time frame, which was generally 12 months. The estimates used forexpected demand were also used for short-term capacity planning and inventory purchasingand were consistent with revenue forecasts. Our entire current inventory isassociated with our former audio business. We have chosen to expense our sensordie and sensor packaged products until such time as we have material resultsfrom this business. We are still in the research and developmental phase of ourmedical products business and thus do not have any related inventory. As ofSeptember 30, 2007 we have approximately $1.68 million of inventory related toour former audio IC business that has been 100% reserved and has no carryingvalue on our balance sheet. This compares to inventory at December 31,2006, of approximately $1.8 million of audio IC inventory which had been 100%reserved and carried no value on the balance sheet.

 

**Valuationof 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 capital investmentsor intangible assets could result in losses or an inability to recover thecarrying value of such assets, thereby possibly requiring an impairment chargein the future.

 

**StockCompensation**

 

Prior to fiscal 2006, weaccounted for stock-based compensation plans under the recognition andmeasurement provisions of APB Opinion No. 25. Effective January 1,2006, we adopted the provisions of SFAS 123(R) using themodified-prospective-transition method. SFAS 123(R) requires companiesto recognize the fair-value of stock-based compensation transactions in thestatement of income. The fair value of our stock-based awards is estimated atthe date of grant using the Black-Scholes option pricing model. TheBlack-Scholes valuation calculation requires us to estimate key assumptionssuch as future stock price volatility, expected terms, risk-free rates anddividend yield.

 

Expected stock pricevolatility is based on implied volatility from traded options on our stock inthe marketplace and historical volatility of our stock. We use historical datato estimate option exercises and employee terminations within the valuationmodel.

 

The expected term ofoptions granted is derived from an analysis of historical exercises andremaining contractual life of stock options, and represents the period of timethat options granted are expected to be outstanding. The risk-free rate isbased on the U.S. Treasury yield curve in effect at the time of grant. We havenever paid cash dividends, and do not currently intend to pay cash dividends,and thus have assumed a 0% dividend yield. If our actual experience differssignificantly from the assumptions used to compute our stock-based compensationcost, or if different assumptions had been used, we may have recorded toomuch or too little stock-based compensation cost. In addition, we are requiredto estimate the expected forfeiture rate of our stock grants and only recognizethe expense for those shares expected to vest. If the actual forfeiture rate ismaterially different from our estimate, our stock-based compensation expensecould be materially different.

 

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**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

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

 

**OffBalance Sheet Arrangements**

 

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

 

**ContractualArrangements**

 

We have no contractualarrangements as of September 30, 2007.

 

**RISK FACTORS**

 

There are a number of important factors that couldcause our actual results to differ materially from those indicated or impliedby forward-looking statements. We disclaim any intention or obligation toupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise, except as may be required by law.

 

Aside from those risks discussed below, there havebeen no material changes to the risk factors included in our Annual Report onForm 10-KSB, as amended, for the fiscal year December 31, 2006.

 

**RISKS RELATED TO OUR BUSINESS**

 

**WE HAVEA HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE OR SUSTAINPROFITABILITY.**

 

As of September 30, 2007, we had stockholders’ equityof approximately $738,000, an accumulated deficit of approximately $17.9million and working capital of approximately $259,000. We had a net loss ofapproximately $712,000 and $2.2 million for the three and nine months endedSeptember 30, 2007. In the fiscal year ended December 31, 2006, werecorded net loss of approximately $3.0 million. We need to generate revenue orobtain financing to continue operations. Our ability to generate future revenueand achieve profitability depends on a number of factors, many of which aredescribed throughout this risk factor section, including our ability to developand generate revenues from the sales of our sensor and medical device products,which are at a very early stage of development. We cannot assure you when, ifever, we will generate meaningful revenues from the sales of these productsunder development. If we are unable to generate revenue or obtain financing,our share price will likely decline.

 

**WE NEEDTO RAISE ADDITIONAL CAPITAL IN ORDER TO CONTINUE OUR OPERATIONS AND TO PERFORMRESEARCH AND DEVELOPMENT TO BUILD OUR BUSINESS - THE NECESSARY CAPITALMAY NOT BE AVAILABLE TO US ON FAVORABLE TERMS, IF AT ALL.**

 

Because we have historically had losses and only alimited amount of cash has been generated from operations, we have funded ouroperating activities to date primarily from the sale of securities and the saleof certain assets to SigmaTel. In order to continue to fund the operation anddevelopment of our business, we will need additional capital, either throughthe sale of securities or through the sale of assets. We cannot be certain thatany such financing or asset sales will be available on acceptable terms, or atall. Moreover, additional financing, if available, would likely be dilutive tothe holders of our common stock, and debt financing, if available, would likelyinvolve restrictive covenants. If we sell assets that are currently used in theconduct of our business, those assets would no longer be available to us as apotential source of revenue generation, as was the case with ourOctober 5, 2005 sale of assets. We have reduced, in the short-term, ouroperating expenses for payroll and related costs, rents and professional feesamongst others, in order to conserve resources for the operation of ourbusiness. We believe that our current working capital and amounts that may beraised to support operations will be sufficient to fund our capital andoperational requirements at least through December 31, 2007. If we cannotraise sufficient additional capital by December 31, 2007, through meansavailable to us, it would adversely affect our ability to achieve our businessobjectives and we may be required to further curtail operations.

 

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**AS ARESULT OF OUR NEED TO RAISE ADDITIONAL CAPITAL AND DUE TO OUR SMALL SIZE ANYREGULATORY INVESTIGATION, LITIGATION OR ADMINISTRATIVE ACTION IMPOSES RISK ONUS.**

 

Many companies have legalactions that arise in the ordinary course of business; we are no different inthis regard. However, given our limited number of personnel, currentcapitalization and stage of development after the sale of our audio business toSigmaTel, legal actions or regulatory investigations that occur in the ordinarycourse of business, or otherwise, may be more challenging for us than for othercompanies. Even if successfully defended, lawsuits, regulatory investigationsor administrative actions may be costly, may divert managementattention and resources from the operation of our business, andmay therefore adversely affect our financial condition and results ofoperations. If not successfully defended, any regulatory investigation,litigation or administrative action may adversely affect our financialcondition and results of operations. See Management’s Discussion and Analysis—Resultsof Operation of the Company—Operating Expenses—Selling General andAdministrative Expenses.

 

**NEITHEROUR DISCLOSURE CONTROLS AND PROCEDURES NOR OUR INTERNAL CONTROL OVER FINANCIALREPORTING CAN PREVENT ALL ERRORS OR FRAUD.**

 

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

 

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

 

While we seek to 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.

 

As our business continues to evolve into a lifescience company in the research and development phase, rather than a companyinvolved in the manufacture and distribution of loudspeaker and IC solutions,the Audit Committee reviews our accounting and auditing procedures to satisfyitself that the correct standards are being employed for our evolving businessand to address an ongoing investigation by the Securities and ExchangeCommission that began during the period of our restatement. We continue tocooperate fully with the investigation and comply with requests as they arise. However,there is no assurance that the concerns of the staff of the Commission can beresolved in a fashion acceptable to us.

 

**RISKS RELATED TO OUR COMMON STOCK**

 

**WE DONOT MEET THE LISTING REQUIREMENTS OF THE AMERICAN STOCK EXCHANGE, AND ARESUBJECT TO A DELISTING PROCEEDING THAT BEGAN ON NOVEMBER 2, 2007. IF WE AREUNABLE TO REGAIN FULL COMPLIANCE DURING THE APPEAL PROCESS, WE MAY BEDELISTED FROM THE AMEX.**

 

Our common stock is quoted on the AMEX. In order tocontinue to be included in the AMEX, we must regain full compliance with theAMEX maintenance criteria. As our shareholders’ equity was approximately$738,000 as of September 30, 2007 as of this report, we are not incompliance with Section 1003 (a) (i), of the Company Guide, Section 1003(a) (ii) of the Company Guide or Section 1003(a) (iii) of the Company Guide due to the low value of itsshareholders’ equity.

 

In accordance with the original AMEX notice, wesubmitted a plan to AMEX prior to December 1, 2006 and a subsequentrevision on December 20, 2006, advising of the actions we have taken, orwould take, to bring Apogee into compliance certain sections of theCompany Guide within a maximum of 12 months. This actions set forth in the plandid not come to fruition as intended and the plan period ended on November 1,2007 without regaining compliance.  Apogee is appealing the delistingproceedings, however, there can be no assurance that Apogee will be able tostay the delisting or regain full compliance with all of the sections of theCompany Guide set forth above. See Footnote 10 of the financial statements -Notification from the American Stock Exchange.

 

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If our common stock were delisted, we would trade onthe Over the Counter Bulletin Board or the Pink Sheets, LLC, which may havesignificantly less liquidity than the AMEX. In order to have our common stockrelisted on the AMEX, we would be required to meet the criteria for initiallisting, which are more stringent than the maintenance criteria. Accordingly,we cannot assure that if we were delisted, we would be able to have our commonstock relisted on the AMEX, and most likely our common stock would be quoted onthe Over the Counter Bulletin Board. In addition, if our common stock weredelisted from the AMEX, it might become more difficult for us to raiseadditional capital and accomplish our business objectives through the sale ofour common stock or securities convertible into our common stock, due toincreased costs and potential diminished liquidity in the market for our commonstock.

 

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

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

 

· anticipated financingactivities;

 

· anticipated strategicalliances or arrangements with development or marketing partners;

 

· anticipated researchand product development results;

 

· projected developmentand commercialization timelines;

 

· descriptions of plansor objectives of management for future operations, products or services;

 

· forecasts of futureeconomic performance; and

 

· descriptions orassumptions underlying or relating to any of the above items.

 

Forward-lookingstatements can be identified by the fact that they do not relate strictly tohistorical or current facts or events. They use words such as “anticipate”, “estimate”,“expect”, “project”, “intend”, “opportunity”, “plan”, “potential”, “believe” orwords of similar meaning. They may also use words such as “will”, “would”, “should”,“could” or “may”.

 

Although we believe thatthe expectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance or achievements.Moreover, we do not assume responsibility for the accuracy and completeness ofsuch statements. We do not intend to update any of the forward-lookingstatements after the date of this report to conform such statements to actualresults except as required by law. Given these uncertainties, you should notplace undue reliance on these forward-looking statements, which speak only asof the date of this report. You should carefully consider that informationbefore you make an investment decision. You should review carefully the risksand uncertainties identified in this report and in our most recent AnnualReport on Form 10-KSB, as amended.

 

**ITEM3 – CONTROLS AND PROCEDURES**

 

(a)   Evaluation of DisclosureControls and Procedures. Our chief executive officer (principal executiveofficer) and chief financial officer (principal financial officer) havereviewed and evaluated the effectiveness of our disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))as of the end of the period covered by this quarterly report. Based on thatevaluation, our chief executive officer and chief financial officer haveconcluded that our current disclosure controls and procedures are adequate andeffective to ensure that material information relating to Apogee was made knownto them by others, particularly during the period in which this QuarterlyReport on Form 10-QSB was being prepared.

 

(b)   Changes in InternalControls. There were no changes in our internal control over financial reporting,identified in connection with the evaluation of such internal control thatoccurred during our last fiscal quarter that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II - OTHER INFORMATION**

 

 **ITEM 1 - LEGAL PROCEEDINGS**

 

From time to time, we may be a party to various legalproceedings arising in the ordinary course of our business.  If and whenthese proceedings arise, we are committed to vigorously defending itself in anysuch legal actions.

 

As previously reported, on March 29, 2007 we receiveda complaint, which had been filed at the Superior Court in Norfolk County,Massachusetts, entitled*Michael S. Danielsonv. Apogee Technology, Case No. 0700512*.  A former employee ofours alleged, among other things, that we failed to pay certain bonuses andretirement contributions in connection with a compensatory arrangementconcerning the development of certain digital amplifier technology.  Theformer employee claimed unpaid compensation of approximately $155,000 and therequest for relief asks for the amount to be trebled, and include costs andattorneys’ fees.

 

A settlement was reached with the former employee fora total payment of $40,000 to the former employee, consisting of $25,000 unpaidcompensation and $15,000 for attorney fees. On September 13, 2007, pursuant toMass R. Civ. P. 41(a)(1), a Stipulation of Dismissal with Prejudice was filedwith the Superior Court of Norfolk County, Massachusetts whereby the partiesagreed and stipulated to the dismissal of action with prejudice and with a fulland complete waiver of all rights of appeal.

 

**ITEM2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

On July 26, 2007, we signed a consulting agreementwhereby we issued 65,000 shares of common stock in a private transaction,exempt from registration under the Securities Act, as an upfront non-refundableretainer as partial compensation to a financial advisor and exclusive placementagent in connection with a possible financing transaction.

 

 

**ITEM3 - DEFAULTS UPON SENIOR SECURITIES**

 

None.

** **

**ITEM4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

        TheAnnual Meeting of Shareholders of the Company was held on August 28, 2007. Thefollowing matters were voted upon:

 
|   | (1)    | Mr. Herbert M. Stein was elected by a plurality of  the shares entitled to vote at the meeting to serve as a Director of the  Company to hold office until the annual meeting of the Corporation in 2010.  This proposal was approved with 9,811,067 votes for the proposal, 93,521  votes against the proposal and no abstentions.                                                                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | (2)    | The shareholders approved the Amendment to the  Amended and Restated Certificate of Incorporation increasing the number of Common  Stock authorized from 20,000,000 to 40,000,000. This proposal was approved  with 9,562,175 votes for the proposal, 316,322 votes against the proposal,  26,090 abstentions and no broker non-votes.                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | (3)    | The shareholders approved the Amendment to the  Amended and Restated Certificate of Incorporation creating 5,000,000 shares  of undesignated Preferred Stock, which will mean that this Preferred Stock  will have rights and preferences to be determined in the future by, and in  the sole discretion of, the Board of Directors. This proposal was approved  with 7,154,719 votes for the proposal, 496,167 votes against the proposal,  2,770 abstentions and 2,250,933 broker non-votes. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | (4)    | The shareholders approved the adoption of a new  Stock Option Plan, the 2007 Employee, Director and Consultant Stock Option  Plan. This proposal was approved with 7,212,789 votes for the proposal,  434,667 votes against the proposal, 6,200 abstentions and 2,250,933 broker  non-votes.                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | (5)    | The shareholders ratified the appointment of Miller  Wachman LLP as the registered independent public accountants for the Company  for the fiscal year ending December 31, 2007. This proposal was approved with  9,813,870 votes for the proposal, 74,440 votes against the proposal, 16,278  abstentions and no broker non-votes.                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | (6)    | Following the annual meeting, the Company’s Board of  Directors consisted of: Mr. Craig A. Dubitsky, Mr. Arthur S. Reynolds, Mr.  Herbert M. Stein, Ms. Sheryl B. Stein and Mr. Alan W. Tuck.                                                                                                                                                                                                                                                                                             |

 

23

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**ITEM5 - OTHER INFORMATION**

 

None.

 

**ITEM6 - EXHIBITS**

 

(a) Exhibits:

 

See Exhibit Indexbelow.

 

24

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**SIGNATURES**

 

In accordance with therequirements of the Securities Exchange Act of 1934, as amended, the registranthas caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   |                    | **APOGEE TECHNOLOGY, INC.**                                |
|--------|-------------------------|-----------------------------------------------------------------|
|   |                    |                                                            |
|   | Date: November 14, 2007 |                                                            | By: | /s/      Herbert M.  Stein |   |
|   |                    |                                                            | Name: Herbert M. Stein |
|   |                    |                                                            | Title: Chairman of the Board, |
|   |                    |                                                            | President, Chief Executive Officer |
|   |                    |                                                            | (principal executive officer) |
|   |                    |                                                            |   |
|   |                    |                                                            |   |
|   |                    |                                                            | **APOGEE TECHNOLOGY, INC.** |
|   |                    |                                                            |   |
|   | Date: November 14, 2007 |                                                            | By: | /s/      Paul J.  Murphy |   |
|   |                    |                                                            | Name: Paul J. Murphy |
|   |                    |                                                            | Title: Chief Financial Officer and Vice President of  Finance |
|   |                    | (principal financial officer and principal  accounting officer) |

 

25

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FORM-10-QSB

 

SEPTEMBER 30, 2007

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                             |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                        |   |
| 3.1                 |       | Certificate of Amendment of the Certificate of  Incorporation of Apogee Technology, Inc. as filed with the Secretary of State  of the State of Delaware on August 29, 2007. |
|                |       |                                                                                                                                                                        |   |
| 10.1                |       | 2007 Employee, Director and Consultant Stock Plan.                                                                                                                          |
|                |       |                                                                                                                                                                        |   |
| 31.1                |       | Certifications pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 by Chief Executive Officer.                                                                       |
|                |       |                                                                                                                                                                        |   |
| 31.2                |       | Certifications pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 by Chief Financial Officer.                                                                  |
|                |       |                                                                                                                                                                        |   |
| 32                  |       | Statement pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 by Chief Executive Officer and Chief Financial  Officer.                                          |

 

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