**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10Q**

 

**(Mark One)**

 

**x   QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31,2008**

 

**o   TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition periodfrom                   to**

 

**Commissionfile number 001-10456**

 

**APOGEETECHNOLOGY, INC.**

(Exact name of registrantas 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**

(Registrant’s telephonenumber, including area code)

 

**NOTAPPLICABLE**

(Former name, formeraddress and former fiscal year,if changed since last report)

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company x |
| (Do not check if a  smaller reporting company) |   |                              |

 

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

 

State the number of shares outstanding of each of theIssuer’s classes of common equity, as of the latest practicable date:  Asof April 28, 2008, there were 12,132,332 shares of Common Stock, $.01 parvalue per share, outstanding.

 

 

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**APOGEETECHNOLOGY, INC.**

 

**INDEX OFINFORMATION CONTAINED IN FORM 10Q FOR THE**

**PERIODSENDED MARCH 31, 2008 AND MARCH 31, 2007**

 
| **PART I -  FINANCIAL INFORMATION**                                                                                                               |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                   |   |   |
| Item 1 - Financial  Statements                                                                                                                         |   |   |
| Consolidated  Balance Sheets at March 31, 2008 (unaudited) and December 31, 2007  (audited)                                                  |   | 3      |
| Consolidated Statements of Operations and Accumulated  Deficit for the Three Months Ended March 31, 2008 and March 31,  2007 (all unaudited) |   | 4      |
| Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2008 and  March 31, 2007 (all unaudited)                         |   | 5      |
|                                                                                                                                                   |   |   |
| Notes to Consolidated  Financial Statements (all unaudited)                                                                                            |   | 6      |
|                                                                                                                                                   |   |   |
| Item 2 -  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                                  |   | 15     |
|                                                                                                                                                   |   |   |
| Item 3 -  Quantitive and Qualitative Disclosures about Market Risks                                                                                    |   | 20     |
|                                                                                                                                                   |   |   |
| Item 4T - Controls  and Procedures                                                                                                                     |   | 21     |
|                                                                                                                                                   |   |   |
| **PART II - OTHER  INFORMATION**                                                                                                                  |   |   |
|                                                                                                                                                   |   |   |
| Item 1 - Legal  Proceedings                                                                                                                            |   | 21     |
|                                                                                                                                                   |   |   |
| Item 1A - Risk Factors                                                                                                                                 |   | 21     |
|                                                                                                                                                   |   |   |
| Item 2 -  Unregistered Sales of Equity Securities and Use of Proceeds                                                                                  |   | 22     |
|                                                                                                                                                   |   |   |
| Item 3 - Defaults  Upon Senior Securities                                                                                                              |   | 22     |
|                                                                                                                                                   |   |   |
| Item 4 -  Submission of Matters to a Vote of Security Holders                                                                                          |   | 22     |
|                                                                                                                                                   |   |   |
| Item 5 - Other  Information                                                                                                                            |   | 22     |
|                                                                                                                                                   |   |   |
| Item 6 - Exhibits                                                                                                                                      |   | 23     |
|                                                                                                                                                   |   |   |
| Signatures                                                                                                                                             |   | 24     |

 

2

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

 

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

 

**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                        | ** ** | **MARCH 31,** | ** **    | **DECEMBER 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|---------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2008**           | ** **    | **2007**              | ** ** |
| ** **                                                                                                                                        | ** ** | **(Unaudited)**    | ** **    | **(Audited)**         | ** ** |
| **ASSETS**                                                                                                                                        |       |               |          |                  |       |
|                                                                                                                                              |       |               |          |                  |       |
| **Current assets**                                                                                                                                |       |               |          |                  |       |
| Cash and cash equivalents                                                                                                                         | ** ** | **$**              | **110,818**   | ** **            | **$**      | **320,524** | ** ** |
| Accounts receivable, net of allowance for doubtful accounts of $9,377  in 2008 and $10,570 in 2007, respectively                                  | ** ** | **—**         | ** **    | **10,536**            | ** ** |
| Inventories, net                                                                                                                                  | ** ** | **—**         | ** **    | **—**            | ** ** |
| Prepaid expenses and other current assets                                                                                                         | ** ** | **70,261**         | ** **    | **86,763**            | ** ** |
|                                                                                                                                              |       |               |          |                  |       |
| Total current assets                                                                                                                              | ** ** | **181,079**        | ** **    | **417,823**           | ** ** |
|                                                                                                                                              |       |               |          |                  |       |
| **Property and equipment, net**                                                                                                                   | ** ** | **170,595**        | ** **    | **183,445**           | ** ** |
|                                                                                                                                              |       |               |          |                  |       |
| **Other assets**                                                                                                                                  |       |               |          |                  |       |
| Patents                                                                                                                                           | ** ** | **284,394**        | ** **    | **269,694**           | ** ** |
| Exclusive licensing, net                                                                                                                          | ** ** | **23,801**         | ** **    | **26,009**            | ** ** |
| ** **                                                                                                                                        | ** ** | ** **         | ** **    | ** **            | ** ** |
| ** **                                                                                                                                        | ** ** | **$**              | **659,869**   |                  | **$**      | **896,971** |   |
|                                                                                                                                              |       |               |          |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIENCY)**                                                                                       |       |               |          |                  |       |
|                                                                                                                                              |       |               |          |                  |       |
| **Current liabilities**                                                                                                                           |       |               |          |                  |       |
| Accounts payable and accrued expenses                                                                                                             | ** ** | **$**              | **1,126,742** | ** **            | **$**      | **745,545** | ** ** |
| Officer and shareholder loans and notes payable, net                                                                                              | ** ** | **839,130**        | ** **    | **400,000**           | ** ** |
|                                                                                                                                              |       |               |          |                  |       |
| Total current liabilities                                                                                                                         | ** ** | **1,965,872**      | ** **    | **1,145,545**         | ** ** |
|                                                                                                                                              |       |               |          |                  |       |
| **Commitments and Contingencies**                                                                                                                 | ** ** | **—**         | ** **    | **—**            | ** ** |
|                                                                                                                                              |       |               |          |                  |       |
| **Stockholders’ equity (deficiency)**                                                                                                        |       |               |          |                  |       |
| Preferred stock, par value $0.0001 per share; 5,000,000 shares  authorized, none issued and outstanding                                           | ** ** | **—**         | ** **    | **—**            | ** ** |
|                                                                                                                                              | ** ** | ** **         | ** **    | ** **            | ** ** |
| Common stock, $.01 par value; 40,000,000 shares authorized,  11,968,332 issued and outstanding at March 31, 2008 and  December 31, 2007 | ** ** | **119,683**        | ** **    | **119,683**           | ** ** |
|                                                                                                                                              | ** ** | ** **         | ** **    | ** **            | ** ** |
| Additional paid-in capital                                                                                                                        | ** ** | **18,523,279**     | ** **    | **18,492,311**        | ** ** |
| Accumulated deficit                                                                                                                               | ** ** | **(19,948,965**    | **)**         | **(18,860,568**       | **)**      |
|                                                                                                                                              |       |               |          |                  |       |
| Total stockholders’ equity (deficiency)                                                                                                      | ** ** | **(1,316,003**     | **)**         | **(248,574**          | **)**      |
| ** **                                                                                                                                        | ** ** | **$**              | **659,869**   |                  | **$**      | **896,971** |   |

 

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

 

3

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 **CONSOLIDATEDSTATEMENTS OF INCOME**

**(UNAUDITED)**

 
| ** **                                                          | ** ** | **THREE MONTHS ENDED MARCH 31,** | ** **      |
|---------------------------------------------------------------------|------------|------------------------------------------------------|-----------------|
| ** **                                                          | ** ** | **2008**                                             | ** **      | **2007** | ** ** |
|                                                                |       |                                                 |            |   |   |
| **Revenues**                                                        |       |                                                 |            |   |   |
| Product sales                                                       | ** ** | **$**                                                | **21,951**      | ** ** | $ | 53,670 |   |
|                                                                |       |                                                 | ** **      |   |   |
| ** **                                                          |       | **21,951**                                           | ** **      | 53,670 |   |
|                                                                |       |                                                 | ** **      |   |   |
| **Costs and expenses**                                              |       |                                                 | ** **      |   |   |
| Product sales                                                       | ** ** | **696**                                              | ** **      | 216 |   |
| Research and development                                            | ** ** | **413,087**                                          | ** **      | 244,260 |   |
| Selling, general and administrative                                 | ** ** | **684,331**                                          | ** **      | 553,892 |   |
|                                                                |       |                                                 | ** **      |   |   |
| ** **                                                          |       | **1,098,114**                                        | ** **      | 798,368 |   |
|                                                                |       |                                                 | ** **      |   |   |
| **Operating loss**                                                  | ** ** | **(1,076,163**                                       | **)**           | (744,698 | ) |
|                                                                |       |                                                 | ** **      |   |   |
| **Other income (expense)**                                          |       |                                                 | ** **      |   |   |
| Interest/other income                                               | ** ** | **1,243**                                            | ** **      | 31,867 |   |
| Interest expense                                                    | ** ** | **(13,477**                                          | **)**           | **—** | ** ** |
|                                                                |       |                                                 | ** **      |   |   |
| ** **                                                          |       | **(12,234**                                          | **)**           | 31,867 |   |
|                                                                |       |                                                 | ** **      |   |   |
| **Net loss**                                                        | ** ** | **$**                                                | **(1,088,397**  | **)** | $ | (712,831 | ) |
|                                                                |       |                                                 | ** **      |   |   |
| Accumulated deficit - beginning                                     | ** ** | **$**                                                | **(18,860,568** | **)** | $ | (15,655,562 | ) |
|                                                                |       |                                                 | ** **      |   |   |
| **Accumulated deficit - ending**                                    | ** ** | **(19,948,965**                                      | **)**           | (16,368,393 | ) |
|                                                                |       |                                                 | ** **      |   |   |
| **Basic and diluted loss per common share**                         | ** ** | **$**                                                | **(0.09**       | **)** | $ | (0.06 | ) |
|                                                                |       |                                                 | ** **      |   |   |
| **Weighted average common shares outstanding -  basic and diluted** | ** ** | **11,968,332**                                       | ** **      | 11,968,332 |   |
|                                                                     |            |                                                      |                 |  |  |  |  |  |  |

 

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

 

4

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                     | ** ** | **THREE MONTHS ENDED MARCH 31,** | ** **     |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------|----------------|
| ** **                                                                     | ** ** | **2008**                                             | ** **     | **2007** | ** ** |
|                                                                           |       |                                                 |           |   |   |
| **Cash flows from operations**                                                 |       |                                                 |           |   |   |
| Net loss                                                                       | ** ** | **$**                                                | **(1,088,397** | **)** | $ | (712,831 | ) |
| *Adjustments to reconcile net loss to net cash  used in operating activities:* |       |                                                 | ** **     |   |   |
| * *                                                                       |       |                                                 | ** **     |   |   |
| Provision for doubtful accounts                                                | ** ** | **(1,193**                                           | **)**          | **—** | ** ** |
| Provision for slow moving, excess and obsolete inventory                       | ** ** | **(1,644,316**                                       | **)**          | (73,950 | ) |
| Depreciation and amortization                                                  | ** ** | **22,140**                                           | ** **     | 18,291 |   |
| Stock compensation expense for employees and directors                         | ** ** | **18,245**                                           | ** **     | 24,603 |   |
| Original issue discount                                                        | ** ** | **1,855**                                            | ** **     | **—** | ** ** |
| *Changes in operating assets and liabilities:*                                 |       |                                                 | ** **     |   |   |
| Accounts receivable                                                            | ** ** | **11,729**                                           | ** **     | (12,931 | ) |
| Inventories                                                                    | ** ** | **1,644,316**                                        | ** **     | 73,950 |   |
| Prepaid expenses and other current assets                                      | ** ** | **16,502**                                           | ** **     | 13,806 |   |
| Accounts payable and accrued expenses                                          | ** ** | **381,196**                                          | ** **     | (38,610 | ) |
|                                                                           |       |                                                 | ** **     |   |   |
| Net cash used in operating activities                                          | ** ** | **(637,923**                                         | **)**          | (707,672 | ) |
|                                                                           |       |                                                 | ** **     |   |   |
| **Cash flows from investing activities**                                       |       |                                                 | ** **     |   |   |
| Purchases of property and equipment                                            | ** ** | **(7,082**                                           | **)**          | (25,222 | ) |
| Patent costs                                                                   | ** ** | **(14,701**                                          | **)**          | (29,654 | ) |
| Leasehold improvements                                                         |       | —                                               | ** **     | 165 |   |
| License fee                                                                    |       | —                                               | ** **     | (11,778 | ) |
|                                                                           |       |                                                 | ** **     |   |   |
| Net cash provided by investing activities                                      | ** ** | **(21,783**                                          | **)**          | (66,489 | ) |
|                                                                           |       |                                                 | ** **     |   |   |
| **Cash flows from financing activities**                                       |       |                                                 | ** **     |   |   |
| Proceeds from shareholder loan and notes payable                               | ** ** | **250,000**                                          | ** **     | — |   |
| Proceeds from officer loan and notes payable                                   | ** ** | **200,000**                                          | ** **     | — |   |
|                                                                           |       |                                                 | ** **     |   |   |
| Net cash provided (used) by financing activities                               | ** ** | **450,000**                                          | ** **     | — |   |
|                                                                           |       |                                                 | ** **     |   |   |
| **Decrease in cash and cash equivalents**                                      | ** ** | **(209,706**                                         | **)**          | (774,161 | ) |
|                                                                           |       |                                                 | ** **     |   |   |
| Cash and cash equivalents – beginning                                     | ** ** | **320,524**                                          | ** **     | 3,051,420 |   |
|                                                                           |       |                                                 | ** **     |   |   |
| **Cash and cash equivalents – ending**                                    | ** ** | **$**                                                | **110,818**    | ** ** | $ | 2,277,259 |   |
|                                                                           |       |                                                 | ** **     |   |   |
| **Supplemental Cash Flow Information:**                                        |       |                                                 | ** **     |   |   |
| During the three months, cash was paid for the following:                      |       |                                                 | ** **     |   |   |
| Interest                                                                       | ** ** | **$**                                                | **5,933**      | ** ** | $ | — |   |
|                                                                                |            |                                                      |                |  |  |  |  |  |  |

 

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

 

5

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 **NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2008 AND MARCH 31, 2007 (UNAUDITED)**

 

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

 

***The Company***

 

Apogee Technology, Inc.and Subsidiary (the “Company” or “Apogee”, “we”, “us”, or “our”) designs anddevelops, with the long-term goal of commercializing advanced drug delivery andsensor based health monitoring devices and systems.  Our Life Science Group is developingPyraDermTM an advanced intradermal drug delivery system to meet the needs ofpatients, health insurers and companies developing pharmaceuticals, as well as,governments and international health organizations. We believe PyraDermTM hasadvantages over competitive approaches for the delivery of vaccines, highpotency therapeutic protein drugs and other pharmaceuticals. We have evaluatedthe feasibility of *PyraDerm* byperforming in vitro tests with model drugs and have started in vivo testingwith two leading research organizations to evaluate the advantages of *PyraDerm* in the delivery of Hepatitis B and the Influenzavaccine antigens. We are working to establish pharmaceutical industry compliantmanufacturing methods and to define regulatory strategies to support itscommercialization. Upon the successful completion of in vitro and in vivoevaluation of *PyraDerm* we intend to pursuelicensing/development or partnership agreements with pharmaceutical companiesinterested in our technologies.   In August 2007,we announced an expansion of our sensor business to include the development ofIntellaPALTM, an innovative sensor based monitoring system designed to improvethe security, independence and quality of life for the elderly and theirfamilies. *IntellaPAL* 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. In May 2008, we plan tobegin testing of *IntellaPAL*prototype designs witha leading geriatric research institute in Boston. We are also developing andmarketing proprietary Micro-Electromechanical Systems (“MEMS”) based pressuresensors for the medical, automotive, industrial and consumer markets under theSensilica® brand name.  These devices are produced using a novelmanufacturing technology that we believe reduces size and cost while improvingreliability as compared to alternative MEMS sensor designs.   Neither product group had meaningfulrevenues for the three months ended March 31, 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, inorder to expand our technology base and to further diversify our product andmarket opportunities, we acquired a portfolio of MEMS and nanotechnologyintellectual property, trade secrets and know-how developed by Standard MEMS, Inc.MEMS are devices produced using high volume IC manufacturing techniques thatinclude both electrical circuits and microscopic mechanical systems.Concurrently, we hired employees from the former Standard MEMS, Inc. andestablished a MEMS Division that we have subsequently consolidated into ourNorwood headquarters.  Since this acquisition, we have been using thisacquired know-how plus additional technologies to develop MEMS andnanotechnology based drug delivery and sensor systems.

 

On October 5, 2005,we completed a transaction with SigmaTel, Inc. (“SigmaTel”) whereby wesold certain 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 major business groups, the Medical Products Group and theSensor Products Group subsequently renamed the Life Science and HealthMonitoring Groups. We also closed our sales offices in China, Japan, Taiwan and

 

6

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Hong Kong and terminatedour agreements with our independent sales representatives and distributors thatsupported our audio IC business.   On January 15, 2008, we soldthe remaining DDX inventory held in the Norwood Office to one of our customersand on January 24, 2008 we sold the remaining DDX inventory housed in HongKong to one of our former DDX distributors. Total proceeds received for the disposition of the DDX inventory was$17,000.

 

***Basis of Presentation***

 

***Consolidated Financial Statements***

 

The financialstatements include the accounts of Apogee Technology, Inc., and its whollyowned inactive subsidiary, DUBLA, Inc. All significant intercompanytransactions and accounts have been eliminated.

 

In management’s opinionall adjustments, consisting of normal recurring accruals considered necessaryfor a fair presentation, have been included in the accompanying unauditedfinancial statements.  Operating resultsfor the three months ended March 31, 2008 are not necessarily indicativeof the results that may be expected for the full year ended December 31,2008.

 

***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 $1.1 million and negative cash flowsfrom operations were approximately $638,000 for the three months ended March 31,2008.   Given our net losses and negativecash flows from operations, we will not be able to continue as a going concernwithout raising additional capital.

 

We have approximately$111,000 of cash at March 31, 2008 and approximately $12,000 at May 5,2008, after receiving an additional $164,000 from the sale of 164,000 shares ofour Common Stock through a private placement. We are actively pursuing various options for additional funding. Duringthe three months ended March 31, 2008, Herbert M. Stein, our President andChief Executive Officer and David Spiegel, a major shareholder, loaned Apogee$200,000 and $250,000, respectively.  Forfinancing details of $164,000 see Footnote 13 - Subsequent Events – AdditionalFinancing.

 

The long-term success ofApogee is dependent upon our ability to successfully develop and market ourtechnologies and products, to attain profitable operations and to raiseadditional funds as needed for such purposes. Although we have modified ourbusiness strategy to improve near-term financial performance, there can be noassurance, however, that we will be able to generate sufficient revenue, becomeprofitable or that additional funds will be available to us on acceptableterms, if at all.  Accordingly, we may beunable to implement current plans.  Inaddition, if sufficient capital cannot be obtained, Apogee may be forced tosignificantly reduce operating expenses to a point which would be detrimentalto business operations, curtail research and development activities or takeother actions which could be detrimental to business prospects and result incharges which could be material to our operations and financial position, orcease operations altogether.  In theevent that any future financing is affected, to the extent it includes equitysecurities; the holders of the common stock may experience additionaldilution.  In the event of a cessation ofoperations, there may not be sufficient assets to fully satisfy all creditors,in which case the holders of securities may be unable to recoup any of theirinvestment.  Without additional fundingwe will be unable to continue operations.

 

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

 

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

 

***Liquidity***

 

During the three monthsended March 31, 2008, Apogee received proceeds from unsecuredinterest-bearing promissory notes in the amounts of $150,000 from Mr. HerbertM. Stein, Chief Executive Officer and Chairman of the Board and $200,000 from Mr. DavidSpiegel, a major shareholder.  Thesepromissory notes are payable upon demand, not subject to any premium or penalty for prepayment, bear simple interestof 8% per annum, and are to be repaid in 180 days.  Associated 

 

7

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with the promissory notesare warrants.  Each of two warrants is athree (3) year warrant representing an underlying ten thousand (10,000)shares of common stock with a strike price of $1.00 for Mr. Spiegel, andeach of two warrants is a three (3) year warrant representing anunderlying ten thousand (10,000) and five thousand (5,000) shares of commonstock with a strike price of $1.00 for Mr. Stein, respectively.  On March 31, 2008 we received $50,000each from Messrs. Stein and Spiegel. On April 1, 2008 these funds were converted to unsecuredinterest-bearing promissory notes.  These promissory notes are payable upon demand, not  subject to any premium or penalty for prepayment,bear simple interest of 8% per annum, and are to be repaid in 180 days.  On April 1, 2008, two warrants eachrepresenting five thousand shares of Apogee common stock were issued to Messrs. Steinand Spiegel, respectively at a strike price of $1.00.  The discount is being amortized over 180days, the life of the notes and charged to interest expense.  The warrants were issued as addedconsideration for the notes.  These warrantshave been documented using customary terms and include cashless or net exerciseprovision for exercise. In addition, on April 9, 2008 we received $164,000from the sale of 164,000 shares of our Common Stock through a privateplacement.  See Footnote 13 - SubsequentEvents – Additional Financing.

 

**2.         Summary of Significant AccountingPolicies**

 

***Revenue Recognition***

 

Apogee recognizes revenuein accordance with Securities and Exchange Commission Staff Accounting BulletinNo. 104 (“SAB 104”), “Revenue Recognition in Financial Statements: RevenueRecognition”, which states that revenue should be recognized when the followingrevenue recognition criteria are met:  (1) persuasive evidence of anarrangement exists; (2) the product has been shipped and the customertakes ownership and assumes the risk of loss; (3) the selling price isfixed or determinable; and (4) collection of the resulting receivable isreasonably assured. The following policies apply to Apogee’s two major productsales categories for revenue recognition. Sales to end users (“OEM”): 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 provided stock rotationrights, price protection and other incentives to our Distributors. As a resultof these incentives, Apogee has adopted a policy of deferring recognition ofrevenue until the distributor sells products to its customers based uponreceipt of point-of-sale reports from the distributors. We accrue the estimatedcost of post-sale obligations including product warranty returns, based onhistorical experience. To date we have 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.

 

***Loss Per Share***

 

Basic net loss per share is computed by dividing the net profit or lossattributable to common stockholders for the period by the weighted averagenumber of common stock outstanding during the period.  Diluted net loss per share is computed basedon the weighted average number of common stock and dilutive potential commonstock outstanding.  The calculation of dilutednet loss per share excluded potential common stock if the effect isanti-dilutive.  Potential common stockconsists of incremental common stock issuable upon the exercise of stockoptions and common stock issuable upon the exercise of common stock warrants.

 

***Research and Development***

 

Costsfor research and development are expensed as incurred.

 

***Inventories***

 

Inventories, includinginventory held at distributors, are stated at the lower of cost on a first-in,first-out basis or market.****This policy requires us to make estimates regardingthe market value of our inventory, including an assessment of excess orobsolete inventory.

 

On January 15, 2008we sold the remaining DDX inventory held in the Norwood Office to one of ourcustomers and on January 24, 2008 we sold the remaining DDX inventoryhoused in Hong Kong to one of our former DDX distributors.  Total proceeds received for the dispositionof the DDX inventory was $17,000.  Inaddition, we may share in proceeds from this sale of inventory by our formerdistributor if sales exceed certain limits.

 

8

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***Inventories purchase commitment losses***

 

Apogee accrues forestimated losses on non-cancelable purchase orders, which may occur if thefuture sales price declines below the committed purchase price.  There are no outstanding significant purchasecommitments of product inventory and therefore no provision was required at March 31,2008.

 

***Property and Equipment***

 

Major replacements and betterments of equipment are capitalized.  Cost of normal maintenance and repairs ischarged to expense as incurred. Depreciation is provided over the estimated useful lives of the assetsusing accelerated methods.

 

***Leasehold Improvements***

 

Leasehold improvements are amortized over either the term of lease orthe estimated useful life of the improvement.

 

***Patents***

 

Costs incurred to register and obtain patents arecapitalized and amortized on a straight-line basis over five years, theirestimated useful lives.

 

***Exclusive License Fee***

 

We capitalize licensefees paid to third parties for costs associated with the exclusive rights totheir patents.  We are amortizing thesefees over a period of four years.

 

***Cash and Cash Equivalents***

 

We consider all highlyliquid investments with an original maturity of three months or less to be cashequivalents.

 

***Use of Estimates in FinancialStatements***

 

In preparing financial statements in conformity with generally acceptedaccounting principles, management is required to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of financial statements, and thereported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

***Accounts Receivable***

 

We carry our trade receivables from direct customers less an allowancefor doubtful accounts to ensure that trade receivables are carried at netrealizable value.  On a periodic basis,we evaluate the collectibility of our accounts receivable on a variety offactors, including length of time receivables are past due, indication ofcustomer willingnessto pay, significant one-time events and historical experience. An additionalreserve for individual accounts is recorded when we become aware of a customer’sinability to meet its financial obligations, such as in the case of bankruptcyfilings or substantial deterioration in the customer’s operating results orfinancial position. If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required.  Accounts receivable are generally consideredpast due if any portion of the receivable balance is outstanding for more than90 days.  If circumstances related to ourcustomers change, estimates of the recoverability of receivables would befurther adjusted.

 

***Fair value of financial instruments***

 

Carrying amounts ofcertain of the 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 May 14, 2007.  At our Annual Meeting held on August 28,2007, the shareholders approved the adoption of a new stock-based compensationplan, the 2007 Employee, Director and 

 

9

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Consultant Stock Plan(the “2007 Plan”).  Prior to fiscal 2006,we accounted for the stock based compensation under the recognition andmeasurement provisions of Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees”, and related Interpretations, aspermitted by Financial Accounting Standards Board (FASB) Statement of FinancialAccounting Standards, “Accounting for Stock-Based Compensation” (SFAS 123(R)).

 

Effective January 1, 2006,we adopted SFAS 123(R) using the modified-prospective-transition method.Under this transition method, stock compensation costs recognized beginning January 1, 2006include (a) compensation cost for all stock-based compensation paymentsgranted prior to, but not yet vested as of January 1, 2006, based on thegrant date fair value estimated in accordance with the original provisions ofSFAS 123(R), and (b) compensation cost for all stock-based paymentsgranted on or subsequent to January 1, 2006, based on the grant datefair value estimated in accordance with the provisions of SFAS 123(R).  Due to the adoption of SFAS 123(R), includedin our net loss for the three months ended March 31, 2008 and 2007, werestock-based compensation charges of approximately $18,000 and $25,000,respectively.

 

***Concentration of Credit Risk***

 

At March 31, 2007and 2008, we had cash balances at a financial institution in excess offederally insured limits.  However, we donot believe that it is subject to unusual credit risk beyond the normal creditrisk associated with commercial banking relationships.

 

***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 fair values of stock grants are amortizedas compensation expense over the options’ vesting period. Compensation expenserecognized is shown in the operating activities section of theconsolidated statements of cash flow.

 

In anticipation ofadopting SFAS 123(R), Apogee evaluated the assumptions used in the Black-Scholesmodel. We continue 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. Apogee believes that this analysis provides a betterestimate of option term periods.

 

We estimate the expectedlife of the option and determine a risk-free rate based on U.S. Treasury issueswith remaining terms similar to the expected life of the option.  We have never paid cash dividends and do notcurrently intend to pay cash dividends. Additionally, we have estimated an expected term of 7.5 years, expectedvolatility of approximately 100% and risk free interest rate of 2.96%.

 

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.

 

Apogee’s stockcompensation activity with respect to the three months ended March 31,2008 is summarized below:

 
| **Stock Options**                | ** ** | **Shares** | ** ** | **Weighted-   Average  Exercise  Price** | ** ** | **Weighted-   Average  Remaining  Contractual**

**Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at December 31, 2007 |       | 2,938,100  |       | $                                             | 4.5548     |                                                           |       |                            |       |   |
| Granted                               | ** ** | **—** |       |                                          |       |                                                           |       |                            |       |
| Exercised                             | ** ** | **—** |       |                                          |       |                                                           |       |                            |       |
| Cancelled or expired                  | ** ** | **—** |       |                                          |       |                                                           |       |                            |       |
| Outstanding at March 31, 2008    |       | 2,938,100  |       | $                                             | 4.5548     |                                                           | 5.6861     |                            | $          | 31,520 |   |
|                                  |       |       |       |                                          |       |                                                           |       |                            |       |
| Vested at March 31, 2008         |       | 2,475,400  |       | $                                             | 5.2338     |                                                           | 5.1554     |                            | $          | 2,976 |   |
|                                  |       |       |       |                                          |       |                                                           |       |                            |       |
| Exercisable at March 31, 2008    |       | 2,475,400  |       | $                                             | 5.2338     |                                                           | 5.1554     |                            | $          | 2,976 |   |

 

10

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The followingtable summarizes information about options outstanding as of March 31,2008:

 
| ** **                      | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                      | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of Exercise** | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Prices**                      | ** ** | **Outstanding**              | ** ** | **Life**                     | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
|                            |       |                         |       |                         |       |   |   |   |   |   |   |
| $0.25 — 1.69               |       | 1,039,900                    |       | 7.5574                       |       | $ | 0.9603 |   | 577,200 |   | $ | 1.0632 |   |
| $2.71 — 6.590              |       | 1,299,200                    |       | 4.0129                       |       | $ | 5.4017 |   | 1,299,200 |   | $ | 5.4017 |   |
| $8.45 — 12.15              |       | 599,000                      |       | 6.0665                       |       | $ | 8.8883 |   | 599,000 |   | $ | 8.8883 |   |
|                            |       |                         |       |                         |       |   |   |   |   |   |   |
| Total at March 31, 2008    |       | 2,938,1000                   |       | 5.68616                      |       | $ | 4.5549 |   | 2,475,400 |   | $ | 5.2338 |   |

 

During the three monthsended March 31, 2008, Apogee did not grant options.  No options were exercised during the threemonths ended March 31, 2008.  During the three months ended March 31,2008, options to purchase 8,300 shares of Apogee common stock vested. ** **Theweighted average fair value of these options was $0.6205.  Total stock-basedcompensation expense for the three months ended March 31, 2008, wasapproximately $18,000 compared to approximately $25,000 for the three monthsended March 31, 2007.

 

***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 at March 31, 2008 and December 31,2007 are comprised of the following:

 
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                           | ** ** | **(Unaudited)**    | ** ** | **(Audited)**         | ** ** |
| Distributor                          | ** ** | **$**              | **—** |                  | $          | 1,650 |   |
| Direct customers                     | ** ** | **9,377**          |       | 19,456                |       |
| ** **                           |       | **$**              | **9,377**  |                  | $          | 21,106 |   |
|                                 |       |               |       |                  |       |
| Less allowance for doubtful accounts | ** ** | **$**              | **(9,377** | **)**                 | (10,570    | ) |
|                                 |       |               |       |                  |       |
| Net accounts receivable              | ** ** | **$**              | **—** |                  | $          | 10,536 |   |

 

**4.**                                             **Property and Equipment**

 

Property and equipment at March 31, 2008 and December 31,2007 are comprised of the following:

 
| ** **                    | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                    | ** ** | **2008**           | ** **  | **2007**              | ** ** |
| ** **                    | ** ** | **(Unaudited)**    | ** **  | **(Audited)**         | ** ** |
|                          |       |               |        |                  |       |
| Equipment                     | ** ** | **$**              | **188,541** |                  | $          | 181,459 |   |
| Software                      | ** ** | **32,943**         |        | 32,943                |       |
| Furniture and fixtures        | ** ** | **22,047**         |        | 22,047                |       |
| Leasehold improvements        | ** ** | **92,892**         |        | 92,892                |       |
|                          |       |               |        |                  |       |
| ** **                    |       | **$**              | **336,423** |                  | $          | 329,341 |   |
|                          |       |               |        |                  |       |
| Less accumulated depreciation | ** ** | **(165,828**       | **)**       | (145,896              | )          |
|                          |       |               |        |                  |       |
| ** **                    |       | **$**              | **170,595** |                  | $          | 183,445 |   |

 

11

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Depreciation expense was $12,191 and $16,573 for thethree months ended March 31, 2008 and 2007, respectively.

 

The estimated useful lives of the classes of physicalassets were as follows:

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

 

**5.****                                            ****Asset Impairment**

 

We recorded an Intangible Asset impairment charge of $40,000 at December 31,2007 to reflect lower than anticipated revenues from our MEMS sensor productline.  This charge is based on estimatesby management and was recorded against $100,000 of intangible assets associatedwith MEMS intellectual property acquired in 2004.  No additional charge was recorded for thethree months ended March 31, 2008.

 

**6.****                                            ****Accrued Expenses**

 
| ** **             | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **             | ** ** | **2008**           | ** **  | **2007**              | ** ** |
| ** **             | ** ** | **(Unaudited)**    | ** **  | **(Audited)**         | ** ** |
|                   |       |               |        |                  |       |
| Accrued audit expenses | ** ** | **$**              | **77,000**  |                  | $          | 63,000 |   |
| Accrued legal expenses | ** ** | **26,000**         |        | 7,000                 |       |
| Other accrued expenses | ** ** | **11,000**         |        | 19,000                |       |
|                   |       |               |        |                  |       |
| ** **             |       | **$**              | **114,000** |                  | $          | 89,000 |   |

 

**7.****                                            ****Promissory Notes, Loansand Warrants**

 

During the three monthsended March 31, 2008, Apogee received proceeds from unsecuredinterest-bearing promissory notes in the amounts of $150,000 from Mr. HerbertM. Stein, Chief Executive Officer and Chairman of the Board and $200,000 from Mr. DavidSpiegel, a major shareholder.  Thesepromissory notes are payable upon demand, not subject to any premium or penalty for prepayment, bear simple interestof 8% per annum, and are to be repaid in 180 days.  On February 21, 2008 two warrants, eachrepresenting ten thousand shares of Apogee common stock were issued to Messrs. Stein and Spiegel at a strike price of$1.00.  Each warrant has been valued at$3,462 using the Black Scholes valuation model based upon the followingassumptions:  term of three years, a riskfree interest rate of 2.23% and a volatility of 98.46%. On March 20, 2008two warrants representing five thousand and ten thousand shares of Apogee commonstock were issued to Messrs. Stein and Spiegel, respectively at a strikeprice of $1.00.  The warrants issued to Messrs. Spiegel and Stein have been valued at$3,867 and $1,934, respectively, using the Black Scholes valuation model basedupon the following assumptions:  term ofthree years, a risk free interest rate of 1.71% and a volatility of 99.87%. Theeffective interest rate is approximately 15.3%.

 

On March 31, 2008 wereceived $50,000 each from Messrs. Stein and Spiegel.  On April 1, 2008 these funds wereconverted to unsecured interest-bearing promissory notes.   These promissory notes are payable upondemand, not  subject to any premium orpenalty for prepayment, bear simple interest of 8% per annum, and are to berepaid in 180 days.  Interest aftermaturity shall be payable on demand at an annual rate which is four (4) percentagepoints above the rate of interest payable during the term of the notes.  On April 1, 2008, two warrants eachrepresenting five thousand shares of Apogee common stock were issued to Messrs. Steinand Spiegel, respectively at a strike price of $1.00.  The warrants issued to Messrs. Spiegel and Stein have been valued at$2,526 each, using the Black Scholes valuation model based upon the followingassumptions:  term of three years, a riskfree interest rate of 1.94% and a volatility of 100%.  All warrants issued 

 

12

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were for addedconsideration for the Notes.  Thediscount is being amortized over 180 days, the life of the notes and charged tointerest expense.

 

Thepromissory notes issued to Messrs. Stein and Spiegel on December 11, 2007 foran aggregate of $400,000 began incurring a post maturity rate of interest onMarch 10, 2008 as a result of non-payment at the maturity date. The promissorynotes originally were issued with simple interest of 8% per year and are to berepaid in cash after 90 days. The promissory notes now bear interest at 12%,the interest after maturity is payable on demand and is compounded monthly,otherwise the December 11, 2007 promissory notes remain unchanged from thestandard promissory notes issued to us.

 

Through March 31,2008 Apogee has received total proceeds from these loans and promissory notesof $450,000 and $400,000 from Mr. Stein and Mr. Spiegel,respectively.

 

The following tablerepresents the net payable due as of March 31, 2008.

 
| ** **                                     | ** ** | **Herbert M. Stein** | ** **  | **David Spiegel** | ** ** |
|------------------------------------------------|------------|--------------------------------|-------------|------------------------|------------|
|                                           |       |                           |        |                   |       |
| Total proceeds from loans and Promissory Notes | ** ** | **$**                          | **450,000** | ** **             | **$**      | **400,000** | ** ** |
| Discount as of March 31, 2008             | ** ** | **(4,527**                     | **)**       | **(6,343**             | **)**      |
| ** **                                     | ** ** | **$**                          | **445,473** | ** **             | **$**      | **393,657** |   |

 

 **8.**                                             **Stockholders’ Equity**

 

***Preferred Stock***

 

At our Annual Meeting held on August 28,2007, our shareholders approved an Amendment to the Amended and RestatedCertificate of Incorporation creating 5 million shares of undesignatedPreferred Stock.  These shares will havefuture rights and preferences to be determined at the sole discretion of ourBoard of Directors.

 

***Common Stock***

 

At our Annual Meeting held on August 28,2007, our shareholders approved an Amendment to the Amended and RestatedCertificate of Incorporation increasing the number of Common Stock authorizedfrom 20 million to 40 million.

 

***Stock Options***

 

During the three monthsended March 31, 2008, no additional stock options were awarded. During thethree months ended March 31, 2007, Company awarded an employee options topurchase 6,000 shares at an exercise price of $1.20 per share.  In addition, the Board of Directors awardedto two new members of the Advisory Board options to purchase 10,000 shares atan exercise price of $1.24 per share and 10,000 shares at an exercise price of$1.36 per share.  These options weregranted under the 1997 Employee, Director and Consultant Stock Option Plan. Theoptions granted to the employee vest over five years beginning at the firstanniversary of the date of grant.  Theoptions granted to the members of the Medical Advisory Board vest over one yearbeginning with 50% at the six-month anniversary of the date of grant and theremaining 50% at the one year anniversary of the date of grant.

 

**9.****                                            ****Related PartyTransactions**

 

In addition to thePromissory Notes, Loans and Warrants set forth in Footnote 7, we rent ourfacility from an entity controlled by a stockholder for $4,400 per monthpursuant to a lease that expired December 31, 2005. Currently, we arerenting the facility on a month-to-month basis.

 

**10.****                                     ****IndemnificationArrangements with our Executives and Others**

 

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.*   Wehave incurred approximately $621,000 toward this indemnification through March 31,2008.

 

Apogee has agreed toindemnify certain employees and a former employee in connection with the SECinquiry. As of March 31, 2008 we have incurred approximately $84,000 based onindemnifying legal expenses of these individuals in association with thismatter. During the three months ended March 31, 2008, we recordedapproximately $73,000 toward this indemnification and we could incursignificantly larger costs before this matter is resolved.  These costs are not being reimbursed underour Directors and Officers Insurance Policy.

 

13

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**11.****             TaxLoss Carryforwards**

 

The following approximates the net losscarryforwards we have available in the future for Federal and State tax purposesas of December 31, 2007:

 
| ** **                           | ** ** | **December  31,** | ** **     | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------|----------------|-----------------------|------------|
| ** **                           | ** ** | **2007**                    | ** **     | **2006**              | ** ** |
| **Net operating loss carryforwards** |       |                        |           |                  |       |
| Federal                              | ** ** | **$**                       | **15,500,000** |                  | $          | 12,300,000 |   |
| State                                | ** ** | **$**                       | **9,200,000**  |                  | $          | 6,000,000 |   |

 

Business credits available in the future:

 
| ** **                                   | ** ** | **December  31,** | ** **  | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------|-------------|-----------------------|------------|
| ** **                                   | ** ** | **2007**                    | ** **  | **2006**              | ** ** |
| **Business credits available in the future** |       |                        |        |                  |       |
| Federal                                      | ** ** | **$**                       | **980,000** |                  | $          | 910,000 |   |
| State                                        | ** ** | **$**                       | **300,000** |                  | $          | 290,000 |   |

 

The net operating loss carryforwards willbegin to expire in 2017 for Federal tax purposes and in 2008 for State taxpurposes.  The Federal and State creditswill begin to expire in 2016.

 

Significant changes in our ownership maysubstantially reduce the available carryforwards and related tax benefits.

 

**12.              Notificationfrom the American Stock Exchange**

 

As reported on our reporton Form 8-K dated November 8, 2007, we were notified by a letter fromthe American Stock Exchange on November 2, 2007 that the AMEX PLAN periodhad expired without our having regained compliance with the relevant continuedlisting standards. As a result, the staff of the AMEX notified us of theirintent to remove our common stock from the AMEX by filing a delistingapplication with the Securities and Exchange Commission (the “SEC”) pursuant toSection 1009(d) of the AMEX Company Guide (the “Company Guide”), and Rule 12d2-2of the Securities Exchange Act of 1934, as amended.

 

On December 12, 2007a hearing with the Listings Qualifications Panel was conducted.  Subsequently, we were notified that theListings Qualification Panel upheld their decision to cease the continuelisting of our stock.  We immediatelybegan the transitioning process to the OTC Bulletin Board® and/or the PinkSheets© LLC.

 

On January 23, 2008we announced that our shares will be quoted on the Over-the-Counter Bulletin Board®under the symbol “ATCS”.

 

**13.              Subsequent Events – Additional Financings**

 

On April 9,2008, Apogee sold 164,000 shares of our common stock to accredited investors ata price of $1.00 per share.  Theaggregate gross proceeds to Apogee, before fees and expenses, were $164,000,which we will use for general working capital and corporate purposes.   Apogee may pay up to 7% of the offeringproceeds for consulting services rendered in connection with the privateplacement.  The shares of Apogee’s common stock were issued andsold in a private placement in reliance on an exemption from registrationprovided by Section 4(2) of Securities Act of 133, as amended, and Rule 506of Regulation D promulgated thereunder**. **The shares of the commonstock issued in this private placement will not be registered under theSecurities Act of 1933 and may not by subsequently offered or sold by theinvestors in the United States absent registration or an application exemptionfrom the registration requirement.

 

14

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

**GENERAL**

 

Thefollowing Management’s Discussion and Analysis of the Company’s FinancialCondition and Results of Operations for the three-month period ended March 31,2008 should be read in conjunction with the Company’s Financial Statements andrelated footnotes included elsewhere in this Quarterly Report on Form 10-Q.This discussion contains, in addition to historical statements, forward-lookingstatements that involve risks and uncertainties. Our actual results coulddiffer significantly from the results discussed in the forward-lookingstatements. Factors that could cause or contribute to such differences includethe factors discussed in the section titled ITEM 1A – RISK FACTORS as wellas other factors described in our Annual Report on Form 10-KSB for theyear ended December 31, 2007.

*** ***

***OVERVIEW***

 

We are developing proprietaryintradermal drug delivery systems for vaccines and other pharmaceuticals thatwe intend to market to pharmaceutical and medical device companies. We are alsoengaged in the development of proprietary sensor, based health monitoringsystems for the elderly care and other markets that we intend to manufactureand market to individuals and health organizations.  Our two major business activities areorganized under the Life Science Group and the Health Monitoring Group.  Our Life Science Group is developing PyraDermTM an advanced intradermaldrug delivery system to meet the needs of patients, health insurers andcompanies developing pharmaceuticals, as well as, governments and internationalhealth organizations. We believe PyraDermTM has advantages over competitiveapproaches for the delivery of vaccines, high potency therapeutic protein drugsand other pharmaceuticals. We have evaluated the feasibility of *PyraDerm* by performing in vitro tests with model drugs andhave started in vivo testing with two leading research organizations toevaluate the advantages of *PyraDerm* in thedelivery of Hepatitis B and the Pandemic Influenza vaccine antigens. We areworking to establish pharmaceutical industry compliant manufacturing methodsand to define regulatory strategies to support its commercialization. Upon thesuccessful completion of in vitro and in vivo evaluation of *PyraDerm* we intend to pursue licensing/development orpartnership agreements with pharmaceutical companies interested in ourtechnologies.   In August 2007, weannounced an expansion of our sensor business to include the development ofIntellaPALTM, an innovative sensor based monitoring system designed to improvethe security, independence and quality of life for the elderly and theirfamilies. *IntellaPAL* 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. In May of 2008, we planto begin testing of *IntellaPAL*prototypedesigns with a leading geriatric research institute in Boston. We are alsodeveloping and marketing proprietary MEMS based pressure sensors for themedical, automotive, industrial, and consumer markets under the Sensilica®brand name.  These devices are produced using a novel manufacturing technologythat we believe reduces size and cost while improving reliability as comparedto alternative MEMS sensor designs.  Neither product group had meaningful revenues in during the three monthsended March 31, 2008.

 

Duringthe three months ended March 31, 2008, virtually all of our revenue wasderived from the sale of the remaining DDX audio IC inventory.  We expect that future revenue will initiallybe the result of potential licensing and development revenues resulting fromthe grant of rights to our intellectual property. In order to support ouroperations we intend to secure additional funding in 2008. We plan to add anetwork of direct sales staff, independent sales representatives anddistributors to support our medical and sensor products.  We currently outsource the manufacturing,assembly and certain testing of our medical, health monitoring and sensorproducts.

 

AtMarch 31, 2008, we had an accumulated deficit of approximately $19.9million, as compared to a deficit of $18.9 million as of December 31,2007.  Our historical net losses and accumulated deficit (since 1995)result primarily from the costs associated with our efforts to design, developand market our DDX technology as well as costs associated with our efforts todevelop new medical and sensor product.

 

Asof March 31, 2008, we had 14 employees compared to 12 employees for thesame period in 2007. This increase was in research and development, one each inour Health Monitoring and Life Science Groups.

 

15

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**SELECTEDCONSOLIDATED FINANCIAL DATA**

 

Thefollowing selected financial data for the three-month periods ended March 31,2008 and 2007 have been derived from our unaudited financial statements. Anytrends reflected by the following table may not be indicative of futureresults.

 
| ** **                               | ** ** | **For the Three Months ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
|                                     |       |                                                               |       |   |   |
| Statement of Operations Data:            |       |                                                               |       |   |   |
| Revenue                                  |       | $                                                                  | 21,951     |   | $ | 53,670 |   |
| Costs and expenses                       |       | 1,098,114                                                          |       | 798,368 |   |
| Other income (expense)                   |       | (12,234                                                            | )          | 31,867 |   |
| Net loss                                 |       | $                                                                  | (1,088,397 | ) | $ | (712,831 | ) |
|                                     |       |                                                               |       |   |   |
| Shares outstanding                       |       | 11,968,332                                                         |       | 11,968,332 |   |
|                                     |       |                                                               |       |   |   |
| Balance Sheet Data:                      |       |                                                               |       |   |   |
| Total assets                             |       | $                                                                  | 659,869    |   | $ | 2,844,377 |   |
| Stockholders’ equity (deficiency)   |       | $                                                                  | (1,316,003 | ) | $ | 2,172,800 |   |
| Loss per share (basic and fully diluted) |       | $                                                                  | (0.09      | ) | $ | (0.06 | ) |

 

**RESULTS OFOPERATIONS OF THE COMPANY**

 

**Revenue**

 

Wehave traditionally derived our revenue from three sources:

 

·                                    product sales, which formerly consisted ofmerchandise sales made either directly to original equipment manufacturers orsell through point of sale (“POS”) by distributors.  All remaining merchandise was sold in January 2008.  All such shipments were fulfilled from ourcontracted warehouse in Hong Kong or from our Norwood, Massachusetts office andwere reported net of returns;

 

·                                    royalty revenue, which formerly consisted ofroyalties paid by STMicroelectronics, which have not been sold as part of thetransaction with SigmaTel; and

 

·                                    consulting income related to contractualservices or development activities for third parties. We may, in thefuture, receive royalties under our remaining audio licensing agreements andfrom new agreements contemplated under our two new business groups. SeeFootnote 2 of the financial consolidated financials statements.  We anticipate that future revenue streamswill come from our life science, health monitoring and sensor businesses,generally in the form of strategic alliances or arrangements with developmentor marketing partners, direct product sales and distribution arrangements, aswell as, from licensing and development related revenues resulting from thegrant of rights to our intellectual property.  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 which the future of our healthmonitoring and sensor businesses will be to develop, produce and market our ownproducts.

 

Werecognized revenue for the three months ended March 31, 2008 ofapproximately $22,000, a decrease of approximately $32,000 from approximately$54,000 for the three months ended March 31, 2007.  On January 15, 2008 we sold theremaining DDX inventory held in the Norwood Office to one of our customers andon January 24, 2008 we sold the remaining DDX inventory housed in HongKong to one of our former DDX distributors. Total proceeds received for the disposition of the DDX inventory was$17,000.  In addition, we may share inproceeds from this sale of inventory by our former distributor if sales exceedcertain limits.

 

Weanticipate not generating significant future revenue until we are able togenerate revenue from our life science, health monitoring and/or sensorproducts.

 

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**Costof Revenue**

 

Sincesubstantially all of the revenue recorded was from products related our formeraudio IC business and had previously been fully reserved at 100%.  For the three months ended March 31,2008 and 2007, we recorded cost of revenue associated with the sale of sensorproducts of $696 and $216, respectively.

 

**OperatingExpenses**

 

**Research and Development Costs**

 

Ourresearch and development, or R&D, expenses consist primarily of salaries,development material costs, external consulting and service costs related tothe development and design of new products. Research and development expensesincreased by approximately $169,000 or 69%, to approximately $413,000 for thethree months ended March 31, 2008, compared to approximately $244,000 forthe three months ended March 31, 2007. This increase was the result of increased utilization of third partyconsultants to support our Health Monitoring group as well as increases inlaboratory equipment and supplies to support our Life Science Group.  In addition, human source expenses increasedto support both our Health Monitoring and Life Science Groups.

 

Forthe three months ended March 31, 2008 costs incurred from the utilizationof third-party consultants increased to approximately $98,000, compared toapproximately $15,000 for the same period in 2007.  This increase of approximately $83,000 was directlyrelated to the continued development of our first generation health monitoringproducts.

 

Humanresource costs increased by approximately $66,000 or 35% to approximately$252,000 compared to approximately $186,000 for the three months ended March 31,2007.  For the three months ended March 31,2008 and 2007, approximately $16,000 and $12,000, respectively, in humanresource expense was the result of our adoption of SFAS 123® effective as of January 1,2006.    Depreciation and amortizationexpense increased approximately $4,000 to approximately $21,000 for the threemonths ended March 21, 2008, from approximately $17,000 for the period in2007.  In addition, expenses primarily tosupport the laboratory increased by approximately $12,000 or 106% toapproximately $24,000 for the three months ended March 31, 2008, comparedto approximately $12,000 for the same period in 2007.  We anticipate that we will continue to commitresources to research and development activities as our financial positionallows, and as a result, R&D costs are expected to increase substantiallyin the future.

 

**Selling, General and AdministrativeCosts**

 

Sellingexpenses consist primarily of salaries and related expenses for personnelengaged in the marketing and selling of our products, as well as costs relatedto trade shows, product literature, travel and other promotional supportcosts.  General and Administrative costs consist primarily of executiveand administrative salaries, professional fees and other associated corporateexpenses. Selling, General and Administrative, or SG&A, expenses wereapproximately $684,000 for the three months ended March 31, 2008, comparedto approximately $554,000 for the three months ended March 31, 2007.  This represents an increase of approximately$130,000 or 24%.  The increase inSG&A was attributable primarily to increased professional fees partiallyoffset by decreases in annual fees, stock-based compensation and otheroperating expenses.

 

Humanresource costs decreased approximately $20,000, or 9% to approximately $212,000for the three months ended March 31, 2008, compared to approximately$232,000 for the three months ended March 31, 2007. This decrease was theresult of reduced stock-based compensation expenses.  For the three months ended March 31,2008, stock compensation expense decreased approximately $10,000, or 84% toapproximately $2,000, compared to approximately $12,000 for the three monthsended March 31, 2007.  In March 2008our Sales and Marketing employee was reclassified into the sensor group toreflect our current focus.  As of March 31,2008 we employed a total of 14 employees all located in Norwood, Massachusetts.

 

Professionalexpenses increased by approximately $179,000, or 91% to approximately $376,000for the three months ended March 31, 2008, compared to approximately$197,000 for the three months ended March 31, 2007.  For the three months ended March 31,2008, legal expenses increased by $176,000, or 133% to approximately $309,000,compared to approximately $133,000 for the three months ended March 31,2007.  Legal fees increased as a resultof the ongoing SEC investigation, as well as, our indemnification of our ChiefExecutive Officer. The investigation by the SEC, which began duringthe period of our restatement, is ongoing.   Through March 31,2008 we have incurred approximately $84,000 based on indemnifying legalexpenses of these individuals in association with this matter. During the threemonths ended March 31, 2008, we recorded approximately $73,000 toward thisindemnification and we could incur significantly larger costs before thismatter is resolved.  These costs are notbeing reimbursed under our Directors and Officers Insurance Policy.  ** **See “RiskFactors—Risks Related to Our Business”. In addition, legal fees associated with the indemnification costs in 

 

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connectionwith the civil case in the Circuit Court of the Fifteenth Judicial Circuit inand for Palm Beach County, Florida entitled *Joseph Shamy v. Herbert M.Stein, case No.: 50 2005 CA 007719 XXXXMB*, were approximately$62,000 for the three months ended March 31 2008 compared to approximately$54,000 for the three months ended March 31, 2007. Todate, we have paid $621,000 towards the indemnification of Mr. Stein.  See Footnote 12 of the consolidated financialstatements—Indemnification Arrangements with our Executives.  Neither the indemnification of Mr. Stein,nor the ongoing investigation by the SEC is presently receiving reimbursementunder our Director and Officer insurance policy.

 

Investorrelations expense increased by approximately $16,000, or 106% to approximately$32,000 for the three months ended March 31, 2008, compared toapproximately $16,000 for the three months ended March 31, 2007. Thisincrease was due to our continued efforts to increase awareness among thefinancial and investing community of our scientific and corporatedevelopments.  This expense was partiallyoffset by a decrease in Sarbanes Oxley consulting expense. By approximately$11,300, or 87% to approximately $1,600 for the three months ended March 31,2008, compared to approximately $12,900 for the three months ended March 31,2007.  This decrease is the result of ourcompleting the final phases of our Sarbanes Oxley testing requirements.  As a result of our transition to the OTCBB,our annual fees were reduced by approximately $19,500, or 88% to approximately$2,700 for the three months ended March 31, 2008, compared toapproximately $22,200 for the three months ended March 31, 2007.

 

Inaddition, nominal reductions in accounting fees, media relations,shareholder-related, office, utilities and communications expenses werepartially offset by increases in travel and entertainment and maintenanceexpenses.

 

Operating expenses areexpected to increase over the next few quarters, as our financial positionallows, supporting our Health Monitoring and Life Science Groups.

 

**InterestIncome (Expense)**

 

Interestincome includes income from Apogee’s cash and cash equivalents and frominvestments and expenses related to its financing activities. During the threemonths ended March 31, 2008, we generated interest income of approximately$700 compared to interest income of approximately $32,000 during the sameperiod in 2007. This decrease in interest income for the three months ended March 31,2008 was primarily due to reduced interest on reduced cash balances as of March 31,2008.

 

Interest expense resultingfrom the issuance of promissory notes to Mr. Herbert M. Stein and Mr. DavidSpiegel was approximately $13,000 for the three months ended March 31,2008.  No interest expense was incurredfor the three months ended March 31, 2007. The promissory notes issued to Messrs. Stein and Spiegel on December 11,2007 for an aggregate of $400,000 began incurring a post maturity rate ofinterest on March 10, 2008 as a result of non-payment at the maturitydate.

 

**Net Loss**

 

Apogee’s net loss for thethree months ended March 31, 2008 was approximately $1.1 million or $0.09per basic and diluted common share, compared to a net loss of approximately$713,000 or $0.06 per basic and diluted common share for the three months endedMarch 31, 2007.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our principal source of liquidity at March 31,2008 consisted of approximately $111,000 in cash and cash equivalents with aworking capital deficit of approximately $1.8 million.  We consider all highly liquid investmentswith an original maturity of three months or less to be cash equivalents.   This compares to approximately $321,000 incash and cash equivalents as of December 31, 2007. In addition, as of December 31,2007, we had a working capital deficit of approximately $728,000.  During the first quarter ended March 31,2008, we received proceeds from loans and unsecured interest-bearing promissorynotes totaling $250,000 from David Spiegel, a major shareholder and totaling$200,000 from Herbert Stein, Chief Executive Officer and Chairman of theBoard.  These promissory notes arepayable upon demand and were not subject to any premium or penalty for prepayment.The loan interest rate was 8% per annum, payable monthly in arrears on theoutstanding balance.   As of March 31,2007, we had working capital of approximately $1.7 million.

 

Net cash used in operatingactivities for the three-month period ended March 31, 2008 decreased toapproximately $638,000 compared to approximately $708,000 in the three-monthperiod ended March 31, 2007. As of March 31, 2008 we sold theremaining DDX inventory for a total of $17,000 and offset the remainingreserves for slow moving, excess and obsolete 

 

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inventory.  As of March 31, 2008 our accountsreceivable was approximately $10,000 with an offset allowance of approximately$10,000, compared to a net accounts receivable of approximately $24,000 at March 31,2007.

 

Net cash used in investingactivities for the three months ended March 31, 2008 was approximately$22,000, compared to approximately $66,000 for the three months ended March 31,2007.  We purchased additional equipmentfor our laboratory as well as supporting the and prosecution of our existingpatent applications all of which related to our medical device group,

 

Net cash provided byfinancing activities was $450,000 for the three months ended March 31,2008.  This compares to no cash providedby financing activities for the three months ended March 31, 2007.  During the three-month period ended March 31,2008, we received the proceeds from loans and unsecured interest bearingpromissory notes totaling $250,000 from David Spiegel, a major shareholder and$200,000 from Herbert M. Stein, Chief Executive Officer and Chairman of theBoard.  These loans arepayable upon demand and are not subject to any premium or penalty forprepayment. The loan interest rate is 8% per annum, payable monthly inarrears on the outstanding balance.  See Footnote 7 of the consolidated financials statements - PromissoryNotes, Loans and Warrants.****We must raise additional capital to continue operations. Our totalcurrents assets are approximately $181,000 and our total assets areapproximately $660,000.  This is notsufficient to sustain current operations. Management remains confident that we will raise sufficient capital inthe near-term to fund operations for at least the next twelve months.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Apogeeprepares its consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires us to make estimates, judgments andassumptions that we believe are reasonable based upon the information currentlyavailable. These estimates and assumptions affect the reported amounts ofassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the periods presented. Any futurechanges to these estimates and assumptions could have a significant impact onthe reported amounts of revenue, expenses, assets and liabilities in ourfinancial statements. The significant accounting policies which we believe arethe most critical to aid in fully understanding and evaluating our reportedfinancial results include the following:

 

**Revenue Recognition**

 

Apogeerecognizes revenue in accordance with Securities and Exchange Commission StaffAccounting Bulletin “104”, or SAB “104”**,**“RevenueRecognition in Financial Statements: Revenue Recognition”, which states thatrevenue should be recognized when the following revenue recognition criteriaare met:  (1) persuasive evidence of an arrangement exists; (2) theproduct has been shipped and the customer takes ownership and assumes the riskof loss; (3) the selling price is fixed or determinable; and (4) collectionof the resulting receivable is reasonably assured. The following policies applyto Apogee’s two major product sales categories for revenue recognition. Salesto end users, OEM:  Revenue is recognized under our standard terms andconditions of sale, title and risk of loss transfer to the customer at the timeproducts are shipped from our warehouse or delivered to the customer’srepresentative/freight forwarder. Sales to Distributors:  From time totime we provide stock rotation rights, price protection and other incentives toour Distributors. See Footnote 2 of the consolidated financials statements. Asa result of these incentives, Apogee has adopted a policy of deferringrecognition of revenue until the distributor sells products to its customersbased upon receipt of point-of-sale reports from the distributors. We accruethe estimated cost of post-sale obligations including product warranty returns,based on historical experience. To date we have experienced minimal warrantyreturns.

 

Inaddition, we record royalty revenue when earned in accordance with theunderlying agreements. Consulting and licensing revenue is recognized asservices are performed.

 

**Accounts Receivable**

 

Apogeeperforms credit evaluations of customers and determines credit limits basedupon payment history, customers’ creditworthiness and other factors, asdetermined by our review of their current credit information. For a majority ofour larger sales, we can require the issuance of a Letter of Credit. Smalleraccounts must either pay via credit card or in advance of shipment. Wecontinuously monitor collections and payments from our customers, and wemaintain a provision for estimated credit losses based upon our historicalexperience and any specific customer collection issues that we have identified.While we have not had any significant credit losses to date, we cannotguarantee that we will continue to avoid credit losses in the future. If thefinancial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired. Since our accounts receivable are highly concentrated in a smallnumber of customers, a significant change in the liquidity or financialposition of any one of these customers could 

 

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havea material adverse impact on our ability to collect our accounts receivable,our liquidity or our future results of operations.

 

**Inventory**

 

Inventoriesare stated at the lower of cost on a first-in, first-out basis or market. Thispolicy requires Apogee to make estimates regarding the market value of ourinventory, including an assessment of excess or obsolete inventory. On January 15,2008, we sold the remaining DDX inventory held in the Norwood Office to one ofour customers and on January 24, 2008 we also sold the remaining DDXinventory housed in Hong Kong to one of our former DDX distributors.  Total proceeds received for the dispositionof the DDX inventory was $17,000.  Inaddition, we may share in proceeds from this sale of inventory by our formerdistributor if sales amounts exceed certain limits.

 

**Valuation of Long-Lived Assets**

 

Property,plant and equipment, patents, trademarks and other intangible assets areamortized over their estimated useful lives. Useful lives are based onmanagement’s estimates over the period that such assets will generate revenue.Intangible assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying value of an asset may not berecoverable. In 2007 we lowered the value of certain intangible assets due toless than expected sales to date in our sensor business.  Future adverse changes in market conditionsor poor operating results of underlying capital investments or intangibleassets could result in losses or an inability to recover the carrying value ofsuch assets, thereby possibly requiring an impairment charge in the future.

 

***Stock-Based Compensation***

 

Apogeehad a stock-based compensation plan, the 1997 Employee, Director and ConsultantStock Option Plan, also referred to as the 1997 Plan, which is describedbelow.  This 1997 Plan expired as of May 14,2007.  At our Annual Meeting held on August 28,2007, the shareholders approved the adoption of a new stock-based compensationplan, the 2007 Employee, Director and Consultant Stock Plan, also referred toas the 2007 Plan.  Prior to fiscal 2006,we accounted for the stock based compensation under the recognition andmeasurement provisions of Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees”, and related Interpretations, aspermitted by Financial Accounting Standards Board (FASB) Statement of FinancialAccounting Standards, “Accounting for Stock-Based Compensation” (SFAS 123(R)).

 

EffectiveJanuary 1, 2006, we adopted SFAS 123(R) using the modified-prospective-transitionmethod. Under this transition method, stock compensation costs recognizedbeginning January 1, 2006 include (a) compensation cost for allstock-based compensation payments granted prior to, but not yet vested as of January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS 123(R), and (b) compensation cost for allstock-based payments granted on or subsequent to January 1, 2006,based on the grant date fair value estimated in accordance with the provisionsof SFAS 123(R).  Due to the adoption ofSFAS 123(R), included in our net loss for the twelve months ended December 31,2007 and 2006 were stock-based compensation charges of approximately $95,000and $292,000, respectively.

 

**Off-Balance Sheet Arrangements**

 

Wehave no off-balance sheet arrangements nor do we have any special purposeentities.

 

**ITEM 3 –QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Ourfinancial instruments include: cash, cash equivalents, accounts receivable andaccounts payable.  At March 31, 2008the carrying value of our cash, cash equivalents, accounts receivable andaccounts payable approximated fair values given the short maturity of theseinstruments.

 

Webelieve that this does not have material foreign currency exchange rate risk since any international sales willbe paid in U.S. dollars and material purchases from foreign suppliers aretypically also denominated in U.S. dollars.

 

It is our policy not to enter into derivative financial instruments forspeculative purposes.

 

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**ITEM 4T –CONTROLS AND PROCEDURES**

 

(a)  Evaluation of Disclosure Controls and Procedures. The Company’s chiefexecutive officer and principal financial officer have reviewed and evaluatedthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the endof the period covered by this quarterly report. Based on that evaluation, thechief executive officer and principal financial officer have concluded that theCompany’s current disclosure controls and procedures are adequate and effectiveto ensure that material information relating to the Company was made known tothem by others, particularly during the period in which this Quarterly Reporton Form 10Q was being prepared.

 

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

 

**PART II - OTHER INFORMATION**

 

**ITEM 1 –LEGAL PROCEEDINGS**

 

Fromtime to time, we may be a party to various legal proceedings arising in theordinary course of our business.  If and when these proceedings arise, weare committed to vigorously defending itself in any such legal actions.

 

Aspreviously reported, an investigation by the SEC, which began duringthe period of our restatement and concerns the causes behind the restatement,is ongoing.  See the December 31, 2004 Form 10-KSB, as amended,for detail regarding the restatement. We continue to cooperate with theinvestigation and comply with requests as they arise.  We are unable to predict the potential reliefsought or possible outcome of this investigation by the SEC regarding thepre-restatement 2003 and 2004 financial statements.

 

**ITEM 1A –RISK FACTORS**

 

Thereare a number of important factors that could cause our actual results to differmaterially from those indicated or implied by forward-looking statements. Wedisclaim any intention or obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise,except as may be required by law.

 

Asidefrom those risks discussed below, there have been no material changes to therisk factors included in our Annual Report on Form-KSB for the fiscal yearended December 31, 2007.

 

**RISKSRELATED TO OUR BUSINESS**

 

**WE REQUIRE ADDITONAL CAPITAL TO CONTINUEOPERATIONS AND HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES.**

 

As of March 31, 2008, we hadstockholders’ deficiency of approximately $1.3 million, an accumulated deficitof approximately $19.9 million and a working capital deficit of approximately$1.8 million.  We had a net lossof approximately $1.1 million for the three months ended March 31 2008. Inthe fiscal year ended December 31, 2007, we recorded net loss ofapproximately $3.2 million.

 

We have substantial debt and interestobligations.  As of April 1, 2008,we have $850,000 in promissory notes outstanding to a large shareholder and ourchairman.  These promissory notesgenerally bear interest at 8% and are of short duration.  The original December 11, 2007promissory notes ($400,000) began incurring a post maturity rate of interest onMarch 10, 2008 as a result of non-payment at the maturity date.  This December 11, 2007 set of promissorynotes now bear interest at 12%, the interest after maturity is payable ondemand and is compounded monthly, otherwise the December 11, 2007promissory notes remain unchanged from the standard promissory notes issued tous.

 

We have large unpaid balances withprofessional service providers.  We anticipate significant future legalexpenses resulting from our indemnification arrangements with our employees,officers and directors. The ongoing investigation by the SEC, theindemnification of Mr. Stein in connection with the *Joseph Shamyvs. Herbert M. Stein, case No.:50 2005 CA 007719 XXXXMB,*matter andthe ordinary legal expenses associated with operating the business have createdsubstantial unplanned expenses that we are required to absorb and theseexpenses are expected to continue. Presently, none of the items 

 

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for which we have an indemnification responsibility are receivingreimbursement from the insurance carrier of our Director and Officer insurancepolicy.  We need to obtain financing orgenerate revenue to continue operations.

 

Our requirements for additional capital and our ability to generatefuture revenue depends on a number of factors, many of which are describedthroughout the risk factor section, in our Annual Report on Form 10-KSBfor the fiscal year ended December 31, 2007, including our ability todevelop and generate revenues from the sales of our sensor and medical deviceproducts, which are at a very early stage of development. We cannot assure youwhen, if ever, we will generate meaningful revenues from the sales of theseproducts under development.  If we areunable to generate or obtain financing, we may be required to further curtailour operations or cease conducting business.

 

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Thisdocument and the documents incorporated by reference herein containforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Also, Apogee’s management may makeforward-looking statements orally or in writing to investors, analysts, themedia and others. Forward-looking statements express our expectations orpredictions of future events or results. They are not guarantees and aresubject to many risks and uncertainties. There are a number of factors thatcould cause actual events or results to be significantly different from thosedescribed in the forward-looking statements. Forward-looking statements mightinclude one or more of the following:

 

·              anticipated financing activities;

 

·              anticipated strategic alliances orarrangements with development or marketing partners;

 

·              anticipated research and product developmentresults;

 

·              projected development and commercializationtimelines;

 

·              descriptions of plans or objectives ofmanagement for future operations, products or services;

 

·              forecasts of future economic performance; and

 

·              descriptions or assumptions underlying orrelating 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”.

 

Althoughwe believe that the expectations reflected in the forward-looking statementsare reasonable, we cannot guarantee future results, levels of activity,performance or achievements. Moreover, we do not assume responsibility for theaccuracy and completeness of such statements. We do not intend to update any ofthe forward-looking statements after the date of this report to conform suchstatements to actual results except as required by law. Given theseuncertainties, you should not place undue reliance on these forward-lookingstatements, which speak only as of the date of this report. You shouldcarefully consider that information before you make an investment decision. Youshould review carefully the risks and uncertainties identified in this reportand in the Company’s Annual Report on Form 10-KSB, as amended.

** **

**ITEM 2 –UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

During the period ended March 31,2008, our unregistered sales of equity securities were reported on CurrentReports on Form 8-K.

 

**ITEM 3 – DEFAULTS UPON SENIOR SECURITIES**

None.

 

**ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

None.

 

**ITEM 5 – OTHER INFORMATION**

 

The promissory notes issued to Messrs. Steinand Spiegel on December 11, 2007 for an aggregate of $400,000 beganincurring a post maturity rate of interest on March 10, 2008 as a resultof non-payment at the maturity date.  Thepromissory notes originally were issued with simple interest of 8% per year andare to be repaid in cash after 90 days. The promissory notes now bear interest at 12%, the interest aftermaturity is payable on demand and is compounded monthly, otherwise the December 11,2007 promissory notes remain unchanged from the standard promissory notesissued to us.

 

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**ITEM 6 – EXHIBITS**

 

(a)           Exhibits:

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                               |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                     |
| 10.1+       |       | Promissory Note dated as  of February 21, 2008 be and between Apogee Technology, Inc. and  Herbert M. Stein. (Previously filed on a Current Report on Form 8-K,  February 22, 2008.) |
| 10.2+       |       | Promissory Note dated as  of February 21, 2008 be and between Apogee Technology, Inc. and  David Spiegel. (Previously filed on a Current Report on Form 8-K, February 22,  2008.)    |
| 10.3+       |       | Promissory Note dated as  of March 20, 2008 be and between Apogee Technology, Inc. and  Herbert M. Stein. (Previously filed on a Current Report on Form 8-K,  March 21, 2008.)       |
| 10.4+       |       | Promissory Note dated as  of March 20, 2008 be and between Apogee Technology, Inc. and David  Spiegel. (Previously filed on a Current Report on Form 8-K,  March 21, 2008.)          |
| 10.5+       |       | Form of Warrant.  (Previously filed on a Current Report on Form 8-K, March 21, 2008.)                                                                                                     |
| 10.6+       |       | Promissory Note dated as  of April 1, 2008 be and between Apogee Technology, Inc. and Herbert  M. Stein. (Previously filed on a Current Report on Form 8-K,  April 2, 2008.)         |
| 10.7+       |       | Promissory Note dated as  of April 1, 2008 be and between Apogee Technology, Inc. and David  Spiegel. (Previously filed on a Current Report on Form 8-K,  April 2, 2008.)            |
| 10.8+       |       | Form of Warrant.  (Previously filed on a Current Report on Form 8-K, April 2, 2008.)                                                                                                      |
| 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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+  Previously filed as indicated.

 

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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: May 14, 2008 | 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: May 14, 2008 | 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) |

 

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