**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**(Mark One)**

 

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

 

**For the quarterly period ended June 30,2005**

 

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

 

**For the transition period from                                 to                                **

 

**Commission file number 000-30656**

 

**APOGEETECHNOLOGY, INC.**

(Exact name of registrant as specified in its charter)

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

 

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

(Address of principal executive offices)

 

**(781) 551-9450**

(Issuer’s telephone number, including area code)

 

**NOT APPLICABLE.**

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

 

Check whether the issuer: (1) filedall reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes o No ý

 

State the number of shares of each of the Issuer’s classes ofcommon equity, as of the latest practicable date:  As of August 5, 2005, there were11,838,332 shares of Common Stock, $.01 par value per share, outstanding.

 

Transitional Small BusinessDisclosure Format (Check one):  Yes o No ý

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). oYes ý No

 

 

----

 

**APOGEE TECHNOLOGY, INC.**

 

**INDEX OF INFORMATION CONTAINED IN FORM 10-QSBFOR THE**

**QUARTER ENDED JUNE 30, 2005 AND RESTATED JUNE 30,2004**

 
|                                                                                                                                                                             | **PART I-FINANCIAL INFORMATION** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------|--------|
|                                                                                                                                                                             |                                  |
| Item 1 - Financial  Statements                                                                                                                                                   |                                  |
| Condensed  Consolidated Balance Sheets at June 30, 2005 (unaudited) and  December 31, 2004 (audited)                                                                   |                                  |
| Condensed Consolidated Statements of Operations and  Accumulated  Deficit for the Three and Six Months Ended June 30, 2005 and restated  June 30, 2004 (all unaudited) |                                  |
| Condensed Consolidated Statements of Cash Flows for  the Six Months  Ended June 30, 2005 and restated June 30, 2004 (all unaudited)                                    |                                  |
| Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                                                                |                                  |
|                                                                                                                                                                             |                                  |
| Item  2 - Management’s Discussion and Analysis of Financial Condition and Results  of Operations                                                                            |                                  |
|                                                                                                                                                                             |                                  |
| Item  3 - Quantitative and Qualitative Disclosures about Market Risk                                                                                                             |                                  |
|                                                                                                                                                                             |                                  |
| Item  4 - Controls and Procedures                                                                                                                                                |                                  |
|                                                                                                                                                                             |                                  |
|                                                                                                                                                                             | **PART II  - OTHER INFORMATION** |   |
|                                                                                                                                                                             |                                  |
| Item 1 - Legal Proceedings                                                                                                                                                       |                                  |
|                                                                                                                                                                             |                                  |
| Item 2 – Unregistered Sales  of Equity Securities and Use of Proceeds                                                                                                       |                                  |
|                                                                                                                                                                             |                                  |
| Item 3 - Defaults Upon Senior  Securities                                                                                                                                        |                                  |
|                                                                                                                                                                             |                                  |
| Item  4 - Submission of Matters to a Vote of Security Holders                                                                                                                    |                                  |
|                                                                                                                                                                             |                                  |
| Item 5 - Other Information                                                                                                                                                       |                                  |
|                                                                                                                                                                             |                                  |
| Item  6 - Exhibits                                                                                                                                                               |                                  |
|                                                                                                                                                                             |                                  |
| Signatures                                                                                                                                                                       |                                  |

 

2

----

 

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

 

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                          | ** ** | **JUNE 30,  2005** | ** **    | **DECEMBER 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|-----------------------------|------------|
| ** **                                                                                          | ** ** | **(Unaudited)**         | ** **    | **(Audited)**               | ** ** |
| **ASSETS**                                                                                          |       |                    |          |                        |       |
| ** **                                                                                          |       |                    |          |                        |       |
| **Current assets**                                                                                  |       |                    |          |                        |       |
| Cash and cash equivalents                                                                           |       | **$**                   | **363,944**   | ** **                  | **$**      | **1,886,883** | ** ** |
| Accounts receivable, net of allowance for  doubtful accounts of $130,000 and $105,000, respectively |       | **581,953**             | ** **    | **533,113**                 | ** ** |
| Inventories, net                                                                                    |       | **2,620,487**           | ** **    | **2,725,308**               | ** ** |
| Prepaid expenses and other current assets                                                           |       | **149,971**             | ** **    | **252,728**                 | ** ** |
|                                                                                                |       | ** **              | ** **    | ** **                  | ** ** |
| Total current assets                                                                                |       | **3,716,355**           | ** **    | **5,398,032**               | ** ** |
|                                                                                                |       | ** **              | ** **    | ** **                  | ** ** |
| **Property and equipment, net of accumulated  depreciation of $408,193 and $376,951, respectively** |       | **134,133**             | ** **    | **103,189**                 | ** ** |
|                                                                                                |       | ** **              | ** **    | ** **                  | ** ** |
| **Other assets**                                                                                    |       | ** **              | ** **    | ** **                  | ** ** |
| Patent, net of accumulated amortization of  $140,675 and $127,442, respectively                     |       | **246,615**             | ** **    | **211,901**                 | ** ** |
|                                                                                                |       | ** **              | ** **    | ** **                  | ** ** |
|                                                                                                |       | **$**                   | **4,097,103** |                        | **$**      | **5,713,122** | ** ** |
|                                                                                                |       | ** **              | ** **    | ** **                  | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIENCY)**                                         |       | ** **              | ** **    | ** **                  | ** ** |
| ** **                                                                                          |       | ** **              | ** **    | ** **                  | ** ** |
| **Current liabilities**                                                                             |       | ** **              | ** **    | ** **                  | ** ** |
| Accounts payable and accrued expenses                                                               |       | **$**                   | **1,906,544** | ** **                  | **$**      | **1,107,111** | ** ** |
| Deferred distributor revenue                                                                        |       | **2,100,479**           | ** **    | **1,955,563**               | ** ** |
| Officer and shareholder loans                                                                       |       | **500,000**             | ** **    | **—**                  | ** ** |
| Deferred contract revenue                                                                           |       | **72,686**              | ** **    | **95,788**                  | ** ** |
|                                                                                                |       | ** **              | ** **    | ** **                  | ** ** |
| Total current liabilities                                                                           |       | **4,579,709**           | ** **    | **3,158,462**               | ** ** |
|                                                                                                |       | ** **              | ** **    | ** **                  | ** ** |
| **Commitments and Contingencies**                                                                   |       | **—**              | ** **    | **—**                  | ** ** |
| ** **                                                                                          |       | ** **              | ** **    | ** **                  | ** ** |
| **Stockholders’ equity (deficiency)**                                                          |       | ** **              | ** **    | ** **                  | ** ** |
| Common stock, $.01 par value; 20,000,000  shares authorized, 11,838,332 issued and outstanding      |       | **118,383**             | ** **    | **118,383**                 | ** ** |
| Additional paid-in capital at June 30, 2005  and December 31, 2004                                  |       | **18,073,223**          | ** **    | **18,073,223**              | ** ** |
| Accumulated deficit                                                                                 |       | **(18,674,212**         | **)**         | **(15,636,946**             | **)**      |
|                                                                                                |       | ** **              | ** **    | ** **                  | ** ** |
| Total stockholders’ equity (deficiency)                                                        |       | **(482,606**            | **)**         | **2,554,660**               | ** ** |
|                                                                                                |       | ** **              | ** **    | ** **                  | ** ** |
|                                                                                                |       | **$**                   | **4,097,103** |                        | **$**      | **5,713,122** | ** ** |

 

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

 

3

----

 

**APOGEE TECHNOLOGY, INC. ANDSUBSIDIARY**

 

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
| ** **                                                          | ** ** | **THREE MONTHS ENDED  June 30,** |            | **SIX MONTHS ENDED  June 30,** |       |
|---------------------------------------------------------------------|------------|---------------------------------------|-----------------|-------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                              | ** **      | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                          | ** ** | ** **                            | ** **      | **(Restated)**                      | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Revenues**                                                        |       | ** **                            | ** **      |                                |       | ** ** | ** ** |   |   |
| Product sales                                                       | ** ** | **$**                                 | **1,154,661**   | ** **                          | $          | 899,247 |   | **$** | **2,168,449** | ** ** | $ | 2,538,710 |   |
| Royalties                                                           | ** ** | **159,978**                           | ** **      | 238,396                             |       | **260,931** | ** ** | 443,973 |   |
| Consulting                                                          | ** ** | **—**                            | ** **      | 200,000                             |       | **—** | ** ** | 504,484 |   |
|                                                                | ** ** | ** **                            | ** **      |                                |       | ** ** | ** ** |   |   |
| ** **                                                          |       | **1,314,639**                         | ** **      | 1,337,643                           |       | **2,429,380** | ** ** | 3,487,167 |   |
| ** **                                                          |       | ** **                            | ** **      |                                |       | ** ** | ** ** |   |   |
| **Costs and expenses**                                              |       | ** **                            | ** **      |                                |       | ** ** | ** ** |   |   |
| Product sales                                                       | ** ** | **885,885**                           | ** **      | 1,076,876                           |       | **1,853,228** | ** ** | 2,086,740 |   |
| Research and development                                            | ** ** | **732,868**                           | ** **      | 606,227                             |       | **1,523,007** | ** ** | 1,318,593 |   |
| Selling, general and administrative                                 | ** ** | **1,293,144**                         | ** **      | 623,523                             |       | **2,093,084** | ** ** | 1,272,860 |   |
|                                                                | ** ** | ** **                            | ** **      |                                |       | ** ** | ** ** |   |   |
| ** **                                                          |       | **2,911,897**                         | ** **      | 2,306,626                           |       | **5,469,319** | ** ** | 4,678,193 |   |
| ** **                                                          |       | ** **                            | ** **      |                                |       | ** ** | ** ** |   |   |
| **Operating (loss) income**                                         | ** ** | **(1,597,258**                        | **)**           | (968,983                            | )          | **(3,039,939** | **)** | (1,191,026 | ) |
| ** **                                                          | ** ** | ** **                            | ** **      |                                |       | ** ** | ** ** |   |   |
| **Other (expense) income**                                          |       | ** **                            | ** **      |                                |       | ** ** | ** ** |   |   |
| Interest expense                                                    | ** ** | **(3,452**                            | **)**           | —                              |       | **(3,452** | **)** | — |   |
| Interest income                                                     | ** ** | **1,728**                             | ** **      | 5,662                               |       | **6,125** | ** ** | 10,977 |   |
|                                                                | ** ** | ** **                            | ** **      |                                |       | ** ** | ** ** |   |   |
| ** **                                                          |       | **(1,724**                            | **)**           | 5,662                               |       | **2,673** | ** ** | 10,977 |   |
| ** **                                                          |       | ** **                            | ** **      |                                |       | ** ** | ** ** |   |   |
| **Net (loss) income**                                               | ** ** | **(1,598,982**                        | **)**           | (963,321                            | )          | **(3,037,266** | **)** | (1,180,049 | ) |
|                                                                |       | ** **                            | ** **      |                                |       | ** ** | ** ** |   |   |
| Accumulated deficit - beginning                                     | ** ** | **(17,075,230**                       | **)**           | (12,468,475                         | )          | **$** | **(15,636,946** | **)** | $ | (12,251,748 | ) |
|                                                                | ** ** | ** **                            | ** **      |                                |       | ** ** | ** ** | ** ** |   |   |   |
| **Accumulated deficit - ending**                                    | ** ** | **$**                                 | **(18,674,212** | **)**                               | $          | (13,431,796 | ) | **$** | **(18,674,212** | **)** | $ | (13,431,797 | ) |
| ** **                                                          | ** ** | ** **                            | ** **      | ** **                          |       |   |   | ** ** | ** ** | ** ** |   |   |   |
| **Basic and diluted (loss) income per common  share**               | ** ** | **$**                                 | **(0.14**       | **)**                               | $          | (0.08 | ) | **$** | **(0.26** | **)** | $ | (0.10 | ) |
| ** **                                                          | ** ** | ** **                            | ** **      | ** **                          |       |   |   | ** ** | ** ** | ** ** |   |   |   |
| **Weighted average common shares outstanding -  basic and diluted** | ** ** | **11,838,332**                        | ** **      | 11,380,790                          |       | **11,838,332** | ** ** | 11,359,469 |   |

 

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

 

4

----

 

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

 

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
| ** **                                                                              | ** ** | **SIX MONTHS ENDED  June 30,** | ** **     |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------|----------------|
| ** **                                                                              | ** ** | **2005**                            | ** **     | **2004** | ** ** |
| ** **                                                                              | ** ** | ** **                          | ** **     | **(Restated)** | ** ** |
| **Cash flows from operations**                                                          |       |                                | ** **     |   |   |
| Net loss                                                                                | ** ** | **$**                               | **(3,037,266** | **)** | $ | (1,180,049 | ) |
| *Adjustments to reconcile net (loss) income  to net cash used in operating activities:* |       |                                | ** **     |   |   |
| Provision for doubtful accounts                                                         | ** ** | **25,000**                          | ** **     | 10,000 |   |
| Provision for slow moving, excess and  obsolete inventory                               | ** ** | **320,867**                         | ** **     | 142,514 |   |
| Depreciation and amortization                                                           | ** ** | **44,475**                          | ** **     | 48,808 |   |
| *Changes in operating assets and  liabilities:*                                         |       |                                | ** **     |   |   |
| Accounts receivable                                                                     | ** ** | **(73,841**                         | **)**          | 1,017,042 |   |
| Inventories                                                                             | ** ** | **(216,045**                        | **)**          | (8,942 | ) |
| Prepaid expenses and other current assets                                               | ** ** | **102,757**                         | ** **     | (77,126 | ) |
| Accounts payable and accrued expenses                                                   | ** ** | **799,433**                         | ** **     | (844,408 | ) |
| Deferred product revenue                                                                | ** ** | **144,916**                         | ** **     | 53,137 |   |
| Deferred contract revenue                                                               | ** ** | **(23,102**                         | **)**          | (50,000 | ) |
|                                                                                    |       |                                | ** **     |   |   |
| Net cash used in operating activities                                                   | ** ** | **(1,912,806**                      | **)**          | (889,024 | ) |
|                                                                                    |       |                                | ** **     |   |   |
| **Cash flows from investing activities**                                                |       |                                | ** **     |   |   |
| Purchases of property and equipment                                                     | ** ** | **(62,186**                         | **)**          | (30,615 | ) |
| Patent costs                                                                            | ** ** | **(47,947**                         | **)**          | (29,729 | ) |
| Other intangible assets                                                                 | ** ** | **—**                          | ** **     | (114,056 | ) |
|                                                                                    |       |                                | ** **     |   |   |
| Net cash used in investing activities                                                   | ** ** | **(110,133**                        | **)**          | (174,400 | ) |
|                                                                                    |       |                                | ** **     |   |   |
| **Cash flows from financing activities**                                                |       |                                | ** **     |   |   |
| Proceeds from issuances of common stock                                                 | ** ** | **—**                          | ** **     | 231,859 |   |
| Proceeds from officer loan                                                              | ** ** | **250,000**                         | ** **     | — |   |
| Proceeds from shareholder loan                                                          | ** ** | **250,000**                         | ** **     | — |   |
|                                                                                    |       |                                | ** **     |   |   |
| Net cash provided by financing activities                                               | ** ** | **500,000**                         | ** **     | 231,859 |   |
|                                                                                    |       |                                | ** **     |   |   |
| **Decrease in and cash equivalents**                                                    | ** ** | **(1,522,939**                      | **)**          | (831,565 | ) |
|                                                                                    |       |                                | ** **     |   |   |
| Cash and cash equivalents - beginning                                                   | ** ** | **1,886,883**                       | ** **     | 2,524,209 |   |
|                                                                                    |       |                                | ** **     |   |   |
| **Cash and cash equivalents - ending**                                                  | ** ** | **$**                               | **363,944**    | ** ** | 1,692,644 |   |
|                                                                                         |            |                                     |                |  |  |  |  |

 

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

 

5

----

 

**APOGEE TECHNOLOGY,INC. AND SUBSIDIARY**

 

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2005 AND RESTATED JUNE 30,2004

 

**1.****                         ****The Company and Basis ofPresentation**

 

***The Company***

 

Apogee Technology, Inc. and Subsidiary (the “Company”or “Apogee”) designs, develops and markets silicon based products incorporatingproprietary technologies.  The Company’spatented all-digital, high efficiency Direct Digital Amplification (DDX®) technologyIntegrated Circuits (“ICs”) are used in a range of audio applications,including:  home theater systems, poweredspeakers, car audio, commercial audio, and PC multi-media.  The Company is developing new system-on-chipproducts using its analog and digital circuit designs andMicro-Electromechanical Systems (“MEMS”) technology for the consumer,automotive, communications and medical markets.

 

***Basis of Presentation***

 

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

 

In the opinion of the Company’s management, alladjustments, consisting of normal recurring accruals considered necessary for afair presentation, have been included in the accompanying unaudited financialstatements.  Operating results for thesix months ended June 30, 2005 are not necessarily indicative of the resultsthat may be expected for the full year ending December 31, 2005.

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates, and such differences could affect theresults of operations reported in future periods and such differences could bematerial.

 

***Liquidity***

 

The Company’s consolidated financial statements havebeen prepared assuming the Company will continue as a going concern.  Because the Company has had recurring losses andat June 30, 2005 has deficiencies of working capital and stock holdersequity of approximately $865,000 and $485,000 respectively, there issubstantial doubt as to the Company’s ability to continue as a going concern. TheCompany believes that its current working capital will be sufficient to fundits capital and operational requirements at least through June 30, 2006.  See Note 13 – Subsequent Events- $2 millionfinancing.  The financial statements donot include any adjustments to reflect the possible future effects ofrecoverability and classification of assets or the amounts and classificationof liabilities that may result from the possible inability of the Company tocontinue as a going concern.

 

The continuance of the Company is highlydependent upon its ability to successfully develop and market both its DDXdigital amplifier and MEMS technologies and raise additional funds for suchpurposes. The Company may also consider the sale of assets to raise additionalfunds.  There can be no assurance, however,that the Company will be able to raise the funds that it needs to continue itsoperations or that additional funds will be available to the Company onacceptable terms, if at all.

 

In May 2005, the Company received proceedsfrom unsecured interest-bearing loans in the amounts of $250,000 fromDavid Spiegel, a shareholder and $250,000 from Herbert Stein, Chief ExecutiveOfficer, President and Chairman of the Board. These loans arepayable upon demand and are not subject to any premium or penalty for prepayment. Theloan interest rate is 6% per annum, payable monthly in arrears on theoutstanding balance.

 

See Note 13 - Subsequent Events - for information onthe $2 million financing completed on August 11, 2005.

 

6

----

 

**2.****                         ****Summary of SignificantAccounting Policies**

 

***Revenue Recognition***

 

The Company recognizes revenue in accordance withSecurities and Exchange Commission Staff Accounting Bulletin No. 104 (“SAB104”), “Revenue Recognition in Financial Statements: Revenue Recognition”,which states that revenue should be recognized when the following revenuerecognition criteria are met:  (1) persuasiveevidence of an arrangement exists; (2) the product has been shipped andthe customer takes ownership and assumes the risk of loss; (3) the sellingprice is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured.  Thefollowing policies apply to the Company’s two major product sales categoriesfor revenue recognition.  Sales to endusers:  Revenue is recognized under theCompany’s standard terms and conditions of sale, title and risk of losstransfer to the customer at the time products are shipped either directly tothe customer or the customer’s representative/freight forwarder.  Sales to Distributors:  From time to time, the Company providescertain incentives such as stock rotation, price protection and otherincentives to its Distributors. See Note 12 - Restatement.  The Company accrues the estimated cost ofpost-sale obligations including product warranty returns, based on historicalexperience.  To date the Company hasexperienced minimal warranty returns.

 

In addition, the Company records royalty revenuewhen earned in accordance with the underlying agreements.  Consulting and licensing revenue isrecognized as services are performed.

 

***Loss Per Share***

 

Basic loss per share is computed by dividingthe net loss attributable to common stockholders for the period by the weightedaverage number 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 ofdiluted net 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 andDevelopment***

 

Costs for research and development are expensed asincurred.

 

***Inventories***

 

Inventories are stated at the lower of coston a first-in, first-out basis or market. This policy requires the Company to make estimates regarding the marketvalue of the Company’s inventory, including an assessment of excess or obsoleteinventory.  The Company determines excessand obsolete inventory based on an estimate of the future demand and estimatedselling prices for the Company’s products within a specified time horizon,generally 12 to 24 months. The estimates the Company uses for expected demandare also used for near-term capacity planning and inventory purchasing and areconsistent with the Company’s revenue forecasts.  Actual demand and market conditions maydiffer from those projected by the Company’s management.  If the Company’s unit demand forecast is lessthat the Company’s current inventory value, the Company will be required totake additional excess inventory charges or write-downs to net realizable valuewhich will decrease the Company’s gross margin and net operating results in thefuture.  During the three and six monthsended June 30, 2005, the Company recorded a provision for inventory lossesof approximately $243,000 and $321,000, respectively, to account for slowmoving, excess and obsolete inventory, as well as inventories to be deliveredon non-cancelable purchase commitments***.***

 

7

----

 

***Purchasecommitment losses***

 

TheCompany accrues for estimated losses on non-cancelable purchase orders.  The estimated losses result from anticipatedfuture sale of products for sales prices less than the estimated cost tomanufacture.  For the six months ended June 30,2005, the Company recorded an additional $150,000 excess and obsolescenceprovision against non-cancelable purchase commitments of approximately $1.7million at June 30, 2005.

 

***Property andEquipment***

 

Major replacements and betterments of equipment arecapitalized.  Cost of normal maintenanceand repairs is charged to expense as incurred. Depreciation is provided over the estimated useful lives of the assetsusing accelerated methods.  Leaseholdimprovements are amortized over either the term of lease or the estimateduseful 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.

 

***Use of Estimatesin Financial Statements***

 

In preparing financial statements in conformity withgenerally accepted accounting principles, management is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date offinancial statements, and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

 

***Cash and CashEquivalents***

 

The Company considers all highly liquid investmentswith an original maturity of three months or less to be cash equivalents.

 

***AccountsReceivable***

 

The Company carries its accounts receivable fromdirect customers at cost less an allowance for doubtful accounts to ensure thattrade receivables are carried at net realizable value.  On a periodic basis, the Company evaluatesthe collectibility of its accounts receivable on a variety of factors,including length of time receivables are past due, indication of customerwillingness to pay, significant one-time events and historical experience. Anadditional reserve for individual accounts is recorded when the Company becomesaware of a customer’s inability to meet its financial obligations, such as inthe case of bankruptcy filings or substantial deterioration in the customer’soperating results or financial position. If the financial condition of theCompany’s customers were to deteriorate, resulting in an impairment of theirability to make payments, additional allowances may be required.  Accounts receivable are generally consideredpast due if any portion of the receivable balance is outstanding for more than90 days.   If circumstances related tothe Company’s customers change, estimates of the recoverability of receivableswould be further adjusted.

 

***Fair value offinancial instruments***

 

Carrying amounts of certain of the Company’sfinancial instruments, including cash and cash equivalents, accounts receivableand accounts payable, approximate their fair values due to their relative shortmaturities and based upon comparable market information available at therespective balance sheet dates. The Company does not hold or issue financialinstruments for trading purposes.

 

8

----

 

**3.****                         ****Pro-forma Information -Stock Options**

 

**The Company has adoptedonly the disclosure provisions of Financial Accounting Standard No. 123, “AccountingFor Stock-Based Compensation” (FAS 123). It applies APB Opinion No. 25, “Accounting For Stock Issued ToEmployees”, and related interpretations in accounting for its stock-basedcompensation plan and does not recognize compensation expense for this planother than for certain options granted in 2001.**

** **

**The following tablesillustrate the effect on net loss and loss per share if the Company had appliedthe fair value recognition provisions of FAS 123 to stock-based employeecompensation.  The loss per shareinformation shown below has not been adjusted for the stock split referred toin Note 4.**

** **
| ** **                                                                                                                         | ** ** | **Six Months Ended  June 30, (unaudited)** | ** **     |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|----------------|
| ** **                                                                                                                         | ** ** | **2005**                                        | ** **     | **2004** | ** ** |
| ** **                                                                                                                         | ** ** | ** **                                      | ** **     | **(Restated)** | ** ** |
|                                                                                                                               |       | ** **                                      | ** **     |   |   |
| Net loss, as reported                                                                                                              | ** ** | **$**                                           | **(3,037,266** | **)** | $ | (1,180,049 | ) |
|                                                                                                                               |       | ** **                                      | ** **     |   |   |
| Deduct:  Total stock-based  employee compensation expense determined under fair value based method for  all awards ***** | ** ** | **(1,064,268**                                  | **)**          | (3,030,701 | ) |
|                                                                                                                               |       | ** **                                      | ** **     |   |   |
| Pro-forma net loss ******                                                                                                          | ** ** | **$**                                           | **(4,101,534** | **)** | $ | (4,210,750 | ) |
|                                                                                                                               |       | ** **                                      | ** **     |   |   |
| Loss per share:                                                                                                                    |       | ** **                                      | ** **     |   |   |
|                                                                                                                               |       | ** **                                      | ** **     |   |   |
| As reported, basic and diluted                                                                                                     | ** ** | **$**                                           | **(0.26**      | **)** | $ | (0.10 | ) |
|                                                                                                                               |       | ** **                                      | ** **     |   |   |
| Pro-forma, basic and diluted                                                                                                       | ** ** | **$**                                           | **(0.35**      | **)** | $ | (0.37 | ) |
|                                                                                                                               |       | ** **                                      | ** **     |   |   |
| ** **                                                                                                                         | ** ** | **Three Months Ended  June 30,**           | ** **     |
| ** **                                                                                                                         | ** ** | **2005**                                        | ** **     | **2004** | ** ** |
| ** **                                                                                                                         | ** ** | ** **                                      | ** **     | **(Restated)** | ** ** |
| Net (loss) income, as reported                                                                                                     | ** ** | **$**                                           | **(1,598,982** | **)** | $ | (963,321 | ) |
|                                                                                                                               |       | ** **                                      | ** **     |   |   |
| Deduct:  Total stock-based  employee compensation expense determined under fair value based method for  all awards ***** | ** ** | **(532,493**                                    | **)**          | (2,502,120 | ) |
|                                                                                                                               |       | ** **                                      | ** **     |   |   |
| Pro-forma net loss ******                                                                                                          | ** ** | **$**                                           | **(2,131,475** | **)** | $ | (3,465,441 | ) |
|                                                                                                                               |       | ** **                                      | ** **     |   |   |
| (Loss) income per share:                                                                                                           |       | ** **                                      | ** **     |   |   |
|                                                                                                                               |       | ** **                                      | ** **     |   |   |
| As reported, basic and diluted                                                                                                     | ** ** | **$**                                           | **(0.14**      | **)** | $ | (0.08 | ) |
|                                                                                                                               |       | ** **                                      | ** **     |   |   |
| Pro-forma, basic and diluted                                                                                                       | ** ** | **$**                                           | **(0.18**      | **)** | $ | (0.30 | ) |

 

----

*****                           All awards refers to awardsgranted, modified, or settled in fiscal periods beginning after December 15,1994 - 

 

9

----

 

awards for which the fair value was required to bemeasured under FAS 123.

 

********                   **For purposes of pro-forma disclosures, theestimated fair value of the options is amortized over the options’ vestingperiod.  Pro-forma information regardingearnings and per share information is required by FAS 123, and has beendetermined as if the Company had accounted for its employee stock options underthe fair value method of that Statement. The fair value of these options was estimated at the date of grant usinga Black-Scholes option pricing model for years subsequent to 2000.  Prior to 2001, the fair value of the optionswas valued using the minimum value method.

 

**4.****                         ****Inventories**

 

Inventories are stated at the lower of cost(first-in, first-out) or market.  Themajor classifications of inventories are as follows at period end:

 

| ** **                                                   | ** ** | **June 30,  2005** | ** **    | **December 31,  2004** | ** ** |
|--------------------------------------------------------------|------------|-------------------------|---------------|-----------------------------|------------|
| ** **                                                   | ** ** | **(Unaudited)**         | ** **    | **(Audited)**               | ** ** |
|                                                         |       |                    | ** **    |                        |       |
| Raw materials                                                | ** ** | **$**                   | **22,830**    | ** **                  | $          | 24,539 |   |
| Finished goods                                               | ** ** | **2,491,770**           | ** **    | 2,143,530                   |       |
| Finished goods held at distributors                          | ** ** | **1,604,470**           | ** **    | 1,734,955                   |       |
|                                                         |       |                    | ** **    |                        |       |
| ** **                                                   |       | **$**                   | **4,119,070** |                        | $          | 3,903,024 | ** ** |
| Less reserve for slow moving, excess and  obsolete inventory | ** ** | **(1,498,583**          | **)**         | (1,177,716                  | )          |
|                                                         |       |                    | ** **    |                        |       |
| Net Inventory                                                | ** ** | **$**                   | **2.620,487** | ** **                  | $          | 2,725,308 |   |

 

**5.****                         ****Property and Equipment**

 

Property and equipment at June 30, 2005 and December 31, 2004 are comprisedof the following:

 

 

| ** **                    | ** ** | **June 30,  2005** | ** **  | **December 31,  2004** | ** ** |
|-------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                    | ** ** | **(Unaudited)**         | ** **  | **(Audited)**               | ** ** |
|                          |       |                    | ** **  |                        |       |
| Equipment                     | ** ** | **$**                   | **447,266** | ** **                  | $          | 390,342 |   |
| Software                      | ** ** | **35,634**              | ** **  | 35,634                      |       |
| Furniture and fixtures        | ** ** | **36,472**              | ** **  | 31,210                      |       |
| Leasehold improvements        | ** ** | **22,954**              | ** **  | 22,954                      |       |
|                          |       |                    | ** **  |                        |       |
| ** **                    |       | **$**                   | **542,326** | ** **                  | $          | 480,140 |   |
|                          |       |                    | ** **  |                        |       |
| Less accumulated depreciation | ** ** | **(408,193**            | **)**       | (376,951                    | )          |
|                          |       |                    | ** **  |                        |       |
| ** **                    |       | **$**                   | **134,133** | ** **                  | $          | 103,189 |   |

 

Depreciation expense was $16,880 and $31,242 for thethree and six months ended June 30, 2005, respectively.

 

10

----

 

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         |       |

 

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

 
| ** **                            | ** ** | **June 30,  2005** | ** **  | **December 31,  2004** | ** ** |
|---------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                            | ** ** | **(Unaudited)**         | ** **  | **(Audited)**               | ** ** |
|                                  |       |                    |        |                        |       |
| Accrued audit and accounting expenses | ** ** | **$**                   | **121,329** |                        | $          | 165,000 |   |
| Accrued legal expenses                | ** ** | **91,186**              |        | 37,000                      |       |
| Other accrued expenses                | ** ** | **65,782**              |        | 10,000                      |       |
|                                  |       |                    |        |                        |       |
| ** **                            |       | **$**                   | **278,297** |                        | $          | 212,000 |   |

 

**7.****                         ****Deferred Contract Revenue**

 

During September 2004, the Company entered intoa funding agreement with United Binational Industrial Research and Development(“BIRD”) Foundation of Israel.  Thisagreement will provide funds to the Company for industrial research anddevelopment activities.  The agreementwill provide up to a maximum of $560,000 of which the Company will receive$280,000, and another partner in the agreement will receive the remainder.  The Company has recorded $101,379 in deferredcontract revenue and for the six months ended June 30, 2005 recorded$23,101 as an offset to research and development expenses.

 

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

 

***Stock Options***

 

**During the three monthsended**June 30, 2005, the Board of Directors awarded to certain employeesoptions to purchase 316,000 shares at exercise prices ranging from $1.08 to$1.27 per share.  These options weregranted under the 1997 Employee, Director and Consultant Stock OptionPlan.  The options vest over five yearsbeginning at the first anniversary of the date of grant.

** **

**9.****                         ****Related Party Transactions**

 

The Company rents its facility from an entitycontrolled by a stockholder for $4,400 per month pursuant to a lease thatexpires on December 31, 2005.  SeeNote – 1 – Liquidity - for additional related party transactions.

 

**10.****                  ****License Agreement**

 

On February 13, 2001, the Company signedan exclusive license agreement with ST Microelectronics NV (“ST”) of theNetherlands.  The agreement calls for STto use certain intellectual property rights owned or controlled by the Companyto commercialize and sell related products utilizing such technology.  In consideration for this license, ST

 

11

----

 

paid to the Company a one-time license fee of$1.6 million in cash and a $400,000 credit for future design services completedin 2004.

 

The Company will also receive royalties based oncertain formulas, as defined in the agreement. This agreement has no expiration date; however, either party may cancelthe agreement upon advance notice in certain circumstances as defined in theagreement.  Total royalties receivedunder this Agreement were approximately $150,000 and $251,000 for the three andsix months ended June 30, 2005.  For the restated three and six months ended June 30, 2004 totalroyalties received were approximately $238,000 and $444,000, respectively.

 

On May 3, 2005, the Company signed anamendment to the license agreement with STMicroelectronics, whereby; 1) the DDXtechnology license rights were changed from an exclusive license to anon-exclusive license, 2) the license royalty terms were modified and 3) termsrelated to Apogee interest transfers were modified. The effective date forterms 1 and 3 above was January 1, 2005 and for item 2 was January 1,2004.

 

**11.****                  ****Concentrations**

 

**During the three monthsended June 30, 2005, the Company derived approximately 28% of its totalrevenue from two end users and 31% of total revenue as a result of sell throughby two distributors.**

** **

**During the three monthsended June 30, 2005, the Company derived approximately 29% of its productrevenue from two end users and 35% of product revenue as a result of sellthrough by two distributors.**

** **

**During the six monthsended June 30, 2005, the Company derived approximately 23% of its totalrevenue from two end users and 44% of total revenue as a result of sell throughby two distributors.**

** **

**During the six monthsended June 30, 2005, the Company derived approximately 15% of its productrevenue from one end user and 50% of product revenue as a result of sellthrough by two distributors.**

** **

**During the restated threemonths ended**June 30, 2004, the Company derived approximately 18% ofits total revenue from one end user and 36% of total revenue as a result ofsell through by two distributors.

** **

**During the restated threemonths ended**June 30, 2004, the Company derived approximately 13% ofits product revenue from one end user and 65% of product revenue as a result ofsell through by two distributors.

** **

**During the restated sixmonths ended**June 30, 2004, the Company derived approximately 38% ofits total revenue from two end users and 19% of total revenue as a result ofsell through by one distributor.

** **

**During the restated sixmonths ended**June 30, 2004, the Company derived approximately 28% ofits product revenue from one end user and 39% of product revenue as a result ofsell through by two distributors.

** **

**Four of the Company’scustomers accounted for approximately 77% of the total accounts receivablebalance at June 30, 2005.**

** **

Four of the Company’s customers accounted forapproximately 83% of the total accounts receivable balance at restated June 30, 2004.

 

Substantiallyall of the Customer sales were to end users or distributors located in Asia andEurope for both the three- and six-month periods ended June 30, 2005 andrestated June 30, 2004.

 

**Two of the Company’s majorvendors accounted for approximately 96% of total purchases for the six monthsended June 30, 2005.**

** **

**12**

----

** **

One of the Company’s major vendors accountedfor approximately 99% of total purchases for the six months ended June 30, 2004.

 

**The Company maintains accounts with financialinstitutions.  Balances usually exceedthe maximum coverage ($100,000) provided by the Federal Deposit InsuranceCorporation on insured depositor accounts.**

** **

**12.****                  ****Supplementary FinancialInformation (unaudited)**

 

**Restatement of Previously Reported Quarterly FinancialInformation**

** **

As a result of management’sdecision to change the accounting method for recognizing product revenue fromdistributors to a sell through or point of sale (POS) method and the internalinvestigation concerning the circumstances surrounding the appropriateaccounting for product revenue, the Audit Committee of the Board of Directorshas determined that the Company restate certain financial informationpreviously reported in the Company’s Form 10-QSB for the quarters ended March 31,2004, June 30, 2004 and September 30, 2004.

 

The following table providesa reconciliation of amounts previously reported in the Company’s Form 10-QSBfor the quarter ended June 30, 2004 with amounts previously adjusted forthe restatement as a result of the change in accounting policy and as a resultof the Audit Committee’s investigation. In reviewing the restated Consolidated Statement of Operations, itshould be taken into consideration that the restated financial informationreflects unaudited adjustments.

 

13

----

 

**CONDENSEDBALANCE SHEETS**

**(in thousands)**

 
| ** **                                       | ** ** | **June 30, 2004 (Unaudited)** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| ** **                                       | ** ** | **Previously  Reported (1)**       | ** ** | **Restatement  Adjustment (2)** | ** ** | **Restated  Total** | ** ** |
| **ASSETS**                                       |       |                               |       |   |   |   |   |
| ** **                                       |       |                               |       |   |   |   |   |
| **Current assets**                               |       |                               |       |   |   |   |   |
| Cash and cash equivalents                        |       | **$**                              | **1,693**  | ** ** | **$** | **—** | ** ** | **$** | **1,693** | ** ** |
| Accounts receivable, net                         |       | **2,637**                          | ** ** | **(1,845** | **)** | **792** | ** ** |
| Inventories, net                                 |       | **937**                            | ** ** | **1,798** | ** ** | **2,735** | ** ** |
| Prepaid expenses and other current assets        |       | **257**                            | ** ** | **—** | ** ** | **257** | ** ** |
| Deferred tax asset                               |       | **195**                            | ** ** | **(195** | **)** | **—** | ** ** |
|                                             |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total current assets                             |       | **5,719**                          | ** ** | **(242** | **)** | **5,477** | ** ** |
|                                             |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Property and equipment, net**                  |       | **121**                            | ** ** | **0** | ** ** | **121** | ** ** |
|                                             |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other assets**                                 |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Patents, net                                     |       | **107**                            | ** ** | **—** | ** ** | **107** | ** ** |
| Other intangible assets                          |       | **173**                            | ** ** | **(59** | **)** | **114** | ** ** |
|                                             |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                             |       | **$**                              | **6,120**  |   | **$** | **(301** | **)** | **$** | **5,819** | ** ** |
|                                             |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**    |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current liabilities**                          |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts payable and accrued expenses            |       | **$**                              | **710**    | ** ** | **$** | **11** | ** ** | **$** | **721** | ** ** |
| Current maturities of capital lease  obligations |       | **—**                         | ** ** | **—** | ** ** | **—** | ** ** |
| Deferred distributor revenue                     |       | **—**                         | ** ** | **2,012** | ** ** | **2,012** | ** ** |
| Deferred contract Revenue                        |       | **—**                         | ** ** | **—** | ** ** | **—** | ** ** |
| Deferred warranty                                |       | **—**                         | ** ** | **—** | ** ** | **—** | ** ** |
|                                             |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total current liabilities                        |       | **710**                            | ** ** | **2,023** | ** ** | **2,733** | ** ** |
|                                             |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Stockholders’ equity**                    |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common stock                                     |       | **114**                            | ** ** | **—** | ** ** | **114** | ** ** |
| Additional paid-in capital                       |       | **16,403**                         | ** ** | **—** | ** ** | **16,403** | ** ** |
| Accumulated deficit                              |       | **(11,107**                        | **)**      | **(2,324** | **)** | **(13,431** | **)** |
|                                             |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total stockholders’ equity                  |       | **5,410**                          | ** ** | **(2,324** | **)** | **3,086** | ** ** |
|                                             |       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                             |       | **$**                              | **6,120**  |   | **$** | **(301** | **)** | **$** | **5,819** | ** ** |

 

----

(1) As previously reported in the Company’s Quarterly Report on Form 10-QSBfor the quarter ended June 30, 2004.

(2) See paragraph following restatement tablesfor a description of the restatement adjustments.

 

14

----

 

CONSOLIDATEDSTATEMENT OF OPERATIONS

(inthousands, except per share data)

 
| ** **                                                          | ** ** | **Three Months Ended June 30, 2004 (Uaudited)** | ** **  | **Six Months Ended June 30, 2004 (Unaudited)** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|-------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | **Previously  Reported (1)**                         | ** **  | **Restatement  Adjustment (2)**                     | ** ** | **Restated  Total** | ** ** | **Previously  Reported (1)** | ** ** | **Restatement  Adjustment (2)** | ** ** | **Restated  Total** | ** ** |
| **Revenues**                                                        |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| Product sales                                                       | ** ** | **$**                                                | **1,036**   | ** **                                          | **$**      | **(137** | **)** | **$** | **899** | ** ** | **$** | **2,733** | ** ** | **$** | **(194** | **)** | **$** | **2,539** | ** ** |
| Royalties                                                           | ** ** | **436**                                              | ** **  | **(198**                                            | **)**      | **238** | ** ** | **811** | ** ** | **(367** | **)** | **444** | ** ** |
| Consulting                                                          | ** ** | **200**                                              |        | —                                              | ** ** | **200** | ** ** | **454** | ** ** | **50** | ** ** | **504** | ** ** |
|                                                                |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| ** **                                                          | ** ** | **1,672**                                            | ** **  | **(335**                                            | **)**      | **1,337** | ** ** | **3,998** | ** ** | **(511** | **)** | **3,487** | ** ** |
|                                                                |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| **Costs and expenses**                                              |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| Product sales                                                       | ** ** | **626**                                              | ** **  | **451**                                             | ** ** | **1,077** | ** ** | **1,740** | ** ** | **348** | ** ** | **2,088** | ** ** |
| Research and development                                            | ** ** | **606**                                              | ** **  | **—**                                          | ** ** | **606** | ** ** | **1,317** | ** ** | **—** | ** ** | **1,317** | ** ** |
| Selling, general and administrative                                 | ** ** | **821**                                              | ** **  | **(198**                                            | **)**      | **623** | ** ** | **1,640** | ** ** | **(367** | **)** | **1,273** | ** ** |
|                                                                |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| ** **                                                          | ** ** | **2,053**                                            | ** **  | **253**                                             | ** ** | **2,306** | ** ** | **4,697** | ** ** | **(19** | **)** | **4,678** | ** ** |
|                                                                |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| **Operating loss**                                                  | ** ** | **(381**                                             | **)**       | **(588**                                            | **)**      | **(969** | **)** | **(699** | **)** | **(492** | **)** | **(1,191** | **)** |
|                                                                |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| **Other (expense) income**                                          |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| Interest expense                                                    | ** ** | **—**                                           | ** **  | **—**                                          | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Interest income                                                     | ** ** | **6**                                                | ** **  | **—**                                          | ** ** | **6** | ** ** | **11** | ** ** | **—** | ** ** | **11** | ** ** |
|                                                                |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| ** **                                                          | ** ** | **6**                                                | ** **  | **—**                                          | ** ** | **6** | ** ** | **11** | ** ** | **—** | ** ** | **11** | ** ** |
|                                                                |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| **Net Income (Loss) before Taxes**                                  | ** ** | **(375**                                             | **)**       | **(588**                                            | **)**      | **(963** | **)** | **(688** | **)** | **(492** | **)** | **(1,180** | **)** |
|                                                                |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| Accumulated deficit - beginning                                     | ** ** | **(10,731**                                          | **)**       | **(1,737**                                          | **)**      | **(12,468** | **)** | **(10,418** | **)** | **(1,070** | **)** | **(11,488** | **)** |
|                                                                |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| **Accumulated deficit - ending**                                    | ** ** | **$**                                                | **(11,106** | **)**                                               | **$**      | **(2,325** | **)** | **$** | **(13,431** | **)** | **$** | **(11,106** | **)** | **$** | **(1,562** | **)** | **$** | **(12,668** | **)** |
|                                                                |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| **Basic and diluted loss per common share**                         | ** ** | **$**                                                | **(0.03**   | **)**                                               | **$**      | **(0.05** | **)** | **$** | **(0.08** | **)** | **$** | **(0.06** | **)** | **$** | **(0.04** | **)** | **$** | **(0.10** | **)** |
|                                                                |       |                                                 |        |                                                |       |   |   |   |   |   |   |   |   |
| **Weighted average common shares outstanding -  basic and diluted** | ** ** | **11,381**                                           | ** **  | ** **                                          | ** ** | **11,381** | ** ** | **11,359** | ** ** | ** ** | ** ** | **11,359** | ** ** |

 

----

(1) As previously reported in theCompany’s Quarterly Report on Form 10-QSB for the quarter endedJune 30, 2004.

(2) See paragraph following restatementtables for a description of the restatement adjustments.

 

15

----

** **

**The restated numbersreflect the change in recognition of reporting of distributor revenue to a sellthrough or point of sale method of accounting. Based on reports from the Company’s distributors, the restated balancesheet reflects the inventory held at d**istributors and related shipments are nowreported as deferred distributor revenue. The related trade receivable was also adjusted to reflect thischange.  In addition, it was determinedthat since the restated fiscal year ended December 31, 2004 was notprofitable the deferred tax asset was no longer applicable.  Therefore the restated balance sheet reflectsthis change.   As part of the overallreview by management, it was determined that the original AMEX listing feeshould be expensed and not carried on the book as an “Other Intangible Asset”.  This reclassification is reflected in thereclassed balance sheets for FY 2004.  Royaltiesreceived from STMicroelectronics have been adjusted to reflect the net effectof the various discounts given to ST for specific customers originally reportedunder SG&A.  Consulting revenue hasbeen adjusted to reflect completion of actual work as opposed to when fundswere received.  Lastly, Apogee determinedthat inventory reserves should be maintained and as such the restated incomestatement reflects reserves for both Apogee held inventory and inventory heldat the distributors.

** **

**13.****                  ****Subsequent Events**

 

On July 22, 2005, theCompany signed a consulting agreement with a semiconductor company toperform audio product development and related marketing and salesactivities.   Under the agreement, the Company willreceive payments of $205,000 per month for specificdeliverables.  The consulting fees paid to the Company under theagreement are subject to reimbursement and thus willbe recorded as a cash advance until such reimbursementconditions become definitive. The initial term of the consulting agreementis one month and can be extended by mutual consent.

 

**On August 11, 2005, the Company entered intoagreements with Laurus Master Fund, Ltd. (“Laurus”), whereby the Companyreceived $2.0 million in gross proceeds (with net proceeds of approximately $1.8million) through the sale of a 120 day secured term note. In accordance withthe terms of the note, the note is payable by the Company in cash during thefirst 120 days following the issuance of the note, and after the 120 day periodit is payable in the amount of $62,500 per month in cash or convertible intothe common stock, $0.01 par value per share, of the Company at a fixedconversion price of $1.05 per share. In connection with the financing, theCompany is paying certain costs and expenses of Laurus and has issued animmediately exercisable warrant with terms restricting exercise. The Lauruswarrant provides for the purchase of 85,000 shares of common stock at a priceof $1.22 per share. The warrant expires seven years after issuance. A finder forthe transaction, and will receive a fee of 5% of the gross proceeds of theoffering, together with a seven year warrant to purchase an aggregate of 8,500shares of common stock immediately exercisable at a price of $1.22 per share.This offering was conducted as a private placement pursuant to the exemptionfrom registration provided by Section 4(2) of the Securities Act of1933, as amended, and the rules and regulations promulgated thereunder.With respect to the transaction with Laurus, the Company has entered into anagreement to register the common stock underlying the warrants and the commonstock that may be received upon any conversion of the secured term note.  This note is senior to the $500,000 unsecurednotes described in Note 1 - Liquidity.**

 

16

----

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS.**

 

**GENERAL**

** **

The following Management’sDiscussion and Analysis of the Company’s Financial Condition and Results ofOperations for the three-and six-month periods ended June 30, 2005 andrestated June 30, 2004 should be read in conjunction with the Company’sFinancial Statements and related Notes included elsewhere in this QuarterlyReport on Form 10-QSB. This discussion contains, in addition to historicalstatements, forward-looking statements that involve risks and uncertainties.The Company’s actual results could differ significantly from the resultsdiscussed in the forward-looking statements. Factors that could cause orcontribute to such differences include the factors discussed in the section titled“Certain Risk Factors That May Affect Future Results of Operations And OurCommon Stock Price” as well as other factors described in the Company’s AnnualReport on Form 10-KSB for the year ended December 31, 2004. TheCompany does not intend to update any such forward-looking statements.

 

**OVERVIEW**

** **

The Companydesigns, develops, and markets silicon based products incorporating proprietarytechnologies.  The Company’s patentedall-digital, high efficiency Direct Digital Amplification (DDX®) technologyIntegrated Circuits (“ICs”) are used in a range of audio applicationsincluding:  home theater systems, poweredspeakers, car audio, commercial audio, and PC multi-media. The Company is developing new System-on-Chip(“SOC”) products using its analog and digital circuit designs andMicro-Electromechanical Systems (“MEMS”) technology for the consumer,automotive, communications and medical markets. At the appropriate time,the Company will segment the financial reporting of the MEMS division.  Under a licensing agreement withSTMicroelectronics NV (“ST”), the Company is developing and providingintellectual property to be used in royalty bearing products produced byST.  In addition, the Company is workingunder a development agreement with ST to develop and market new semiconductorproducts that leverage Apogee’s DDX technology and ST’s intellectual propertyand semiconductor design, development and manufacturing capability. The Company generates revenue from the sale of ICs, IC relatedproducts, consulting work for third parities as well as royalties and licensefees earned under its agreement with ST and other third parties.  The Company markets its products using aworldwide network of direct sales staff, independent sales representatives anddistributors.   The Company incurred a net loss ofapproximately $1.6 million and $3.0 million for the three and six months ended June 30,2005, as compared to a loss of approximately $963,000 and $1.2 million for therestated three and six months ended June 30, 2004.  As of June 30, 2005, the Company had anaccumulated deficit of approximately $18.7 million, as compared to a deficit ofapproximately $15.6 million at December 31, 2004.  The Company’s net losses and accumulateddeficit (since 1995) result primarily from research costs associated with theCompany’s efforts to develop and market its DDX technology.

 

As of June 30, 2005,the Company had 37 employees.

 

During the three-month periodended June 30, 2005, the Company derived approximately 59% of its totalrevenue and 64% of its product revenue from four customers.   The Company utilizes a network of salesrepresentatives and distributors, as well as sales offices in China, Hong Kong,Japan and Taiwan, to support the Company’s worldwide sales and marketingactivities

 

17

----

 

**SELECTEDCONSOLIDATED FINANCIAL DATA**

 

The following selected financial data for the three- andsix-month periods ended June 30, 2005 and restated June 30, 2004 havebeen derived from the Company’s unaudited financial statements.  Any trends reflected by the following tablemay not be indicative of future results.

 

| ** **                             | ** ** | **For the Three-Month Period  Ended  June 30,** | ** ** | **For the Six-Month Period  Ended  June 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                             | ** ** | **2004**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                             | ** ** | ** **                                           | ** ** | **(Restated)**                                     | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Statement of Operations Data:          |       |                                                 |       |                                               |       |   |   |   |   |
| Revenue                                |       | $                                                    | 1,314,639  |                                               | $          | 1,337,643 |   | $ | 2,429,380 |   | $ | 3,487,167 |   |
| Costs and expenses                     |       | (2,911,897                                           | )          | (2,306,626                                         | )          | (5,469,319 | ) | (4,678,193 | ) |
| Other Income (expenses)                |       | (1,724                                               | )          | 5,662                                              |       | 2,673 |   | 10,977 |   |
| Net Loss                               |       | $                                                    | (1,598,982 | )                                                  | $          | (963,321 | ) | $ | (3,037,266 | ) | $ | (1,180,049 | ) |
|                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Shares Outstanding                     |       | 11,838,332                                           |       | 11,380,790                                         |       | 11,838,332 |   | 11,359,469 |   |
|                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Balance Sheet Data:                    |       |                                                 |       |                                               |       |   |   |   |   |
| Total Assets                           |       | $                                                    | 4,097,103  |                                               | $          | 5,819,133 |   | $ | 4,097,103 |   | $ | 5,819,133 |   |
| Stockholders’ equity (deficiency) |       | $                                                    | (482,605   | )                                                  | $          | 3,084,945 |   | $ | (482,605 | ) | $ | 3,084,945 |   |
| Loss per share (basic and diluted)     |       | $                                                    | (0.14      | )                                                  | $          | (0.08 | ) | $ | (0.26 | ) | $ | (0.10 | ) |

 

**RESULTS OFOPERATIONS OF THE COMPANY**

 

The following table setsforth, for the periods indicated, the percentage of total revenue representedby certain revenue and expense items. The table and the discussion below should be read in conjunction withthe consolidated financial statements and notes thereto that appear elsewherein this report.

 
| ** **                        | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | ** **                                    | ** ** | **(Restated)**                              | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                              |       |                                          |       |                                        |       |   |   |   |   |
| Product Sales                     |       | 87.83                                         | %          | 67.23                                       | %          | 89.26 | % | 72.80 | % |
| Royalties                         |       | 12.17                                         |       | 17.82                                       |       | 10.74 |   | 12.73 |   |
| Consulting/Licensing              |       | 0.00                                          |       | 14.95                                       |       | 0.00 |   | 14.47 |   |
|                              |       |                                          |       |                                        |       |   |   |   |   |
| Cost of Sales                     |       | (67.39                                        | )          | (80.51                                      | )          | (76.28 | ) | (59.84 | ) |
| Research and Development          |       | (55.75                                        | )          | (45.32                                      | )          | (62.69 | ) | (37.81 | ) |
| Sales, General and Administrative |       | (98.36                                        | )          | (46.61                                      | )          | (86.16 | ) | (36.50 | ) |
|                              |       |                                          |       |                                        |       |   |   |   |   |
| Operating Loss                    |       | (121.50                                       | )%         | (72.44                                      | )%         | (125.13 | )% | (34.15 | )% |
|                              |       |                                          |       |                                        |       |   |   |   |   |
| Other Income (Expense)            |       | (0.13                                         | )          | 0.42                                        |       | (0.11 | ) | 0.31 |   |
| Net Loss                          |       | (121.63                                       | )%         | (72.02                                      | )%         | (125.24 | )% | (33.84 | )% |

 

Revenue

 

**The Company derives its revenue fromthree sources: (1) product sales, which consist of merchandise sales madeeither directly to end customers or sell through (point of sale) bydistributors.  All shipments arefulfilled from the Company’s warehouses in Hong Kong and/or Norwood,Massachusetts and revenue is reported net of returns;**(2) royaltyrevenue, which consists of royalties paid by STMicroelectronics under the termsof the licensing agreement signed in February 2001 and (3) consultingincome

 

18

----

 

related to the development ofcustom ICs for STMicroelectronics and other third parties who are developingDDX and non-DDX based solutions.  Shouldit be determined that segment reporting is required, both revenue recognizedand expenses incurred by the MEMS division will be segmented at the appropriatetime.   See Note 2 of the financialstatements – Revenue Recognition.

** **

Total revenue wassubstantially unchanged at approximately $1.3 million for both the three monthsended June 30, 2005 and the restated three months ended June 30,2004.  Total revenue decreased byapproximately 30% or $1.1 million to approximately $2.4 million for the sixmonths ended June 30, 2005 from approximately $3.5 million for therestated six months ended June 30, 2004.  Thisdecrease in revenue was due to reduced sales to the Company’s largest customersand at this time the Company is unable to anticipate when there will be aturnaround in this trend.

 

Revenue from the sale of the Company’s products, consistingof IC’s, as well as, IC evaluation and reference boards, increased byapproximately 28% or $300,000 to approximately $1.2 million for the threemonths ended June 30, 2005 from approximately $900,000 for the restatedthree months ended June 30, 2004 but decreased by approximately 14% or$300,000 to $2.2 million for the six months ended June 30, 2005 ascompared to $2.5 million for the restated six months ended June 30, 2004.This decrease in product sales was related to an unexpected weakness in demandfrom its key customers.

 

Revenue from non-product related items accounted forapproximately 12% and 11% of total revenue for the three and six months ended June 30,2005, respectively, compared to revenue from non-product related items ofapproximately 33% and 27% of total revenue for the restated six months ended June 30,2004.  During the three and six monthsended June 30, 2005, the Company recorded royalties of approximately$160,000 and $261,000, compared to royalties of approximately $238,000 and$444,000 for the restated three and six months ended June 30, 2004,representing a decrease of approximately 33% and 41% for the respectiveperiods. The decrease in royalties is primarily due to the reduction in averageselling prices of the products sold by STMicroelectronics and reduced royaltyrates on certain products.  During thethree- and six-month periods ended June 30, 2005, the Company did notrecord any consulting or licensing revenue. During the restated three- andsix-month periods ended June 30, 2004, the Company recorded $200,000 and$504,500, respectively, in consulting revenue.

 

Total revenue for the three and six months ended June 30, 2005 andrestated 2004 consisted of:

 
| ** **       | ** ** | **For the Three-Month Period  Ended  June 30, (unaudited)** | ** ** | **For the Six-Month Period  Ended  June 30, (unaudited)** | ** ** |
|------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **       | ** ** | **2005**                                                         | ** ** | **2004**                                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **       | ** ** | ** **                                                       | ** ** | **(Restated)**                                                 | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Product  Revenue |       | $                                                                | 1,154,661  |                                                           | $          | 899,247 |   | $ | 2,168,449 |   | $ | 2,538,710 |   |
| Royalties        |       | 159,978                                                          |       | 238,396                                                        |       | 260,931 |   | 443,973 |   |
| Consulting       |       | —                                                           |       | 200,000                                                        |       | — |   | 504,484 |   |
|             |       |                                                             |       |                                                           |       |   |   |   |   |
| Total:           |       | $                                                                | 1,314,639  |                                                           | $          | 1,337,643 |   | $ | 2,429,380 |   | $ | 3,487,167 |   |

 

Cost of Revenue

 

Costof revenue decreased as a result of reduced product revenue to approximately$886,000 and $1.9 million for the three and six months ended June 30,2005, respectively, compared to approximately $1.1 million and $2.1 million forthe restated three and six months ended June 30, 2004.  Cost of revenue primarily consists ofpurchasing finished semiconductor chips and costs associated with assembly,testing and shipping of those products as well as customs and storage feesassociated with warehousing a large portion of the Company’s semiconductorproducts in Asia.  In addition, theCompany has established reserves for slow moving, excess and obsoleteinventories held at Apogee and at its distributors.  These provisions are reported as part of theCost of Revenue.  Provisions for thethree and six months ended June 30, 2005 were approximately $78,000 and$321,000 compared to approximately $164,000 and $143,000 for the restated threeand six months ended June 30, 2004. For the three and six months ended June 30, 2005, the Company hadgross margins before inventory reserve provisions of approximately 30% and 29%,respectively, compared to (1%) and 23% in the same periods in 2004, asrestated. This was due to price erosion on the sale of existing products, not offsetby sales of higher margin newer products. Although the Company increased itsreserve, no inventory write-off was recorded for either the three or six monthsended June 30, 2005 or the restated three and six months ended June 30,2004.  The Company is monitoring itsinventory and as of June 30, 2005, the Company believes the reserves inplace are adequate but will continue to re-evaluate on a quarterly basis ormore frequently if market conditions warrant.

 

19

----

 

Research and Development (“R&D”)Expenses

 

Research anddevelopment expenses consist primarily of salaries and related expenses in thedesign, development and technical support of the Company’s products as well asdirect support to current and potential customers.  Research and development expenses increased toapproximately $733,000 and $1.5 million for the three months and six monthsended June 30, 2005, compared to approximately $606,000 and $1.3 millionfor the restated three and six months ended June 30, 2004. This increaseof approximately $127,000 or 21% and $204,000 or 16%, respectively, was primarilydue to the acquisition of the MEMS Division and the related increased humanresource costs of this new division partially offset by a reduction in vendorexpenses..  For the three and six monthsended June 30, 2005 vendor expenses accounted for approximately $32,000and $121,000 of total research and development costs, down from $40,000 and$233,000, respectively, for the restated three and six month periods ended June 30,2004.  Costs related to human resourcesfor R&D were approximately $556,000 and $1.1 million for the three monthsand six months ended June 30, 2005, compared to approximately $501,000 and$968,000 for the restated three and six months ended June 30, 2005.  This increase of $55,000 or 11% and $146,000or 15% for the respective periods was a result of additional staffing for thenew MEMS Division.  During the six monthsended June 30, 2005, the Company introduced two IC products and one MEMSproduct.  The Company continues to investin the development of its next generation of ICs and MEMS products and thecontinuation of support to both existing and potential customers. Due to thetechnical nature of the Company’s products, engineering and design support arecritical parts of the Company’s strategy during both the development of itsproducts and the support to its customers from product design to finalproduction.  Management anticipates thatit will continue to commit resources to research, development and designactivities.  It expects these expenses toincrease.

 

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

 

Sellingexpenses consist primarily of salaries and related expenses for personnelengaged in the marketing and sales of the Company’s products, as well as costsrelated to trade shows, product literature, travel and other promotionalsupport costs. In addition, selling expenses include costs of its Asian salesoffices and support staff.  General andadministrative costs consist primarily of executive and administrativesalaries, professional fees and other associated corporate expenses. Theincrease in SG&A was attributable principally to professional fees as wellas increased support for the Company’s Asian offices and increased humanresource costs.  SG&A expenses wereapproximately $1.3 million and $2.1 million for the three and six months ended June 30,2005, compared to approximately $623,000 and $1.3 million for the restatedthree and six months ended June 30, 2004, an increase of approximately$670,000 or 107% and $820,000 or 64%, respectively.  Professional expenses increased approximately$560,400 or 595% and $629,100 or 342% to approximately $655,000 and $813,000for the three and six months ended June 30, 2005 compared to approximately$94,000 and $184,000 for the restated three and six months ended June 30,2004.  Of this increase for the threemonths ended June 30, 2005, approximately $471,000 was due to the legalexpense associated with the Audit Committee’s investigation and subsequentrestatement of the Company’s financial statements and $55,000 was additionalaccounting expense related to the Company’s restatement of the Company’sfinancial statements. The Company expects that administrative expenses willdecrease when it becomes current with its financial statements. Human resourcecosts increased approximately $26,000 and $45,000 to approximately $335,000 and$678,000 during the three months and six months ended June 30, 2005compared to approximately $309,000 and $633,000 during the same periods in2004, as restated, an increase of 8% and 7%, respectively.  This increase was primarily due to highercompensation, as well as, an increase in staffing both domestically and at theAsian sales offices.  Expenses from theAsian sales office in Hong Kong, including human resources, were approximately$128,000 and $252,000 for the three and six months ended June 30, 2005,compared to approximately $103,000 and $206,000 for the restated three and sixmonth periods ended June 30, 2004, an increase of 25% and 22%,respectively.  This increase was due tohigher office expense and human resources expenses.  In addition, the Company increased theallowance for doubtful accounts by $10,000 and $25,000 for the three and sixmonths ended June 30, 2005 compared to $5,000 and $10,000 increase in theallowance for the restated three and six months ended June 30, 2004.

 

Interest Income (Expense)

 

Interest income includes income from the Company’s cash andcash equivalents and from investments and expenses related to its financingactivities.  During the three and sixmonths ended June 30, 2005, the Company generated interest income ofapproximately $1,700 and $6,000 compared to interest income of approximately$6,000 and $11,000 during the same periods in 2004.  As a result of the loans by Mr. HerbertM. Stein and Mr. David Spiegel in May 2005, the Company incurredinterest expense of approximately $3,500 for the three months ended June 30,2005.  This decrease in interest incomefor the three and six months ended June 30, 2005 was primarily due toreduced interest on reduced cash as of June 30, 2005.

 

Net Loss

 

The Company’s net loss forthe three months ended June 30, 2005 was approximately $1.6 million or$0.14 per basic and diluted common share, compared to a net loss ofapproximately $963,000 or $0.08 per basic and diluted common share for therestated three months ended June 30, 2004. For the six months ended June 30, 2005 the Company reported a lossof approximately $3.0 million or $0.26 per basic and diluted common share,compared to a net loss of approximately $1.2 million or $0.10 per basic anddiluted common share for the restated six months ended June 30, 2004.

 

20

----

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company’s principalsource of liquidity at June 30, 2005 consisted of approximately $364,000in cash and short-term investments and no debt. This compares to approximately $1.9 million in cash and cash equivalentsat December 31, 2004.  This decreasein cash was due to increased working capital requirements.

 

Netcash used in operations during the six-month period ended June 30, 2005increased to approximately $1.9 million compared to approximately $889,000 inthe six-month period ended June 30, 2004. The increase was mainly due to an increase in net loss and increases inallowances for doubtful account, slow moving, excess and obsolete inventory andaccounts receivable reserves.  As of June 30,2005, inventory, net of reserves, was approximately $2.6 million compared toinventory of approximately $2.7 million as of June 30, 2004.  Net accounts receivable was approximately$582,000 at June 30, 2005, up from approximately $533,000 at June 30,2004.  As of June 30, 2005, fourmajor customers accounted for approximately 77% of the total accountsreceivable balance.  The Company increasedits reserve against bad debts to $130,000 as of June 30, 2005 from$105,000 as of December 31, 2004. The Company believes this reserve is sufficient at this time.

 

Net cash used in investingactivities for the six months ended June 30, 2005 was approximately$110,000, compared to approximately $174,000 for the restated six months ended June 30,2004.

 

Net cash provided byfinancing activities for the six months ended June 30, 2005 wasapproximately $500,000, compared to $232,000 provided by financing activitiesfor the six months ended June 30, 2004. During the three-month period ended June 30, 2005, the Companyreceived  received the proceeds from unsecured interest bearing loans inthe amounts of $250,000 from David Spiegel, a shareholder and $250,000from Herbert Stein, Chief Executive Officer, President and Chairman of theBoard. These loans are payable upon demand and are not subjectto any premium or penalty for prepayment. The loan interest rate is 6% perannum, payable monthly in arrears on the outstanding balance.   During the three-month period ended June 30,2004, the Company received $141,156 in cash from the exercise of options by tenemployees and $10,000 in cash from the exercise of warrants.  The Company believes that cash flow from operationsand amounts that may be raised from time to time in private offerings of itscommon stock as well as the amounts received in debt financings (See Note 13)will be sufficient to support operations and fund capital equipmentrequirements at least through June 30, 2006.

 

**On August 11, 2005, the Company completed afinancing in which it raised net proceeds of approximately $1.8 million througha secured note. See Note 13 – Subsequent Events.**

** **

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

The preparation of the consolidated financial statements requires theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities and expenses.  On anon-going basis, the Company evaluates its estimates, including those related touncollectible accounts receivable, inventories, intangibles and otherlong-lived assets.  The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

The Companybelieves the following critical accounting policies affect its more significantjudgments and estimates used in the preparation of its consolidated financialstatements.  The Company maintainsallowances for uncollectible accounts receivable for estimated losses resultingfrom the inability of its customers to make required payments.  If the financial condition of the Company’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required. The Company maintainsallowances for estimated slow moving, excess or obsolete inventories includingfuture non-cancelable purchase commitments based on the Company’s review ofinventory levels, projected future sales and comparison of actual manufacturingcosts to standard costs.  If actualmarket conditions are less favorable than those projected by management,additional allowances may be required. Property, plant and equipment, patents,trademarks and other intangible assets are amortized over their estimateduseful 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. Future adverse changes in market conditions or poor operatingresults of underlying capital investments or intangible assets could result inlosses or an inability to recover the carrying value of such assets, therebypossibly requiring an impairment charge in the future.

 

TheCompany prepares its consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America.  The preparation of these financial statementsrequires us to make estimates, judgments and assumptions that we believe arereasonable based upon the information currently available.  These estimates and assumptions affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the periodspresented.  Any future changes to theseestimates and assumptions could have a significant impact on the reportedamounts of

 

21

----

 

revenue,expenses, assets and liabilities in our financial statements.  The significant accounting policies which webelieve are the most critical to aid in fully understanding and evaluating ourreported financial results include the following:

 

RevenueRecognition

 

Apogeerecognizes revenue in accordance with Securities and Exchange Commission StaffAccounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in FinancialStatements: Revenue Recognition, which states that revenue should be recognizedwhen the following revenue recognition criteria are met:  (1) persuasive evidence of anarrangement exists; (2) the product has been shipped and the customertakes ownership and assumes the risk of loss; (3) the selling price isfixed or determinable; and (4) collection of the resulting receivable isreasonably assured.  The followingpolicies apply to the Company’s two major product sales categories for revenuerecognition.  Sales to end users:  Revenue is recognized under the Company’sstandard terms and conditions of sale, title and risk of loss transfer to thecustomer at the time products are shipped either directly to the customer orthe customers representative/freight. Sales to Distributors:  From totime the Company provides certain incentives such as stock rotation, price protectionand other incentives to its Distributors. As a result of these incentives, the Company has adopted a policy ofdeferring recognition of revenue until the distributor sells products to theircustomers based upon receipt of point-of-sale reports from the distributors.See Footnote 12 - Restatement.  TheCompany accrues the estimated cost of post-sale obligations including product warrantyreturns, based on historical experience. To date the Company has experienced minimal warranty returns.

 

Inaddition, the Company records royalty revenue when earned in accordance withthe underlying agreements.  Consultingand licensing revenue is recognized as services are performed.

 

AccountsReceivable

 

TheCompany performs credit evaluations of customers and determines credit limitsbased upon payment history, customers’ creditworthiness and other factors, asdetermined by our review of their current credit information.  For a majority of our larger sales, we canrequire the issuance of a Letter of Credit. Smaller accounts must either pay via credit card or in advance ofshipment.  We continuously monitorcollections and payments from our customers, and we maintain a provision forestimated credit losses based upon our historical experience and any specificcustomer collection issues that we have identified.  While we have not had any significant creditlosses to date, we cannot guarantee that we will continue to avoid creditlosses in the future.  If the financialcondition of the Company’s customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.  Since our accounts receivableare highly concentrated in a small number of customers, a significant change inthe liquidity or financial position of any one of these customers could have amaterial adverse impact on the collectibility of our accounts receivable, ourliquidity or our future results of operations. Receivables associated with deferred distributor revenue has beenreclassed and an allowance for doubtful accounts is maintained to ensure tradereceivables are recorded at net realizable value.

 

Inventory

 

Apogeestates its inventory at the lower of cost (first-in, first-out) or market**. **This policyrequires that the Company make certain estimates regarding the market value ofthe inventory, including an assessment of excess or obsolete inventory.  The Company determines excess and obsoleteinventory based on an estimated future demand and estimated selling prices forthe Company’s products within a specified time frame, which is generally 12months.  The estimates used for expecteddemand are also used for short-term capacity planning and inventory purchasingand are consistent with revenue forecasts. In addition to current inventory ofapproximately $2.6 million, net of reserve, consisting of $1.2 million held atApogee and $1.4 million held at distributors, there are inventory purchasecommitments of approximately $1.7 million at June 30, 2005.   This compares to inventory, net of reserves,of approximately $2.7 million consisting of approximately $1.5 million held atdistributors with the remaining $1.2 million at Apogee at December 31,2004.  The current inventory level andpurchase commitments are maintained due to expected demand and not necessarilybuilt for firm purchase commitments for the current customers.  Due to the 13 week delivery lead time, it isnecessary to carry a high level of inventory in comparison to past sales.  Actual demand and market conditions may bedifferent from those projected by management. If the unit demand forecast is less than current inventory value, theCompany will be required to take additional excess inventory charges orwrite-downs to net realizable value which will decrease the gross margin aswell as the net operating results in the future.  During the three and six months ended June 30,2005, the Company recorded a provision for excess or obsolete inventory ofapproximately $77,000 and $321,000, respectively.  If actual market conditions are less thanfavorable than those projected by management, additional allowances may berequired.

 

Valuationof 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. Future adverse changes in market conditions or poor operatingresults of underlying capital investments or intangible assets could result inlosses or an inability to recover the carrying value of such assets, therebypossibly requiring an impairment charge in the future.

 

22

----

 

**CERTAIN RISK FACTORS THAT MAY AFFECTFUTURE RESULTS OF OPERATIONS AND OUR COMMON STOCK PRICE**

** **

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

 

**RISKSRELATED TO OUR BUSINESS**

 

**WE HAVE HAD A HISTORY OFLOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE OR SUSTAINPROFITABILITY.**

** **

**As of June 30,2005, the Company had a stockholder deficiency of $483,000 and had anaccumulated deficit of approximately $18.7 million and working capitaldeficiency of approximately $865,000. The Company recorded a loss of approximately $1.6 million and $3.0million for the three- and six-month periods ended June 30, 2005.  The Company recorded a net loss ofapproximately $3.4 million for the year ended December 31, 2004 and arestated net loss of approximately $270,000 in 2003.  The Company will need to generate revenue toachieve and sustain profitability and positive cash flow. **The Company’s ability to generate future revenue and achieve andsustain profitability will depend on a number of factors, many of which are describedthroughout this risk factor section.  Ifwe are unable to achieve and sustain profitability, the Company’s share pricewould likely decline.

** **

**THE COMPANY HASONLY A SMALL NUMBER OF CUSTOMERS, AND THE LOSS OF ANY OF THESE CUSTOMERS WOULDHAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’S BUSINESS.**

 

During the sixmonths ended June 30, 2005, the Company derived approximately 67% of itstotal revenue and 65% of product revenue from four customers for both total andproduct revenue.  The loss of any of theCompany’s customers, or a significant decrease in the amount of revenuegenerated from any of these customers, would have a material adverse effect onits business, financial condition and results of operations.  The Company is developing new customers andmarkets in order to diversify the market applications of its products.

 

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

 

Because we have historicallyhad losses and only a limited amount of cash has been generated fromoperations, we have funded our operating activities to date primarily from thesale of securities. In order to continue to fund the development of ourbusiness, we will need additional capital, either through the sale ofsecurities or through the sale of assets. We cannot be certain that any suchfinancing or asset sales will be available on acceptable terms, or at all.Moreover, additional equity financing, if available, would likely be dilutiveto the holders of our common stock, and debt financing, if available, wouldlikely involve restrictive covenants. If we sell assets that are currently usedin the conduct of our business, those assets would no longer be available to usas a potential source of revenue generation. If we cannot raise sufficientadditional capital through means available to us, it would adversely affect ourability to achieve our business objectives.

 

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

 

Our management does not expect that our disclosurecontrols and procedures or our internal control over financial reporting willprevent all errors or fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that the objectivesof the control system will be attained. Furthermore, the design of a controlsystem must reflect the fact that there are resource constraints and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in a cost-effective control system, no evaluation ofcontrols can provide absolute assurance that all misstatements due to error orfraud, if any, may occur and not be detected on a timely basis. These inherentlimitations include the possibility that judgments in decision-making can befaulty and that breakdowns can occur because of errors or mistakes. Ourcontrols and procedures can also be circumvented by the individuals acts ofsome persons, by collusion of two or more people or by management override of thecontrols. The design of any system of controls is based in part on certainassumptions about the likelihood of future events and there can be no assurancethat any design will succeed in achieving its stated goals under all potentialfuture conditions. Furthermore, controls may become inadequate because ofchanges in conditions or deterioration in the degree of compliance withpolicies or procedures. While we seek to design our controls and procedures toprovide reasonable assurance that information required to be

 

23

----

 

disclosed in our periodicfilings is timely disclosed, these inherent limitations expose us to breakdownsin such controls and procedures. For example, while our certifying officersbelieved that the design of our controls and procedures would ensure thatmaterial information related to the Company would be made known to them on atimely basis, in light of the circumstances underlying the Restatement, thesecontrols and procedures for the financial statement periods covered by theRestatement were not effective. We have made certain changes to our internalcontrol over financial reporting that are designed to address thesecircumstances, although even these improvements to our controls and procedurescannot ensure that all errors or fraud will be prevented.

 

**OUR BUSINESS ISCONCENTRATED IN A LIMITED NUMBER OF MARKETS AND ANY SIGNIFICANT CHANGE IN THESEMARKETS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’S BUSINESS.**

 

Substantiallyall of the Company’s total and product revenue for the three and six monthsended June 30, 2005 were to customers in Asia and Europe.  The Company is working to develop newcustomers and markets in order to diversify the market applications of itsproducts.

 

**OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGEAND, THEREFORE, OUR SUCCESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS INA TIMELY FASHION.**

 

The life cycle of thetechnology and any future products developed by us may be limited by theemergence of new products and technologies, changes in consumer preferences andother factors.  Our future performancewill depend on our ability to consistently:

 

•  identify emerging technological trends in ourmarket;

 

•  identify changing consumer requirements;

 

•  develop or maintain competitive technology,including new product offerings;

 

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

 

• bring technology to market quickly at cost-effective prices, and

 

•  protectour intellectual property.

 

We may not succeed indeveloping and marketing new products that respond to technological andcompetitive developments and changing customer needs, or and such products maynot gain market acceptance and be incorporated into the technology or productsof third parties.  Any significant delayor failure to develop new enhanced technologies, including new productofferings, and any failure of the marketplace to accept any new technology andproduct offerings would have a material adverse effect on our business,financial condition and results of operations.

 

**WE MAY REQUIRE ADDITIONAL CAPITAL TO FUND OUROPERATIONS AND RESEARCH AND DEVELOPMENT.**

 

We havehistorically incurred net losses from operations and may continue to do so inthe future.  We have funded our operatingactivities to date primarily from the sale of securities and debtfinancing.  We will likely requireadditional capital in the future, which may be in the form of additional salesof securities or additional debt financings. The additional capital may not be readily available to us on favorableterms, if at all.  Any sale of securitieswould result in dilution to our current stockholders’ ownership in the Company.

 

**OUR ABILITY TO ACHIEVE SUSTAINED REVENUE GROWTH WILLBE HARMED IF WE ARE UNABLE TO MAINTAIN OUR EXISTING LICENSING RELATIONSHIPS.**

 

Part ofour business strategy is to expand our licensing activities withSTMicroelectronics and to enter into licensing relationships with othercompanies in order to offer products to a larger customer base than could bereached through our own development and marketing efforts.  We believe that such relationships canaccelerate market penetration of our products and technologies, while limitingour manufacturing exposure and sales and marketing costs.  However, we may not be able to expand ormaintain our existing licensing relationships or establish new licensingrelationships on commercially reasonable terms, if at all.  Any future inability by us to maintain ourlicensing relationships or to enter into additional licensing relationships, orthe failure of one or more of our licensing

 

24

----

 

relationshipsto contribute to the development and maintenance of a market for our products,could have a material adverse effect on our business, operating results andfinancial condition.

 

**OUR QUARTERLY OPERATINGRESULTS MAY FLUCTUATE.**

** **

We haveexperienced fluctuations in our quarterly operating results in the past and itis likely that these fluctuations will continue in the future.  These fluctuations are caused by manyfactors, including, but not limited to:

 

•                  availability andpricing from our suppliers;

 

•                  changes in thedemand for our products by customers;

 

•                  introductions orenhancements of products, or delays in the introductions or enhancements ofproducts, by us or our competitors;

 

•                  rate and successof new customer development;

 

•                  changes in ourpricing policies or those of our competitors;

 

•                  success inattracting, retaining and motivating qualified personnel;

 

•                  changes ingeneral economic conditions, and

 

•                  obsolescence ofinventory.

 

A substantialportion of our operating expenses is related to personnel, facilities, andsales and marketing programs and are fixed. Our expense level is based in part on our expectations of future ordersand sales, which are extremely difficult to predict.  Accordingly, we may not be able to adjust ourfixed expenses quickly enough to address any significant shortfall in demandfor our products in relation to our expectations.

 

Fluctuationsin our operating results may also result in fluctuations in our common stockprice.  In such event, the trading priceof our common stock would likely suffer and adversely affect our ability toraise capital and the value of your investment in the Company.

 

**IF WE ARE UNABLE TO HIRE OR RETAIN KEY PERSONNEL, WE MAY NOTBE ABLE TO OPERATE OUR BUSINESS SUCCESSFULLY.**

 

We may not besuccessful in recruiting and retaining executive officers and other keymanagement and technical personnel.  Thecompetition for employees with the necessary high level of technical expertiseto design, market and sell our products is intense, particularly in easternMassachusetts and Asia.  We will need tohire a number of additional technical personnel if we are to increase the rateat which we develop new products. Because competition for highly skilled technical personnel is sointense, companies in Apogee’s industry are subject from time to time tocomplaints brought by competitors alleging interference with contractualrelations or wrongful hiring of employees. Such lawsuits may be costly, may divert management attention andresources from the operation of our business, and may therefore adverselyaffect our financial condition and results of operations.  In addition, the loss of the management andtechnical expertise of our senior management could seriously harm us.  Our employees may also be recruited away fromus by our competitors.  The Company doesnot have in place employment contracts for some members of its seniormanagement, including the CFO, COO and Vice President of Engineering.

 

**THERE IS A NEWEUROPEAN DIRECTIVE TO ELIMINATE HAZARDOUS MATERIALS IN ELECTRONIC PRODUCTS ANDAS SUCH WE MAY NOT BE ABLE TO TRANSITION OUR IC PRODUCTS TIMELY TO MEETCUSTOMER NEEDS AND MAY HAVE INVENTORY THAT CAN ONLY BE SOLD IN LIMITEDMARKETS.**

 

The IC industry isresponding to the European directive of Restriction of Hazardous Substances (“RoHS”)that will become effective in July 2006. As a result of this directive, semiconductor companies are working toremove lead and other hazardous materials used in their IC products. TheCompany expects to transition all of its IC products to conform to the RoHS standardduring the first half of 2005. However, the Company may not be able to meetcustomer delivery requirements to support the 2005 consumer electronic designcycle. In addition, the Company currently has inventory to support Europeancustomers that may have to be sold in other markets.  Any excess inventory may not be able to besold timely or at all.

 

25

----

 

**WE DO NOT HAVE MANUFACTURING CAPABILITIES, AND AS ARESULT, WE RELY ON OUTSIDE FOUNDRIES TO MANUFACTURE OUR SEMICONDUCTOR PRODUCTS.**

** **

We have nomanufacturing capabilities, nor do we have plans to establish any suchcapabilities.  Accordingly, we utilizeoutside semiconductor foundries, assembly and test companies to manufacture oursemiconductor products.  There aresignificant risks associated with our reliance on these foundries that canadversely affect our business, operating results and financial condition.  These risks include:

 

•                  the ability tomaintain foundry relationships, the failure of which could result insignificant delays in  productintroduction due to the time necessary to establish new relationships;

 

•                  delays inproduction or shortages in product delivery as a result of production problemsat outside contractors;

 

•                  the loss offoundry priority that may limit our ability to obtain products on schedule;

 

•                  limited controlover product quality that could result in product returns and the loss ofcustomers;

 

•                  inability tocontrol manufacturing yield that could increase production costs, therebyreducing sales potential and operating margins, and

 

•                  lack of accessor control over new process and manufacturing technologies to maintain product competitivenessin the market.

 

**OUR PRODUCTS USE NEW TECHNOLOGY AND MAY HAVE MANUFACTURING DEFECTSOR OTHER CHARACTERISTICS THAT ARE ONLY DETECTED AFTER INSTALLATION IN CUSTOMERAPPLICATIONS, WHICH MAY HARM OUR BUSINESS.**

 

Our productsare based on recently developed technology and are manufactured usingstate-of-the-art manufacturing processes. Our approach to product qualification and testing may not fully evaluateor identify product characteristics or defects that could adversely affect theproduct’s ability to operate in the intended application.  If such defects or characteristics arediscovered after installation, product revenue might be significantly delayedand our ability to maintain existing customers and to retain new customers maybe seriously affected.

 

**OUR ABILITY TO ACHIEVE REVENUE GROWTH WILL BE HARMEDIF WE ARE UNABLE TO PERSUADE THE MARKET TO ADOPT OUR TECHNOLOGIES.**

 

We facechallenges in persuading manufacturers to adopt our products using our DDXamplifier technology and our MEMS technology. Traditional amplifiers use design approaches developed in the 1930s.  These approaches are still used in mostamplifiers and engineers are familiar with these design approaches.  In order to adopt our products, manufacturersand engineers must understand and accept our new technology.  In addition, our amplifier and MEMStechnologies may be more expensive for some applications than traditionaltechnologies.  For these reasons,prospective customers may be reluctant to adopt our technology.

 

**INTENSE COMPETITION IN THE SEMICONDUCTOR AND MEMSINDUSTRY COULD PREVENT US FROM ACHIEVING PROFITABILITY.**

 

The semiconductorand the MEMS industry is highly competitive, and we expect the intensity of thecompetition to increase. Many of our competitors have greater financial,technical, research, marketing, sales, distribution, service and otherresources than we do.  Moreover, ourcompetitors may offer broader product lines and have greater name recognitionthan we do, and may offer discounts as a competitive tactic, forcingintense pricing pressure on our products. In addition, several development stage companies are currently creatingor developing technologies and products that compete with or are being designedto compete with our technologies and products. Our competitors may develop or market technologies or products that aremore effective or more commercially attractive than our current or futureproducts, or that may render our technologies or products less competitive orobsolete.  Accordingly, if competitorsintroduce superior technologies or products and we cannot make enhancements toour technologies and products necessary for them to remain competitive, ourcompetitive position, and in turn, our business, revenues and financialcondition, will be seriously harmed.

 

**OUR BUSINESS COULD SUFFER IF WE EXPERIENCE DIFFICULTIESIN INTEGRATING ANY TECHNOLOGIES, PRODUCTS OR BUSINESSES WE ACQUIRE**.

 

In May 2004, the Companyacquired the intellectual property and other intangibles and hired staff fromStandard MEMS, Inc. Acquisitions typically entail many risks and couldresult in difficulties in integrating the operations and personnel of companiesthat we acquire or the technologies and products that we acquire. If we are notable to successfully integrate our acquisitions, we may not

 

26

----

 

obtain the advantages that theacquisitions were intended to create, which could adversely affect our resultsof operations, financial condition and cash flows. In addition, in connectionwith acquisitions, we could experience disruption in our business or employeebase. There is also a risk that key employees of companies that we acquire orkey employees necessary to successfully commercialize technologies and productsthat we acquire may seek employment elsewhere, including with our competitors.

 

**RISKS RELATED TO OURINTELLECTUAL PROPERTY**

** **

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

 

Our businessdepends, in part, on our ability to protect our intellectual property.  We rely primarily on patent, copyright,trademark and trade secret laws to protect our proprietary technologies.  We cannot be sure that such measures willprovide meaningful protection for our proprietary technologies andprocesses.  We have four issued UnitedStates patents and three pending patent applications.  In addition, we have acquired a portfolio ofMEMS intellectual property and the Company is reviewing this portfolio todetermine which of the acquired rights will be most useful in its business.  We cannot be sure that any existing or futurepatents will not be challenged, invalidated or circumvented, or that any rightsgranted thereunder would provide us meaningful protection.  The failure of any patents to provideprotection to our technology would make it easier for our competitors to offersimilar products.

 

We alsogenerally enter into confidentiality agreements with our employees andstrategic partners, and generally control access to and distribution of ourdocumentation and other proprietary information.  Despite these precautions, it may be possiblefor a third party to copy or otherwise obtain and use our products ortechnology without authorization, develop similar technology independently ordesign around our patents.  In addition,effective copyright, trademark and trade secret protection may be unavailableor limited in certain foreign countries in which we operate.

 

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

 

Thesemiconductor and consumer audio industries are characterized by vigorousprotection and pursuit of intellectual property rights. From time to time, wemay receive notices of claims of infringement, misappropriation or misuse ofother parties’ proprietary rights. We cannot be sure that we will prevail in theseactions, or that other actions alleging infringement by us of third-partypatents, misappropriation or misuse by us of third-party trade secrets or theinvalidity of one or more patents held by us will not be asserted or prosecutedagainst us, or that any assertions of infringement, misappropriation or misuseor prosecutions seeking to establish the invalidity of our patents will notseriously harm our business.  Forexample, in a patent or trade secret action, an injunction could be issuedagainst us requiring that we withdraw particular products from the market ornecessitating that specific products offered for sale or under development beredesigned.

 

Irrespectiveof the validity or successful assertion of various claims of infringement,misappropriation or misuse of other parties’ proprietary rights, we wouldlikely incur significant costs and diversion of our management and personnelresources with respect to the defense of such claims, which could seriouslyharm our business.  If any claims or actionsare asserted against us, we may seek to obtain a license under a third party’sintellectual property rights.  We cannotbe sure that under such circumstances a license would be available oncommercially reasonable terms, if at all. Moreover, we often incorporate the intellectual property of ourstrategic customers into our designs, and we have certain obligations withrespect to the non-use and non- disclosure of such intellectual property.  We cannot be sure that the steps taken by usto prevent our, or our customers’, misappropriation or infringement of theintellectual property will be successful.

 

**RISKS RELATING TO OUR COMMONSTOCK**

** **

**FACTORS UNRELATED TO OUR BUSINESS COULD NEGATIVELYIMPACT THE MARKET PRICE OF OUR COMMON STOCK.**

 

The stock markets haveexperienced extreme price and volume fluctuations that have affected andcontinue to affect the market prices of equity securities of many technologycompanies.  These fluctuations often havebeen unrelated or disproportionate to the operating performance of thosecompanies.  We expect that the marketprice of our Common Stock will fluctuate as a result of variations in ourquarterly operating results, or for other reasons that are not related to theperformance of our business.  Thesefluctuations may be exaggerated if the trading volume of our Common Stock islow.  In addition, due to thetechnology-intensive nature of our business, the market price for our CommonStock may rise and fall in response to various factors, including:

 

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

 

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

 

27

----

 

•                  acquisitions orstrategic alliances by us or our competitors, and

 

•                  the gain or lossof a significant customer or order.

 

In addition,market fluctuations, as well as general economic, political and marketconditions such as recessions, interest rate changes or international currencyfluctuations, may negatively impact the market price of our Common Stock.

 

**ITEM3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company’s financial instruments include: cash, cash equivalents,accounts receivable and accounts payable. At June 30, 2005, the carrying value of the Company’s cash, cashequivalents, accounts receivable and accounts payable approximate fair valuesgiven the short maturity of these instruments.

 

Although the Company’s sales are predominately to internationalmarkets, the Company believes that it does not have material foreign currencyexchange rate risk since international sales are in U.S. dollars and materialpurchases from foreign suppliers are typically also denominated in U.S.dollars.   Additionally, the functionalcurrency of the Company’s foreign sales offices is the U.S. dollar.

 

It is the Company’s policy not to enter into derivative financialinstruments for speculative purposes.

 

**ITEM4 – CONTROLS AND PROCEDURES**

 

(a)          Evaluation of DisclosureControls and Procedures.  The Company’schief executive officer and principal financial officer have reviewed andevaluated the effectiveness of the Company’s disclosure controls and procedures(as defined in Exchange Act Rules 13d-15 (e) and 15d-15 (e)) as ofthe end of the period covered by this quarterly report.  Based on that evaluation, the chief executiveofficer and principal financial officer have concluded that the Company’scurrent disclosure controls and procedures are adequate and effective to ensurethat material information relating to the Company was made known to them byothers, particularly during the period in which this Quarterly Report on Form 10-QSBwas being prepared.

 

(b)         Changes in InternalControls.  There were no changes in ourinternal control over financial reporting, identified in connection with theevaluation of such internal control that occurred during our last fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II- OTHER INFORMATION**

** **

**ITEM 1 - LEGALPROCEEDINGS**

 

In November 2004, Apogee commenced an action againstNational Hybrid, Inc. (Hybrid) in the United States District Courtfor the Eastern District of New York, claiming that as part of Hybrid’sprocurement of the tangible assets from the secured lien holder of thebankrupt Standard MEMS, Inc. (SMI), Hybrid had inadvertently obtainedcopies of files, containing in part, the intangible assets purchased by Apogeein May of 2004 as part of its MEMS acquisition. In November 2004, thecourt directed Hybrid not to sell, destroy or otherwise dispose of thesefiles.  In response, Hybrid filed acounterclaim in February 2005, stating that they were the ownerof the files. The court has delayed any further actions on thismatter until January 2006 since the parties are now working toresolve the issue.  TheCompany believes Hybrid’s claims are without merit. TheCompany expects to resolve this issue with Hybrid, now held in estate due tothe death of the prior owner, in 2005, and further does not believe theresolution will be material to its business.

 

**ITEM 2 – UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**

 

During the second quarter ended June 30, 2005, theCompany granted options to employees and directors to purchase, in theaggregate, up to 316,000 shares of the Company’s Common Stock at exerciseprices ranging from $1.08 per share to $1.27 per share under the Plan.

 

**ITEM 3 - DEFAULTSUPON SENIOR SECURITIES**

 

None.

 

**ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

28

----

 

**ITEM 5 - OTHERINFORMATION**

 

None.

 

**ITEM 6 - EXHIBITS**

 

(a)           Exhibits:

 

See Exhibit Index

 

29

----

 

**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: August 22, 2005 |       | 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: August 22, 2005 |       | 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)                        |

 

30

----

 

FORM-10-QSB

JUNE 30, 2005

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                         |
|--------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **               | ** ** | ** **                                                                                                                                                                                              |
| 10.1*                    |       | Amendment to the License Agreement between STMicroelectronics, N.V. and Apogee Technology, Inc., dated April 25, 2005.                                                                        |
|                     |       |                                                                                                                                                                                                    |
| 10.2                     |       | Promissory Note between David Spiegel and Apogee Technology, dated May 9, 2005.                                                                                                                    |
|                     |       |                                                                                                                                                                                                    |
| 10.3                     |       | Promissory Note between Herbert M. Stein and Apogee Technology, dated May 9, 2005.                                                                                                                 |
|                     |       |                                                                                                                                                                                                    |
| 31.1                     |       | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer Regarding Facts and Circumstances Relating to Exchange Act Filings.                                 |
|                     |       |                                                                                                                                                                                                    |
| 31.2                     |       | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer Regarding Facts and Circumstances Relating to Exchange Act Filings.                                 |
|                     |       |                                                                                                                                                                                                    |
| 32                       |       | Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer and Principal Financial Officer Regarding Facts and Circumstances Relating to Exchange Act Filings. |

 

Wherea document is incorporated by reference from a previous filing, the exhibitnumber of the document in that previous filing is indicated in parenthesesafter the description of such document.

 

----

*              Certain confidential material contained inthis document has been omitted and filed separately with the Securities andExchange Commission pursuant to Rule 24b-2 under the Securities ExchangeAct of 1934, as amended.

 

31

----