**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-QSB**

**(Mark One)**

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

 

**Forthe quarterly period ended June 30, 2006**

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

 

**Forthe transition periodfrom                   to**

**Commissionfile number 001-10456**

**APOGEE TECHNOLOGY, INC.**

(Exact name ofsmall business issuer as specified in its charter)

 

| **DELAWARE**                                           |   | **04-3005815**       |
|--------------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of                       |   | (I.R.S. Employer     |
| incorporation or  organization)                        |   | 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) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes   x  No   o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).o  Yes   x   No

State the number ofshares outstanding of each of the Issuer’s classes of common equity, as of thelatest practicable date:  As of July 28, 2006, there were 11,968,332 sharesof Common Stock, $.01 par value per share, outstanding.

Transitional SmallBusiness Disclosure Format (Check one):  Yes   o No  x

 

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**APOGEETECHNOLOGY, INC.**

**INDEX OFINFORMATION CONTAINED IN FORM 10-QSB FOR THEPERIODS ENDED JUNE 30, 2006 AND JUNE 30, 2005**

 
| Item  1. Financial Statements                                                                                                                      |   |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Consolidated  Balance Sheets at June 30, 2006 (unaudited) and December 31, 2005  (audited)                                                    |   | 3      |   |
| Consolidated Statements of Operations and Accumulated  Deficit for the Three and Six Months Ended June 30, 2006 and June 30, 2005  (all unaudited) |   | 4      |   |
| Consolidated Statements of Cash Flows for the Three  and Six Months Ended June 30, 2006 and June 30, 2005 (all unaudited)                          |   | 5      |   |
| Notes to Consolidated Financial Statements (all  unaudited)                                                                                        |   | 6      |   |
|                                                                                                                                               |   |   |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                               |   | 16     |   |
|                                                                                                                                               |   |   |   |
| Item 3. Controls  and Procedures                                                                                                                   |   | 29     |   |
|                                                                                                                                               |   |   |   |
| **PART II. OTHER INFORMATION**                                                                                                                |   |   |   |
|                                                                                                                                               |   |   |   |
| Item  1. Legal Proceedings                                                                                                                         |   | 30     |   |
|                                                                                                                                               |   |   |   |
| Item  2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                               |   | 30     |   |
|                                                                                                                                               |   |   |   |
| Item 3.  Defaults Upon Senior Securities                                                                                                           |   | 30     |   |
|                                                                                                                                               |   |   |   |
| Item  4. Submission of Matters to a Vote of Security Holders                                                                                       |   | 30     |   |
|                                                                                                                                               |   |   |   |
| Item  5. Other Information                                                                                                                         |   | 30     |   |
|                                                                                                                                               |   |   |   |
| Item 6.  Exhibits                                                                                                                                  |   | 30     |   |
|                                                                                                                                               |   |   |   |
| Signatures                                                                                                                                         |   | 31     |   |

 

2

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**PART I****                  FINANCIALINFORMATION**

**Item1.****                    Financial Statements**

**APOGEETECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                        | ** ** | **JUNE 30,** | ** **    | **DECEMBER 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|---------------|-----------------------|------------|
| ** **                                                                                                                                                        | ** ** | **2006**          | ** **    | **2005**              | ** ** |
| ** **                                                                                                                                                        | ** ** | **(Unaudited)**   | ** **    | **(Audited)**         | ** ** |
| **ASSETS**                                                                                                                                                        | ** ** | ** **        | ** **    | ** **            | ** ** |
| ** **                                                                                                                                                        | ** ** | ** **        | ** **    | ** **            | ** ** |
| **Current assets**                                                                                                                                                | ** ** | ** **        | ** **    | ** **            | ** ** |
| Cash and cash  equivalents                                                                                                                                        | ** ** | **$**             | **3,756,059** | ** **            | **$**      | **5,512,974** | ** ** |
| Accounts  receivable, net of allowance for doubtful accounts of $13,245 and $145,000,  in 2006 and 2005 respectively                                              | ** ** | **102,349**       | ** **    | **152,837**           | ** ** |
| Inventories, net                                                                                                                                                  | ** ** | **354,242**       | ** **    | **1,327,964**         | ** ** |
| Prepaid expenses  and other current assets                                                                                                                        | ** ** | **66,974**        | ** **    | **123,462**           | ** ** |
|                                                                                                                                                              |       |              |          |                  |       |
| Total current  assets                                                                                                                                             | ** ** | **4,279,624**     | ** **    | **7,117,237**         | ** ** |
|                                                                                                                                                              |       |              |          |                  |       |
| **Property and equipment, net**                                                                                                                                   | ** ** | **52,806**        | ** **    | **39,932**            | ** ** |
|                                                                                                                                                              |       |              |          |                  |       |
| **Other assets**                                                                                                                                                  | ** ** | ** **        | ** **    | ** **            | ** ** |
| Escrow account                                                                                                                                                    | ** ** | **417,463**       | ** **    | **409,480**           | ** ** |
| Patents                                                                                                                                                           | ** ** | **155,862**       | ** **    | **149,536**           | ** ** |
|                                                                                                                                                              |       |              |          |                  |       |
| ** **                                                                                                                                                        | ** ** | **$**             | **4,905,755** | ** **            | **$**      | **7,716,185** | ** ** |
|                                                                                                                                                              |       |              |          |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                    | ** ** | ** **        | ** **    | ** **            | ** ** |
|                                                                                                                                                              |       |              |          |                  |       |
| **Current liabilities**                                                                                                                                           | ** ** | ** **        | ** **    | ** **            | ** ** |
| Accounts payable  and accrued expenses                                                                                                                            | ** ** | **$**             | **423,033**   | ** **            | **$**      | **766,930** | ** ** |
| Deferred  distributor revenue                                                                                                                                     | ** ** | **433,770**       | ** **    | **1,337,022**         | ** ** |
| Deferred  contract revenue                                                                                                                                        | ** ** | **72,686**        | ** **    | **72,686**            | ** ** |
|                                                                                                                                                              |       |              |          |                  |       |
| Total current  liabilities                                                                                                                                        | ** ** | **929,489**       | ** **    | **2,176,638**         | ** ** |
|                                                                                                                                                              |       |              |          |                  |       |
| **Commitments and Contingencies**                                                                                                                                 | ** ** | **—**        | ** **    | **—**            | ** ** |
| ** **                                                                                                                                                        | ** ** | ** **        | ** **    | ** **            | ** ** |
| **Stockholders’ equity**                                                                                                                                     | ** ** | ** **        | ** **    | ** **            | ** ** |
| Common stock,  $.01 par value; 20,000,000 shares authorized, 11,968,332 and 11,968,332  shares issued and outstanding at June 30, 2006 and December 31, 2005 | ** ** | **119,683**       | ** **    | **119,683**           | ** ** |
| Additional  paid-in capital                                                                                                                                       | ** ** | **18,104,423**    | ** **    | **18,104,423**        | ** ** |
| Deferred stock  compensation                                                                                                                                      | ** ** | **97,354**        | ** **    | **—**            | ** ** |
| Accumulated  deficit                                                                                                                                              | ** ** | **(14,345,194**   | **)**         | **(12,684,559**       | **)**      |
|                                                                                                                                                              |       |              |          |                  |       |
| Total  stockholders’ equity                                                                                                                                  | ** ** | **3,976,266**     | ** **    | **5,539,547**         | ** ** |
| ** **                                                                                                                                                        | ** ** | **$**             | **4,905,755** | ** **            | **$**      | **7,716,185** | ** ** |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

3

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** **

**APOGEETECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)**
| ** **                                                          | ** ** | **THREE MONTHS ENDED  June 30,** | ** **      | **SIX MONTHS ENDED  June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------|-----------------|-----------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                        | ** **      | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                          | ** ** | ** **                                      | ** **      | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                        | ** ** | ** **                                      | ** **      | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                                                       | ** ** | **$**                                           | **339,549**     |                                          | $          | 1,154,661 | ** ** | **$** | **1,324,947** |   | $ | 2,168,449 |   |
| Royalties                                                           | ** ** | **1,250**                                       |            | 159,978                                       | ** ** | **1,250** |   | 260,931 |   |
|                                                                |       |                                            |            |                                          |       |   |   |   |   |
| ** **                                                          | ** ** | **340,799**                                     |            | 1,314,639                                     | ** ** | **1,326,197** |   | 2,429,380 |   |
| ** **                                                          | ** ** | ** **                                      | ** **      | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Costs  and expenses**                                             | ** ** | ** **                                      | ** **      | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                                                       | ** ** | **271,844**                                     |            | 885,885                                       | ** ** | **997,089** |   | 1,853,228 |   |
| Research and  development                                           | ** ** | **605,738**                                     |            | 732,868                                       | ** ** | **1,000,313** |   | 1,523,007 |   |
| Selling, general  and administrative                                | ** ** | **531,884**                                     |            | 1,293,144                                     | ** ** | **1,158,593** |   | 2,093,084 |   |
|                                                                |       |                                            |            |                                          |       |   |   |   |   |
| ** **                                                          | ** ** | **1,409,466**                                   |            | 2,911,897                                     | ** ** | **3,155,995** |   | 5,469,319 |   |
| ** **                                                          | ** ** | ** **                                      | ** **      | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  loss**                                                 | ** ** | **(1,068,667**                                  | **)**           | (1,597,258                                    | )          | **(1,829,798** | **)** | (3,039,939 | ) |
| ** **                                                          | ** ** | ** **                                      | ** **      | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  (expense) income**                                         | ** ** | ** **                                      | ** **      | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                | ** ** | ** **                                      | ** **      | ** **                                    | ** ** | ** ** |   |   |   |
| SigmaTel  earn-out                                                  | ** ** | **84,108**                                      |            | —                                        | ** ** | **84,108** |   | — |   |
| Interest/other  expense                                             | ** ** | **(864**                                        | **)**           | (3,452                                        | )          | **(22,451** | **)** | (3,452 | ) |
| Interest income                                                     | ** ** | **53,790**                                      |            | 1,728                                         | ** ** | **107,506** |   | 6,125 |   |
|                                                                |       |                                            |            |                                          |       |   |   |   |   |
| ** **                                                          | ** ** | **137,034**                                     | ** **      | (1,724                                        | )          | **169,163** |   | 2,673 |   |
| ** **                                                          | ** ** | ** **                                      | ** **      | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  loss**                                                       | ** ** | **(931,633**                                    | **)**           | (1,598,982                                    | )          | **(1,660,635** | **)** | (3,037,266 | ) |
|                                                                |       |                                            |            |                                          |       |   |   |   |   |
| Accumulated  deficit - beginning                                    | ** ** | **(13,413,561**                                 | **)**           | (17,075,230                                   | )          | **(12,684,559** | **)** | (15,636,946 | ) |
|                                                                |       |                                            |            |                                          |       |   |   |   |   |
| **Accumulated  deficit - ending**                                   | ** ** | **$**                                           | **(14,345,194** | **)**                                         | $          | (18,674,212 | ) | **$** | **(14,345,194** | **)** | $ | (18,674,212 | ) |
| ** **                                                          | ** ** | ** **                                      | ** **      | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted loss per common share**                        | ** ** | **$**                                           | **(0.08**       | **)**                                         | $          | (0.14 | ) | **$** | **(0.14** | **)** | $ | (0.26 | ) |
| ** **                                                          | ** ** | ** **                                      | ** **      | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Weighted average common shares  outstanding - basic and diluted** | ** ** | **11,968,332**                                  |            | 11,838,332                                    | ** ** | **11,968,332** |   | 11,838,332 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**
| ** **                                                                     | ** ** | **SIX MONTHS ENDED JUNE 30,** | ** **     |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------|----------------|
| ** **                                                                     | ** ** | **2006**                                          | ** **     | **2005** | ** ** |
|                                                                           |       |                                              |           |   |   |
| **Cash  flows from operations**                                                | ** ** | ** **                                        | ** **     | ** ** | ** ** |
| Net loss                                                                       | ** ** | **$**                                             | **(1,660,635** | **)** | $ | (3,037,266 | ) |
| *Adjustments to reconcile net loss to net cash  used in operating activities:* | * *   | * *                                          | * *       | * * | * * |
| Provision for doubtful accounts                                                | ** ** | **(131,755**                                      | **)**          | 25,000 |   |
| Provision for slow moving, excess and obsolete  inventory                      | ** ** | **21,411**                                        |           | 320,867 |   |
| Depreciation and amortization                                                  | ** ** | **8,130**                                         | ** **     | 44,475 |   |
| Stock compensation expense                                                     | ** ** | **97,354**                                        |           | — |   |
| Disposal of property and equipment                                             |       | **11,032**                                        | ** **     | — |   |
| *Changes in operating assets and liabilities:*                                 | ** ** | ** **                                        | ** **     | ** ** |   |
| Accounts receivable                                                            |       | **155,181**                                       | ** **     | (73,841 | ) |
| Inventories                                                                    | ** ** | **952,311**                                       |           | (216,045 | ) |
| Prepaid expenses and other current assets                                      | ** ** | **56,488**                                        |           | 102,757 |   |
| Accounts payable and accrued expenses                                          | ** ** | **(324,818**                                      | **)**          | 799,433 |   |
| Deferred distributor revenue                                                   | ** ** | **(903,253**                                      | **)**          | 144,916 |   |
| Deferred contract revenue                                                      |       | —                                            |           | (23,102 | ) |
|                                                                           | ** ** | ** **                                        | ** **     | ** ** | ** ** |
|                                                                           |       |                                              |           |   |   |
| Net cash used in operating activities                                          | ** ** | **(1,718,554**                                    | **)**          | (1,912,806 | ) |
|                                                                           |       |                                              |           |   |   |
| **Cash  flows used in investing activities**                                   | ** ** | ** **                                        | ** **     | ** ** | ** ** |
| Purchases of property and equipment                                            | ** ** | **(32,035**                                       | **)**          | (62,186 | ) |
| Patent costs                                                                   | ** ** | **(6,326**                                        | **)**          | (47,947 | ) |
|                                                                           |       |                                              |           |   |   |
| Net cash used in investing activities                                          | ** ** | **(38,361**                                       | **)**          | (110,133 | ) |
|                                                                           |       |                                              |           |   |   |
| **Cash  flows from financing activities**                                      | ** ** | ** **                                        | ** **     | ** ** | ** ** |
| Proceeds from officer loan                                                     |       | —                                            | ** **     | 250,000 |   |
| Proceeds from shareholder loan                                                 |       | —                                            | ** **     | 250,000 |   |
|                                                                           |       |                                              |           |   |   |
| Net cash provided by financing activities                                      |       | —                                            |           | 500,000 |   |
|                                                                           |       |                                              |           |   |   |
| **Decrease  in cash and cash equivalents**                                     | ** ** | **(1,756,915**                                    | **)**          | (1,522,939 | ) |
|                                                                           |       |                                              |           |   |   |
| Cash and cash  equivalents — beginning                                    | ** ** | **5,512,974**                                     |           | 1,886,883 |   |
|                                                                           |       |                                              |           |   |   |
| **Cash and cash equivalents —  ending**                                   | ** ** | **$**                                             | **3,756,059**  |   | $ | 363,944 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

5

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** **

**APOGEETECHNOLOGY, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2006 AND JUNE 30, 2005 (UNAUDITED)**

**1****                                  TheCompany and Basis of Presentation**

***The Company***

Apogee Technology, Inc. and Subsidiary (the “Company” or “Apogee”,“we”, “us”, or “our”) has historically designed, developed, and marketedintegrated circuit (“IC”) products incorporating our proprietary DDX® audioamplifier technology to the consumer electronics market. In addition, underlicensing agreements with third parties, we granted rights to our intellectualproperty for use in royalty bearing audio IC products. Apogee is in the processevolving from an audio focused enterprise to a provider of sensors and medicaldevice products based upon our acquired Micro-Electromechanical Systems (“MEMS”)and Nanotechnologies. We released our first sensor products inDecember 2005 targeted for the consumer, automotive and industrial marketsand we are currently developing a MEMS based device for transdermal andintradermal drug delivery for the medical market.

On October 5, 2005, Apogee completed a transaction withSigmaTel, Inc. (“SigmaTel”), whereby certain assets of the audio divisionwere sold, including the DDX technology and the associated royalties from itslicense agreement with STMicroelectronics (“ST”).  These assets were sold to SigmaTel forapproximately $9.4 million, resulting in a gain of approximately $8.9 millionplus a one-year earn-out of potentially up to $4.5 million (the “SigmaTelTransaction”). During the three-month period ended June 30, 2006, we recordedapproximately $84,000 from the earn-out. No assurance can be given that any portion of the additional earn-outwill be realized. The Company and certain of its principal stockholders alsoentered into an Indemnification Agreement in the event that certain terms ofthe Agreement are violated. The Company is authorized to indemnify theprincipal stockholders in the event any one or more of them has to satisfy anyobligations thereunder. In addition, the Company’s engineering and marketingstaff related to the audio division were offered positions at SigmaTel as apart of the Transaction.

Although the Company retained some of its audio division relatedagreements (with the exception of the royalty rights from the license agreementwith ST) and its audio IC inventory, the Company intends to cease theoperations of its audio division upon completion of the sale or disposition ofthese remaining assets which is expected within the next year.

Subsequent to the sale of the audio division, we organized our MEMSdivision into two business groups, the Sensor Products Group and the MedicalProducts Group. The Sensor Products Group will focus on the design, developmentand marketing of proprietary MEMS/Nanotechnology based sensors for theconsumer, industrial and automotive markets. In December 2005, weintroduced our first sensor products, a family of miniature pressure sensors,trademarked under the SensilicaTM brand name. These sensors are presently beingsampled to potential customers. We intend to sell these sensor devices asstand-alone die and as packaged solutions in a similar manner as we employed inthe marketing and sale of our former audio IC products. The Medical ProductsGroup is currently focused on creating value added products to address unmetmedical needs by commercializing nanotechnology based drug encapsulation andtherapeutic delivery products. We have demonstrated the feasibility of our drugdelivery device by performing efficacy tests with model drugs in laboratorysettings. We are currently establishing manufacturing and regulatory strategiesto support commercialization of our transdermal and intradermal line ofproducts for both Food and Drug Administration (“FDA”) regulated and nonFDA-regulated applications. Depending upon the results of our technology andproduct development activities, we may: (i) license our technology tothird party medical device or pharmaceutical companies, (ii) develop, havemade and market through distributors our own medical products, or(iii) partner with third party pharmaceutical companies to commercializeour products.

***Basis of Presentation***

***Consolidated Financial Statements***

The financial statements include the accounts of ApogeeTechnology, Inc., and its wholly owned inactive subsidiary,DUBLA, Inc. All significant intercompany transactions and accounts havebeen eliminated.

6

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In the opinion of the Company’s management, all adjustments, consistingof normal recurring accruals considered necessary for a fair presentation, havebeen included in the accompanying unaudited financial statements. Operatingresults for the three and six months ended June 30, 2006 are not necessarilyindicative of the results that may be expected for the full year endingDecember 31, 2006.

***Going Concern***

The accompanying consolidated financial statements have been preparedon a going concern basis which contemplates the realization of assets andsatisfaction of liabilities in the normal course of business. As shown in theconsolidated financial statements, we have incurred continuing losses andnegative cash flows from operations. Net losses were approximately $1.7 millionand negative cash flows from operations were approximately $1.7 million for thesix months ended June 30, 2006. This raises substantial doubt about the Company’sability to continue as a going concern.

The Company sold certain tangible and intangible assets associated withits audio business in 2005 and has approximately $3.8 million of cash at June30, 2006. The Company has reduced, in the short-term, its operating expensesfor payroll and related costs, rents and professional fees amongst others. TheCompany believes that its current working capital and amounts that may beraised to support operations will be sufficient to fund its capital andoperational requirements at least through June 30, 2007.

The long term success of the Company is dependent upon its ability tosuccessfully develop and market its sensor and medical device products basedupon its MEMS technology, to attain profitable operations and/or raiseadditional funds as needed for such purpose. There can be no assurance,however, that the Company will be able to become profitable or raise the fundsthat it needs or that additional funds will be available to the Company onacceptable terms, if at all.

***Use of Estimates inFinancial Statements***

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates, and such differences could affect the results of operations reportedin future periods and such differences could be material.

7

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**2.****                               Summaryof Significant Accounting Policies**

***Revenue Recognition***

The Company recognizes revenue in accordance with Securities andExchange Commission Staff Accounting Bulletin No. 104 (“SAB 104”), “RevenueRecognition in Financial Statements: Revenue Recognition”, which states thatrevenue should be recognized when the following revenue recognition criteriaare met:  (1) persuasive evidence of an arrangement exists;(2) the product has been shipped and the customer takes ownership andassumes the risk of loss; (3) the selling price is fixed or determinable;and (4) collection of the resulting receivable is reasonably assured. Thefollowing policies apply to the Company’s major product sales categories forrevenue recognition.

Sales to OEM Customers:  Revenue is recognized under the Company’sstandard terms and conditions of sale, title and risk of loss transfer to thecustomer at the time products are shipped to the customer or the customers’representative/freight forwarder (shipping terms Ex Works). The Company hasexperienced minimal warranty or other returns and based upon historicalexperience has recorded a $10,000 provision for such returns.

Sales to Distributors:  At times the Company provides incentivessuch as stock rotation, price protection and other incentives to itsdistributors. Therefore, under the sell through method of revenue recognitionthe Company defers recognition of revenue until such time that the distributorsells products to its customers based upon receipt of point-of-sale reportsfrom the distributors. Distributor payments received before revenue isrecognized are recorded as deferred revenue. Unsold inventory held atdistributors is included as a component of finished goods inventory.

The Company records royalty revenue when earned in accordance with theunderlying agreement. Royalties are based upon sales of products commercializedfrom the Company’s licensed technology. Consulting revenue is recognized asservices are performed in accordance with the terms of the underlyingconsulting agreements.

***Loss Per Share***

Basic loss per share is computed by dividing the net loss attributableto common stockholders for the period by the weighted average number of sharesof common stock outstanding during the period. Diluted net loss per share iscomputed based on the weighted average number of shares of common stock andshares of common stock issuable upon the exercise of stock options and commonstock warrants.

***Research andDevelopment***

Costs for research and development are expensed as incurred.

***Inventories***

Inventories, including inventory held at distributors are stated at thelower of cost on a first-in, first-out basis or market. See Footnote 4.  This policy requires the Company to makeestimates regarding the market value of the Company’s inventory, including anassessment of excess or obsolete inventory. The Company determines excess andobsolete 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.

8

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During the six-month period ended June 30, 2006, the Company recorded aprovision of approximately $32,000 for slow moving, excess and obsoleteinventory.  During the three-month periodended June 30, 2006 the Company wrote off approximately $11,000 against thisprovision.

***Purchase commitmentlosses***

The Company accrues for estimated losses on non-cancelable purchaseorders of products, which may occur if the future sale price declinesbelow the committed purchase price. There are no outstanding purchasecommitments of product inventory and therefore no provision was required atJune 30, 2006.

***Property andEquipment***

Major replacements and betterments of equipment are capitalized. Costof normal maintenance and repairs is charged to expense as incurred.Depreciation is provided over the estimated useful lives of the assets usingaccelerated methods. Leasehold improvements are amortized over either the termof lease or the estimated useful life of the improvement.

***Patents***

Costs incurred to register and obtain patents are capitalized andamortized on a straight-line basis over five years, their estimated usefullives.

***Cash and CashEquivalents***

The Company considers all highly liquid investments with an originalmaturity of three months or less to be cash equivalents. Substantially all ofthe Company’s cash is held in high quality money market funds comprised ofshort-term, fixed income securities earning interest at 4.66% at June 30, 2006.

***Accounts Receivable***

The Company carries its trade receivables from direct customers less anallowance for doubtful accounts to ensure that trade receivables are carried atnet realizable value. On a periodic basis, the Company evaluates thecollectibility of its accounts receivable on a variety of factors, includinglength of time receivables are past due, indication of customer willingness topay, significant one-time events and historical experience. An additionalreserve for individual accounts is recorded when the Company becomes aware of acustomer’s inability to meet its financial obligations, such as in the case ofbankruptcy filings or substantial deterioration in the customer’s operatingresults or financial position. 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. Accounts receivableare generally considered past due if any portion of the receivable balance isoutstanding for more than 90 days. The earn-out payment due Apogee, as part ofthe SigmaTel transaction, if and to the extent earned by the Company, would bedue for payment within forty-five days following the end of the Earn-Out Period(October 5, 2006). See Footnote 3 – Accounts Receivable.  If circumstances related to the Company’scustomers change, estimates of the recoverability of receivables would befurther adjusted.

9

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***Fair value offinancial instruments***

Carrying amounts of certain of the Company’s financial instruments,including cash and cash equivalents, accounts receivable and notes and accountspayable, approximate their fair values due to their relatively short maturitiesand based upon comparable market information available at the respectivebalance sheet dates. The Company does not hold or issue financial instrumentsfor trading purposes.

***Stock BasedCompensation***

The Company has one stock-based compensation plan, the 1997 Employee,Director and Consultant Stock Option Plan (“Plan”) which is described below.Prior to fiscal 2006, the Company accounted for the plan under the recognitionand measurement provisions of Accounting Principles Board (APB) OpinionNo. 25, “Accounting for Stock Issued to Employees”, and relatedInterpretations, as permitted by Financial Accounting Standards Board (FASB)Statement of Financial Accounting Standards (SFAS) No. 123, “Accountingfor Stock-Based Compensation” (SFAS 123). Compensation costs related to stockoptions granted at fair value under those plans were not recognized in theconsolidated statements of income.

In December 2004, FASB issued SFAS 123 (revised 2004), “Share-BasedPayments” (SFAS 123(R)). Under the new standard, companies are no longer ableto account for stock-based compensation transactions using the intrinsic valuemethod in accordance with APB Opinion No. 25. Instead companies arerequired to account for such transactions using a fair-value method andrecognize the expense in the consolidated statement of income.

Prior to January 1, 2006, the Company had adopted only thedisclosure provisions of SFAS 123(R). It applied APB Opinion No. 25, “AccountingFor Stock Issued To Employees”, and related interpretations in accounting forits plan and did not recognize compensation expense for its stock-basedcompensation plan.

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

Included in the Company’s net loss for the three and six months endedJune 30, 2006 was approximately $23,000 and $97,000, respectively, due to theadoption of SFAS 123(R).  In addition,the basic and diluted loss per share for these periods was approximately $0.01higher due to the adoption of SFAS 123(R).

**1997 Employee, Director andConsultant Stock Option Plan**

In May 1997, the Company adopted a stock option plan foremployees, directors and consultants. The Company’s board of directorsauthorized a maximum of 600,000 shares of common stock for issuance under theplan, which in 2001 was increased to 2,100,000 shares, increased in 2002 to3,100,000 shares and further increased in 2003 to 4,100,000 shares. Pursuant tothe plan, the board may grant options to employees, directors, orconsultants at its discretion. Options granted under the plan to individualswith less than 10% ownership are to be for 100% of the fair value of the commonstock on the date of grant and expire 10 years from the date of grant. Optionsgranted under the plan to individuals with greater than 10% ownership are to befor 110% of the fair value of the common stock on the date of grant and expirefive years from the date of grant.

 

10

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**Accounting for Stock Compensation**

Stock-based compensation costs are generally based on the fair valuecalculated from the Black-Scholes option-pricing model on the date of grant forstock options.

The fair values of stock grants are amortized as compensation expenseover the options’ vesting period. Compensation expense recognized is shown inthe operating activities section of the consolidated statements of cashflow.

In anticipation of adopting SFAS 123(R), the Company evaluated theassumptions used in the Black-Scholes model. The Company continues to calculatethe expected volatility based solely on historical volatility. The Companybelieves that historical volatility provides the best estimate of future stockprice volatility.

The expected term was previously and is currently calculated based onan analysis of vesting periods and contractual life. The Company believes thatthis analysis provides a better estimate of option term periods.

The Company continues to base the estimate of risk-free rate on theU.S. Treasury yield curve in effect at the time of grant. The Company has neverpaid cash dividends and does not currently intend to pay cash dividends, andthus has assumed a 0% dividend yield.

***Stock BasedCompensation***

As part of the requirements of SFAS 123(R), the Company isrequired to estimate potential forfeitures of stock grants and adjustcompensation cost recorded accordingly. The estimate of forfeitures will beadjusted over the requisite service period to the extent that actualforfeitures differ, or are expected to differ, from such estimates. Changes inestimated forfeitures will be recognized through a cumulative catch-upadjustment in the period of change and will also impact the amount of stockcompensation expense to be recognized in future periods.

A summary of the Company’s stock compensation activity with respect tothe six months ended June 30, 2006 follows:

| Stock Options                     | ** ** | **Shares** | ** ** | **Weighted-   Average   Exercise   Price** | ** ** | **Weighted-   Average   Remaining   Contractual   Term** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| Outstanding at  December 31, 2005 |       | 2,495,060  |       | $                                                         | 5.4939     |                                                                         |       |   |
| Granted                                |       | 141,500    |       | 0.9940                                                    |       |                                                                         |       |
| Exercised                              |       | -0-        |       |                                                      |       |                                                                         |       |
| Cancelled or  expired                  |       | (148,960   | )          | 4.5431                                                    |       |                                                                         |       |
| Outstanding at  June 30, 2006          |       | 2,487,600  |       | $                                                         | 5.3231     |                                                                         | 6.3869     |   |
|                                   |       |       |       |                                                      |       |                                                                         |       |
| Vested at  June 30, 2006          |       | 2,219,900  |       | $                                                         | 5.8244     |                                                                         | 6.0396     |   |
|                                   |       |       |       |                                                      |       |                                                                         |       |
| Exercisable at  June 30, 2006     |       | 2,219,900  |       | $                                                         | 5.8244     |                                                                         | 6.0396     |   |

 

The following table summarizes information about options outstanding asof June 30, 2006:

|                                 | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                      | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of Exercise** | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Prices**                      | ** ** | **Outstanding**              | ** ** | **Life**                     | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
|                            |       |                         |       |                         |       |   |   |   |   |   |   |
| $0.25 — 4.50               |       | 964,600                      |       | 6.4035                       |       | $ | 2.1998 |   | 696,900 |   | $ | 2.5970 |   |
| $5.25 — 12.15              |       | 1,523,000                    |       | 6.3764                       |       | $ | 7.3012 |   | 1,523,000 |   | $ | 7.3012 |   |
|                            |       |                         |       |                         |       |   |   |   |   |   |   |
| Total at June 30, 2006          |       | 2,487,600                    |       | 6.3869                       |       | $ | 5.3221 |   | 2,219,900 |   | $ | 5.8244 |   |

 

11

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During the six months ended June 30, 2006, the Company granted optionsto purchase 141,500 shares of its common stock at a weighted price average fairmarket value of $.80.  No options wereexercised during the six months ended June 30, 2006.  During the six months ended June 30, 2006,options to purchases 35,300 shares of Apogee common stock vested.  ** **The weighted averagefair value of these options was $1.025. Total stock-based compensation expense for the six months ended June 30,2006 was approximately $97,000.  Had weimplemented SFAS 123(R) during the six months ended June 30, 2005, ourstock-based compensation expense for such period would have been approximately$1.1 million.

During the six months ended June 30, 2006, the Company issued 141,500options to purchase shares under the Company’s Plan.  No options were exercised for the six monthsended June 30, 2006.

**3.****                               AccountsReceivable**

Accounts Receivable at June 30, 2006 and December 31, 2005 arecomprised of the following:
| ** **                           | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|-------------|-----------------------|------------|
|                                      | ** ** | **2006**          | ** **  | **2005**              | ** ** |
| ** **                           | ** ** | **(Unaudited)**   | ** **  | **(Audited)**         | ** ** |
| Distributor                          | ** ** | **$**             | **13,630**  |                  | $          | 190,202 |   |
| Direct  customers*                   | ** ** | **101,964**       |        | 107,635               |       |
| ** **                           | ** ** | **$**             | **115,594** |                  | $          | 297,837 |   |
|                                 |       |              |        |                  |       |
| Less allowance for doubtful accounts | ** ** | **$**             | **(13,245** | **)**                 | (145,000   | ) |
|                                 |       |              |        |                  |       |
| Net accounts  receivable             | ** ** | **$**             | **102,349** |                  | $          | 152,837 |   |

----

* $84,108 of the 2006amount is from the earn-out due Apogee as part of the SigmaTel transaction.

**4.****                               Inventories**

Inventories are stated at the lower of cost (first-in, first-out) ormarket. The major classifications of inventories are as follows:

|                                                                | ** ** | **June 30,** | ** **    | **December 31,** | ** ** |
|----------------------------------------------------------------|------------|-------------------|---------------|-----------------------|------------|
| ** **                                                     | ** ** | **2006**          | ** **    | **2005**              | ** ** |
| ** **                                                     | ** ** | **(Unaudited)**   | ** **    | **(Audited)**         | ** ** |
|                                                           |       |              |          |                  |       |
| Raw materials                                                  | ** ** | **$**             | **-0-**       |                  | $          | -0- |   |
| Finished goods  held by Apogee                                 | ** ** | **1,940,472**     |          | 2,297,795             |       |
| Finished goods  held by distributors                           | ** ** | **348,435**       |          | 943,423               |       |
|                                                           |       |              |          |                  |       |
| ** **                                                     | ** ** | **$**             | **2,288,907** |                  | $          | 3,241,218 |   |
| Less allowance for slow moving, excess and obsolete  inventory | ** ** | **(1,934,665**    | **)**         | (1,913,254            | )          |
|                                                           |       |              |          |                  |       |
| Inventory — net                                           | ** ** | **$**             | **354,242**   |                  | $          | 1,327,964 |   |

 

12

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**5.****                               Propertyand Equipment**

Property and equipment at June 30, 2006 and December 31, 2005 arecomprised of the following:

|                               | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                    | ** ** | **2006**          | ** **  | **2005**              | ** ** |
| ** **                    | ** ** | **(Unaudited)**   | ** **  | **(Audited)**         | ** ** |
|                          |       |              |        |                  |       |
| Equipment                     | ** ** | **$**             | **60,872**  |                  | $          | 48,091 |   |
| Software                      | ** ** | **32,943**        |        | 32,943                |       |
| Furniture and  fixtures       | ** ** | **23,553**        |        | 22,515                |       |
| Leasehold  improvements       | ** ** | **22,954**        |        | 22,954                |       |
|                          |       |              |        |                  |       |
| ** **                    | ** ** | **$**             | **140,332** |                  | $          | 126,503 |   |
|                          |       |              |        |                  |       |
| Less accumulated depreciation | ** ** | **(87,516**       | **)**       | (86,570               | )          |
|                          |       |              |        |                  |       |
| ** **                    | ** ** | **$**             | **52,806**  |                  | $          | 39,933 |   |

 

Depreciation expense was $4,296 and $8,130 for the three and six monthsended June 30, 2006.

The estimateduseful lives of the classes of physical assets were as follows:

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

 

**6.****                               AccruedExpenses**

|                         | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|-------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **              | ** ** | **2006**          | ** **  | **2005**              | ** ** |
| ** **              | ** ** | **(Unaudited)**   | ** **  | **(Audited)**         | ** ** |
|                    |       |              |        |                  |       |
| Accrued audit  expenses | ** ** | **$**             | **57,000**  |                  | $          | 69,000 |   |
| Accrued legal  expenses | ** ** | **51,000**        |        | 86,000                |       |
| Accrued taxes           | ** ** | **20,000**        |        | 20,000                |       |
| Other accrued  expenses | ** ** | **36,000**        |        | 39,000                |       |
|                    |       |              |        |                  |       |
| ** **              | ** ** | **$**             | **164,000** |                  | $          | 214,000 |   |

 

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**7.****                               DeferredContract Revenue**

During September 2004, the Company entered into a fundingagreement with United Binational Industrial Research and Development (“BIRD”)Foundation of Israel. This agreement will provide funds to the Company forindustrial research and development activities. The agreement will provide upto a maximum of $560,000 of which the Company may receive $280,000, andanother partner in the agreement will receive the remainder. The Company hasrecorded $101,379 in deferred contract revenue and for the twelve months endedDecember 31, 2004 recorded $23,101 as an offset to research anddevelopment expenses. There was no revenue recorded under this agreement forthe fiscal year ended December 31, 2005 or the six months ended June 30,2006.  A portion of the deferred contractrevenue has been refunded to Bird.  SeeFootnote 12 - Subsequent Events.

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

***Stock Options***

During the three months ended June 30, 2006, the Board of Directorsawarded an employee options to purchase 15,000 shares at an exercise price of$1.02 per share.  In addition, the Boardof Directors awarded to each of two members of the newly formed Advisory Boardoptions to purchase 10,000 shares at an exercise price of $1.05 per share.  These options were granted under the 1997Employee, Director and Consultant Stock Option Plan. The options granted to theemployee vest over five years beginning at the first anniversary of the date ofgrant.  The options granted to themembers of the Medical Advisory Board vest over one year beginning with 50% atthe six month anniversary of the date of grant and the remaining 50% at the oneyear anniversary of the date of grant.

**9.****                               RelatedParty Transactions**

The Company rents its facility from an entity controlled by astockholder for $4,400 per month pursuant to a lease that expiredDecember 31, 2005. Currently, the Company is renting the facility on amonth-to-month basis.

**10.****                        LicenseAgreement**

On February 7, 2001, the Company signed a license agreement withST Microelectronics NV (“ST”). The agreement granted ST the exclusive rights todevelop, manufacture, and sell products incorporating certain intellectualproperty rights owned or controlled by the Company. In consideration for thislicense, ST paid to the Company a one-time license fee of $1.6 million in cash,a $400,000 credit for future design services and royalties based upon the saleof ST products that incorporate the licensed technology.

Royalty income was recognized during the period in which the royaltieswere earned. Royalties were reported to us by ST on a quarterly “RoyaltySchedule,” which was received within 30 days of quarter end. Royalties weredetermined based upon either a percentage of selling prices or a flat ratedepending on the particular product item sold in the reporting quarter. Inconjunction with the SigmaTel transaction, Apogee sold the rights to theroyalties received under the license agreement to SigmaTel, as well as all therights, title and interest in the related intellectual property.

14

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**11.****                        Concentrations**

During the three months ended June 30, 2006, the Company derivedapproximately 71% of its revenue as a result of sell through by twodistributors.

During the six months ended June 30, 2006, the Company derivedapproximately 77% of its revenue as a result of sell through by fourdistributors.

During the three months ended June 30, 2005, the Company derivedapproximately 28% of its total revenue from two end users and 31% of totalrevenue as a result of sell through by two distributors.

During the three months ended June 30, 2005, the Company derivedapproximately 29% of its product revenue from two end users and 35% of productrevenue as a result of sell through by two distributors.

During the six months ended June 30, 2005, the Company derivedapproximately 23% of its total revenue from two end users and 44% of totalrevenue as a result of sell through by two distributors.

During the six months ended June 30, 2005, the Company derivedapproximately 15% of its product revenue from one end user and 50% of productrevenue as a result of sell through by two distributors.

During the three months ended June 30, 2006, the Company derivedapproximately 86% of its revenue from distributors and end users located inAsia and Europe.

During the six months ended June 30, 2006, the Company derivedapproximately 84% of its revenue from distributors and end users located inAsia and Europe.

During the three months ended June 30, 2005, the Company derivedapproximately 83% of its total revenue from distributors located in Asia andEurope.

During the three months ended June 30, 2005, the Company derivedapproximately 81% of its product revenue from distributors located in Asia andEurope.

During the six months ended June 30, 2005, the Company derivedapproximately 87% of its total revenue from distributors located in Asia andEurope.

During the six months ended June 30, 2005, the Company derivedapproximately 86% of its product revenue from distributors located in Asia andEurope.

Two of the Company’s customers accounted for approximately 92% of thetotal accounts receivable balance at June 30, 2006.

Four of the Company’s customers accounted for approximately 77% of thetotal accounts receivable balance at June 30, 2005.

The Company maintains its cash accounts with high quality financialinstitutions. Balances usually exceed the maximum coverage ($100,000) providedby the Federal Deposit Insurance Corporation on insured depositor accounts.

**12.****                        SubsequentEvents**

On July 25, 2006, The Bird Foundationinformed Apogee that it had received final reports on the “IrDDX — FullyDigital Wireless Amplification Controller” Project and determined that aportion of the original $101,379 paid to Apogee was owed to theFoundation.  On July 27, 2006 Apogeerefunded approximately $63,000 thus satisfying its obligation in full to theBird Foundation under the Agreement.  The remaining $10,000 in deferred contract revenue was applied againstResearch and Development expense.

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 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, 2006 and June30, 2005 should be read in conjunction with the Company’s Financial Statementsand related Notes included elsewhere in this Quarterly Report onForm 10-QSB. This discussion contains, in addition to historicalstatements, forward-looking statements that involve risks and uncertainties.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 thesection of this Quarterly Report titled “Certain Risk Factors ThatMay Affect Future Results of Operations And Our Common Stock Price” aswell as other factors described in the Company’s Annual Report onForm 10-KSB for the year ended December 31, 2005. The Company doesnot intend to update any such forward-looking statements.

**OVERVIEW**

Apogee has historicallydesigned, developed, and marketed integrated circuit (“IC”) productsincorporating our proprietary DDX® audio amplifier technology to the consumerelectronics market. In addition, under licensing agreements with third parties,we granted rights to our intellectual property for use in royalty bearing audioIC products. Apogee is currently in the final stages of the process of evolvingfrom an audio focused enterprise to a provider of sensors and medical deviceproducts based upon its acquired Micro-Electromechanical Systems (“MEMS”) andnanotechnologies. We released our first sensor products in December 2005targeted for the consumer, automotive and industrial markets and we are currentlydeveloping a MEMS based device for transdermal drug delivery for the medicalmarket.

From 1981 until 1995,Apogee was in the business of engineering, manufacturing and marketing highquality, high-end patented ribbon loudspeaker systems for use in home audio andvideo entertainment systems. From 1995 until October 2005, we focused on thedevelopment and commercialization of our proprietary all-digital, highefficiency audio amplifier technology, known as DDX®. Our DDX developmentefforts were directed toward the licensing of our technology and the design anddevelopment of DDX based IC’s. Apogee signed an exclusive licensing agreementfor audio applications with STMicroelectronics NV (“ST”) in February 2001,which was subsequently transitioned to a non-exclusive license in 2005. Underthis licensing agreement with ST, Apogee developed and provided intellectualproperty to be used in royalty bearing products produced by ST.

As set forth in ourCurrent Report on Form 8-K as filed on October 11, 2005, we completeda transaction with SigmaTel, Inc. (“SigmaTel”) on October 5,2005.  In this transaction, certainassets of our audio division were sold, including the DDX technology and theassociated royalties from our license agreement with ST, to SigmaTel forapproximately $9.4 million plus a one-year potential earn-out of up to $4.5million.  For the three months ended June30, 2006, we recorded approximately $84,000 from the earn-out.  No assurance can be given that any portion ofthe additional earn-out will be realized, and based on our reports received todate, the revenue generated from this earn-out is likely to be moderate.  As part of the transition, a significantportion of Apogee’s engineering and marketing staff related to the audiodivision left the Company after they were offered positions at SigmaTel. Wehave chosen to exit the audio business and by the terms of a non-compete withSigmaTel, signed in connection with our sale of assets to them, we can nolonger compete in the Class D audio/amplifier business for a period of twoyears.

Subsequent to the sale ofthe audio division, we reorganized the Company’s remaining MEMS division intotwo business groups, the Sensor Products Group and the Medical Products Group.The Sensor Products Group is focused on the design, development and marketingof proprietary MEMS/Nanotechnology based sensors for the consumer, industrialand automotive markets. In December 2005, we introduced our first sensorproducts, a family of miniature pressure sensors, trademarked under theSensilicaTM brand name. These sensors are presently being sampled to potentialcustomers. We intend to sell these sensor devices as stand-alone die and aspackaged solutions in a similar manner as we employed in the marketing and saleof our former audio IC products. The Medical Products Group is currentlyfocused on creating value added products to address unmet medical needs bycommercializing nanotechnology based drug encapsulation and therapeuticdelivery products.  We have demonstratedthe feasibility of our solution by performing efficacy tests with model drugsand have performed related testing to support the commercialization of ourtransdermal and intradermal delivery device. Depending upon the results of ourtechnology and product development activities, we may: (i) license ourtechnology to third party medical device or pharmaceutical companies,(ii) develop, have made and market through distributors our own medicalproducts, or (iii) partner with third party pharmaceutical companies to commercializeour products.

For the immediate future,we expect that our revenue will result from the sale our remaining audioinventory. We expect that future revenue will initially be the result of sensorsales, potential licensing revenues resulting from the grant of rights to ourintellectual property, and consulting work from product or intellectualproperty development for third parties. It is likely that our MEMS-basedmedical products will take longer to commercialize, but the same business modelwill likely apply. Although the sales and marketing staff is not the same, weplan to leverage our past experience with a worldwide network of direct salesstaff, independent sales representatives and distributors to support our SensorProducts Group and in conjunction with this we also intend to add new saleschannels for our emerging medical products as appropriate.

16

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In our audio business, weoutsourced the manufacturing, assembly and preliminary testing of our products.We intend to follow the same business model with respect to our sensor andmedical products businesses. Our cost of revenue includes the third-partymanufacturing, testing and assembly costs as well as costs associated withshipping. Research and development expenses consist primarily of salaries andrelated overhead costs associated with engineering activities as well as othermaterials and related services used in the development of our medical deviceand sensor products. Selling, general and administrative expenses consistprimarily of employee compensation and overhead charges as well as expensesdirectly associated with the marketing of our former DDX products as well asour sensor and medical device products. We expect our business structure toremain largely the same.

At June 30, 2006, we hadan accumulated deficit of approximately $14.3 million, as compared to a deficitof $12.7 million as of December 31, 2005. Our historical net losses and accumulated deficit (since 1995) resultprimarily from the costs associated with our efforts to design, develop andmarket its DDX technology as well as costs associated with our efforts todevelop new products using our analog and digital circuit designs and MEMStechnology.

As of June 30, 2006, wehad 13 employees compared to 36 employees for the same period in 2005. Thisreduction in employees is a direct result of the audio business sale toSigmaTel, Inc. in October 2005.

During the three-monthperiod ended June 30, 2006, we derived approximately 71% of our revenue as aresult of sell through by two distributors of our audio products.  During the six-month period ended June 30,2006, we derived approximately 77% of our revenue as a result of sell throughby four of our distributors.  As of June30, 2006, Apogee recognized substantially all of the deferred revenue,approximately $452,000, related to two of our former distributors. AtDecember 31, 2005, we had formally terminated these distributor contracts.At June 30, 2006 it was determined that we would have no continuing involvementwith these distributors as they related to the audio business. For the threeand six months ended June 30, 2006, all of our revenue was attributable to theaudio division. Prior to the SigmaTel transaction, we utilized a network ofsales representatives and distributors, as well as sales offices in China, HongKong, Japan and Taiwan, to support our worldwide sales and marketingactivities.  Subsequent to the selling ofthe audio business in October 2005, we closed our locations in China, HongKong and Taiwan.  In an effort toconsolidate operations and further reduce overhead, we closed our Long Island,New York office in January 2006.

**SELECTEDCONSOLIDATED FINANCIAL DATA**

The following selectedfinancial data for the three- and six-month periods ended June 30, 2006 and 2005have been derived from our unaudited financial statements. Any trends reflectedby the following table may not be indicative of future results.

 
| ** **                               | ** ** | **For the Three-Month Period  Ended  June 30,** | ** ** | **For the Six-Month Period  Ended  June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                            | ** ** | **2005**                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | ** **                                                          | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statement of Operations  Data:           |       |                                                                |       |                                                              |       |   |   |   |   |
| Revenue                                  |       | $                                                                   | 340,799    |                                                              | $          | 1,314,639 |   | $ | 1,326,197 |   | $ | 2,429,380 |   |
| Costs and expenses                       |       | (1,409,466                                                          | )          | (2,911,897                                                        | )          | (3,155,995 | ) | (5,469,319 | ) |
| Other Income (expenses)                  |       | 137,034                                                             |       | (1,724                                                            | )          | 169,163 |   | 2,673 |   |
| Net Loss                                 |       | $                                                                   | (931,633   | )                                                                 | $          | (1,598,982 | ) | $ | (1,660,635 | ) | $ | (3,037,266 | ) |
|                                     |       |                                                                |       |                                                              |       |   |   |   |   |
| Shares Outstanding                       |       | 11,968,332                                                          |       | 11,838,332                                                        |       | 11,968,332 |   | 11,838,332 |   |
|                                     |       |                                                                |       |                                                              |       |   |   |   |   |
| Balance Sheet Data:                      |       |                                                                |       |                                                              |       |   |   |   |   |
| Total Assets                             |       | $                                                                   | 4,905,755  |                                                              | $          | 4,097,103 |   | $ | 4,905,755 |   | $ | 4,097,103 |   |
| Stockholders’ equity  (deficiency)  |       | $                                                                   | 3,976,266  |                                                              | $          | (482,605 | ) | $ | 3,976,266 |   | $ | (482,605 | ) |
| Loss per share (basic and fully diluted) |       | $                                                                   | (0.08      | )                                                                 | $          | (0.14 | ) | $ | (0.14 | ) | $ | (0.26 | ) |

 

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**RESULTSOF OPERATIONS OF THE COMPANY**

The following table setsforth the percentage of total revenue represented by certain revenue andexpense items for the three- and six-month periods ended June 30, 2006 and2005. The table and the discussion below should be read in conjunction with theconsolidated financial statements and notes thereto that appear elsewhere inthis report.
| ** **                           | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                          | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                 |       |                                                              |       |                                                            |       |   |   |   |   |
| Product Sales                        |       | 99.63                                                             | %          | 87.83                                                           | %          | 99.91 | % | 89.26 | % |
| Royalties                            |       | 0.37                                                              |       | 12.17                                                           |       | 0.09 |   | 10.74 |   |
|                                 |       |                                                              |       |                                                            |       |   |   |   |   |
| Cost of Sales                        |       | (79.77                                                            | )          | (67.39                                                          | )          | (75.18 | ) | (76.28 | ) |
| Research and  Development            |       | (177.74                                                           | )          | (55.75                                                          | )          | (75.43 | ) | (62.69 | ) |
| Selling, General  and Administrative |       | (156.07                                                           | )          | (98.36                                                          | )          | (87.36 | ) | (86.16 | ) |
|                                 |       |                                                              |       |                                                            |       |   |   |   |   |
| Operating Loss                       |       | (313.58                                                           | )%         | (121.50                                                         | )%         | (137.97 | )% | (125.13 | )% |
| Other Income  (Expense)              |       | 40.21                                                             |       | (0.13                                                           | )          | 12.76 |   | (0.11 | ) |
|                                 |       |                                                              |       |                                                            |       |   |   |   |   |
| Net Loss                             |       | (273.37                                                           | )%         | (121.63                                                         | )%         | (125.21 | )% | (125.24 | )% |

 

**Revenue**

On October 5, 2005,we completed a transaction with SigmaTel, Inc. whereby certain assets ofthe audio division were sold, including the DDX® technology and the associatedroyalties from our license agreement with ST, for approximately $9.4 million,resulting in a gain of approximately $8.9 million, plus a one-year earn-out ofpotentially up to $4.5 million.  As aresult, we will formally discontinue our residual audio division aftercompleting the sale of our remaining audio division assets. For the threemonths ended June 30, 2006, we recorded approximately $84,000 of theearn-out.  No assurance can be given thatany additional earn-out will be realized and based on our reports received todate, any revenue generated from this earn-out is likely to be moderate.  We derive our revenue from three sources:(1) product sales, which consist of merchandise sales made either directlyto original equipment manufacturers or sell through point of sale (“POS”) bydistributors. All shipments are fulfilled from our contracted warehouse in HongKong and/or from our Norwood, Massachusetts office and is reported net ofreturns; (2) royalty revenue, which formerly consisted of royalties paidby STMicroelectronics which have now been sold as part of the transactionwith SigmaTel. The Company may in the future receive royalties under itsremaining audio licensing agreements and from new agreements contemplated underits two new business groups, and (3) consulting income related to thedevelopment of custom products for third parties. See Footnote 2 – RevenueRecognition.

Total revenue declined byapproximately $974,000 or 74% to approximately $341,000 for the three monthsended June 30, 2006, compared to approximately $1.3 million for the threemonths ended June 30, 2005.  Totalrevenue declined by approximately $1.1 million or 45% to approximately $1.3million for the six months ended June 30, 2006, compared to approximately $2.4million for the six months ended June 30, 2005. This decline in revenue is directly related to the selling of certainassets of the audio division, including the DDX® technology and the associatedroyalties to SigmaTel in October 2005.

During the three- andsix-month periods June 30, 2006, we recognized revenue from product sales ofapproximately $340,000 and $1.3 million, respectively, a decrease ofapproximately $815,000 or 71% and $900,000 or 39% from product revenuerecognized of approximately $1.1 million and $2.2 million for the three- andsix-month periods ended June 30, 2005, respectively. Product sales consisted ofsemiconductor products sold directly to end users or POS revenue by ourdistributors.

Subsequent to thetransaction with SigmaTel, we no longer recognize, or are eligible to receive,royalties under the ST Licensing Agreement. As a result, no royalty revenue wasrecorded for the three and six months ended June 30, 2006 under the STLicensing Agreement.  For the three andsix months ended June 30, 2006, we did, however, record royalty revenue of$1,250 as a result of an agreement with QSound Labs, Inc.  For the same periods in 2005 we recognizedroyalty revenue of approximately $160,000 and $261,000, respectively.

Total revenue for thethree and six months ended June 30, 2006 and 2005 consisted of:
| ** **      | ** ** | **For the Three-Month Period  Ended  June 30,** | ** ** | **For the Six-Month Period  Ended  June 30,** | ** ** |
|-----------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **      | ** ** | **2006**                                                            | ** ** | **2005**                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **      | ** ** | ** **                                                          | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product Revenue |       | $                                                                   | 339,549    |                                                              | $          | 1,154,661 |   | $ | 1,324,947 |   | $ | 2,168,449 |   |
| Royalties       |       | 1,250                                                               |       | 159,978                                                           |       | 1,250 |   | 260,931 |   |
|            |       |                                                                |       |                                                              |       |   |   |   |   |
| Total:          |       | $                                                                   | 340,799    |                                                              | $          | 1,314,639 |   | $ | 1,326,197 |   | $ | 2,429,380 |   |

 

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Revenue from the sale ofDDX products is expected to continue to diminish over the next few quarters asDDX inventory is sold and deferred revenue is recognized through the POSreporting by distributors. In addition, licensing revenue from the ST LicensingAgreement has been assigned to SigmaTel in conjunction with the sale of certainDDX assets to SigmaTel.  Accordingly, weexpect that the declines in our revenues will continue until such time as weare able to generate revenues from the sale of our sensor products or medicaldevice products.

It is anticipated thatnominal revenue from sensor related products will be generated by the end of2006.

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**Cost ofRevenue**

Cost of revenue decreasedas a result of reduced product revenue to approximately $272,000 and $997,000for the three and six months ended June 30, 2006, respectively, compared toapproximately $886,000 and $1.9 million for the three and six months ended June30, 2005.  Cost of revenue primarilyconsists of purchasing finished semiconductor chips and costs associated withassembly, testing and shipping of those products as well as customs and storagefees associated with warehousing a large portion of our semiconductor productsin Asia. For the three and six months ended June 30, 2006 we recorded a grossmargin from product revenue of approximately 20% and 25%, compared to a grossmargin of approximately 23% and 15% for the three and six months ended June 30,2005, respectively. Additionally, from an analysis of sales to inventory onhand and/or on order, management determined that it was necessary to establishreserves for slow moving, excess and/or obsolete inventories held at ourfacility or at our distributors. These provisions are reported as part ofthe cost of revenue. For the six month period ended June 30, 2006, we recordeda provision of approximately $21,000, compared to a provision of approximately$321,000 for the three months ended June 30, 2005.  During the three months ended June 30, 2006,we wrote-off approximately $11,000 in inventory against this reserve.  During the three months ended June 30, 2005,we recorded a provision of $78,000.   AtJune 30, 2006 the total reserve for slow moving, excess and obsolete inventorywas approximately $1.9 million compared to a total reserve of approximately$1.5 million at June 30, 2005. We continue to monitor our inventory and webelieve the reserves currently in place are adequate, but we will continue tore-evaluate on a quarterly basis or more frequently if market conditionswarrant.

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

The Company’s researchand development (“R&D”) expenses consist primarily of salaries, developmentmaterial costs, external consulting and service costs related to the design ofnew products and the refinement of existing products. Research and developmentexpenses decreased to approximately $606,000 and $1.0 million for the three andsix months ended June 30, 2006, respectively, compared to approximately$733,000 and $1.5 million for the three and six months ended June 30,2005.  This decrease of approximately$127,000 or 17% and $500,000 or 34%, respectively, was the result of thetransaction with SigmaTel and the transfer of our audio related R&D staffto SigmaTel. Human resource costs decreased by approximately $372,000 or 67%and $747,000 or 67% to approximately $184,000 and $367,000 for the three andsix months ended June 30, 2006, respectively, compared to approximately$556,000 and $1.1 million for the same periods in 2005. For the three and sixmonths ended June 30, 2005, human resource costs associated with our formeraudio division were approximately $431,000 and $852,000, respectively.  With our adoption of SFAS 123(R), thehuman resource expense for the three and six months ended June 30, 2006 wasincreased by approximately $9,000 and $57,000, respectively.

With the sale of ourformer audio division to SigmaTel, we have expanded the development of both oursensor and medical device products. Expenses associated with the development ofnew products and the refinement of existing products increased to approximately$368,000 and $544,000 for the three and six months ended June 30, 2006,respectively, compared to approximately $47,000 and $91,000 for the sameperiods in 2005.  In an effort to supportand expand the development of both our medical device and sensor products, weincurred professional fees of approximately $116,000 and $233,000 for the threeand six months ended June 30, 2006, respectively, compared to approximately$77,000 and $208,000 for the same periods in 2005.  In addition, due to the technical nature ofboth the medical device and sensor components, we incurred approximately$203,000 and $227,000 in developmental wafer and micro needle mask costs forthe three and six months ended June 30, 2006.  Of this amount we expensed approximately $129,000 in wafers related toour sensor business.   We will continueto invest in the development of our sensor and medical device products. InJanuary 2006, we consolidated our MEMS division to our home office inNorwood, Massachusetts and closed the Long Island Office. We anticipate that wewill continue to commit resources to research and development activities andR&D costs are expected to increase in the future.

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

Selling expenses consistprimarily of salaries and related expenses for personnel engaged in themarketing and selling of the Company’s products, as well as costs related totrade shows, product literature, travel and other promotional support costs. Inaddition, selling expenses had included costs related to the operation ofApogee’s Hong Kong, Taiwan and Japan sales offices. Subsequent to the SigmaTeltransaction, the Taiwan and Chinese Offices were closed and in February 2006 weclosed our Hong Kong office.  General andadministrative costs consist primarily of executive and administrativesalaries, professional fees and other associated corporate expenses. Selling,General and Administrative (“SG & A”) expenses were approximately $532,000and $1.2 million for the three and six months ended June 30, 2006 compared toapproximately $1.3 million and $2.1 million for the three and six months endedJune 30, 2005. This represents a decrease of approximately $768,000 or 59% and$900,000 or 45% for the respective periods. The decrease in SG&A, describedbelow, was attributable primarily to the closing of the Hong Kong and Taiwanoffices as well as decreased professional fees, travel and human resourcecosts.

Human resource costsdecreased approximately $85,000 or 23% and $140,000 or 19% to approximately$288,000 and $613,000 for the three and six months ended June 30, 2006 comparedto approximately $375,000 and $753,000 for the same periods in 2005.  With our adoption of SFAS 123(R), thehuman resource expense for the three and six months ended June 30, 2006 wasincreased by approximately $14,000 and $40,000, respectively. This decreasereflects the reduction in staffing and subsequent closing of the Taiwan officein 2005 and Hong Kong offices as of February 2006 as a result of the sale ofthe Audio Division to SigmaTel, Inc. in October 2005. As of June 30,2006, Apogee employed a total of 13 employees, 12 domestically and 1 in ourJapanese office.  As of June 30, 2005 weemployed a total of 36 employees, 28 domestically with 6 employees in Hong Kongand 1 employee each in Japan and Taiwan.

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Professional expensesdecreased by approximately $506,000 or 82% and $495,000 or 67% to approximately$110,000 and $243,000 for the three and six months ended June 30, 2006,compared to approximately $616,000and $738,000 for the three and six monthsended June 30, 2005, respectively.  Ofthis decrease approximately $448,000 and $391,000 was the result of decreasedlegal and accounting fees due to our becoming compliant with our SEC filingsand the completion of the Audit Committee’s investigation and subsequentrestatement of Apogee’s financial statements. For the three and six months ended June 30, 2006, we incurred legalexpenses of approximately $75,000 and $168,000 compared to legal expenses of$474,000 and $508,000 for the same periods in 2005, respectively.  For the three and six months ended June 30,2006, we incurred accounting expenses of approximately $22,000 and $50,000compared to accounting expenses of approximately $72,000 and $101,000 for thesame periods in 2005.  A decrease inthird party marketing consultants accounted for the remainder of the decreasefor both the three and six months ended June 30, 2006, partially offset by thepayment of fees to our Board of Directors.

Other expensescontributing to the decrease in SG&A were reduced international travel,closing of the Hong Kong, China and Taiwan Offices as well as reducedcommissions and distribution expense. Travel expense decreased by approximately$57,000 or 74% and $116,000 or 71% to approximately $19,000 and $46,000 for thethree and six months ended June 30, 2006, compared to approximately $76,000 and$162,000 for the same periods in 2005. As a result of the audio division saleof assets to SigmaTel, we closed the Taiwan Office effective as ofDecember 31, 2005 and the Hong Kong Office effective as ofFebruary 28, 2006. Expenses associated with the Hong Kong Office, net ofhuman resources were approximately $2,000 and $11,000 for the three and sixmonths ended June 30, 2006, compared to approximately $47,000 and $82,000 forthe same periods in 2005.  The othermajor contributor to the decrease in SG&A is the reduction in thedistribution and commission expense. Distribution and commission expense declined by approximately $41,000 or94% and $50,000 or 89% to approximately $3,000 and $6,000 for the three and sixmonths ended June 30, 2006, respectively, compared to approximately $44,000 and$56,000 for the same periods in 2005.

Operating expenses areexpected to increase over the next few quarters due to the addition of staff tosupport our Sensor and Medical Product groups.

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**Interest/OtherIncome (Expense)**

Interest income includesincome from Apogee’s cash and cash equivalents. During the three and six monthsended June 30, 2006, we generated interest income of approximately $54,000 and$107,500 compared to interest income of approximately $1,700 and $5,800 duringthe same periods in 2005. This increase was primarily due to interest on thenet cash received of approximately $5.7 million as a result of the SigmaTeltransaction.   In addition, during thethree and six months ended June 30, 2006 we recorded approximately $84,000 ofincome as a result of the earn-out in connection with the SigmaTeltransaction.  The approximately $20,000in other expense resulted from a loss on the disposal of fixed assets andadditional expenses in connection with the SigmaTel transaction.

**Net Loss**

Apogee’s net loss for thethree months ended June 30, 2006 was approximately $932,000 or $0.08 per basicand diluted common share, compared to a net loss of approximately $1.6 millionor $0.14 per basic and diluted common share for the three months ended June 30,2005.  For the six months ended June 30,2006 the Company reported a loss of approximately $1.7 million or $0.14 perbasic and diluted common share, compared to a net loss of approximately $3.0 millionor $0.26 per basic and diluted common share for the six months endedJune 30, 2005.

**LIQUIDITYAND CAPITAL RESOURCES**

Our principal source ofliquidity at June 30, 2006 consisted of approximately $3.8 million in cash andcash equivalents. Cash equivalents consist of certificates of deposits, whichare highly liquid and have original maturities of no more than 90 days. Thiscompares to approximately $364,000 at June 30, 2005. In addition, as of June30, 2006, we had working capital of approximately $3.4 million, compared toworking capital deficiency of approximately $863,000 at June 30, 2005. Thisincrease in cash was the result of the SigmaTel transaction whereby onOctober 5, 2005, we received approximately $8.6 million, net of expenses,as a result of the sale of certain assets of our audio division.

Net cash used inoperating activities for the six-month period ended June 30, 2006 decreased toapproximately $1.7 million compared to approximately $1.9 million in thesix-month period ended June 30, 2005. The decrease was primarily due to adecrease in the net loss as a result of decreased spending following theSigmaTel transaction and the transfer of the DDX related engineering and salesstaff. As of June 30, 2006, inventory, net of reserves was approximately$354,000 compared to inventory, net of reserves, of approximately $2.6 millionas of June 30, 2005. This trend is likely to continue as we sell off theremaining DDX inventory. Net accounts receivable was approximately $102,000 atJune 30, 2006 down from approximately $582,000 at June 30, 2005. Of this amountapproximately $84,000 is earn-out due to us as part of the SigmaTeltransaction. As of June 30, 2006 we had reserves against bad debt ofapproximately $13,000 compared to a reserve of $130,000 as of June 30, 2005.This decrease in the reserve was the result of a write-off of approximately$132, 000 relating to two receivables from one of our distributors and one ofour direct customers. Given the current accounts receivable we believe that theremaining reserve is sufficient at this time.

Net cash used ininvesting activities for the six months ended June 30, 2006 was approximately$38,000, compared to approximately $110,000 for the six months ended June 30,2005.

No cash wasprovided by financing activities for the six months ended June 30, 2006.  During the three-month period endedJune 30, 2005, the Company received the proceeds from unsecured interestbearing loans in the amounts of $250,000 from David Spiegel, a shareholderand $250,000 from Herbert Stein, Chief Executive Officer, President andChairman of the Board. These loans were payable upon demand andwere not subject to any premium or penalty for prepayment. The loaninterest rate was 6% per annum, payable monthly in arrears on the outstandingbalance.  On October 20, 2005 proceedsfrom the SigmaTel transaction were used to repay the $500,000 principal as wellas all accrued interest.

We believe that cash flowfrom operations as well as the funds from the audio division sale, as well as amountsthat may be raised from time to time in private offerings of our commonstock or debt financings will be sufficient to support operations and fundcapital equipment requirements at least through June 2007.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

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

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**RevenueRecognition**

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

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

**AccountsReceivable**

Apogee performs creditevaluations of customers and determines credit limits based upon paymenthistory, customers’ creditworthiness and other factors, as determined by ourreview of their current credit information. For a majority of our larger sales,we can require the issuance of a Letter of Credit. Smaller accounts must eitherpay via credit card or in advance of shipment. We continuously monitorcollections and payments from our customers, and we maintain a provision forestimated credit losses based upon our historical experience and any specificcustomer collection issues that we have identified. While we have not had anysignificant credit losses to date, we cannot guarantee that we will continue toavoid credit losses in the future. If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required. Since our accountsreceivable are highly concentrated in a small number of customers, asignificant change in the liquidity or financial position of any one of thesecustomers could have a material adverse impact on the collectibility of ouraccounts receivable, our liquidity or our future results of operations.

**Inventory**

Apogee states itsinventory at the lower of cost (first-in, first-out) or market**.** This policy requires that we make certainestimates regarding the market value of the inventory, including an assessmentof excess or obsolete inventory. Apogee had determined excess and obsoleteinventory based on estimated future demands and estimated selling prices forour products within a specified time frame, which was generally 12 months. Theestimates used for expected demand were also used for short-term capacityplanning and inventory purchasing and were consistent with revenue forecasts.The inventory at June 30, 2006 of approximately $354,000, net of reserve,consisted of $6,000 held at Apogee and $348,000 held at distributors. Thiscompares to inventory at December 31, 2005, net of reserves, ofapproximately $1.3 million consisting of $719,000 held at distributors with theremaining $609,000 held at Apogee. The inventory level was established based onexpected demand and not from firm customer purchase commitments prior to theSigmaTel transaction.  As of June 30,2006 the total allowance for slow moving, excess and obsolete inventory was approximately$1.9 million. Currently, we believe that our reserves are sufficient given ourcurrent inventory level. However, if we are unable to sell the inventory in arelatively short period of time, we will be required to take additional excessinventory charges or write-downs to net realizable value, which will decreasethe gross margin as well as the net operating results in the future.

**Valuationof Long-Lived Assets**

Property, plant andequipment, patents, trademarks and other intangible assets are amortized overtheir estimated useful lives. Useful lives are based on management’s estimatesover the period that such assets will generate revenue. Intangible assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying value of an asset may not be recoverable. Future adversechanges in market conditions or poor operating results of underlying capitalinvestments or intangible assets could result in losses or an inability torecover the carrying value of such assets, thereby possibly requiring an impairmentcharge in the future.

**StockCompensation**

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

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

**CERTAINRISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND OUR COMMONSTOCK PRICE.**

There are a number ofimportant factors that could cause our actual results to differ materially fromthose indicated or implied by forward-looking statements. Factors that couldcause or contribute to such differences include those discussed below, as wellas those discussed elsewhere in this Form 10-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 HAVEA HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE OR SUSTAINPROFITABILITY.**

As of June 30, 2006, wehad stockholders’ equity of approximately $4.0 million, an accumulated deficitof approximately $14.3 million and working capital of approximately $3.4million. We recorded a loss of approximately $932,000 and $1.7 million for thethree and six months ended June 30, 2006. In the fiscal year ended December 31, 2005, we recorded anoperating loss of approximately $5.5 million with a net profit of approximately$3.0 million from a gain of approximately $8.9 million. This net profitresulted from the sale of the DDX assets to SigmaTel, Inc. onOctober 5, 2005, for approximately $9.4 million, plus a one-year earn-outof potentially up to $4.5 million. No assurance can be given that anyadditional earn-out will be realized and based on our reports received to datethe revenue generated from this earn-out is likely to be moderate. We will needto generate revenue to sustain profitability and positive cash flow. Ourability to generate future revenue and sustain profitability depends on anumber of factors, many of which are described throughout this risk factorsection, including our ability to develop and generate revenues from the salesof our sensor and medical device products, which are at a very early stage ofdevelopment.  We cannot assure you when,if ever, we will generate meaningful revenues from the sales of these productsunder development. If we are unable to achieve and sustain profitability, theCompany’s share price would likely decline.

**WE WILLNEED TO RAISE ADDITIONAL CAPITAL OR SELL ASSETS IN ORDER TO CONTINUE TOPERFORM RESEARCH AND DEVELOPMENT AND OPERATE OUR BUSINESS, AND SUCHTRANSACTIONS MAY NOT BE AVAILABLE TO US ON FAVORABLE TERMS, IF AT ALL.**

Because we havehistorically had losses and only a limited amount of cash has been generatedfrom operations, we have funded our operating activities to date primarily fromthe sale of securities. In order to continue to fund the development of ourbusiness, we will need additional capital, either through the sale ofsecurities or through the sale of assets. We cannot be certain that any suchfinancing or asset sales will be available on acceptable terms, or at all.Moreover, additional equity financing, if available, would likely be dilutiveto the holders of our common stock, and debt financing, if available, wouldlikely involve restrictive covenants. If we sell assets that are currently usedin the conduct of our business, those assets would no longer be available to usas a potential source of revenue generation, as was the case with theOctober 5, 2005 sale of assets. We have reduced, in the short-term, ouroperating expenses for payroll and related costs, rents and professional feesamongst others, in order to conserve resources for the operation of ourbusiness.  We believe that our currentworking capital and amounts that may be raised to support operations will besufficient to fund our capital and operational requirements at least throughJune 30, 2007.  If we cannot raisesufficient additional capital by that date through means available to us, itwould adversely affect our ability to achieve our business objectives and wecould be required to further curtail operations.

**WE HAVEONLY A SMALL NUMBER OF CUSTOMERS TO SUPPORT THE REMAINING DDX INVENTORY AND WEWILL BE CHANGING OUR CUSTOMER BASE. THE LOSS OF THESE DDX CUSTOMERS AND ANINABILITY TO BUILD A CUSTOMER BASE FOR OUR SENSOR AND MEDICAL DEVICE PRODUCTSWOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’S BUSINESS.**

We derived approximately77% of our revenue as a result of sell through to end customers by fourdistributors during the six months ended June 30, 2006 as compared toapproximately 67% of total revenue as a result of sales by two end users andthe sell through to end customers by two distributors during the six monthsended June 30, 2005.  As of June 30, 2005we derived approximately 65% of product revenue as a result of sales to one enduser and the sell through to end customers by two distributors.  With the sale of the audio business, Apogee’straditional consumer electronic customer will not be supported with audioproducts after the sale of its remaining inventory. We are working to developcustomers for our sensor and medical products but we cannot guarantee that wewill be able to succeed in these efforts, but there can be no assurance that wewill be able to add new distributors to support our sensor and medical deviceproducts.

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**AS ARESULT OF THE SALE OF OUR AUDIO BUSINESS THE COMPANY WILL NOT RECEIVE ROYALTIESFROM ST AND AUDIO PRODUCT REVENUE WILL EVENTUALLY END. AS A RESULT, OUR ABILITYTO ACHIEVE OR SUSTAIN REVENUE GROWTH WILL BE HARMED IF WE ARE UNABLE TO FINDCUSTOMERS AND TO DEVELOP AND SELL OUR SENSOR AND MEDICAL PRODUCTS.**

Apogee historicallyderived revenue from audio IC product sales, royalties pursuant to our licenseagreement with ST and others and consulting revenues from contracted audioproduct development. With the sale of our audio assets to SigmaTel inOctober 2005, we will no longer be receiving license revenue and futureaudio IC sales will diminish as we sells off our remaining inventory.Significant revenues from the earn-out with SigmaTel appear unlikely tomaterialize. To date we have recorded approximately $84,000 in revenue fromthis earn-out.  Apogee released newsensor products in December 2005 and expects to generate revenue from thesale of these products in 2006. However, we may not have any revenues ifwe are unable to find customers and to develop and our sensor products. Due tothe long time required to develop and approve our medical products, we do notexpect to receive income in the near future.

**THERE ISA NEW EUROPEAN-BASED ENVIRONMENTAL DIRECTIVE TO ELIMINATE HAZARDOUS MATERIALSIN ELECTRONIC PRODUCTS, AND AS SUCH, WE MAY NOT BE ABLE TO SELL OURINVENTORY AND MAY HAVE INVENTORY THAT CAN ONLY BE SOLD IN LIMITED MARKETS.**

The IC industry isresponding to the European directive of Restriction of Hazardous Substances (“RoHS”)that will become effective in July 2006. As a result of this directive,semiconductor companies are working to remove lead and other hazardousmaterials used in their IC products. Apogee transitioned our IC products toconform to the RoHS standard during the first half of 2005. However, wehave significant inventory that does not comply with this standard.  Consequently, this inventory may not be soldtimely or at all, although management has provided reserves for thispossibility.  As the sale of DDXinventory from our former audio business is currently our only ongoing significantsource of revenue, any inability to sell this inventory could have a materialeffect on our revenues and results of operations.

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

Approximately 84% of ourrevenue for the six months ended June 30, 2006, was a result of revenue fromour former audio business to customers located in Asia. This compares toapproximately 87% of total revenue and 81% of product revenue to customerslocated in Asia and Europe, for the six months ended June 30, 2005. We haveentered into a non-compete in connection with the sale of assets toSigmaTel, Inc., except for permissible sales of our audio IC inventory. Wewill need to develop new markets and add new sales channels in order toeffectively market our new sensor and medical device products.

**OURMARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE; THEREFORE, OUR SUCCESSDEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS IN A 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 customer preferences andother factors. Our future performance will depend on our ability toconsistently:

·                    identifyemerging technological trends in our market;

·                    identifychanging customer requirements;

·                    develop ormaintain competitive technology, including new product offerings;

·                    improve theperformance, features and reliability of our products, particularly in responseto technological change and competitive offerings;

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

·                    protect ourintellectual property.

We may not succeedin developing and marketing new products that respond to technological andcompetitive developments and changing customer needs, and such productsmay not gain market acceptance or be incorporated into the technology orproducts of third parties. Any significant delay or failure to develop newenhanced technologies, including new product offerings, and any failure of themarketplace to accept any new technology and product offerings would have amaterial adverse effect on our business, financial condition and results ofoperations.

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

Some of our activitiesare regulated by federal and state statutes and government agencies. Theexpected manufacturing, processing, formulation, packaging, labeling,distribution and advertising of our products, and disposal of waste productsarising from these activities, are subject to regulation by one or more federalagencies, including the FDA, the Drug Enforcement Agency, which we refer to as the“DEA,” the Federal Trade Commission, the Consumer Product Safety Commission,the U.S. Department of Agriculture, the Occupational Safety and HealthAdministration, and the Environmental Protection Agency (“EPA”), as well as byforeign governments in countries where we distribute some of our products.

Noncompliance withapplicable FDA policies or requirements could subject us to enforcementactions, such as suspensions of manufacturing or distribution, seizure ofproducts, product recalls, fines, criminal penalties, injunctions, failure toapprove pending drug product applications or withdrawal of product marketingapprovals. Similar civil or criminal penalties could be imposed by othergovernment agencies, such as the DEA, the EPA or various agencies of states andlocalities. These enforcement actions, if they were to occur, could have amaterial adverse effect on our business, financial condition, results ofoperations and cash flows.

The FDA has the authorityand discretion to withdraw approvals and review the regulatory status ofmarketed products at any time. For example, the FDA may require anapproved marketing application for any drug product marketed if new informationreveals questions about a drug’s safety or efficacy. All drugs must bemanufactured in conformity with current Good Manufacturing Practices and drugproducts subject to an approved application must be manufactured, processed,packaged, held and labeled in accordance with information contained in theapproved application.

**WE HAVERECENTLY REDUCED OUR WORKFORCE CONSIDERABLY; IF WE ARE UNABLE TO HIRE OR RETAINKEY PERSONNEL, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS SUCCESSFULLY.**

We may not besuccessful in recruiting and retaining executive officers and other keymanagement and technical personnel. The competition for employees with thenecessary high level of technical expertise to design, market and sell ourproducts is intense, particularly in eastern Massachusetts and Asia. As aresult of the October 2005 sale of certain assets to SigmaTel, we willneed to hire a number of additional technical personnel if we are to sustainthe development of new products and our ability to sell those products. Becausecompetition for highly skilled technical personnel is so intense, companies inApogee’s industry are subject from time to time to complaints brought bycompetitors alleging interference with contractual relations or wrongful hiringof employees. Such lawsuits may be costly, may divert managementattention and resources from the operation of our business, andmay therefore adversely affect our financial condition and results ofoperations. In addition, the loss of the management and technical expertise ofour senior management could seriously harm us. Our employees may also berecruited away from us by our competitors. We do not have in place employmentcontracts for members of our senior management, including the CFO and COO.

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

We have no manufacturingcapabilities, nor do we have plans to establish any such capabilities.Accordingly, we utilize outside manufacturers and assembly and test companiesto produce our products. There are significant risks associated with our relianceon these manufacturers that can adversely affect our business, operatingresults and financial condition. These risks include:

·                    the ability tomaintain manufacturing relationships, the failure of which could result insignificant delays in product introduction due to the time necessary toestablish new relationships;

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

·                    the loss ofmanufacturing priority that may limit our ability to obtain products onschedule;

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

·                    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 productcompetitiveness in the market.

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

Our products are based onrecently developed technology and are manufactured using state-of-the-artmanufacturing processes. Our approach to product qualification and testingmay not fully evaluate or identify product characteristics or defects thatcould adversely affect the product’s ability to operate in the intendedapplication. If such defects or characteristics are discovered afterinstallation, product revenue might be significantly delayed and our ability tomaintain existing customers and to retain new customers may be seriouslyaffected.

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

We face challenges in persuadingmanufacturers and customers to adopt our products based upon newMEMS/Nanotechnologies. In order to adopt our products, customers and theirdevelopment staff must understand and accept our new technology. In addition,our products may be more expensive or difficult to use for someapplications than products based on traditional technologies. For thesereasons, prospective customers may be reluctant to adopt our products.

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

The sensor and medicaldevice industries are highly competitive, and we expect the intensity of thecompetition to increase. Many of our competitors have greater financial,technical, research, marketing, sales, distribution, service and otherresources than we do. Moreover, our competitors may offer broader productlines and have greater name recognition than we do, and may offerdiscounts as a competitive tactic, forcing intense pricing pressure on ourproducts. In addition, several development stage companies are currentlycreating or developing technologies and products that compete with or are beingdesigned to compete with our technologies and products. Our competitorsmay develop or market technologies or products that are more effective ormore commercially attractive than our current or future products, or thatmay render our technologies or products less competitive or obsolete.Accordingly, if competitors introduce superior technologies or products and wecannot make enhancements to our technologies and products necessary for them toremain competitive, our  competitiveposition, and in turn, our business, revenues and financial condition, will beseriously harmed.

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

In May 2004, theCompany acquired the intellectual property and other intangibles and hiredstaff from Standard MEMS, Inc. Acquisitions typically entail many risksand could result in difficulties in integrating the operations and personnel ofcompanies that we acquire or the technologies and products that we acquire. Ifwe are not able to successfully integrate our acquisitions, we may notobtain the advantages that the acquisitions were intended to create, whichcould adversely affect our results of operations, financial condition and cashflows. In addition, in connection with acquisitions, we could experiencedisruption in our business or employee base. There is also a risk that keyemployees of companies that we acquire or key employees necessary tosuccessfully commercialize technologies and products that we acquiremay seek employment elsewhere, including with our competitors.

**OURQUARTERLY OPERATING RESULTS MAY FLUCTUATE.**

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

·                     availabilityand pricing from our suppliers;

·                     changes inthe demand for our products by customers;

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

·                     rate andsuccess of new customer development;

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·                     changes inour pricing policies or those of our competitors;

·                     success inattracting, retaining and motivating qualified personnel;

·                     changes ingeneral economic conditions; and

·                     obsolescenceof inventory.

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

Fluctuations in ouroperating results may also result in fluctuations in our common stockprice. In such event, the trading price of our common stock would likely sufferand adversely affect our ability to raise capital and the value of yourinvestment in the Company.

**RISKSRELATED TO OUR INTELLECTUAL PROPERTY**

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

Our business depends, inpart, on our ability to protect our intellectual property. We rely primarily onpatent, copyright, trademark and trade secret laws to protect our proprietarytechnologies. We cannot be sure that such measures will provide meaningfulprotection for our proprietary technologies and processes. We have acquired aportfolio of MEMS intellectual property and the Company is presently reviewingthis portfolio to determine which of the acquired rights can be protected andwill be most useful in its business. We cannot be sure that any existing orfuture patents will not be challenged, invalidated or circumvented, or that anyrights granted thereunder would provide us meaningful protection. The failureof any patents to provide protection to our technology would make it easier forour competitors to offer similar products.

We also generally enterinto confidentiality agreements with our employees and strategic partners, andgenerally control access to and distribution of our documentation and otherproprietary information. Despite these precautions, it may be possible fora third party to copy or otherwise obtain and use our products or technology withoutauthorization, develop similar technology independently or design around ourpatents. In addition, effective copyright, trademark and trade secretprotection may be unavailable or limited in certain foreign countries inwhich we operate.

**WEMAY BE SUBJECT TO INTELLECTUAL PROPERTY RIGHTS DISPUTES WHICH THAT COULDDIVERT MANAGEMENT’S ATTENTION AND COULD BE COSTLY.**

The sensor and medicaldevice industries are characterized by vigorous protection and pursuit ofintellectual property rights. From time to time, we may receive notices ofclaims of infringement, misappropriation or misuse of other parties’proprietary rights. We cannot be sure that we will prevail in these actions, orthat other actions alleging infringement by us of third-party patents,misappropriation or misuse by us of third-party trade secrets or the invalidityof one or more patents held by us will not be asserted or prosecuted againstus, or that any assertions of infringement, misappropriation or misuse orprosecutions seeking to establish the invalidity of our patents will notseriously harm our business. For example, in a patent or trade secret action,an injunction could be issued against us requiring that we withdraw particularproducts from the market or necessitating that specific products offered forsale or under development be redesigned.

Irrespective of thevalidity or successful assertion of various claims of infringement,misappropriation or misuse of other parties’ proprietary rights, we wouldlikely incur significant costs and diversion of our management and personnelresources with respect to the defense of such claims, which could seriouslyharm our business. If any claims or actions are asserted against us, wemay seek to obtain a license under a third party’s intellectual propertyrights. We cannot be sure that under such circumstances a license would beavailable on commercially reasonable terms, if at all. Moreover, we oftenincorporate the intellectual property of our strategic customers into ourdesigns, and we have certain obligations with respect to the non-use and non-disclosure of such intellectual property. We cannot be sure that the stepstaken by us to prevent our or our customers’ misappropriation or infringementof the intellectual property will be successful.

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**RISKSRELATING TO OUR COMMON STOCK**

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

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

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

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

·            acquisitionsor strategic alliances by us or our competitors; and

·            thegain or loss of a significant customer or order.

In addition, marketfluctuations, as well as general economic, political and market conditions suchas recessions, interest rate changes or international currency fluctuations,may negatively impact the market price of our Common Stock.

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

Our management does notexpect that our disclosure controls and procedures or our internal control overfinancial reporting will prevent all errors or fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system will be attained.Furthermore, the design of a control system must reflect the fact that thereare resource constraints and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in acost-effective control system, no evaluation of controls can provide absoluteassurance that all misstatements due to error or fraud, if any, may occurand not be detected on a timely basis. These inherent limitations include thepossibility that judgments in decision-making can be faulty and that breakdownscan occur because of errors or mistakes. Our controls and procedures can alsobe circumvented by the individual acts of some persons, by collusion of two ormore people or by management override of the controls.

The design of any systemof controls is based in part on certain assumptions about the likelihoodof future events and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Furthermore,controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with policies or procedures. While weseek to design our controls and procedures to provide reasonable assurance thatinformation required to be disclosed in our periodic filings is timelydisclosed, these inherent limitations expose us to breakdowns in such controlsand procedures.

**ITEM3. CONTROLS AND PROCEDURES**

(a)             Evaluationof Disclosure Controls and Procedures. The Company’s chief executive officerand principal financial officer have reviewed and evaluated the effectivenessof the Company’s disclosure controls and procedures (as defined in Exchange ActRules 13d-15(e) and 15d-15(e)) as of the end of the period covered bythis quarterly report. Based on that evaluation, the chief executive officerand principal financial officer have concluded that the Company’s currentdisclosure controls and

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procedures are adequate and effective to ensure that materialinformation relating to the Company was made known to them by others,particularly during the period in which this Quarterly Report onForm 10-QSB was being prepared.

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

**PART II - OTHER INFORMATION**

**ITEM1. LEGAL PROCEEDINGS**

None.

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

None.

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

None.

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

The Annual Meetingof Shareholders of the Company was held on May 25, 2006.  The following matters were voted upon:

(1)          Mr. Arthur S. Reynoldswas elected by a plurality of the shares entitled to vote at the meeting toserve as a Director of the Company to hold office until the annual meeting ofthe Corporation in 2009.  This proposalwas approved with 10,078,688 votes for the proposal, 52,350 votes against theproposal and no abstentions.

(2)          Ms. Sheryl B. Stein waselected by a plurality of the shares entitled to vote at the meeting to serveas a Director of the Company to hold office until the annual meeting of theCorporation in 2009.  This proposal wasapproved with 10,078,188 votes for the proposal, 52,850 votes against theproposal and no abstentions.

(3)          The shareholdersratified the appointment of Miller Wachman LLP as the registered independentpublic accountants for the Company for the fiscal year ending December 31,2006.  This proposal was approved with10,116,238 votes for the proposal, 14,800 votes against the proposal, and noabstentions and no broker non-votes.

(4)          Following the annualmeeting, the Company’s Board of Directors consisted of:  Mr. Craig A. Dubitsky, Mr. Arthur S.Reynolds, Mr. Herbert M. Stein, Ms. Sheryl B. Stein and Mr. Alan W. Tuck.

**ITEM5. OTHER INFORMATION**

None.

**ITEM6. EXHIBITS**

(a)           Exhibits:

See Exhibit Index

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**SIGNATURES**

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

 
|                        | ** ** | **APOGEE TECHNOLOGY, INC.**                                |
|------------------------|------------|-----------------------------------------------------------------|
|                   |       |                                                            |
| Date: August 14,  2006 |       | 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 14,  2006 |       | By:                                                             | /s/ | Paul J. Murphy |
|                   |       | Name: Paul J. Murphy                                            |
|                   |       | Title: Chief Financial Officer and Vice President of  Finance   |
|                   |       | (principal financial officer and principal  accounting officer) |

 

 

 

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FORM-10-QSB

JUNE 30, 2006

**EXHIBIT INDEX**

 
| Exhibit    | ** ** | ** **                                                                                                                                                                                                                                   |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description**                                                                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                         |
| 31.1       |       | Certification of Herbert M. Stein, President and  Chief Executive Officer, pursuant to Rules 13a-14 and 15d-14 under the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.            |
|       |       |                                                                                                                                                                                                                                         |
| 31.2       |       | Certification of Paul J. Murphy, Chief Financial  Officer and Vice President Finance, pursuant to Rules 13a-14 and 15d-14 under  the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
|       |       |                                                                                                                                                                                                                                         |
| 32.1       |       | Certification of Herbert M. Stein, President and  Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                        |
|       |       |                                                                                                                                                                                                                                         |
| 32.2       |       | Certification of Paul J. Murphy, Chief Financial  Officer and Vice President Finance, pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                             |

 

 

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