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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For thequarterly period ended September 30, 2008**

 

**o****  TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition periodfrom               to               **

 

**Commission file number 001-10456**

 

**APOGEETECHNOLOGY, INC.**

(Exactname of registrant 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**

(Addressof principal executive offices)

 

**(781) 551-9450**

(Registrant’stelephone number, including area code)

 

**NOT APPLICABLE**

(Formername, former address and former fiscal year,

ifchanged since last report)

 

Indicate by check markwhether the issuer: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes   x  No   o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large accelerated  filer  o |   | Accelerated filer  o |   | Non-accelerated  filer  o

(Do  not check if a smaller  Reporting company) |   | Smaller reporting  company  x |
|----------------------------------|--------|---------------------------|--------|---------------------------------------------------------------------------------|--------|------------------------------------|

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common equity, as of the latestpracticable date:  As of November 1, 2008, there were 12,132,332shares of Common Stock, $0.01 par value per share, outstanding.

 

 

 

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**APOGEE TECHNOLOGY, INC.**

 

**INDEX OF INFORMATION CONTAINED IN FORM 10-Q FOR THE**

**PERIODS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007**

 
| **PART I -  FINANCIAL INFORMATION**                                                                                                                                |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                    |   |
| Item 1 - Financial Statements                                                                                                                                           |   |
| Consolidated Balance Sheets at  September 30, 2008 (unaudited) and December 31, 2007 (audited)                                                                | 3 |
|                                                                                                                                                                    |   |
| Consolidated Statements of  Operations and Accumulated Deficit for the Three and Nine Months Ended  September 30, 2008 and September 30, 2007 (all unaudited) | 4 |
|                                                                                                                                                                    |   |
| Consolidated Statements of  Cash Flows for the Nine Months Ended September 30, 2008 and  September 30, 2007 (all unaudited)                                   | 5 |
|                                                                                                                                                                    |   |
| Notes to  Consolidated Financial Statements (all unaudited)                                                                                                             | 6 |
|                                                                                                                                                                    |   |
| Item 2 -  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                                                   | 17 |
|                                                                                                                                                                    |   |
| Item 3 -  Quantitive and Qualitative Disclosures about Market Risk                                                                                                      | 27 |
|                                                                                                                                                                    |   |
| Item 4T -  Controls and Procedures                                                                                                                                      | 27 |
|                                                                                                                                                                    |   |
| **PART II  - OTHER INFORMATION**                                                                                                                                   |
|                                                                                                                                                                    |   |
| Item 1 - Legal  Proceedings                                                                                                                                             | 27 |
|                                                                                                                                                                    |   |
| Item 1A - Risk Factors                                                                                                                                                  | 28 |
|                                                                                                                                                                    |   |
| Item 2 -  Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                   | 29 |
|                                                                                                                                                                    |   |
| 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                                                                                                                                                              | 32 |

 

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

 

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

 

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                  | ** ** | **SEPTEMBER 30,** | ** **    | **DECEMBER 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|---------------|-----------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | **2008**               | ** **    | **2007**              | ** ** |
| ** **                                                                                                                                                                                  | ** ** | **(Unaudited)**        | ** **    | **(Audited)**         | ** ** |
| **ASSETS**                                                                                                                                                                                  |       |                   |          |                  |       |
|                                                                                                                                                                                        |       |                   |          |                  |       |
| **Current assets**                                                                                                                                                                          |       |                   |          |                  |       |
| Cash and cash equivalents                                                                                                                                                                   | ** ** | **$**                  | **—**    | ** **            | **$**      | **320,524** | ** ** |
| Accounts receivable, net of allowance for  doubtful accounts of $9,377 in 2008 and $10,570 in 2007, respectively                                                                            | ** ** | **—**             | ** **    | **10,536**            | ** ** |
| Inventories, net                                                                                                                                                                            | ** ** | **—**             | ** **    | **—**            | ** ** |
| Prepaid expenses and other current assets                                                                                                                                                   | ** ** | **35,113**             | ** **    | **86,763**            | ** ** |
|                                                                                                                                                                                        |       |                   |          |                  |       |
| Total current assets                                                                                                                                                                        | ** ** | **35,113**             | ** **    | **417,823**           | ** ** |
|                                                                                                                                                                                        |       |                   |          |                  |       |
| **Property and equipment, net**                                                                                                                                                             | ** ** | **131,380**            | ** **    | **183,445**           | ** ** |
|                                                                                                                                                                                        |       |                   |          |                  |       |
| **Other assets**                                                                                                                                                                            |       |                   |          |                  |       |
| Patents                                                                                                                                                                                     | ** ** | **352,403**            | ** **    | **269,694**           | ** ** |
| Exclusive licensing, net                                                                                                                                                                    | ** ** | **—**             | ** **    | **26,009**            | ** ** |
| ** **                                                                                                                                                                                  | ** ** | ** **             | ** **    | ** **            | ** ** |
| ** **                                                                                                                                                                                  | ** ** | **$**                  | **518,896**   | ** **            | **$**      | **896,971** |   |
|                                                                                                                                                                                        |       |                   |          |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIENCY)**                                                                                                                                 |       |                   |          |                  |       |
|                                                                                                                                                                                        |       |                   |          |                  |       |
| **Current liabilities**                                                                                                                                                                     |       |                   |          |                  |       |
| Bank Overdraft                                                                                                                                                                              | ** ** | **4,284**              | ** **    | **—**            | ** ** |
| Accounts payable and accrued expenses                                                                                                                                                       | ** ** | **$**                  | **1,872,234** | ** **            | **$**      | **745,545** | ** ** |
| Officer, shareholder and other loans and  notes payable, net                                                                                                                                | ** ** | **1,665,934**          | ** **    | **400,000**           | ** ** |
|                                                                                                                                                                                        |       |                   |          |                  |       |
| Total current liabilities                                                                                                                                                                   | ** ** | **3,542,452**          | ** **    | **1,145,545**         | ** ** |
|                                                                                                                                                                                        |       |                   |          |                  |       |
| **Commitments and Contingencies**                                                                                                                                                           | ** ** | **—**             | ** **    | **—**            | ** ** |
|                                                                                                                                                                                        |       |                   |          |                  |       |
| **Stockholders’ equity (deficiency)**                                                                                                                                                  |       |                   |          |                  |       |
| Preferred stock, par value $0.0001 per share;  5,000,000 shares authorized, none issued and outstanding                                                                                     | ** ** | **—**             | ** **    | **—**            | ** ** |
| Common stock, $0.01 par value; 40,000,000  shares authorized, 12,132,332 issued and outstanding at September 30,  2008 and 11,968,332 issued and outstanding at December 31, 2007 | ** ** | **121,323**            | ** **    | **119,683**           | ** ** |
| Additional paid-in capital                                                                                                                                                                  | ** ** | **18,746,827**         | ** **    | **18,492,311**        | ** ** |
| Accumulated deficit                                                                                                                                                                         | ** ** | **(21,891,706**        | **)**         | **(18,860,568**       | **)**      |
|                                                                                                                                                                                        |       |                   |          |                  |       |
| Total stockholders’ equity (deficiency)                                                                                                                                                | ** ** | **(3,023,556**         | **)**         | **(248,574**          | **)**      |
| ** **                                                                                                                                                                                  | ** ** | **$**                  | **518,896**   | ** **            | **$**      | **896,971** |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT**

**(UNAUDITED)**

** **
| ** **                                                          | ** ** | **THREE MONTHS ENDED  September 30,** |            | **NINE MONTHS ENDED  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|-----------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                             | ** **      | **2007**                                            |       | **2008** | ** ** | **2007** | ** ** |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          |       | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                        | ** ** | ** **                                           | ** **      | ** **                                          |       | ** ** | ** ** | ** ** | ** ** |
| Product sales                                                       | ** ** | **$**                                                | **—**      | ** **                                          | $          | 13,601 |   | **$** | **21,951** | ** ** | $ | 132,268 |   |
| Royalties                                                           | ** ** | **37,893**                                           | ** **      | —                                              |       | **63,499** | ** ** | — |   |
|                                                                |       |                                                 | ** **      |                                                |       |   | ** ** |   |   |
| ** **                                                          |       | **37,893**                                           | ** **      | 13,601                                              |       | **85,450** | ** ** | 132,268 |   |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          |       | ** ** | ** ** | ** ** | ** ** |
| **Costs and expenses**                                              | ** ** | ** **                                           | ** **      | ** **                                          |       | ** ** | ** ** | ** ** | ** ** |
| Product sales                                                       | ** ** | **—**                                           | ** **      | 12                                                  |       | **696** | ** ** | 1,427 |   |
| Research and development                                            | ** ** | **299,764**                                          | ** **      | 304,899                                             |       | **1,078,962** | ** ** | 924,404 |   |
| Selling, general and administrative                                 | ** ** | **454,190**                                          | ** **      | 489,022                                             |       | **1,942,580** | ** ** | 1,530,893 |   |
|                                                                |       |                                                 | ** **      |                                                |       |   | ** ** |   |   |
| ** **                                                          |       | **753,954**                                          | ** **      | 793,933                                             |       | **3,022,238** | ** ** | 2,456,724 |   |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          |       | ** ** | ** ** | ** ** | ** ** |
| **Operating loss**                                                  | ** ** | **(716,061**                                         | **)**           | (780,332                                            | )          | **(2,936,788** | **)** | (2,324,456 | ) |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          |       | ** ** | ** ** | ** ** | ** ** |
| **Other income (expense)**                                          | ** ** | ** **                                           | ** **      | ** **                                          |       | ** ** | ** ** | ** ** | ** ** |
|                                                                |       |                                                 | ** **      |                                                |       |   | ** ** |   |   |
| Interest and other expense                                          | ** ** | **(55,612**                                          | **)**           | —                                              |       | **(102,552** | **)** | — |   |
| Interest and other income                                           | ** ** | **558**                                              | ** **      | 67,825                                              |       | **8,202** | ** ** | 123,760 |   |
|                                                                |       |                                                 | ** **      |                                                |       |   | ** ** |   |   |
| ** **                                                          |       | **(55,054**                                          | **)**           | 67,825                                              |       | **(94,350** | **)** | 123,760 |   |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          |       | ** ** | ** ** | ** ** | ** ** |
| **Net loss**                                                        | ** ** | **$**                                                | **(771,115**    | **)**                                               | $          | (712,507 | ) | **$** | **(3,031,138** | **)** | $ | (2,200,696 | ) |
|                                                                |       |                                                 | ** **      |                                                |       |   | ** ** |   |   |
| Accumulated deficit - beginning                                     | ** ** | **$**                                                | **(21,120,591** | **)**                                               | $          | (17,143,751 | ) | **$** | **(18,860,568** | **)** | $ | (15,655,562 | ) |
|                                                                |       |                                                 | ** **      |                                                |       |   | ** ** |   |   |
| **Accumulated deficit - ending**                                    | ** ** | **(21,891,706**                                      | **)**           | (17,856,258                                         | )          | **(21,891,706** | **)** | (17,856,258 | ) |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          |       | ** ** | ** ** | ** ** | ** ** |
| **Basic and diluted loss per common share**                         | ** ** | **$**                                                | **(0.06**       | **)**                                               | $          | (0.06 | ) | **$** | **(0.25** | **)** | $ | (0.18 | ) |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          |       | ** ** | ** ** | ** ** | ** ** |
| **Weighted average common shares outstanding  - basic and diluted** | ** ** | **12,132,332**                                       | ** **      | 11,968,060                                          |       | **12,070,704** | ** ** | 11,976,665 |   |

 

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

 

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                     | ** ** | **NINE MONTHS ENDED SEPTEMBER 30,** | ** **     |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------------|----------------|
| ** **                                                                     | ** ** | **2008**                                                | ** **     | **2007** | ** ** |
|                                                                           |       |                                                    | ** **     |   |   |
| **Cash flows from operations**                                                 |       |                                                    | ** **     |   |   |
| Net loss                                                                       | ** ** | **$**                                                   | **(3,031,138** | **)** | $ | (2,200,696 | ) |
| *Adjustments to reconcile net loss to net  cash used in operating activities:* |       |                                                    | ** **     |   |   |
| * *                                                                       |       |                                                    | ** **     |   |   |
| Provision for doubtful accounts                                                | ** ** | **(1,193**                                              | **)**          | (1,925 | ) |
| Provision for slow moving, excess and  obsolete inventory                      | ** ** | **(1,644,316**                                          | **)**          | (136,327 | ) |
| Depreciation and amortization                                                  | ** ** | **64,068**                                              | ** **     | 57,108 |   |
| Stock compensation expense for employees  and directors                        | ** ** | **46,723**                                              | ** **     | 77,592 |   |
| Original issue discount                                                        | ** ** | **32,849**                                              | ** **     | **—** | ** ** |
| Termination of Patent License Fee                                              | ** ** | **22,329**                                              | ** **     | **—** | ** ** |
| *Changes in operating assets and  liabilities:*                                |       |                                                    | ** **     |   |   |
| Accounts receivable                                                            | ** ** | **11,729**                                              | ** **     | 8,127 |   |
| Inventories                                                                    | ** ** | **1,644,316**                                           | ** **     | 136,327 |   |
| Prepaid expenses and other current assets                                      | ** ** | **51,651**                                              | ** **     | 46,197 |   |
| Accounts payable and accrued expenses                                          | ** ** | **1,126,687**                                           | ** **     | (111,491 | ) |
|                                                                           |       |                                                    | ** **     |   |   |
| Net cash used in operating activities                                          | ** ** | **(1,676,295**                                          | **)**          | (2,125,088 | ) |
|                                                                           |       |                                                    | ** **     |   |   |
| **Cash flows from investing activities**                                       |       |                                                    | ** **     |   |   |
| Purchases of property and equipment                                            | ** ** | **(8,322**                                              | **)**          | (33,130 | ) |
| Patent costs                                                                   | ** ** | **(82,710**                                             | **)**          | (85,641 | ) |
| Leasehold improvements                                                         |       | **—**                                              | ** **     | (2,250 | ) |
| License fee                                                                    |       | **—**                                              | ** **     | (11,778 | ) |
|                                                                           |       |                                                    | ** **     |   |   |
| Net cash provided by investing activities                                      | ** ** | **(91,032**                                             | **)**          | (132,799 | ) |
|                                                                           |       |                                                    | ** **     |   |   |
| **Cash flows from financing activities**                                       |       |                                                    | ** **     |   |   |
| Bank Overdraft                                                                 | ** ** | **4,284**                                               | ** **     |   |   |
| Proceeds from shareholder loan and notes  payable                              | ** ** | **620,000**                                             | ** **     | — |   |
| Proceeds from officer loans and notes  payable                                 | ** ** | **510,000**                                             | ** **     | — |   |
| Proceeds from employees and other loan and  notes payable                      | ** ** | **160,000**                                             | ** **     |   |   |
| Proceeds from sale of equity securities                                        | ** ** | **152,519**                                             | ** **     | — |   |
|                                                                           |       |                                                    | ** **     |   |   |
| Net cash provided by financing activities                                      | ** ** | **1,446,801**                                           | ** **     | — |   |
|                                                                           |       |                                                    | ** **     |   |   |
| **Decrease in cash and cash equivalents**                                      | ** ** | **(320,523**                                            | **)**          | (2,257,887 | ) |
|                                                                           |       |                                                    | ** **     |   |   |
| Cash and cash equivalents – beginning                                     | ** ** | **320,524**                                             | ** **     | 3,051,420 |   |
|                                                                           |       |                                                    | ** **     |   |   |
| **Cash and cash equivalents – ending**                                    | ** ** | **$**                                                   | **—**     | ** ** | $ | 793,533 |   |
|                                                                           |       |                                                    | ** **     |   |   |
| **Supplemental Cash Flow Information:**                                        |       |                                                    | ** **     |   |   |
| Cash paid for interest                                                         | ** ** | **$**                                                   | **5,933**      | ** ** | $ | — |   |
| Warrants issued in conjunction with notes  payable – non-cash             | ** ** | **$**                                                   | **57,810**     | ** ** | $ | — |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007 (UNAUDITED)**

 

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

 

***The Company***

 

ApogeeTechnology, Inc. and Subsidiary (the “Company” or “Apogee”, “we”, “us”, or“our”) designs and develops, with the long-term goal of commercializing,advanced drug delivery and sensor-based health monitoring devices and systems.  Our Life Science Group is developingPyraDermTM, an advanced intradermal drug delivery system to meet the needs ofpatients, health insurers and companies developing pharmaceuticals, as well as,governments and international health organizations. We believe PyraDermTM hasadvantages over competitive approaches for the delivery of vaccines, highpotency therapeutic protein drugs and other pharmaceuticals. We have evaluatedthe feasibility of *PyraDerm* byperforming in vitro tests with model drugs and are in the process of in vivotesting with two leading research organizations to evaluate the advantages of *PyraDerm* in the delivery of Hepatitis B and the Influenzavaccine antigens. We are working to establish pharmaceutical industry compliantmanufacturing methods and to define regulatory strategies to support thecommercialization of *PyraDerm*.  If in vitro and in vivo evaluation of *PyraDerm* is successful, we intend to pursuelicensing/development or partnership agreements with pharmaceutical companies interestedin this technology.   In August 2007,we announced an expansion of our sensor business to include the development ofIntellaPALTM, an innovative sensor based monitoring system designed to improvethe security, independence and quality of life for the elderly and theirfamilies. *IntellaPAL* will utilize a wirelesssensor module and advanced software processing to continuously measure a rangeof health characteristics and automatically notify responders when specifiedconditions are detected. In addition, the system will provide monitored dataonline so that approved caregivers will be able to assist in the earlyidentification of certain health characteristics. We have developed a family ofproprietary Micro-Electromechanical Systems (“MEMS”)-based pressure sensordesigns and are now evaluating various commercialization options.  There is a possibility this product line willbe discontinued if the results determine commercialization is not economicallyviable or if we do not raise additional capital.  ** **We had no material revenues for thethree and nine months ended September 30, 2008.

 

***Basis of Presentation***

 

***Consolidated Financial Statements***

 

The financial statements include the accounts of Apogee Technology, Inc.,and its wholly owned inactive subsidiary, DUBLA, Inc. All significantintercompany transactions and accounts have been eliminated.

 

In management’s opinion all adjustments, consisting of normal recurringaccruals considered necessary for a fair presentation, have been included inthe accompanying unaudited financial statements.  Operating results for the three and ninemonths ended September 30, 2008 are not necessarily indicative of theresults that may be expected for the full year ended December 31, 2008.

 

***Going Concern***

 

Theaccompanying consolidated financial statements have been prepared on a goingconcern basis, which contemplates the realization of assets and satisfaction ofliabilities in the normal course of business. As shown in the consolidatedfinancial statements, we have incurred continuing losses and negative cashflows from operations. Net losses were approximately $3.0 million and negativecash flows from operations were approximately $1.7 million for the nine monthsended September 30, 2008.   Givenour net losses and negative cash flows from operations, we will not be able tocontinue as a going concern without raising additional capital.

 

Wehad a temporary overdraft of approximately $4,000 at September 30,2008.  We had approximately****$15,000 cash balance at November 7, 2008, afterreceiving additional loans of for an aggregate of $166,000, consisting of$10,000 and $25,000 on October 8, 2008 and October 10, 2008,respectively from David Spiegel, $25,000 on October 14, 2008 from HerbertM. Stein, $6,000 from others on October 1, 2008 and $100,000 from TYJOCorporation Money Purchase Pension Plan on October 27, 2008.  We are actively pursuing various options foradditional funding. During the nine months ended September 30, 2008Herbert M. Stein, our President, Chief Executive Officer and Chairman of theBoard of Directors and David Spiegel, a major shareholder, loaned Apogee$760,000 and $770,000, respectively. During the nine months ended 

 

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September 30,2008, Mr. Robert Schacter, as Custodian for Tyler Schacter UTMA/CA, Mr. RobertSchacter, as Custodian for Joseph Schacter UTMA/CA and TYJO Corporation MoneyPurchase Pension Plan (“Robert Schacter et al”), an individual investor loanedApogee $140,000 and others loaned Apogee $20,000.  In addition, on April 9, 2008, wereceived net proceeds of $152,519 from the sale of 164,000 shares of our commonstock in a private placement.  See Footnote8 – Stockholders’ Equity – Common Stock.

 

Thelong-term success of Apogee is dependent upon our ability to raise additionalfunds to continue our operations, to successfully develop and market ourtechnologies and products and to attain profitable operations. Although we havemodified our business strategy to improve near-term financial performance,there can be no assurance, however, that we will be able to generate sufficientrevenue, become profitable or that additional funds will be available to us onacceptable terms, if at all. Accordingly, we may be unable to implement current plans.  In addition, if sufficient capital cannot beobtained, Apogee may be forced to significantly reduce operating expenses to apoint which would be detrimental to business operations, curtail research anddevelopment activities or take other actions which could be detrimental tobusiness prospects and result in charges which could be material to ouroperations and financial position, or cease operations altogether.  In the event that any future financing isaffected, to the extent it includes equity securities; the holders of thecommon stock may experience additional dilution.  In the event of a cessation of operations,there may not be sufficient assets to fully satisfy all creditors, in whichcase the holders of securities may be unable to recoup any of their investment.

 

Weare in the process of attempting to secure sufficient equity financing tocontinue development of our products. In the interim, short-term debt financingprovided by two of Apogee’s significant shareholders, including our President,Chief Executive Officer and Chairman of the Board of Directors, an individualinvestor and others, is being utilized to keep development moving forward.  Additionally, cost cutting measures,including salary reduction for non-*PyraDerm*employees, diminished pace of sensor development, deferral of capitalexpenditures, and reduced general spending have been instituted until such timeas financing is secured.  Due to the earlystages of development of our products candidates, we cannot estimate at thistime the amounts of cash that will be required to bring our products underdevelopment to market.  It is expectedthat such costs will be funded not only by external funding but also throughpartnership activities.  Withoutadditional financing, we will be unable to continue operations.

 

***Use of Estimates in FinancialStatements***

 

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.

 

***Liquidity***

 

Duringthe nine months ended September 30, 2008, Apogee received proceeds fromunsecured interest-bearing promissory notes in the amounts of $510,000from Mr. Herbert M. Stein, President, Chief Executive Officer and Chairmanof the Board of Directors, $620,000 from Mr. David Spiegel, a majorshareholder, $140,000 from Mr. Robert Schacter et al and $20,000 fromothers.  These promissory notes arepayable upon demand, not  subject to anypremium or penalty for prepayment, bear simple interest of 8% per annum, andare to be repaid in 180 days.   Anadditional 4% interest will be charged on any notes exceeding 180 days.  As of September 30, 2008, $850,000 is indefault and accruing post-maturity interest. The promissory notes issued to Messrs. Stein and Spiegel on December 11,2007 for an aggregate of $400,000 began incurring a post-maturity rate ofinterest on March 11, 2008 as a result of non-payment at the maturitydate. These promissory notes originally were issued with simple interest of 8%per year and were to be repaid in cash after 90 days.  Promissory notes issued to Messrs. Steinand Spiegel on February 21, 2008, March 20, 2008 and April 1,2008 for an aggregate of $450,000 began incurring a post-maturity rate ofinterest on August 20, 2008, September 17, 2008 and September 29,2008, respectively, as a result of non-payment at the maturity date.   In addition, as of September 30, 2008,total unpaid interest of approximately $64,000 is due, consisting of $33,000 toMr. Stein, $29,000 to Mr. Spiegel and $2,000 to others.

 

Associatedwith the promissory notes are warrants. Each warrant is a three (3)-year warrant with an exercise price of$1.00, and the warrants represent, in the aggregate, an underlying sixty-twothousand (62,000) shares of common stock for Mr. Spiegel, an underlyingfifty-one thousand (51,000) shares of common stock for Mr. Stein, anunderlying fourteen thousand (14,000) shares of common stock for Mr. Schacterand an underlying two thousand (2,000) shares of common stock for others.  These warrants were issued as addedconsideration for the notes.  Thesewarrants have been documented using customary terms and include a cashless ornet exercise provision for exercise. In addition, on April 9, 2008, wereceived 

 

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$164,000from the sale of 164,000 shares of our Common Stock in a privateplacement.   See Footnote 8 –Stockholders’ Equity – Common Stock.

 

Apogee continuesto be an operating entity as we continue to receive royalty revenue from ourformer product line.

 

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

 

***Revenue Recognition***

 

Apogeerecognizes revenue in accordance with Securities and Exchange Commission StaffAccounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in FinancialStatements: Revenue Recognition”, which states that revenue should berecognized when the following revenue recognition criteria are met:  (1) persuasiveevidence of an arrangement exists; (2) the product has been shipped andthe customer takes ownership and assumes the risk of loss; (3) the sellingprice is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured. We had no product revenue during the quarterended September 30, 2008.  Thefollowing policies apply to Apogee’s two major product sales categories forrevenue recognition. Sales to end users (“OEM”):  revenue is recognizedunder our standard terms and conditions of sale, title and risk of losstransfer to the customer at the time products are shipped from our warehouse ordelivered to the customer’s representative/freight forwarder. Sales toDistributors:  from time to time, we provided stock rotation rights, priceprotection and other incentives to our Distributors. As a result of theseincentives, Apogee has adopted a policy of deferring recognition of revenueuntil the distributor sells products to its customers based upon receipt ofpoint-of-sale reports from the distributors. We accrue the estimated cost ofpost-sale obligations including product warranty returns, based on historicalexperience. To date we have experienced minimal warranty returns.

 

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

 

InApril of 2008, SigmaTel, Inc. agreed to pay Apogee a percentage ofthe royalties it received from STMicroelectronics NV (“ST”) in exchange forsupporting their royalty negotiations with ST. As a result of this agreement,Apogee received approximately $38,000 and $63,000 for the three and nine monthsended September 30, 2008. Subsequently, on November 4, 2008 Apogee was notified that ST andFreescale (formerly SigmaTel, Inc.) had agreed to a reduction in theroyalties.    We expect no futurepayments under this arrangement.  SeeFootnote 13 – Subsequent Events – Royalty Payments from STMicroelectronics NV.

 

***Loss Per Share***

 

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

 

***Research and Development***

 

Costs for research and development are expensed as incurred.

 

***Legal Fees***

 

We record legalcosts (such as fees and expenses of external lawyers and other serviceproviders) when incurred or when it is probable that a liability has beenincurred on or before the balance sheet date and the amount can be reasonablyestimated if invoices have not been received. Significantlyhigher legal fees were incurred during the quarters ended June 30, 2008and September 30, 2008, compared to prior periods, in connection with theongoing SEC investigation and our indemnification of our President, ChiefExecutive Officer and Chairman of the Board of Directors.

 

***Contingencies***

 

Apogee is involved inand/or indemnifies others in various legal proceedings.  Management assesses the probability of lossfor such contingencies and recognizes a liability when a loss is probable andestimable.  See Footnote 10 –Indemnification Arrangements with our Executives and Others.

 

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***Inventories***

 

Inventories,including inventory held at distributors, are stated at the lower of cost on afirst-in, first-out basis or market.****This policyrequires us to make estimates regarding the market value of our inventory,including an assessment of excess or obsolete inventory.

 

OnJanuary 15, 2008, we sold the remaining DDX inventory held in our Norwoodoffice to one of our customers and on January 24, 2008, we sold theremaining DDX inventory housed in Hong Kong to one of our former DDXdistributors.  Total proceeds receivedfrom the disposition of the DDX inventory were $17,000.  In addition, we may share in proceeds fromthis sale of inventory by our former distributor if sales exceed certainlimits.

 

***Inventories purchase commitment losses***

 

Apogeeaccrues for estimated losses on non-cancelable purchase orders, which may occurif the future sales price declines below the committed purchase price.  There are no outstanding significant purchasecommitments of product inventory, and therefore, no provision for estimatedlosses on non-cancellable purchase orders was required at September 30,2008.

 

***Property and Equipment***

 

Major replacements andbetterments of equipment are capitalized. Cost of normal maintenance and repairs is charged to expense asincurred.  Depreciation is provided overthe estimated useful lives of the assets using accelerated methods.

 

***Leasehold Improvements***

 

Leasehold improvements areamortized over either the term of lease or the estimated useful life of theimprovement.

 

***Patents***

 

Costs incurred to registerand obtain patents are capitalized and amortized on a straight-line basis overfive years, the patent’s estimated useful lives.

 

***Exclusive License Fee***

 

We capitalized license fees paid to third partiesfor costs associated with the exclusive rights to their patents.  We were amortizing these fees over a periodof four years.  During the quarter ended June 30,2008, Apogee elected to terminate our 2006 license agreement with theUniversity of Akron Research Foundation and expensed the remaining license feesas well as expensing an additional $30,000, which represented the minimumroyalty due under this terminated license agreement.

 

***Cash and CashEquivalents***

 

We consider all highly liquid investments with anoriginal maturity of three months or less to be cash equivalents.

 

***Accounts Receivable***

 

We carry our tradereceivables from direct customers less an allowance for doubtful accounts toensure that trade receivables are carried at net realizable value.  On a periodic basis, we evaluate thecollectibility of our 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 we become aware of a customer’sinability to meet its financial obligations, such as in the case of bankruptcyfilings or substantial deterioration in the customer’s operating results orfinancial position. If the financial condition of our customers were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required. Accounts receivable are generally considered past due if any portion ofthe receivable balance is outstanding for more than 90 days.  If circumstances related to our customerschange, estimates of the recoverability of receivables would be furtheradjusted.

 

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***Fair value of financial instruments***

 

Carrying amounts of certain of our financialinstruments, including cash and cash equivalents, accounts receivable and notesand accounts payable, approximate their fair values due to their relativelyshort maturities and based upon comparable market information available at therespective balance sheet dates. We do not hold or issue financial instrumentsfor trading purposes.

 

***Stock-Based Compensation***

 

Apogee had a stock-based compensation plan, the 1997Employee, Director and Consultant Stock Option Plan (the “1997 Plan”), which isdescribed below.  This 1997 Plan expiredas of May 14, 2007.  At our AnnualMeeting held on August 28, 2007, the shareholders approved the adoption ofa new stock-based compensation plan, the 2007 Employee, Director and ConsultantStock Plan (the “2007 Plan”).  Prior tofiscal 2006, we accounted for the stock-based compensation under therecognition and measurement provisions of Accounting Principles Board (APB)Opinion No. 25, “Accounting for Stock Issued to Employees”, and relatedInterpretations, as permitted by Financial Accounting Standards Board (FASB)Statement of Financial Accounting Standards, “Accounting for Stock-BasedCompensation” (SFAS 123(R)).

 

Effective January 1, 2006, we adopted SFAS123(R) using the modified-prospective-transition method. Under thistransition method, stock compensation costs recognized beginning January 1, 2006include (a) compensation cost for all stock-based compensation paymentsgranted prior to, but not yet vested as of January 1, 2006, based on thegrant date fair value estimated in accordance with the original provisions ofSFAS 123(R), and (b) compensation cost for all stock-based paymentsgranted on or subsequent to January 1, 2006, based on the grant datefair value estimated in accordance with the provisions of SFAS 123(R).  Due to the adoption of SFAS 123(R), includedin our net loss for the three and nine months ended September 30, 2008,were stock-based compensation charges of approximately $14,000 and $47,000,respectively.  This compares toapproximately $24,000 and $78,000 for the same periods in 2007.

 

***Accounting forStock Compensation***

 

Stock-based compensation costs are generally basedon the fair value calculated from the Black-Scholes option-pricing model on thedate of grant for stock options.  Thefair values of option grants are amortized as compensation expense over theoption’s vesting period. Compensation expense recognized is shown in theoperating activities section of the consolidated statements of cash flow.

 

In anticipation of adopting SFAS 123(R), Apogeeevaluated the assumptions used by it in applying the Black-Scholes model. Wecontinue to calculate the expected stock price volatility based solely onhistorical volatility. We believe that historical volatility provides the bestestimate of future stock price volatility.

 

The expected term of options was previously and iscurrently calculated based on an analysis of vesting periods and contractuallife. Apogee believes that this analysis provides a better estimate of optionterm periods.

 

We estimate the expected life of the option anddetermine a risk-free rate based on U.S. Treasury issues with remaining termssimilar to the expected life of the option. We have never paid cash dividends and do not currently intend to paycash dividends.  Additionally, we haveestimated an expected term of 7.5 years, expected volatility of approximately100% and risk free interest rate of 3.415% as of September 30, 2008.

 

Pursuant to SFAS 123(R), we are required to estimatepotential forfeitures of stock grants and adjust compensation cost recordedaccordingly. The estimate of forfeitures will be adjusted over the requisiteservice period to the extent that actual forfeitures differ, or are expected todiffer, from such estimates. Changes in estimated forfeitures will berecognized through a cumulative catch-up adjustment in the period of change andwill also impact the amount of stock compensation expense to be recognized infuture periods.

 

Apogee’s stock compensation activity with respect tothe nine months ended September 30, 2008 is summarized below:

 

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| **Stock Options**                 | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at December 31, 2007  |       | 2,938,100  |       | $                                       | 4.5548     |                                                 |       |                            |       |   |
| Granted                                | ** ** | **—** |       |                                    |       |                                                 |       |                            |       |
| Exercised                              | ** ** | **—** |       |                                    |       |                                                 |       |                            |       |
| Cancelled or expired                   | ** ** | **—** |       |                                    |       |                                                 |       |                            |       |
| Outstanding at September 30, 2008 |       | 2,938,100  |       | $                                       | 4.5548     |                                                 | 5.4370     |                            | $          | 5,100 |   |
|                                   |       |       |       |                                    |       |                                                 |       |                            |       |
| Vested at September 30, 2008      |       | 2,578,000  |       | $                                       | 5.0677     |                                                 | 4.7792     |                            | $          | 750 |   |
|                                   |       |       |       |                                    |       |                                                 |       |                            |       |
| Exercisable at September 30, 2008 |       | 2,578,000  |       | $                                       | 5.0677     |                                                 | 4.7792     |                            | $          | 750 |   |

 

The following table summarizes information about options outstanding asof September 30, 2008:

 
| ** **                       | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                       | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of Exercise**  | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Prices**                       | ** ** | **Outstanding**              | ** ** | **Term**                     | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
|                             |       |                         |       |                         |       |   |   |   |   |   |   |
| $0.25 — 1.69                |       | 1,178,900                    |       | 7.4256                       |       | $ | 1.0012 |   | 679,800 |   | $ | 1.0630 |   |
| $2.71 — 6.59                |       | 1,299,200                    |       | 3.5118                       |       | $ | 5.4017 |   | 1,299,200 |   | $ | 5.4017 |   |
| $8.45 — 12.15               |       | 599,000                      |       | 5.5655                       |       | $ | 8.8883 |   | 599,000 |   | $ | 8.8883 |   |
|                             |       |                         |       |                         |       |   |   |   |   |   |   |
| Total at September 30, 2008 |       | 3,077,100                    |       | 5.4051                       |       | $ | 4.3945 |   | 2,578,000 |   | $ | 5.0677 |   |

 

During the nine months ended September 30,2008, Apogee granted options to purchase 160,000 shares of its common stock ata weighted average fair market value of $0.7405.  In addition, during the nine months ended September 30,2008, options to purchase 104,900 shares of Apogee common stock vested.  The weighted average exercise price of theseoptions was $1.0442. No options were exercised during the nine monthsended September 30, 2008.   Duringthe nine months ended September 30, 2007, Apogee granted options topurchase 110,000 shares of its common stock at a weighted average fair marketvalue of $0.7470.  During the nine months ended September 30, 2007,options to purchase 114,000 shares of Apogee common stock expired.  No options were exercised during the ninemonths ended September 30, 2007.  During the nine months ended September 30,2007, options to purchase 89,100 shares of Apogee common stock vested.  The weighted average fair value of theseoptions was $0.8494 Total stock-based compensation expense for the three andnine months ended September 30, 2008, was approximately $14,000 and$47,000, respectively, compared to approximately $24,000 and $78,000,respectively, for the three and nine months ended September 30, 2007.

 

***Recent Accounting Pronouncements***

 

Managementdoes not believe there are any recently issued but not yet effective accountingpronouncements that will have a material effect on our financial statements andresults of operation.

 

**3.**                                                   **Accounts Receivable**

 

AccountsReceivable at September 30, 2008 and December 31, 2007 are comprisedof the following:

 
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                           | ** ** | **(Unaudited)**        | ** ** | **(Audited)**         | ** ** |
| Distributor                          | ** ** | **$**                  | **—** |                  | $          | 1,650 |   |
| Direct customers                     | ** ** | **9,377**              |       | 19,456                |       |
| ** **                           |       | **$**                  | **9,377**  |                  | $          | 21,106 |   |
|                                 |       |                   |       |                  |       |
| Less allowance for doubtful accounts | ** ** | **$**                  | **(9,377** | **)**                 | (10,570    | ) |
|                                 |       |                   |       |                  |       |
| Net accounts receivable              | ** ** | **$**                  | **—** |                  | $          | 10,536 |   |

 

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

 

Propertyand equipment at September 30, 2008 and December 31, 2007 arecomprised of the following:

 

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| ** **                    | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                    | ** ** | **2008**               | ** **  | **2007**              | ** ** |
| ** **                    | ** ** | **(Unaudited)**        | ** **  | **(Audited)**         | ** ** |
|                          |       |                   |        |                  |       |
| Equipment                     | ** ** | **$**                  | **189,780** |                  | $          | 181,459 |   |
| Software                      | ** ** | **32,943**             |        | 32,943                |       |
| Furniture and fixtures        | ** ** | **22,047**             |        | 22,047                |       |
| Leasehold improvements        | ** ** | **92,892**             |        | 92,892                |       |
|                          |       |                   |        |                  |       |
| ** **                    |       | **$**                  | **337,662** |                  | $          | 329,341 |   |
|                          |       |                   |        |                  |       |
| Less accumulated depreciation | ** ** | **(206,282**           | **)**       | (145,896              | )          |
|                          |       |                   |        |                  |       |
| ** **                    |       | **$**                  | **131,380** |                  | $          | 183,445 |   |

 

Depreciationexpense was $12,487 and $37,165 for the three and nine months ended September 30,2008, respectively, compared to $9,911 and $28,398 for the three and ninemonths ended September 30, 2007, respectively.

 

Theestimated useful 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              |       |

 

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

 

We recorded an Intangible Asset impairment charge of$40,000 at December 31, 2007 to reflect lower than anticipated revenuesfrom our MEMS sensor product line.  Thischarge is based on estimates by management and was recorded against $100,000 ofintangible assets associated with MEMS intellectual property acquired in2004.  No additional charges wererecorded for the nine months ended September 30, 2008.

 

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

 
| ** **                  | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|-----------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                  | ** ** | **2008**               | ** **  | **2007**              | ** ** |
| ** **                  | ** ** | **(Unaudited)**        | ** **  | **(Audited)**         | ** ** |
|                        |       |                   |        |                  |       |
| Accrued audit expenses      | ** ** | **$**                  | **63,000**  |                  | $          | 63,000 |   |
| Accrued legal expenses      | ** ** | **5,000**              |        | 7,000                 |       |
| Accrued consulting expenses | ** ** | **37,000**             |        |                  |       |
| Other accrued expenses      | ** ** | **50,000**             |        | 19,000                |       |
|                        |       |                   |        |                  |       |
| ** **                  |       | **$**                  | **155,000** |                  | $          | 89,000 |   |

 

**7.**                                                   **Promissory Notes, Loans andWarrants**

 

Duringthe nine months ended September 30, 2008, Apogee received proceeds fromunsecured interest-bearing promissory notes in the amounts of $510,000from Mr. Herbert M. Stein, President, Chief Executive Officer and Chairmanof the Board of Directors, $620,000 from Mr. David Spiegel, a majorshareholder, $140,000 from Mr. Robert Schacter et al and $20,000 fromothers.  These promissory notes arepayable upon demand, not  subject to anypremium or penalty for prepayment, bear simple interest of 8% per annum, andare to be repaid in 180 days.  Anadditional 4% interest will be charged on any notes exceeding 180 days.  As of September 30, 2008, $850,000 is indefault and accruing post-maturity interest. The promissory notes issued to Messrs. Stein and Spiegel on December 11,2007 for an aggregate of $400,000 began incurring a post-maturity rate ofinterest on March 11, 2008 as a result of non-payment at the maturitydate. These promissory notes originally were issued with simple interest of 8%per year and were to be repaid in cash after 90 days.  Promissory notes issued to Messrs. Steinand Spiegel on February 21, 2008, March 20, 2008 and April 1,2008 for an aggregate of $450,000

 

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began incurring a post-maturity rate of interest on August 20,2008, September 17, 2008 and September 29, 2008, respectively, as aresult of non-payment at the maturity date.  In addition, as of September 30, 2008, total unpaid interest ofapproximately $64,000 is due, consisting of $33,000 to Mr. Stein, $29,000to Mr. Spiegel and $2,000 to others.

 

Associated with thepromissory notes are warrants.  Eachwarrant is a three (3)-year warrant with an exercise price of $1.00, and thewarrants represent, in the aggregate, an underlying sixty-two thousand (62,000)shares of common stock for Mr. Spiegel, an underlying fifty-one thousand(51,000) shares of common stock for Mr. Stein, an underlying fourteenthousand (14,000) shares of common stock for Mr. Schacter et al and anunderlying ten thousand (2,000) each shares of common stock for others.  These warrants were issued as addedconsideration for the notes.  These warrantshave been documented using customary terms and include a cashless or netexercise provision for exercise. The values of these warrants were determinedby using the Black Scholes valuation model. The following tables detail the warrants issued and assumptions used.

 

David Spiegel

 
| ** **                    | ** ** | ** **         | ** ** | **Stock Price**     | ** ** | ** **       | ** ** | ** ** | ** ** | **Risk Free** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **           | ** ** |
|-------------------------------|------------|--------------------|------------|--------------------------|------------|------------------|------------|------------|------------|--------------------|------------|----------------|------------|--------------------|------------|----------------------|------------|
| ** **                    | ** ** | **Number of** | ** ** | **At Date of** | ** ** | **Term of** | ** ** | **Strike** | ** ** | **Interest**       | ** ** | ** **     | ** ** | **Value Per** | ** ** | ** **           | ** ** |
| **Date of Warrant** | ** ** | **Warrants**       | ** ** | **Issuance**             | ** ** | **Warrant**      | ** ** | **Price**  | ** ** | **Rate**           | ** ** | **Volatility** | ** ** | **Warrant**        | ** ** | **Total Value** | ** ** |
|                          |       |               |       |                     |       |             |       |       |       |               |       |           |       |               |       |                 |       |
| February 21, 2008        |       | 10,000             |       | $                        | 0.65       |             | 3 Years    |       | $          | 1.00               |       | 2.23           |       | 98.45824           | %          | $                    | 0.3462     |   | $ | 3,462.00 |   |
| March 20, 2008           |       | 10,000             |       | $                        | 0.70       |             | 3 Years    |       | $          | 1.00               |       | 1.71           |       | 99.87467           | %          | $                    | 0.3867     |   | $ | 3,867.00 |   |
| April 1, 2008            |       | 5,000              |       | $                        | 0.85       |             | 3 Years    |       | $          | 1.00               |       | 1.94           |       | 100.00925          | %          | $                    | 0.5042     |   | $ | 2,526.00 |   |
| May 15, 2008             |       | 5,000              |       | $                        | 0.83       |             | 3 Years    |       | $          | 1.00               |       | 2.70           |       | 102.78266          | %          | $                    | 0.5036     |   | $ | 2,518.00 |   |
| June 16, 2008            |       | 6,500              |       | $                        | 0.63       |             | 3 Years    |       | $          | 1.00               |       | 3.33           |       | 104.12541          | %          | $                    | 0.3555     |   | $ | 2,310.75 |   |
| June 18, 2008            |       | 5,000              |       | $                        | 0.61       |             | 3 Years    |       | $          | 1.00               |       | 3.19           |       | 104.07197          | %          | $                    | 0.3397     |   | $ | 1,698.50 |   |
| July 15, 2008            |       | 5,000              |       | $                        | 0.87       |             | 3 Years    |       | $          | 1.00               |       | 2.70           |       | 104.55357          | %          | $                    | 0.5429     |   | $ | 2,714.50 |   |
| July 28, 2008            |       | 5,000              |       | $                        | 0.75       |             | 3 Years    |       | $          | 1.00               |       | 2.90           |       | 104.54508          | %          | $                    | 0.4481     |   | $ | 2,240.60 |   |
| August 12, 2008          |       | 3,500              |       | $                        | 0.75       |             | 3 Years    |       | $          | 1.00               |       | 2.73           |       | 104.93498          | %          | $                    | 0.4488     |   | $ | 1,570.80 |   |
| August 27, 2008          |       | 3,500              |       | $                        | 0.85       |             | 3 Years    |       | $          | 1.00               |       | 2.58           |       | 106.26182          | %          | $                    | 0.5331     |   | $ | 1,865.85 |   |
| September 5, 2008        |       | 3,500              |       | $                        | 0.86       |             | 3 Years    |       | $          | 1.00               |       | 2.44           |       | 106.21122          | %          | $                    | 0.5404     |   | $ | 1,891.40 |   |
| Total                         |       | 62,000             |       |                     |       |             |       |       |       |               |       |           |       |               |       | $                    | 26,665.40  |   |

 

Herbert M. Stein

 
| ** **                    | ** ** | ** **         | ** ** | **Stock Price**     | ** ** | ** **       | ** ** | ** ** | ** ** | **Risk Free** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **           | ** ** |
|-------------------------------|------------|--------------------|------------|--------------------------|------------|------------------|------------|------------|------------|--------------------|------------|----------------|------------|--------------------|------------|----------------------|------------|
| ** **                    | ** ** | **Number of** | ** ** | **At Date of** | ** ** | **Term of** | ** ** | **Strike** | ** ** | **Interest**       | ** ** | ** **     | ** ** | **Value Per** | ** ** | ** **           | ** ** |
| **Date of Warrant** | ** ** | **Warrants**       | ** ** | **Issuance**             | ** ** | **Warrant**      | ** ** | **Price**  | ** ** | **Rate**           | ** ** | **Volatility** | ** ** | **Warrant**        | ** ** | **Total Value** | ** ** |
|                          |       |               |       |                     |       |             |       |       |       |               |       |           |       |               |       |                 |       |
| February 21, 2008        |       | 10,000             |       | $                        | 0.65       |             | 3 Years    |       | $          | 1.00               |       | 2.23           |       | 98.45824           | %          | $                    | 0.3462     |   | $ | 3,462.00 |   |
| March 20, 2008           |       | 5,000              |       | $                        | 0.70       |             | 3 Years    |       | $          | 1.00               |       | 1.71           |       | 99.87467           | %          | $                    | 0.3867     |   | $ | 1,933.50 |   |
| April 1, 2008            |       | 5,000              |       | $                        | 0.85       |             | 3 Years    |       | $          | 1.00               |       | 1.94           |       | 100.00925          | %          | $                    | 0.5042     |   | $ | 2,526.00 |   |
| May 15, 2008             |       | 5,000              |       | $                        | 0.83       |             | 3 Years    |       | $          | 1.00               |       | 2.70           |       | 102.78266          | %          | $                    | 0.5036     |   | $ | 2,518.00 |   |
| June 16, 2008            |       | 3,500              |       | $                        | 0.63       |             | 3 Years    |       | $          | 1.00               |       | 3.33           |       | 104.12541          | %          | $                    | 0.3555     |   | $ | 1,244.25 |   |
| June 18, 2008            |       | 4,000              |       | $                        | 0.61       |             | 3 Years    |       | $          | 1.00               |       | 3.19           |       | 104.07197          | %          | $                    | 0.3397     |   | $ | 1,358.80 |   |
| July 15, 2008            |       | 3,000              |       | $                        | 0.87       |             | 3 Years    |       | $          | 1.00               |       | 2.70           |       | 104.55357          | %          | $                    | 0.5429     |   | $ | 1,628.70 |   |
| July 28, 2008            |       | 5,000              |       | $                        | 0.75       |             | 3 Years    |       | $          | 1.00               |       | 2.90           |       | 104.545 08         | %          | $                    | 0.4481     |   | $ | 2,240.60 |   |
| August 12, 2008          |       | 3,500              |       | $                        | 0.75       |             | 3 Years    |       | $          | 1.00               |       | 2.73           |       | 104.93498          | %          | $                    | 0.4488     |   | $ | 1,570.80 |   |
| August 27, 2008          |       | 3,500              |       | $                        | 0.85       |             | 3 Years    |       | $          | 1.00               |       | 2.58           |       | 106.26182          | %          | $                    | 0.5331     |   | $ | 1,865.85 |   |
| September 5, 2008        |       | 3,500              |       | $                        | 0.86       |             | 3 Years    |       | $          | 1.00               |       | 2.44           |       | 106.21122          | %          | $                    | 0.5404     |   | $ | 1,891.40 |   |
| Total                         |       | 51,000             |       |                     |       |             |       |       |       |               |       |           |       |               |       | $                    | 22,239.90  |   |

 

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The promissory notesissued to Messrs. Stein and Spiegel on December 11, 2007, February 21,2008, March 20, 2008 and April 1, 2008 for an aggregate of $850,000are incurring a post-maturity rate of interest 12%.  The promissory notes originally were issuedwith simple interest of 8% per year and were to be repaid in cash after 90 daysfor the December 11, 2007 and 180 days for the remaining promissorynotes.  The effective interestrate is approximately 17%.

 

Through September 30, 2008,Apogee has received total proceeds from loans and promissory notes of $760,000,$770,000 and $160,000 from Mr. Stein and Mr. Spiegel and others,respectively.

 

The following tables represent thenet payable due as of September 30, 2008:

 
| ** **                                      | ** ** | **Herbert M. Stein** | ** **  | **David Spiegel** | ** ** | **Total**   | ** ** |
|-------------------------------------------------|------------|--------------------------------|-------------|------------------------|------------|-------------|------------|
| ** **                                      | ** ** | ** **                     | ** **  | ** **             | ** ** | ** **  | ** ** |
| Total proceeds from Loans and Promissory  Notes | ** ** | **$**                          | **760,000** | ** **             | **$**      | **770,000** | ** ** | **$** | **1,530,000** | ** ** |
|                                            | ** ** | ** **                     | ** **  | ** **             | ** ** | ** **  | ** ** |
| Discount (Fair Market Value of Warrants)        | ** ** | **(7,665**                     | **)**       | **(9,312**             | **)**      | **(16,977** | **)**      |
| ** **                                      | ** ** | **$**                          | **752,336** | ** **             | **$**      | **760,688** | ** ** | **$** | **1,513,023** |   |

 

Asof September 30, 2008 unpaid interest of $33,304 and $29,350 is due to Mr. Steinand Mr. Spiegel, respectively.

 

**OtherWarrants**

 
| ** **                    | ** ** | ** **         | ** ** | **Stock Price**     | ** ** | ** **       | ** ** | ** ** | ** ** | **Risk Free** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **           | ** ** |
|-------------------------------|------------|--------------------|------------|--------------------------|------------|------------------|------------|------------|------------|--------------------|------------|----------------|------------|--------------------|------------|----------------------|------------|
| ** **                    | ** ** | **Number of** | ** ** | **At Date of** | ** ** | **Term of** | ** ** | **Strike** | ** ** | **Interest**       | ** ** | ** **     | ** ** | **Value Per** | ** ** | ** **           | ** ** |
| **Date of Warrant** | ** ** | **Warrants**       | ** ** | **Issuance**             | ** ** | **Warrant**      | ** ** | **Price**  | ** ** | **Rate**           | ** ** | **Volatility** | ** ** | **Warrant**        | ** ** | **Total Value** | ** ** |
| **Others**                    |       |               |       |                     |       |             |       |       |       |               |       |           |       |               |       |                 |       |
| July 28, 2008            |       | 2,000              |       | $                        | 0.75       |             | 3 Years    |       | $          | 1.00               |       | 2.90           |       | 104.545 08         | %          | $                    | 0.4460     |   | $ | 892.00 |   |
| **Robert  Schacter et al***   |       |               |       |                     |       |             |       |       |       |               |       |           |       |               |       |                 |       |
| September 5, 2008        |       | 14,000             |       | $                        | 0.86       |             | 3 Years    |       | $          | 1.00               |       | 2.44           |       | 106.21122          | %          | $                    | 0.5404     |   | $ | 7,565.60 |   |

 

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*10,000 Warrants issued in the name of TYJO Corporation Money Purchase PensionPlan, 2,000 Warrants issued in the name of Mr. Robert Schacter, asCustodian for Tyler Schacter UTMA/CA and 2,000 Warrants issued in the name of Mr. RobertSchacter, as Custodian for Joseph Schacter UTMA/CA Warrants issued to Mr. RobertSchacter.

 

Thefollowing table represents the net payable due as of September 30, 2008.

 
| ** **                                      | ** ** | **Robert Schacter   et al** | ** **  | **Others** | ** ** | **Total**  | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|-------------|------------|------------|------------|------------|
| ** **                                      | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| Total proceeds from Loans and Promissory  Notes | ** ** | **$**                                      | **140,000** | ** ** | **$**      | **20,000** | ** ** | **$** | **160,000** | ** ** |
|                                            | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| Discount (Fair Market Value of Warrants)        | ** ** | **(6,515**                                 | **)**       | **(574**   | **)**      | **(7,089** | **)**      |
| ** **                                      | ** ** | **$**                                      | **134,485** | ** ** | **$**      | **19,426** | ** ** | **$** | **152,911** |   |

 

Asof September 30, 2008 unpaid interest of $809 and $289 is due Mr. RobertSchacter and others, respectively.

 

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

 

***Preferred Stock***

 

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

 

***Common Stock***

 

At our Annual Meeting held on August 28,2007, our shareholders approved an Amendment to the Amended and RestatedCertificate of Incorporation increasing the number of shares of common stockauthorized from 20 million to 40 million. On April 9,2008, Apogee sold 164,000 shares of our common stock to accredited investors ata price of $1.00 per share.  The netproceeds to Apogee were $152,519, which we will use for general working capitaland corporate purposes.   The shares ofApogee’s common stock were issued and sold in a private placement in relianceon an exemption from registration provided by Section 4(2) of SecuritiesAct of 133, as amended, and Rule 506 of Regulation D promulgatedthereunder**. **The shares of commonstock issued in this private placement were not registered under the SecuritiesAct of 1933 and may not be subsequently offered or sold by the investors in theUnited States absent registration or an applicable exemption from theregistration requirements.

 

***Stock Options***

 

Duringthe three months ended September 30, 2008, we awarded each of our outsidedirectors’ options to purchase 40,000 shares, at an exercise price of $1.00 pershare. During the three months ended September 30, 2007, we awardedcertain of our employees’ options to purchase 26,000 shares, in the aggregate,at an exercise price of $0.74 per share.  These options were granted under the 2007 Plan. The options granted tothese employees vest over five years beginning at the first anniversary of thedate of grant.

 

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

 

Inaddition to the Promissory Notes, Loans and Warrants described in Footnote 7,we rent our facility from an entity controlled by a stockholder for $4,400 permonth pursuant to a lease that expired December 31, 2005. Currently, weare renting the facility on a month-to-month basis.

 

**10.****                                           ****Indemnification Arrangementswith our Executives and Others**

 

Apogee has been assumingand will continue to assume the legal costs and related expenses of Herbert M.Stein, in connection with the civil action styled*Joseph Shamy vs. Herbert M. Stein, Case No.: 50 2005 CA 007719XXXXMB. *In this action instituted on August 10,2005 and pending in Palm Beach Court Circuit Court, Joseph Shamy has suedHerbert M. Stein, President, Chief Executive Officer and Chairman of the Boardof Apogee, for fraud and breach of fiduciary duty in connection with Shamy’spurchase of Apogee shares in 2003 and 2004. The initial Complaint was dismissed for failing to adequately allegefraud.  In his Amended Complaint, Shamyalleged that in or around October 2003, Mr. Stein, in his capacity asPresident and Chief Executive Officer of Apogee, provided Mr. Shamy withmisleading financial projections for Apogee in the form of a spreadsheet whichShamy attached as Exhibit A to the Amended Complaint.  Mr. Stein has vigorously denied theallegations of the Complaint, including that he prepared or ever saw thespreadsheet at any time before it was attached to the Amended Complaint.  Mr. Stein has moved for summaryjudgment.

 

Wehave incurred approximately $648,000 toward this indemnification through September 30,2008. Although we are assuming legal costs and expenses of Herbert M. Stein, wedo not believe that it is probable that a Company asset will be impaired or aliability will be incurred as a result of the outcome of the legal matter and,as such, the amount of potential loss cannot be reasonably estimated.

 

Aninvestigation by the SEC, which the Company first became aware of in May 2005,is ongoing. The Company believes that the subject matter of this investigationis the Company’s prior revenue recognition practices that were addressed in theCompany’s restatement of its financial statements for the fiscal yearended December 31, 2004. As previously disclosed in our Annual Report on Form 10-KSBfor the fiscal year ended December 31, 2004, as amended, Apogee’s AuditCommittee, with the assistance of independent counsel, conducted aninvestigation into Apogee’s historical accounting practices that resulted inthe implementation of remedial actions. See our Annual Report on Form 10-KSBfor the year ended December 31, 2004, as amended, for detail regarding therestatement.

 

InJuly 2008, Apogee, it’s Chief Executive Officer andother employees received notifications from the Staff of the SEC relatingto the Staff’s 2005 investigation. These notifications, known as “WellsNotices,” stated that the Staff is considering recommending that the Commissionbring enforcement actions against the Company and certain employees, basedon 

 

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allegedviolations of certain provisions of the federal securities laws, including Section 17(a) ofthe Securities Act of 1933, as amended, Section 10(b) of theSecurities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder,Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20,13a-1 and 13a-13 thereunder. The Wells Notice sent to the Company indicatesthat in any action actually brought against the Company, the Staff would seekan injunction against future violations of the federal securities laws asrelief.  We continue to coordinate withthe Staff with respect to their investigation, and seek to comply with requestsas they arise.

 

Wedo not believe that it is probable that a Company asset will be impaired or aliability will be incurred as a result of the outcome of the legal matters and,as such, the amount of potential loss cannot be reasonably estimated. Wehave agreed to indemnify certain employees, directors and a former employee inconnection with the SEC investigation. As of September 30, 2008, we haveincurred approximately $517,000 in legal expenses to indemnify theseindividuals in association with this matter. During the three and nine monthsended September 30, 2008, we recorded approximately $118,000 and $507,000,respectively, toward this indemnification and we could incur significantlylarger costs before this matter is resolved.  These costs are not being reimbursed under our Directors and OfficersInsurance Policy.

 

**11.**                                            **Tax Loss Carryforwards**

 

The following approximates the net losscarryforwards we have available in the future for federal and state taxpurposes as of December 31, 2007:

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

 

Business credits available in the future:

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

 

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

 

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

 

**12.****                                            ****Notification from theAmerican Stock Exchange**

 

As reported on our reporton Form 8-K dated November 8, 2007, we were notified by a letter fromthe American Stock Exchange (AMEX) on November 2, 2007 that the periodprovided to us by AMEX to regain compliance with its continued listingrequirements had expired without our having regained compliance with therelevant continued listing standards. As a result, the staff of the AMEXnotified us of their intent to remove our common stock from the AMEX by filinga delisting application with the Securities and Exchange Commission (the “SEC”)pursuant to Section 1009(d) of the AMEX Company Guide (the “CompanyGuide”), and Rule 12d2-2 of the Securities Exchange Act of 1934, asamended.

 

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

 

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

 

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

 

**AdditionalFinancings**

 

On October 27, 2008, weissued unsecured interest-bearing promissory notes, in the aggregate, for$166,000 for funds received in October 2008.  We received $35,000 from Mr. Spiegel,$25,000 from Mr. Stein, $100,000 from Mr. Robert Schacter and $6,000from others.  On October 27, 2008,in connection with the promissory notes, we issued warrants to theseindividuals.  One warrant representingthree-thousand five hundred shares of Apogee common stock was issued to Mr. Spiegel,one warrant representing two-thousand five hundred shares of Apogee commonstock was issued to Mr. Stein, one warrant representing twenty-fivethousand shares of Apogee Common stock was issued to Mr. Schacter and twowarrants each representing three hundred shares of Apogee common stock wasissued to others.  All warrants issued atan exercise price of $1.00 and were issued as added consideration for theadditional $166,000.

 

**STMicroelectronicsNV Royalty Payments**

 

OnNovember 4, 2008 Apogee was notified by STMicroelectronics NV that theyhad reached an agreement with Freescale (formerly SigmaTel, Inc.) reducingthe quarterly royalties due Freescale. The original agreement was a result of the transaction with SigmaTel, Inc. (“SigmaTel”)whereby we sold certain assets of our audio division, including the DDXtechnology and the associated royalties from our license agreement with ST, forapproximately $9.78 million.  Upon acceptance by Freescale of the lowerroyalty payments, the arrangement agreed to between Freescale and Apogee in April 2008was cancelled.  We expect nofuture payments under this arrangement.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**GENERAL**

 

Thefollowing Management’s Discussion and Analysis of the Company’s FinancialCondition and Results of Operations for the three-and nine-month periods ended September 30,2008 and September 30, 2007, should be read in conjunction with theCompany’s Financial Statements and related footnotes included elsewhere in thisQuarterly Report on Form 10-Q. This discussion contains, in addition tohistorical statements, forward-looking statements that involve risks anduncertainties. Our 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 titled ITEM 1A – RISK FACTORS as well as other factors describedin our Annual Report on Form 10-KSB for the year ended December 31,2007.

 

***OVERVIEW***

* *

We are developing proprietaryintradermal drug delivery systems for vaccines and other pharmaceuticals thatwe intend to market to pharmaceutical and medical device companies. We are alsoengaged in the development of proprietary sensor, based health monitoringsystems for the elderly care and other markets that we intend to manufactureand market to individuals and health organizations.  Our two major business activities areorganized under the Life Science Group and the Health Monitoring Group.  Our Life Science Group is developing PyraDermTM, an advanced intradermaldrug delivery system to meet the needs of patients, health insurers andcompanies developing pharmaceuticals, as well as governments and internationalhealth organizations. We believe PyraDermTM, has advantages over competitiveapproaches for the delivery of vaccines, high potency therapeutic protein drugsand other pharmaceuticals. We have evaluated the feasibility of *PyraDerm* by performing in vitro tests with model drugs andare in the process of in vivo testing with two leading research organizationsto evaluate the advantages of *PyraDerm* in thedelivery of Hepatitis B and the Pandemic Influenza vaccine antigens. We areworking to establish pharmaceutical industry compliant manufacturing methodsand to define regulatory strategies to support *PyraDerm’s*potential commercialization. If in vitro and in vivo evaluation of *PyraDerm* is successful, we intend to pursuelicensing/development or partnership agreements with pharmaceutical companiesinterested in this technology.   In August 2007,we announced an expansion of our sensor business to include the development of *IntellaPAL*TM, an innovative sensor-based monitoring systemdesigned to improve the security, independence and quality of life for theelderly and their families. *IntellaPAL* willutilize a wireless sensor module and advanced software processing tocontinuously measure a range of health characteristics and automatically notifyresponders when specified conditions are detected. In addition, the system willprovide monitored data online so that approved caregivers will be able toassist in the early identification of certain health characteristics.  We have developed a family of proprietaryMicro-Electromechanical Systems (“MEMS”)-based pressure sensor designs and arenow evaluating various commercialization options.  There is a 

 

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possibilitythis product line will be discontinued if the results determinecommercialization is not economically viable or if we do not raise additionalcapital.  ** **We had no material revenues for thethree and nine months ended September 30, 2008.

 

Duringthe three and nine months ended September 30, 2008, virtually all of ourrevenue was derived from the sale of the remaining DDX audio IC inventory and ofroyalty revenue.  In April of 2008,SigmaTel, Inc. agreed to pay Apogee a percentage of the royalties itreceived from STMicroelectronics NV (“ST”) in exchange for supporting theirroyalty negotiations with ST. As a result of this agreement, Apogee receivedapproximately $38,000 and $63,000 for the three and nine months ended September 30,2008.  On November 4, 2008 Apogeewas notified that ST and Freescale (formerly SigmaTel, Inc.) had agreed toa reduction in the royalties, thus cancelling the arrangement from April 2008.  We expect no future payments under thisarrangement.  See Footnote 13 –Subsequent Events – Royalty Payments from STMicroelectronics NV.

 

Weexpect that any future revenue will initially be in the form of potentiallicensing and development revenues resulting from the grant of rights to ourintellectual property. In order to support our operations we need to secureadditional funding in 2008. Subject to receipt of sufficient funding, we planto add a network of direct sales staff, independent sales representatives anddistributors to support our medical and sensor products.  We currently plan to outsource themanufacturing, assembly and certain testing of our medical, health monitoringand sensor products.

 

At September 30, 2008, we had an accumulated deficit ofapproximately $21.9 million, as compared to a deficit of $18.9 million as of December 31,2007.  Our historical net losses and accumulated deficit (since 1995)result primarily from the costs associated with our efforts to design, developand market our DDX technology as well as costs associated with our efforts todevelop new medical and sensor products.

 

Asof September 30, 2008, we had 13 employees, compared to 14 employees at September 30,2007.  Effective as of June 9, 2008,9 employees transitioned to part-time status in an effort to reduce humanresource costs.

 

**SELECTEDCONSOLIDATED FINANCIAL DATA**

 

The following selectedfinancial data for the three- and nine-month periods ended September 30,2008 and 2007 have been derived from our unaudited financial statements. Anytrends reflected by the following table may not be indicative of futureresults.

 
| ** **                               | ** ** | **For the Three-Month Period   Ended  September 30,** | ** ** | **For the Nine-Month Period   Ended   September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                                                       | ** ** | **2007**                                                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                               | ** ** | ** **                                                                     | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statement of Operations Data:            |       |                                                                           |       |                                                                                |       |   |   |   |   |
| Revenue                                  |       | $                                                                              | 37,893     |                                                                                | $          | 13,601 |   | $ | 85,450 |   | $ | 132,268 |   |
| Costs and expenses                       |       | (753,954                                                                       | )          | (793,933                                                                            | )          | (3,022,238 | ) | (2,456,724 | ) |
| Other Income (expenses)                  |       | (55,054                                                                        | )          | 67,825                                                                              |       | (94,350 | ) | 123,760 |   |
| Net Loss                                 |       | $                                                                              | (771,115   | )                                                                                   | $          | (712,507 | ) | $ | (3,031,138 | ) | $ | (2,200,696 | ) |
|                                     |       |                                                                           |       |                                                                                |       |   |   |   |   |
| Shares Outstanding                       |       | 12,132,332                                                                     |       | 12,033,332                                                                          |       | 12,132,332 |   | 12,033,332 |   |
|                                     |       |                                                                           |       |                                                                                |       |   |   |   |   |
| Total Assets                             |       | $                                                                              | 518,896    |                                                                                | $          | 1,372,370 |   | $ | 518,896 |   | $ | 1,372,370 |   |
| Stockholders’ equity (deficiency)   |       | $                                                                              | (3,023,556 | )                                                                                   | $          | 773,673 |   | $ | (3,023,556 | ) | $ | 773,673 |   |
| Loss per share (basic and fully diluted) |       | $                                                                              | (0.06      | )                                                                                   | $          | (0.06 | ) | $ | (0.25 | ) | $ | (0.18 | ) |

 

**RESULTS OFOPERATIONS OF THE COMPANY**

 

**Revenue**

 

Wehave traditionally derived our revenue from three sources:

 

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·                                    product sales, which formerly consisted ofmerchandise sales of our former DDX products made either directly to originalequipment manufacturers or through point of sale (“POS”) by distributors.  During the nine months ended September 30,2008, we had product revenues of $21,951, and all remaining merchandise wassold in January 2008.  All shipmentsrelated to the January 2008 sales were fulfilled from our contractedwarehouse in Hong Kong or from our Norwood, Massachusetts office and werereported net of returns;

 

·                                    royalty revenue, formerly consisted ofroyalties paid by STMicroelectronics under a license agreement, for which weretain limited rights following the SigmaTel transaction;   See Footnote 13 – Subsequent Events –STMicroelectronics NV Royalty Payments, and

 

·                                    consulting income related to contractualservices or development activities for third parties. We may, in thefuture, receive royalties under our remaining audio licensing agreements andfrom potential new licensing agreements contemplated under our two new businessgroups. See Footnote 2 to our consolidated financial statements.  We anticipate that any future revenue streamswill come from our life science, health monitoring and sensor businesses,generally in the form of strategic alliances or arrangements with developmentor marketing partners, direct product sales and distribution arrangements, aswell as, from licensing and development-related revenues resulting from thegrant of rights to our intellectual property.  We envision the future ofour medical devices as (i) licensing or selling our technologies topharmaceutical or medical device companies; (ii) establishing partnershipswith pharmaceutical and medical device companies to commercialize our products;and (iii) developing, producing and marketing our own products.  In order to develop and market any products,we will need to secure additional funding.

 

Werecognized revenue for the three months ended September 30, 2008 ofapproximately $38,000, an increase of approximately $24,000 or 179%, fromapproximately $14,000 for the three months ended September 30, 2007.  For the nine months ended September 30,2008 revenue decreased approximately $47,000 or 35% to approximately $85,000from approximately $132,000 for the nine months ended September 30,2007.  On January 15, 2008, we soldthe remaining DDX inventory held in our Norwood office to one of our customers,and on January 24, 2008, we sold the remaining DDX inventory housed inHong Kong to one of our former DDX distributors.  Total proceeds received from the dispositionof the DDX inventory were $17,000.  Inaddition, we may share in proceeds from the sale of this inventory by ourformer distributor if sales exceed certain limits.

 

SeeFootnote 13 – Subsequent Events – Royalty Payments from STMicroelectronics NV,for details related to discontinuance of future royalty payments to Apogee.

 

Weanticipate that we will not generate any material future revenue until suchtime, if ever, when we are able to generate revenue from our life science,health monitoring and/or sensor products.

 

**Costof Revenue**

 

Substantiallyall of the product revenue recorded in the three and nine months ended September 30,2008 was from products related to our former audio IC business and hadpreviously been fully reserved at 100%. All of the revenue recorded for the three months ended September 30,2008 was for royalties received as a result of the above-referenced arrangementwith SigmaTel.  Therefore, we did notrecord any cost of revenue for the three months ended September 30,2008.  For the nine months ended September 30,2008, we recorded cost of revenue associated with the sale of sensor productsof $696.  Cost of revenue for the ninemonths ended September 30, 2007 associated with the sale of sensorproducts was $1,427.

 

**Operating Expenses**

 

**Research and Development Costs**

 

Ourresearch and development, or R&D, expenses consist primarily of salaries,development material costs, and external consulting and service costs relatedto the development and design of new products. Research and developmentexpenses decreased by approximately $5,000 or , or 2%, to approximately$300,000 for the three months ended September 30, 2008, compared toapproximately $305,000 for the three months ended September 30, 2007.During the nine months ended September 30, 2008, R&D expensesincreased by approximately $156,000, or 17%, to approximately $1.08 million,compared to approximately $924,000 for the nine months ended September 30,2007.

 

Thedecrease in the three month comparison was the result of a reduction in thepurchase of supplies and consumables for the medical laboratory as well asdecreases in computer software, utilization of third-party consultants andtravel, partially offset by increases in human resources and amortizationexpenses. Expenses primarily to support our laboratory decreased

 

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byapproximately $10,000, or 71% and $3,000, or 8%, to approximately $4,000 and$43,000 for the three months and nine months ended September 30, 2008,compared to approximately $14,000 and $46,000 for the same periods in 2007.This decrease was the result of our having previously supplied materials etc.toward the initial development and related testing requirements in our medicallaboratory to support our research collaboration with St. Jude Children’sResearch Hospital and the completion of our agreement with Vaccine andInfectious Disease Organization (VIDO).  Inaddition, this reduction is a direct result of our efforts to limit purchasesuntil additional funding is secured. During the nine months ended September 30, 2008, the cost ofutilization of third-party consultants increased by approximately $30,000, or22%, to approximately $165,000, compared to approximately $135,000 for the ninemonths ended September 30, 2007. This increase was directly related to our continued in vivo testingefforts in our Life Science Group; as well as, the development of our firstgeneration health monitoring products in our Health Monitoring Group. For thethree and nine months ended September 30, 2008, we incurred approximately$8,000 in expense to support in vivo vaccine studies performed by a prominentuniversity compared to approximately $24,000 for the same periods in 2007.  In addition we incurred approximately $26,000in expense to support our research collaboration with St. Jude Children’sResearch Hospital.  No comparable expensewas incurred in the nine months ended September 30, 2007.  During the second quarter of 2008, wecurtailed further third-party consultant arrangements to support our HealthMonitoring Group.  With additionalfinancing we will be in a position to resume development in this area.

 

Forthe three and nine months ended September 30, 2008, human resource costsincreased by approximately $9,000, or 4%, and $97,000, or 16%, to approximately$227,000 and $722,000, respectively, compared to approximately $218,000 and$625,000 for the same periods in 2007. For the three and nine months ended September 30, 2008,approximately $13,000 and $43,000, respectively, compared to approximately$14,000 and $43,000 for the same periods in 2007, in human resource expense wasthe result of our adoption of SFAS 123(R) effective as of January 1,2006. Effective as of June 9, 2008, human resource expense was reduced by20% for some R&D employees as a result of transitioning from full time topart time in order to reduce expenses.

 

Depreciationand amortization expense increased by approximately $1,000, or 8%, and $60,000,or 113%, to approximately $19,000 and $113,000 for the three and nine monthsended September 30, 2008, respectively, from approximately $18,000 and$53,000 for the same periods in 2007.  Wehad been capitalizing license fees paid to third parties for costs associatedwith the exclusive rights to their patents. We were amortizing these fees over a period of four years.  During the previous quarter ended June 30,2008, we elected to terminate our 2006 license agreement with the University ofAkron Research Foundation, as we had developed technology in-house and licenseda more compatible technology.  As aresult, we expensed the remaining $22,000 of unamortized license fees underthis license agreement.  In addition,during the quarter ended June 30, 2008, we expensed an additional $30,000,which represented the minimum royalty due under this terminated licenseagreement.

 

Forthe three months ended September 30, 2008, travel and entertainmentexpenses decreased by approximately $2,000, or 39%, to approximately $2,000,compared to approximately $4,000 for the same period in 2007.  For the nine months ended September 30,2008, travel and entertainment increased by approximately $12,000, or 90%, toapproximately $25,000, compared to approximately $13,000 for the same period in2007.  This increase was primarily the resultof our expanded effort in seeking strategic alliances for both our medical andhealth monitoring technologies. If we are able to secure additional financing,we anticipate that we will continue to commit resources to research anddevelopment activities as our financial position allows, and as a result,R&D costs are expected to increase substantially in the future.

 

**Selling, General and Administrative Costs**

 

Selling expenses consist primarily of salaries and related expenses forpersonnel engaged in the marketing and selling of our products, as well ascosts related to trade shows, product literature, travel and other promotionalsupport costs.  General and Administrative costs consist primarily ofexecutive and administrative salaries, professional fees and other associatedcorporate expenses. Selling, General and Administrative, or SG&A, expenseswere approximately $454,000 for the three months ended September 30, 2008,compared to approximately $489,000 for the three months ended September 30,2007.  This represents a decrease ofapproximately $35,000, or 7%.  SG&Aexpenses were approximately $1.9 million for the nine months ended September 30,2008, compared to approximately $1.5 million for the nine months ended September 30,2007.  This represents an increase ofapproximately $400,000, or 27%.  Thedecrease in the three-month year-to-year comparison was the result of areduction in human resource costs, travel and entertainment and other operatingexpenses partially offset by an increase in professional fees.  The increase in SG&A for the nine monthsended September 30, 2008 was attributable primarily to increasedprofessional fees in connection with the ongoing SEC investigation and ourindemnification of our President, Chief Executive Officer and Chairman of theBoard of Directors (as described below), partially offset by decreases inannual listing fees as a result of our transitioning of the listing of ourcommon stock from AMEX to OTCBB, human resource costs and other operatingexpenses.

 

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Human resources costs decreased by approximately $76,000, or 35%, and$139,000, or 21%, to approximately $142,000 and $538,000 for the three and ninemonths ended September 30, 2008, respectively, compared to approximately$218,000 and $677,000 for the three and nine months ended September 30,2007. This decrease in three and nine months ended September 30, 2008 was theresult of a 20% reduction in SG&A employee salaries effective as of June 9,2008, as well as reduced stock-based compensation expenses.  For the three and nine months ended September 30,2008, stock compensation expense decreased by approximately $8,000, or 81%, and$30,500, or 89%, respectively, to $1,800 and $3,700 for the three and ninemonths ended September 30, 2008, compared to approximately $9,800 and$34,200 for the same periods in 2007.

 

Professionalexpenses increased by approximately $75,000, or 45%, and $635,000, or 119%, toapproximately $244,000 and $1.16 million for the three and nine months ended September 30,2008, compared to approximately $169,000 and $532,000 for the three and ninemonths ended September 30, 2007. For the three and nine months ended September 30, 2008, legalexpenses increased by $105,000, or 109%, and $654,000, or 190%, to approximately $201,000 and $1 million,respectively, compared to approximately $96,000 and $346,000 for the sameperiods in 2007.  Legal fees increasedprimarily as a result of the ongoing SEC investigation, as well as ourindemnification of our President, Chief Executive Officer and Chairman of theBoard of Directors.

 

Aninvestigation by the SEC, which the Company first became aware of in May 2005,is ongoing. The Company believes that the subject matter of this investigationis the Company’s prior revenue recognition practices that were addressed in theCompany’s restatement of its financial statements for the fiscal yearended December 31, 2004.  Aspreviously disclosed in our Annual Report on Form 10-KSB for the fiscalyear ended December 31, 2004, as amended, Apogee’s Audit Committee, withthe assistance of independent counsel, conducted an investigation into Apogee’shistorical accounting practices that resulted in the implementation of remedialactions. See our Annual Report on Form 10-KSB for the year ended December 31,2004, as amended, for detail regarding the restatement.

 

InJuly 2008, Apogee, it’s Chief Executive Officer and other employeesreceived notifications from the Staff of the SEC relating to the Staff’s 2005investigation. These notifications, known as “Wells Notices,” stated that theStaff is considering recommending that the Commission bring enforcement actionsagainst the Company and certain employees, based on alleged violations ofcertain provisions of the federal securities laws, including Section 17(a) ofthe Securities Act of 1933, as amended, Section 10(b) of theSecurities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder,Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20,13a-1 and 13a-13 thereunder. The Wells Notice sent to the Company indicatesthat in any action actually brought against the Company, the Staff would seekan injunction against future violations of the federal securities laws asrelief.  We continue to coordinate withthe Staff with respect to their investigation, and seek to comply with requestsas they arise.

 

We do not believe that itis probable that a Company asset will be impaired or a liability will beincurred as a result of the outcome of the legal matters and, as such, theamount of potential loss cannot be reasonably estimated. We have agreed toindemnify certain employees, directors and a former employee in connection withthe SEC investigation. As of September 30, 2008, we have incurredapproximately $517,000 in legal expenses to indemnify these individuals inassociation with this matter.  During thethree and nine months ended September 30, 2008, we recorded approximately$118,000 and $507,000, respectively, toward this indemnification and we couldincur significantly larger costs before this matter is resolved.  Accounting fees increased by approximately$1,000 and $19,000 to approximately $25,000 and $70,000 for the three and ninemonths ended September 30, 2008, respectively, compared to approximately$24,000 and $51,000 for the same periods in 2007.  See “Risk Factors—Risks Related to OurBusiness”.  In addition, legal feesassociated with the indemnification costs in connection with the civil actionstyled *Joseph Shamy vs. Herbert M. Stein Case No.: 50 2005CA 007719 XXXXMB*.  In thisaction instituted on August 10, 2005 and pending in Palm Beach CourtCircuit Court, Joseph Shamy has sued Herbert M. Stein, President, ChiefExecutive Officer and Chairman of the Board of Apogee, for fraud and breach offiduciary duty in connection with Shamy’s purchase of Apogee shares in 2003 and2004.  The initial Complaint wasdismissed for failing to adequately allege fraud.  In his Amended Complaint, Shamy alleged thatin or around October 2003, Mr. Stein, in his capacity as Presidentand Chief Executive Officer of Apogee, provided Mr. Shamy with misleadingfinancial projections for Apogee in the form of a spreadsheet which Shamyattached as Exhibit A to the Amended Complaint.  Mr. Stein has vigorously denied theallegations of the Complaint, including that he prepared or ever saw thespreadsheet at any time before it was attached to the Amended Complaint.  Mr. Stein has moved for summaryjudgment.  These costs were approximately$14,000 and $89,000 for the three and nine months ended September 30, 2008compared to approximately $59,000 and $181,000 for the three and nine monthsended September 30, 2007. To date, we have incurred $648,000 towards theindemnification of Mr. Stein.  SeeFootnote 10 to the consolidated financial statements—IndemnificationArrangements with our Executives and Others. We are not receiving reimbursement under our Director and Officer insurancepolicy for either theindemnification of Mr. Stein or the ongoing investigation by the SEC, andwe expect to continue to incur additional legal expenses related to thesematters.

 

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Investor relations expense decreased by approximately $22,000, or 74%,to approximately $8,000 for the three months ended September 30, 2008,compared to approximately $30,000 for the three months ended September 30,2007.  As part of our cost reduction, wewere forced to limit our investor relations expenses during the three monthsended September 30, 2008.  For thenine months ended September 30, 2008 investor relations expense increaseby approximately $4,000 or 8% to approximately $64,000, compared toapproximately $59,000 for the same period in 2007.  This increase in the nine month period endingSeptember 30, 2008 was due to our efforts to increase awareness among thefinancial and investing community of our scientific and corporatedevelopments.  If additional funding issecured, we will be in a position to resume focusing on increasing awareness ofour scientific and corporate developments. This expense was partially offset by a decrease consulting expensesrelated to the Sarbanes-Oxley Act of 2002 by approximately $9,000, or 100%, and$46,500, or 99%.  Since we had completedthe major implementation phase of our Sarbanes-Oxley testing requirements, wedid not incur any Sarbanes-Oxley-related expenses for the three and nine monthsended September, 2008, compared to approximately $9,000 and $47,200 for thesame periods in 2007.  As a result of thetransition of the listing of our common stock from AMEX to the OTCBB, ourannual listing fees were reduced by approximately $20,000, or 85%, toapproximately $4,000 for the nine months ended September 30, 2008,compared to approximately $24,000 for the nine months ended September 30,2007.  For the three months ended September 30,2008, annual fees decreased by approximately $500, or 20%, to approximately$1,900 from approximately $2,400 for the same period in 2007.

 

Travel and Entertainment costs decreased by approximately $8,800, or95% and $21,000, or 40% for the three and nine months ended September 30,2008, respectively, to approximately $500 and $31,000, compared toapproximately $9,200 and $52,000 for the same periods in 2007.  Office expenses decreased by approximately$3,000, or 34% and $11,000, or 35%, to approximately $6,000 and $20,000 for thethree and nine months ended September 30, 2008, compared to approximately$9,000 and $31,000 for the same periods in 2007.  In addition, we had reductions to variousother overhead expenses, including: communication, corporate insurance marketingand maintenance.  Operating expenses areexpected to increase over the next few quarters, if our financial positionallows, supporting our Health Monitoring and Life Science Groups.

 

**InterestIncome (Expense)**

 

Interestincome includes income from Apogee’s cash and cash equivalents and frominvestments and expenses related to its financing activities. During the threeand nine months ended September 30, 2008, we generated interest income ofapproximately $58 and $842 compared to interest income of approximately $14,000and $70,000 during the same periods in 2007. This decrease in interest incomefor the three and nine months ended September 30, 2008 was primarily dueto reduced cash balances.

 

Interestexpense resulting from the issuance of promissory notes to Mr. Herbert M.Stein, Mr. David Spiegel, Mr. Robert Schacter et al, Mr. DavidMeyers and Ms. Annette Jaynes was approximately $56,000 and $103,000 forthe three and nine months ended September 30, 2008.  No interest expense was incurred for the threeand nine months ended September 30, 2007. During the nine months ended September 30, 2008, we recordedmiscellaneous income of approximately $7,000, primarily from as a result of aninsurance company refund.  During thethree months and nine months ended September 30, 2007, we recordedmiscellaneous income of approximately $54,000 consisting of approximately$47,000 as a result of our recognizing an unclaimed deposit customer depositheld for over two years.  Attempts torefund the money to this Asian company failed and subsequently the company wassold.  In addition, approximately $5,600tax refunds received from Massachusetts and New York tax agencies.

 

**Net Loss**

 

Apogee’snet loss for the three months ended September 30, 2008 was approximately$771,000, or $0.06 per basic and diluted common share, compared to a net lossof approximately $712,500, or $0.06 per basic and diluted common share, for thethree months ended September 30, 2007 For the nine months ended September 30 2008, we reported a loss ofapproximately $3.0 million, or $0.25 per basic and diluted common share,compared to a net loss of approximately $2.2 million, or $0.18 per basic anddiluted common share, for the nine months ended September 30, 2007.  This increase in our net loss was primarilythe result of increased legal fees as a result of the ongoing SECinvestigation, as well as the indemnification of our President, Chief ExecutiveOfficer and Chairman of the Board of Directors and increased consultingexpenses in our efforts to secure additional funding and increased humanresource costs in R&D.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The tables below summarize our outstanding unsecuredinterest-bearing promissory notes (including amounts subsequent to September 30,2008):

 

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Herbert M. Stein

 
| **Date of**         | ** ** | ** ** | ** ** | **Maturity**             | ** **           | **Initial**  | ** ** | **Current**            | ** ** |
|--------------------------|------------|------------|------------|--------------------------|----------------------|--------------|------------|------------------------|------------|
| **Promissory Note** | ** ** | **Amount** | ** ** | **Date**                 | ** **           | **Interest** | ** ** | **Interest Rate** | ** ** |
|                     |       |       |       |                     |                 |         |       |                   |       |
| December 11, 2007   |       | $          | 250,000    |                     | March 10,  2008 |         | 8.00       | %                      | 12.00      | % |
| February 21, 2008   |       | 100,000    |       | August 19,  2008    |                 | 8.00         | %          | 12.00                  | %          |
| March 20, 2008      |       | 50,000     |       | September 16,  2008 |                 | 8.00         | %          | 12.00                  | %          |
| April 1, 2008       |       | 50,000     |       | September 28,  2008 |                 | 8.00         | %          | 12.00                  | %          |
| May 15, 2008        |       | 50,000     |       | November 11,  2008  |                 | 8.00         | %          | 12.00                  | %          |
| June 16, 2008       |       | 35,000     |       | December 13,  2008  |                 | 8.00         | %          | 8.00                   | %          |
| June 18, 2008       |       | 40,000     |       | December 15,  2008  |                 | 8.00         | %          | 8.00                   | %          |
| July 15, 2008       |       | 30,000     |       | January 11,  2009   |                 | 8.00         | %          | 8.00                   | %          |
| July 28, 2008       |       | 50,000     |       | January 24,  2009   |                 | 8.00         | %          | 8.00                   | %          |
| August 12, 2008     |       | 35,000     |       | February   8, 2009  |                 | 8.00         | %          | 8.00                   | %          |
| August 27, 2008     |       | 35,000     |       | February 23,  3009  |                 | 8.00         | %          | 8.00                   | %          |
| September 5, 2008   |       | 35,000     |       | March 4,  2009      |                 | 8.00         | %          | 8.00                   | %          |
| October 27, 2008    |       | 25,000     |       | April 25,  2009     |                 | 8.00         | %          | 8.00                   | %          |
|                     |       | $          | 785,000    |                     |                 |         |       |                   |       |   |

 

David Spiegel

 
| **Date of**         | ** ** | ** ** | ** ** | **Maturity**             | ** **           | **Initial**  | ** ** | **Current**            | ** ** |
|--------------------------|------------|------------|------------|--------------------------|----------------------|--------------|------------|------------------------|------------|
| **Promissory Note** | ** ** | **Amount** | ** ** | **Date**                 | ** **           | **Interest** | ** ** | **Interest Rate** | ** ** |
|                     |       |       |       |                     |                 |         |       |                   |       |
| December 11, 2007   |       | $          | 150,000    |                     | March 10,  2008 |         | 8.00       | %                      | 12.00      | % |
| February 21, 2008   |       | 100,000    |       | August 19,  2008    |                 | 8.00         | %          | 12.00                  | %          |
| March 20, 2008      |       | 100,000    |       | September 16,  2008 |                 | 8.00         | %          | 12.00                  | %          |
| April 1, 2008       |       | 50,000     |       | September 28,  2008 |                 | 8.00         | %          | 12.00                  | %          |
| May 15, 2008        |       | 50,000     |       | November 11,  2008  |                 | 8.00         | %          | 12.00                  | %          |
| June 16, 2008       |       | 65,000     |       | December 13,  2008  |                 | 8.00         | %          | 8.00                   | %          |
| June 18, 2008       |       | 50,000     |       | December 15,  2008  |                 | 8.00         | %          | 8.00                   | %          |
| July 15, 2008       |       | 50,000     |       | January 11,  2009   |                 | 8.00         | %          | 8.00                   | %          |
| July 28, 2008       |       | 50,000     |       | January 24,  2009   |                 | 8.00         | %          | 8.00                   | %          |
| August 12, 2008     |       | 35,000     |       | February 8,  2009   |                 | 8.00         | %          | 8.00                   | %          |
| August 27, 2008     |       | 35,000     |       | February 23,  3009  |                 | 8.00         | %          | 8.00                   | %          |
| September 5, 2008   |       | 35,000     |       | March 4,  2009      |                 | 8.00         | %          | 8.00                   | %          |
| October 27, 2008    |       | 35,000     |       | April 25,  2009     |                 | 8.00         | %          | 8.00                   | %          |
|                     |       | $          | 805,000    |                     |                 |         |       |                   |       |   |

 

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**Others**

 
| **Date of**         | ** ** | ** ** | ** ** | **Maturity**         | ** **             | **Initial**  | ** ** | **Current**            | ** ** |
|--------------------------|------------|------------|------------|----------------------|------------------------|--------------|------------|------------------------|------------|
| **Promissory Note** | ** ** | **Amount** | ** ** | **Date**             | ** **             | **Interest** | ** ** | **Interest Rate** | ** ** |
|                     |       |       |       |                 |                   |         |       |                   |       |
| July 28, 2008       |       | $          | 20,000     |                 | January 24,  2009 |         | 8.00       | %                      | 8.00       | % |
| October 27, 2008    |       | 6,000      |       | April 25,  2009 |                   | 8.00         | %          | 8.00                   | %          |
|                     |       | $          | 26,000     |                 |                   |         |       |                   |       |   |

 

**Robert Schacter et al**

 
| **Date of**          | ** ** | **Name on**                                                    | ** ** | ** ** | ** ** | **Maturity**         | ** **          | **Initial**  | ** ** | **Current**  | ** ** |
|---------------------------|------------|---------------------------------------------------------------------|------------|------------|------------|----------------------|---------------------|--------------|------------|--------------|------------|
| **Promissory Notes** | ** ** | **Promissory Note**                                            | ** ** | **Amount** | ** ** | **Date**             | ** **          | **Interest** | ** ** | **Interest** | ** ** |
|                      |       |                                                                |       |       |       |                 |                |         |       |         |       |
| September 5, 2008    |       | TYJO  Corporation Money Purchase Pension Plan                       |       | $          | 100,000    |                 | March 4,  2009 |         | 8.00       | %            | 8.00       | % |
| September 5 2008     |       | Mr. Robert  Schacter, as Custodian for Tyler Schacter UTMA/CA  |       | 20,000     |       | March 4,  2009  |                | 8.00         | %          | 8.00         | %          |
| September 5 2008     |       | Mr. Robert  Schacter, as Custodian for Joseph Schacter UTMA/CA |       | 20,000     |       | March 4,  2009  |                | 8.00         | %          | 8.00         | %          |
| October 27, 2008     |       | TYJO  Corporation Money Purchase Pension Plan                       |       | 100,000    |       | April 25,  2009 |                | 8.00         | %          | 8.00         | %          |
|                      |       |                                                                |       | $          | 240,000    |                 |                |         |       |         |       |   |

 

As of September 30, 2008 we had a working capital deficit ofapproximately $3.5 million and a temporary cash overdraft of approximately$4,000.  This compares to approximately$321,000 in cash and cash equivalents as of December 31, 2007. Inaddition, as of December 31, 2007, we had a working capital deficit ofapproximately $728,000.  During the threeand nine months ended September 30, 2008, we received proceeds from loansand unsecured interest-bearing promissory notes totaling $205,000 and $620,000,respectively, from David Spiegel, a major shareholder, and $185,000 and$510,000, respectively, from Herbert M. Stein, President, Chief ExecutiveOfficer and Chairman of the Board of Directors. In addition, for the three and nine months ended September 30,2008, we received proceeds from loans and unsecured interest-bearing promissorynotes totaling $140,000 from Mr. Robert Schacter et al and $20,000 fromothers.  These promissory notes arepayable upon demand and were not subject to any premium or penalty forprepayment. The loan interest rate is 8% per annum, payable monthly in arrearson the outstanding balance.  Anadditional 4% interest will be charged on any notes exceeding 180 days.  In addition, on April 9, 2008, Apogeesold 164,000 shares of our common stock to accredited investors at a price of$1.00 per share.  The aggregate netproceeds to Apogee, after fees and expenses, were $152,519, which we will usefor general working capital and corporate purposes.  The shares of Apogee’s common stock wereissued and sold in a private placement in reliance on an exemption fromregistration provided by Section 4(2) of Securities Act of 133, asamended, and Rule 506 of Regulation D promulgated thereunder**. **The shares of the common stock issued in thisprivate placement have not been registered under the Securities Act of 1933 andmay not be subsequently offered or sold by the investors in the United Statesabsent registration or an applicable exemption from the registrationrequirements.  As of September 30,2007, we had working capital of approximately $259,000.

 

Netcash used in operating activities for the nine-month period ended September 30,2008 decreased to approximately $1.7 million compared to approximately $2.1million in the nine-month period ended September 30, 2007. As of March 31,2008, we sold the remaining DDX inventory for a total of $17,000 and offset theremaining reserves for slow moving, excess and obsolete inventory.  As of September 30, 2008, our netaccounts receivable were approximately $10,000 with an offset allowance ofapproximately $10,000.  As of September 30,2007, our net accounts receivable were approximately $5,000 with a reserveagainst bad debt of approximately $11,300.

 

Net cash used in investingactivities for the nine months ended September 30, 2008 was approximately$91,000, compared to approximately $133,000 for the nine months ended September 30,2007.  We purchased additional equipmentfor our laboratory as well as supported our existing patent applications, allof which related to our Life Science Group.

 

Net cash provided by financing activities wasapproximately $1.4 million for the nine months ended September 30,2008.  This compares to no cash providedby financing activities for the nine months ended September 30, 2007.  During the nine-month period ended September 30,2008, we received the proceeds from unsecured interest bearing promissory notestotaling 

 

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$620,000 from David Spiegel, a major shareholder,$510,000 from Herbert M. Stein, President, Chief Executive Officer and Chairmanof the Board of Directors, $140,000 from Mr. Robert Schacter and $20,000from others.  These loans arepayable upon demand and are not subject to any premium or penalty forprepayment. The loan interest rate is 8% per annum, payable monthly inarrears on the outstanding balance.  SeeFootnote 7 of the consolidated financials statements - Promissory Notes, Loansand Warrants.****In addition, on April 9, 2008, Apogee sold 164,000 shares ofour common stock to accredited investors at a price of $1.00 per share.  The aggregate gross proceeds to Apogee,before fees and expenses, were $164,000. We must raise additional capital to continue operations.

 

Apogee is in the process of attempting to securesufficient financing to continue operations. In the interim, short-term debtfinancing provided by two of Apogee’s significant shareholders, including ourPresident, Chief Executive Officer and Chairman of the Board of Directors aswell as Mr. Robert Schacter, et a and others, is being utilized to keepproduct development moving forward.  Dueto the early stages of development of our products candidates, we cannotestimate at this time the amounts of cash that will be required to bring ourproducts under development to market.  Itis expected that such costs will be funded not only by external financing, butalso through partnership activities. Additionally, cost cutting measures, including salary reduction for non-*PyraDerm* employees, diminished pace of sensor development,deferral of capital expenditures, and reduced general spending have beeninstituted until such time as financing is secured.  We do not expect any significant changes inthe number of employees until funding has been secured.  Management remains confident that we willraise sufficient capital in the near-term to fund operations for at least thenext twelve months.  If, however, we areunable to generate or obtain financing, we may be required to further curtailour operations, including a reduction in the number of employees, or ceaseconducting business.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

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

 

**Revenue Recognition**

 

Apogeerecognizes revenue in accordance with Securities and Exchange Commission StaffAccounting Bulletin “104”, or SAB “104”**,**“RevenueRecognition in Financial Statements: Revenue Recognition”, which states thatrevenue should be recognized when the following revenue recognition criteriaare met:  (1) persuasive evidence of an arrangement exists; (2) theproduct has been shipped and the customer takes ownership and assumes the riskof loss; (3) the selling price is fixed or determinable; and (4) collectionof the resulting receivable is reasonably assured.  We had no product revenue during the quarterended September 30, 2008.  Thefollowing policies apply to Apogee’s two major product sales categories forrevenue recognition. Sales to end users, OEM:  revenue is recognized underour standard terms and conditions of sale, title and risk of loss transfer tothe customer at the time products are shipped from our warehouse or deliveredto the customer’s representative/freight forwarder. Sales toDistributors:  from time to time we provide stock rotation rights, priceprotection and other incentives to our Distributors. See Footnote 2 of theconsolidated financials statements. As a result of these incentives, Apogee hasadopted a policy of deferring recognition of revenue until the distributorsells products to its customers based upon receipt of point-of-sale reportsfrom the distributors. We accrue the estimated cost of post-sale obligationsincluding product warranty returns, based on historical experience. To date, wehave experienced minimal warranty returns.

 

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

 

**Accounts Receivable**

 

Apogeeperforms credit evaluations of customers and determines credit limits basedupon payment history, customers’ creditworthiness and other factors, asdetermined by our review of their current credit information. For a majority ofour larger sales, we can require the issuance of a Letter of Credit. Smalleraccounts must either pay via credit card or in advance of shipment. Wecontinuously monitor collections and payments from our customers, and wemaintain a provision for 

 

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estimatedcredit losses based upon our historical experience and any specific customercollection 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 our ability to collect ouraccounts receivable, our liquidity or our future results of operations.

 

**Inventory**

 

Inventoriesare stated at the lower of cost on a first-in, first-out basis or market. Thispolicy requires Apogee to make estimates regarding the market value of ourinventory, including an assessment of excess or obsolete inventory.

 

OnJanuary 15, 2008, we sold the remaining DDX inventory held in our Norwoodoffice to one of our customers, and on January 24, 2008, we also sold theremaining DDX inventory housed in Hong Kong to one of our former DDXdistributors.  Total proceeds receivedfrom the disposition of the DDX inventory were $17,000.  In addition, we may share in proceeds fromthe sale of this inventory by our former distributor if sales amounts exceedcertain limits.

 

**Valuation of Long-Lived Assets**

 

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

 

**Stock-Based Compensation**

 

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

 

EffectiveJanuary 1, 2006, we adopted SFAS 123(R) using themodified-prospective-transition method. Under this transition method, stockcompensation costs recognized beginning January 1, 2006 include (a) compensationcost for all stock-based compensation payments granted prior to, but not yetvested as of January 1, 2006, based on the grant date fair value estimatedin accordance with the original provisions of SFAS 123(R), and (b) compensationcost for all stock-based payments granted on or subsequent to January 1, 2006,based on the grant date fair value estimated in accordance with the provisionsof SFAS 123(R).  Due to the adoption ofSFAS 123(R), included in our net loss for the three and nine months ended September 30,2008 were stock-based compensation charges of approximately $14,000 and$47,000, respectively.  This compares tostock-based compensation charges of approximately $24,000 and $78,000 for thethree and nine months ended September 30,, 2007.

 

**Legal Fees**

 

We record legalcosts (such as fees and expenses of external lawyers and other serviceproviders) when incurred or when it is probable that a liability has beenincurred on or before the balance sheet date and the amount can be reasonablyestimated if invoices have not been received. Significantlyhigher legal fees were incurred during the quarters ended June 30, 2008and September 30, 2008, compared to prior periods, in connection with theongoing SEC investigation partially offset by a decrease in legal feesassociated with our indemnification of our President, Chief Executive Officerand Chairman of the Board of Directors.

 

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**Contingencies**

 

Apogee is involved inand/or indemnifies others in various legal proceedings.  Management assesses the probability of lossfor such contingencies and recognizes a liability when a loss is probable andestimable.  See Footnote 10 –Indemnification Arrangements with our Executives and Others.

 

**Off-Balance Sheet Arrangements**

 

We have no off-balance sheet arrangements nor do wehave any special purpose entities.

 

**ITEM 3 – QUANTITIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Our financialinstruments include: cash, cash equivalents, accounts receivable and accountspayable.  At September 30, 2008 thecarrying value of our cash, cash equivalents, accounts receivable and accountspayable approximated fair values given the short maturity of these instruments.

 

We believe that ourfinancial instruments do not carry material foreign currency exchange rate risk because any products that we maysell outside the United States will be paid for in U.S. dollars, and materialpurchases from foreign suppliers are typically also denominated in U.S.dollars.

 

It isour policy not to enter into derivative financial instruments for speculativepurposes.

 

**ITEM 4T – CONTROLS AND PROCEDURES**

 

(a)    Evaluation of Disclosure Controls andProcedures. The Company’s management, with the participation of the Company’sChief Executive Officer and Chief Financial Officer, has evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934, as amended, or the Exchange Act) as of the end of the periodcovered by this report.  Based on thisevaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that, as of the end of such period, the disclosure controls andprocedures were effective in providing reasonable assurance that theinformation required to be disclosed in our Securities and Exchange Commission reports(i) is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and forms,and (ii) is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure.

 

(b)    Changes in Internal Controls. There have notbeen any changes in the Company’s internal control over financial reporting (assuch term is defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) during the fiscal quarter to which this report relates that havematerially affected, or are reasonably likely to materially affect the Company’sinternal control over financial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM 1 – LEGAL PROCEEDINGS**

 

From time to time, we may be a party to variouslegal proceedings arising in the ordinary course of our business.  If andwhen these proceedings arise, we are committed to vigorously defending theCompany in any such legal actions.

 

An investigation by the SEC, which the Company firstbecame aware of in May 2005, is ongoing. The Company believes that thesubject matter of this investigation is the Company’s prior revenue recognitionpractices that were addressed in the Company’s restatement of itsfinancial statements for the fiscal year ended December 31, 2004. Aspreviously disclosed in our Annual Report on Form 10-KSB for the fiscalyear ended December 31, 2004, as amended, Apogee’s Audit Committee, withthe assistance of independent counsel, conducted an investigation into Apogee’shistorical accounting practices that resulted in the implementation of remedialactions. See our Annual Report on Form 10-KSB for the year ended December 31,2004, as amended, for detail regarding the restatement.

 

In July 2008, Apogee, it’s Chief ExecutiveOfficer and other employees received notifications from the Staff of theSEC relating to the Staff’s 2005 investigation. These notifications, known as “WellsNotices,” stated that the Staff is considering recommending that the Commissionbring enforcement actions against the Company and certain employees, basedon alleged violations of certain provisions of the federal securities laws,including Section 17(a) of the Securities Act of 1933, as amended, Section 10(b) ofthe Securities Exchange Act of 1934, as amended, and Rule 10b-5thereunder, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of theExchange Act, and Rules 12b-20, 13a-1 and 13a-13 thereunder. The WellsNotice sent to 

 

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theCompany indicates that in any action actually brought against the Company, theStaff would seek an injunction against future violations of the federalsecurities laws as relief.  We continueto cooperate with the Staff with respect to their investigation, and seek tocomply with requests as they arise.

 

In an action styled *Joseph Shamy vs. Herbert M. Stein*, Case No.:  50 2005 CA 007719 XXXXMB, instituted on August 10,2005 and pending in Palm Beach Court Circuit Court, Joseph Shamy has suedHerbert M. Stein, President, Chief Executive Officer and Chairman of the Boardof Apogee, for fraud and breach of fiduciary duty in connection with Shamy’spurchase of Apogee shares in 2003 and 2004. The initial Complaint was dismissed for failing to adequately allegefraud.  In his Amended Complaint, Shamyalleged that in or around October 2003, Mr. Stein, in his capacity asPresident and Chief Executive Officer of Apogee, provided Mr. Shamy withmisleading financial projections for Apogee in the form of a spreadsheet whichShamy attached as Exhibit A to the Amended Complaint.  Mr. Stein has vigorously denied theallegations of the Complaint, including that he prepared or ever saw thespreadsheet at any time before it was attached to the Amended Complaint.  Mr. Stein has moved for summaryjudgment.

 

**ITEM 1A – RISK FACTORS**

 

There are a number ofimportant factors that could cause our actual results to differ materially fromthose indicated or implied by forward-looking statements. 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.

 

Aside from those risksdiscussed below, there have been no material changes to the risk factorsincluded in our Annual Report on Form-KSB for the fiscal year ended December 31,2007.

 

**RISKSRELATED TO OUR BUSINESS**

 

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

 

As of September 30, 2008, we had no cash, a stockholders’deficiency of approximately $3.0 million, an accumulated deficit ofapproximately $21.9 million and a working capital deficit of approximately $3.5million.  We had a net loss ofapproximately $771,000 and $3.0 million for the three and nine months ended September 30,2008. In the fiscal year ended December 31, 2007, we recorded a netloss of approximately $3.2 million.

 

We have substantial debt and interest obligations and expect to incuradditional debt to the extent available, to maintain our operations.  As of November 1, 2008, we had$1,856,000 in promissory notes outstanding to a large shareholder, ourPresident, Chief Executive Officer and Chairman of the Board of Directors, anindividual investor and others.  Thesepromissory notes generally bear interest at 8% and are of short duration.  The original December 11, 2007, February 21,2008, March 20, 2008 and April 1, 2008 promissory notes ($850,000)began incurring a post-maturity rate of interest of 12%, compounded monthly, onMarch 11, 2008, August 19, 2008, September 16, 2008 and September 28,2008, respectively, as a result of non-payment at the maturity date.

 

We have large unpaid balances with professional service providers.  We anticipate significant future legal expenses resulting from ourindemnification arrangements with our employees, officers and directors. Theongoing investigation by the SEC and the indemnification of Mr. Stein inconnection with the *Joseph Shamy vs. HerbertM. Stein, case No.:50 2005 CA 007719 XXXXMB,* matter have resulted insubstantial unplannedexpenses that we are required to absorb and these expenses are expected tocontinue.  Presently, none of the itemsfor which we have an indemnification responsibility are receiving reimbursementfrom the insurance carrier of our Director and Officer insurance policy.  We need to obtain financing or generaterevenue to continue operations.  See Footnote 10 of the consolidatedfinancials statements – Indemnification Arrangements with our Executives andOthers.

 

Ourrequirements for additional capital and our ability to generate future revenuedepend on a number of factors, many of which are described in the Risk FactorsSection, of our Annual Report on Form 10-KSB for the fiscal year ended December 31,2007, including our ability to develop and generate revenues from the sales ofour sensor and medical device products, which are at a very early stage ofdevelopment. We cannot assure you when, if ever, we will generate meaningfulrevenues from the sales of these products under development.

 

**IF OURATTEMPTS TO SECURE ADDITIONAL FINANCING ARE NOT SUCCESSFUL, WE WILL BE REQUIREDTO CEASE OR CURTAIL OUR OPERATIONS, OR OBTAIN FUNDS ON UNFAVORABLE**

 

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**TERMS.  THESE FACTORS CREATE A SUBSTANTIAL DOUBTABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.**

 

Our available resources willnot be sufficient, without additional sources of financing, to continue ourbusiness and we expect to incur operating losses for the foreseeablefuture.  Consequently, in order tomaintain our operations, which we have already curtailed substantially, we willneed to access additional equity or debt capital.  Securing financing is proving even moredifficult than anticipated in light of the current global economic crisis andthe turmoil impacting global financial markets. These factors create asubstantial doubt about our ability to continue as a going concern.  In light of our negative stockholders’equity, there can be no assurance that we will be able to obtain the necessaryadditional capital on a timely basis or on acceptable terms, if at all, tocontinue our operations and, to the extent available, to fund the developmentof our business. In any of such events, the continuation of our operationswould be materially and adversely affected and we may have to cease conductingbusiness.

 

Apogee is in the process of attempting to secure sufficientfinancing to continue operations.  In theinterim, short-term debt financing provided by two of the Apogee’s significantshareholders, including our President, Chief Executive Officer and Chairman ofthe Board of Directors, and our employees is being use to continue ouroperations and, to the extent available, continue product developmentefforts.  Additionally, cost cuttingmeasures, including salary reduction for non-*PyraDerm*employees, diminished pace of sensor development, deferral of capitalexpenditures, and reduced general spending have been instituted until such timeas financing is secured.  If we areunable to obtain financing, we may be required to further curtail ouroperations or cease conducting business. Given our current level of debt, we do not expect that our stockholderswould receive any proceeds if we declare bankruptcy or seek to liquidate theCompany.

 

**SPECIAL NOTEREGARDING FORWARD-LOOKING STATEMENTS**

 

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

 

·                                          anticipated financing activities;

 

·                                          anticipated strategic alliances orarrangements with development or marketing partners;

 

·                                          anticipated research and product developmentresults;

 

·                                          projected development and commercializationtimelines;

 

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

 

·                                          forecasts of future economic performance; and

 

·                                          descriptions or assumptions underlying orrelating to any of the above items.

 

Forward-looking statementscan be identified by the fact that they do not relate strictly to historical orcurrent facts or events. They use words such as “anticipate”, “estimate”, “expect”,“project”, “intend”, “opportunity”, “plan”, “potential”, “believe” or words ofsimilar meaning. They may also use words such as “will”, “would”, “should”, “could”or “may”.

 

Although we believe that theexpectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements. Moreover, we do not assume responsibility for the accuracy andcompleteness of such statements. We do not intend to update any of theforward-looking statements after the date of this report to conform suchstatements to actual results except as required by law. Given theseuncertainties, you should not place undue reliance on these forward-lookingstatements, which speak only as of the date of this report. You shouldcarefully consider that information before you make an investment decision. Youshould review carefully the risks and uncertainties identified in this reportand in the Company’s Annual Report on Form 10-KSB for the year ended December 31,2007.

 

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

 

During the period ended September 30, 2008, our unregistered salesof equity securities were reported on Current Reports on Form 8-K.

 

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**ITEM 3 – DEFAULTS UPON SENIOR SECURITIES**

 

The promissory notes issued to Messrs. Stein and Spiegel on December 11,2007 for an aggregate of $400,000 began incurring a post-maturity rate ofinterest on March 11, 2008 as a result of non-payment at the maturity date.These promissory notes originally were issued with simple interest of 8% peryear and were to be repaid in cash after 90 days.  In addition promissory notes issued to Messrs. Steinand Spiegel on February 21, 2008, March 20, 2008 and April 1,2008 for an aggregate of $450,000 began incurring a post-maturity rate ofinterest on August 20, 2008, September 17, 2008 and September 29,2008, respectively, as a result of non-payment at the maturity date.  These promissory notes originally were issuedwith simple interest of 8% per year and were to be repaid in cash after 180days.  The promissory notes now bearinterest at 12%, the interest after maturity is payable on demand and iscompounded monthly.

 

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

 

None.

 

**ITEM 5 – OTHER INFORMATION**

 

Thepromissory notes issued to Messrs. Stein and Spiegel on December 11,2007 for an aggregate of $400,000 began post-maturity rate of interest on March 11,2008 as a result of non-payment at the maturity date. These promissory notesoriginally were issued with simple interest of 8% per year and were to berepaid in cash after 90 days.  Inaddition promissory notes issued to Messrs. Stein and Spiegel on February 21,2008, March 20, 2008 and April 1, 2008 for an aggregate of $450,000began incurring a post-maturity rate of interest on August 20, 2008, September 17,2008 and September 29, 2008, respectively, as a result of non-payment atthe maturity date.  These promissorynotes originally were issued with simple interest of 8% per year and were to berepaid in cash after 180 days.  Thepromissory notes now bear interest at 12%, the interest after maturity ispayable on demand and is compounded monthly.

 

**ITEM 6 – EXHIBITS**

 

(a)                                  Exhibits:

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                        |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                   |
| 10.1+       |       | Promissory Note dated as  of August 27, 2008 by and between Apogee Technology, Inc. and  Herbert M. Stein. (Previously filed on a Current Report on Form 8-K,  August 29, 2008.)                                              |
| 10.2+       |       | Promissory Note dated as  of August 27, 2008 by and between Apogee Technology, Inc. and David  Spiegel. (Previously filed on a Current Report on Form 8-K,  August 29, 2008.)                                                 |
| 10.3+       |       | Form of Warrant.  (Previously filed on a Current Report on Form 8-K, August 29,  2008.)                                                                                                                                            |
| 10.4+       |       | Promissory Note dated as  of September 5, 2008 by and between Apogee Technology, Inc. and  Herbert M. Stein. (Previously filed on a Current Report on Form 8-K,  September 10, 2008.)                                         |
| 10.5+       |       | Promissory Note dated as  of September 5 2008 by and between Apogee Technology, Inc. and  David Spiegel. (Previously filed on a Current Report on Form 8-K,  September 10, 2008.)                                             |
| 10.6+       |       | Promissory Note dated as  of September 5 2008 by and between Apogee Technology, Inc. and TYJO  Corporation Money Purchase Pension Plan. (Previously filed on a Current  Report on Form 8-K, September 10, 2008.)              |
| 10.7+       |       | Promissory Note dated as  of September 5, 2008 by and between Apogee Technology, Inc. and  Robert Schacter, as Custodian for Tyler Schacter UTMA/CA. (Previously filed  on a Current Report on Form 8-K, September 10, 2008.) |
| 10.8+       |       | Promissory Note dated as  of September 5, 2008 by and between Apogee Technology, Inc. and  Robert Schacter as Custodian for Tyler Schacter UTMA/CA. (Previously filed on  a Current Report on Form 8-K, September 10, 2008.)  |
| 10.9+       |       | Form of Warrant.  (Previously filed on a Current Report on Form 8-K, September 10,  2008.)                                                                                                                                         |
| 10.10+      |       | Promissory Note dated as  of October 27, 2008 by and between Apogee Technology, Inc. and  Herbert M. Stein. (Previously filed on a Current Report on Form 8-K,  October 30, 2008.)                                            |
| 10.11+      |       | Promissory Note dated as  of October 27, 2007 by and between Apogee Technology, Inc. and  David Spiegel. (Previously filed on a Current Report on Form 8-K,  October 30, 2008.)                                               |
| 10.12+      |       | Promissory Note dated as  of October 27, 2008 by and between Apogee Technology, Inc. and Annette  Jaynes. (Previously filed on a Current Report on Form 8-K,  October 30, 2008.)                                              |
| 10.13+      |       | Promissory Note dated as  of October 27, 2008 by and between Apogee Technology, Inc. and  David Meyers. (Previously filed on a Current Report on Form 8-K,  October 30, 2008.)                                                |
| 10.14+      |       | Promissory Note dated as  of October 27, 2008 by and between Apogee Technology, Inc. and TYJO  Corporation Money Purchase Pension Plan. (Previously filed on a Current  Report on Form 8-K, October 30, 2008.)                |

 

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| 10.15+ |   | Form of Warrant.  (Previously filed on a Current Report on Form 8-K, October 30,  2008.)                                |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
| 31.1   |   | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive  Officer.                             |
| 31.2   |   | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial  Officer.                             |
| 32     |   | Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer  and Chief Financial Officer. |

 

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+ Previously filed asindicated.

 

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**SIGNATURES**

 

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

 
| ** **                     | **APOGEE  TECHNOLOGY, INC.**                               |
|--------------------------------|-----------------------------------------------------------------|
|                           |                                                            |
| Date: November  14,  2008 | By:                                                             | /s/           Herbert  M. Stein |
|                           | Name: Herbert M. Stein                                          |
|                           | Title: Chairman of the  Board,                                  |
|                           | President, Chief Executive  Officer                             |
|                           | (principal executive  officer)                                  |
|                           |                                                            |
|                           |                                                            |
| ** **                     | **APOGEE  TECHNOLOGY, INC.**                               |
|                           |                                                            |
| Date: November 14,  2008  | By:                                                             | /s/             Paul J. Murphy |
|                           | Name: Paul J. Murphy                                            |
|                           | Title: Chief Financial  Officer and Vice President of Finance   |
|                           | (principal financial  officer and principal accounting officer) |

 

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EXHIBITINDEX

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                        |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                   |
| 10.1+       |       | Promissory Note dated as  of August 27, 2008 by and between Apogee Technology, Inc. and  Herbert M. Stein. (Previously filed on a Current Report on Form 8-K,  August 29, 2008.)                                              |
| 10.2+       |       | Promissory Note dated as  of August 27,, 2008 by and between Apogee Technology, Inc. and  David Spiegel. (Previously filed on a Current Report on Form 8-K,  August 29, 2008.)                                                |
| 10.3+       |       | Form of Warrant.  (Previously filed on a Current Report on Form 8-K, August 29,  2008.)                                                                                                                                            |
| 10.4+       |       | Promissory Note dated as  of September 5, 2008 by and between Apogee Technology, Inc. and  Herbert M. Stein. (Previously filed on a Current Report on Form 8-K,  September 10, 2008.)                                         |
| 10.5+       |       | Promissory Note dated as  of September 5 2008 by and between Apogee Technology, Inc. and  David Spiegel. (Previously filed on a Current Report on Form 8-K,  September 10, 2008.)                                             |
| 10.6+       |       | Promissory Note dated as  of September 5 2008 by and between Apogee Technology, Inc. and TYJO  Corporation Money Purchase Pension Plan. (Previously filed on a Current  Report on Form 8-K, September 10, 2008.)              |
| 10.7+       |       | Promissory Note dated as  of September 5, 2008 by and between Apogee Technology, Inc. and  Robert Schacter, as Custodian for Tyler Schacter UTMA/CA. (Previously filed  on a Current Report on Form 8-K, September 10, 2008.) |
| 10.8+       |       | Promissory Note dated as  of September 5, 2008 by and between Apogee Technology, Inc. and  Robert Schacter as Custodian for Tyler Schacter UTMA/CA. (Previously filed on  a Current Report on Form 8-K, September 10, 2008.)  |
| 10.9+       |       | Form of Warrant.  (Previously filed on a Current Report on Form 8-K, September 10,  2008.)                                                                                                                                         |
| 10.10+      |       | Promissory Note dated as  of October 27, 2008 by and between Apogee Technology, Inc. and  Herbert M. Stein. (Previously filed on a Current Report on Form 8-K,  October 30, 2008.)                                            |
| 10.11+      |       | Promissory Note dated as  of October 27, 2007 by and between Apogee Technology, Inc. and  David Spiegel. (Previously filed on a Current Report on Form 8-K,  October 30, 2008.)                                               |
| 10.12+      |       | Promissory Note dated as  of October 27, 2008 by and between Apogee Technology, Inc. and  Annette Jaynes. (Previously filed on a Current Report on Form 8-K,  October 30, 2008.)                                              |
| 10.13+      |       | Promissory Note dated as  of October 27, 2008 by and between Apogee Technology, Inc. and  David Meyers. (Previously filed on a Current Report on Form 8-K,  October 30, 2008.)                                                |
| 10.14+      |       | Promissory Note dated as  of October 27, 2008 by and between Apogee Technology, Inc. and TYJO  Corporation Money Purchase Pension Plan. (Previously filed on a Current  Report on Form 8-K, October 30, 2008.)                |
| 10.15+      |       | Form of Warrant.  (Previously filed on a Current Report on Form 8-K, October 30,  2008.)                                                                                                                                           |
| 31.1        |       | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive  Officer.                                                                                                                                        |
| 31.2        |       | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial  Officer.                                                                                                                                        |
| 32          |       | Certification pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer  and Chief Financial Officer.                                                                                                            |

 

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+ Previously filed asindicated.

 

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