**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**(Mark One)**

 

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

 

**For the quarterly period ended March 31,2006**

 

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

 

**For the transition period from                   to                   **

 

**Commission file number 000-30656**

 

**APOGEE TECHNOLOGY, INC.**

(Exact name of small business issuer as specified in its charter)

 

| **DELAWARE**                                          | ** ** | **04-3005815**      |
|-------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                       |       | (I.R.S. Employer    |
| incorporation or organization)                        |       | Identification No.) |
|                                                  |       |                |
| **129 MORGAN DRIVE, NORWOOD, MASSACHUSETTS 02062**    |
| (Address of principal executive offices)              |
|                                                  |       |                |
| **(781) 551-9450**                                    |
| (Issuer’s telephone number, including area code) |
|                                                  |       |                |
| **NOT APPLICABLE**                                    |
| (Former name, former address and former fiscal year,  |
| if changed since last report)                         |

 

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

 

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

 

State the number of shares outstanding of each of the Issuer’sclasses of common equity, as of the latest practicable date:  As of April 24, 2006, there were11,968,332 shares of Common Stock, $.01 par value per share, outstanding.

 

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

 

 

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**APOGEETECHNOLOGY, INC.**

 

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

**QUARTERENDED MARCH 31, 2006 AND MARCH 31, 2005**

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

 

2

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

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

 

**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                        | ** ** | **MARCH 31,** | ** **    | **DECEMBER 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|---------------|-----------------------|------------|
| ** **                                                                                                                                                        | ** ** | **2006**           | ** **    | **2005**              | ** ** |
| ** **                                                                                                                                                        | ** ** | **(Unaudited)**    | ** **    | ** **            | ** ** |
| **ASSETS**                                                                                                                                                        |       |               |          |                  |       |
| ** **                                                                                                                                                        |       |               |          |                  |       |
| **Current  assets**                                                                                                                                               |       |               |          |                  |       |
| Cash and  cash equivalents                                                                                                                                        | ** ** | **$**              | **4,673,581** | ** **            | **$**      | **5,512,974** | ** ** |
| Accounts  receivable, net of allowance for doubtful accounts of $88,074 and $145,000,  in 2006 and 2005 respectively                                              | ** ** | **119,291**        | ** **    | **152,837**           | ** ** |
| Inventories,  net                                                                                                                                                 | ** ** | **613,585**        | ** **    | **1,327,964**         | ** ** |
| Prepaid  expenses and other current assets                                                                                                                        | ** ** | **92,529**         | ** **    | **123,462**           | ** ** |
|                                                                                                                                                              |       |               |          |                  |       |
| Total  current assets                                                                                                                                             | ** ** | **5,498,986**      | ** **    | **7,117,237**         | ** ** |
|                                                                                                                                                              |       |               |          |                  |       |
| **Property  and equipment, net**                                                                                                                                  | ** ** | **47,687**         | ** **    | **39,932**            | ** ** |
|                                                                                                                                                              |       |               |          |                  |       |
| **Other  assets**                                                                                                                                                 |       |               |          |                  |       |
| Escrow  account                                                                                                                                                   | ** ** | **411,924**        | ** **    | **409,480**           | ** ** |
| Patents, net  of accumulated amortization of $-0- and $-0-, in 2006 and 2005 respectively                                                                         | ** ** | **154,044**        | ** **    | **149,536**           | ** ** |
|                                                                                                                                                              |       |               |          |                  |       |
| ** **                                                                                                                                                        | ** ** | **$**              | **6,112,641** | ** **            | **$**      | **7,716,185** | ** ** |
|                                                                                                                                                              |       |               |          |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                    |       |               |          |                  |       |
|                                                                                                                                                              |       |               |          |                  |       |
| **Current  liabilities**                                                                                                                                          |       |               |          |                  |       |
| Accounts  payable and accrued expenses                                                                                                                            | ** ** | **$**              | **529,299**   | ** **            | **$**      | **766,930** | ** ** |
| Deferred  distributor revenue                                                                                                                                     | ** ** | **625,521**        | ** **    | **1,337,022**         | ** ** |
| Deferred  contract revenue                                                                                                                                        | ** ** | **72,686**         | ** **    | **72,686**            | ** ** |
|                                                                                                                                                              |       |               |          |                  |       |
| Total  current liabilities                                                                                                                                        | ** ** | **1,227,506**      | ** **    | **2,176,638**         | ** ** |
|                                                                                                                                                              |       |               |          |                  |       |
| **Commitments  and Contingencies**                                                                                                                                | ** ** | **—**         | ** **    | **—**            | ** ** |
| ** **                                                                                                                                                        | ** ** | ** **         | ** **    | ** **            | ** ** |
| **Stockholders’  equity**                                                                                                                                    |       |               |          |                  |       |
| Common  stock, $.01 par value;  20,000,000 shares authorized, 11,968,332 and 11,968,332 issued and  outstanding at March 31, 2006 and December 31, 2005 | ** ** | **119,683**        | ** **    | **119,683**           | ** ** |
| Additional  paid-in capital                                                                                                                                       | ** ** | **18,104,423**     | ** **    | **18,104,423**        | ** ** |
| Deferred  stock compensation                                                                                                                                      | ** ** | **74,590**         | ** **    | **—**            | ** ** |
| Accumulated  deficit                                                                                                                                              | ** ** | **(13,413,561**    | **)**         | **(12,684,559**       | **)**      |
|                                                                                                                                                              |       |               |          |                  |       |
| Total  stockholders’ equity                                                                                                                                  | ** ** | **4,885,135**      | ** **    | **5,539,547**         | ** ** |
| ** **                                                                                                                                                        | ** ** | **$**              | **6,112,641** | ** **            | **$**      | **7,716,185** | ** ** |

 

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

 

3

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF INCOME**

**(UNAUDITED)**

 
| ** **                                                          | ** ** | **THREE MONTHS ENDED MARCH 31,** | ** **   |
|---------------------------------------------------------------------|------------|------------------------------------------------------|--------------|
| ** **                                                          | ** ** | **2006**                                             | ** **   | **2005** | ** ** |
|                                                                |       |                                                 |         |   |   |
| **Revenues**                                                        |       |                                                 |         |   |   |
| Product  sales                                                      | ** ** | **$**                                                | **985,398**  |   | $ | 1,013,787 |   |
| Royalties                                                           | ** ** | **—**                                           |         | 100,953 |   |
|                                                                |       |                                                 |         |   |   |
| ** **                                                          |       | **985,398**                                          |         | 1,114,740 |   |
|                                                                |       |                                                 |         |   |   |
| **Costs  and expenses**                                             |       |                                                 | ** **   |   |   |
| Product  sales                                                      | ** ** | **725,244**                                          | ** **   | 967,342 |   |
| Research and  development                                           | ** ** | **394,576**                                          | ** **   | 790,140 |   |
| Selling,  general and administrative                                | ** ** | **626,709**                                          | ** **   | 799,939 |   |
|                                                                |       |                                                 | ** **   |   |   |
| ** **                                                          |       | **1,746,529**                                        | ** **   | 2,557,421 |   |
|                                                                |       |                                                 | ** **   |   |   |
| **Operating  loss**                                                 | ** ** | **(761,131**                                         | **)**        | (1,442,681 | ) |
|                                                                |       |                                                 | ** **   |   |   |
| **Other  income (expense)**                                         |       |                                                 | ** **   |   |   |
| Interest/other  income                                              | ** ** | **53,715**                                           | ** **   | 4,397 |   |
| Interest/other  expense                                             | ** ** | **(21,586**                                          | **)**        | — |   |
|                                                                |       |                                                 | ** **   |   |   |
| ** **                                                          |       | **32,129**                                           | ** **   | 4,397 |   |
|                                                                |       |                                                 | ** **   |   |   |
| **Net  income (loss)**                                              | ** ** | **$**                                                | **(729,002** | **)** | $ | (1,438,284 | ) |
|                                                                |       |                                                 | ** **   |   |   |
| **Basic  and diluted loss per common share**                        | ** ** | **$**                                                | **(0.06**    | **)** | $ | (0.12 | ) |
|                                                                |       |                                                 | ** **   |   |   |
| **Weighted  average common shares outstanding - basic and diluted** | ** ** | **11,968,332**                                       | ** **   | 11,838,332 |   |

 

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

 

4

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                             | ** ** | **THREE MONTHS ENDED MARCH 31,** | ** **    |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|---------------|
| ** **                                                                             | ** ** | **2006**                                             | ** **    | **2005** | ** ** |
|                                                                                   |       |                                                 |          |   |   |
| **Cash  flows from operations**                                                        |       |                                                 | ** **    |   |   |
| Net income  (loss)                                                                     | ** ** | **$**                                                | **(729,002**  | **)** | $ | (1,438,285 | ) |
| *Adjustments  to reconcile net income (loss)to net cash used in operating activities:* |       |                                                 | ** **    |   |   |
| Provision  for doubtful accounts                                                       | ** ** | **(56,926**                                          | **)**         | 15,000 |   |
| Provision  for slow moving, excess and obsolete inventory                              | ** ** | **32,270**                                           | ** **    | 243,229 |   |
| Depreciation  and amortization                                                         | ** ** | **(2,873**                                           | **)**         | 20,891 |   |
| Stock  compensation expense                                                            | ** ** | **74,590**                                           | ** **    | — |   |
| *Changes  in operating assets and liabilities:*                                        |       |                                                 | ** **    |   |   |
| Accounts  receivable                                                                   | ** ** | **68,949**                                           | ** **    | 172,574 |   |
| Inventories                                                                            | ** ** | **682,108**                                          | ** **    | 100,103 |   |
| Prepaid  expenses and other current assets                                             | ** ** | **30,934**                                           | ** **    | 56,529 |   |
| Accounts  payable and accrued expenses                                                 | ** ** | **(218,551**                                         | **)**         | (47,465 | ) |
| Deferred  distributor revenue                                                          | ** ** | **(711,501**                                         | **)**         | (214,237 | ) |
| Deferred  contract revenue                                                             | ** ** | **—**                                           | ** **    | (23,102 | ) |
|                                                                                   |       |                                                 | ** **    |   |   |
| Net cash  (used) in operating activities                                               | ** ** | **(830,002**                                         | **)**         | (1,114,763 | ) |
|                                                                                   |       |                                                 | ** **    |   |   |
| **Cash  flows from investing activities**                                              |       |                                                 | ** **    |   |   |
| Purchases of  property and equipment                                                   | ** ** | **(4,882**                                           | **)**         | (4,894 | ) |
| Patent costs                                                                           | ** ** | **(4,509**                                           | **)**         | (18,426 | ) |
|                                                                                   |       |                                                 | ** **    |   |   |
| Net cash  provided by (used in) investing activities                                   | ** ** | **(9,391**                                           | **)**         | (23,320 | ) |
|                                                                                   |       |                                                 | ** **    |   |   |
| **Cash  flows from financing activities**                                              |       |                                                 | ** **    |   |   |
|                                                                                   |       |                                                 | ** **    |   |   |
| Net cash  provided by financing activities                                             | ** ** | **—**                                           | ** **    | — |   |
|                                                                                   |       |                                                 | ** **    |   |   |
| **Incease  (decrease) in cash and cash equivalents**                                   | ** ** | **(839,393**                                         | **)**         | (1,138,083 | ) |
|                                                                                   |       |                                                 | ** **    |   |   |
| Cash and  cash equivalents - beginning                                                 | ** ** | **5,512,974**                                        | ** **    | 1,886,883 |   |
|                                                                                   |       |                                                 | ** **    |   |   |
| **Cash and  cash equivalents - ending**                                                | ** ** | **$**                                                | **4,673,581** | ** ** | $ | 748,800 |   |

 

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

 

5

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2006 AND MARCH 31, 2005 (UNAUDITED)**

 

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

 

***The Company***

 

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

 

OnOctober 5, 2005, Apogee completed a transaction with SigmaTel, Inc. (“SigmaTel”),whereby certain assets of the audio division were sold, including the DDX technologyand the associated royalties from its license agreement with STMicroelectronics(“ST”), to SigmaTel for approximately $9.4 million, resulting in a gain ofapproximately $8.9 million plus a one-year earn-out of potentially up to $4.5million (the “SigmaTel Transaction”). No assurance can be given that any ofthis earn-out will be realized. The Company and certain of its principal stockholdersalso entered into an Indemnification Agreement if certain terms of theAgreement are violated. The Company is authorized to indemnify the principal stockholdersin the event any one or more of them has to satisfy any obligations thereunder.In addition, the Company’s engineering and marketing staff related to the audiodivision were offered positions at SigmaTel as a part of the Transaction.

 

Althoughthe Company retained some of its audio division related agreements (with theexception of the royalty rights from the license agreement with ST) and itsaudio IC inventory, the Company intends to cease the operations of its audiodivision upon completion of the sale of these remaining assets.

 

Subsequent to the sale of the audio division, we organized our MEMSdivision into two business groups, the Sensor Products Group and the MedicalProducts Group. The Sensor Products Group will focus on the design, developmentand marketing of proprietary MEMS/Nanotechnology based sensors for theconsumer, industrial and automotive markets. In December 2005, weintroduced our first sensor products, a family of miniature pressure sensors,trademarked under the SensilicaTM brand name. These sensors are presently beingsampled to potential customers. We intend to sell these sensor devices asstand-alone die and as packaged solutions in a similar manner as employed inthe marketing and sale of our former audio IC products. The Medical ProductsGroup is currently focused on the design, development and marketing of MEMSbased devices to provide enhanced delivery of a range of therapies through theskin, or transdermally. We have demonstrated the feasibility of our solution byperforming efficacy tests with model drugs and have performed related testingto support the commercialization of our transdermal delivery device. Dependingupon the results of our technology and product development activities, we may: (i) licenseour technology to third party medical device or pharmaceutical companies, (ii) develop,have made and market through distributors our own medical products, or (iii) partnerwith third party pharmaceutical companies to commercialize our products.

 

Since the scope of operations covered by the Medical Products Group iscurrently considered immaterial, we have not implemented disclosuresencompassed under SFAS 131, “Disclosures about Segments of an Enterpriseand Related Information”. We will, however, continue to evaluate themateriality of this business Group.

 

***Basis ofPresentation***

 

***ConsolidatedFinancial Statements***

 

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

 

6

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In the opinion of the Company’s management, alladjustments, consisting of normal recurring accruals considered necessary for afair presentation, have been included in the accompanying unaudited financialstatements. Operating results for the three months ended March 31, 2006 arenot necessarily indicative of the results that may be expected for thefull year ending December 31, 2006.

 

***Going Concern***

 

The accompanyingconsolidated financial statements have been prepared on a going concern basiswhich contemplates the realization of assets and satisfaction of liabilities inthe normal course of business. As shown in the consolidated financialstatements, we have incurred continuing losses and negative cash flows from operations.Net losses were approximately $729,000 and negative cash flows from operationswere approximately $830,000 for the three months ended March 31, 2006. Thisraises substantial doubt about the Company’s ability to continue as a goingconcern.

 

**The Company sold certain tangible and intangible assetsassociated with its audio business in 2005 and has approximately $4.7 millionof cash at March 31, 2006. The Company has reduced, in the short-term, itsoperating expenses for payroll and related costs, rents and professional feesamongst others. The Company believes that its current working capital will besufficient to fund its capital and operational requirements at least through March 31,2007.**

** **

The long term success of the Company is dependentupon its ability to successfully develop and market its sensor and medicaldevice products based upon its MEMS technology, to attain profitable operationsand/or raise additional funds as needed for such purpose. There can be noassurance, however, that the Company will be able to become profitable or raisethe funds that it needs or that additional funds will be available to theCompany on acceptable terms, if at all.

 

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

 

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

 

7

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

 

***Revenue Recognition***

 

The Company recognizes revenuein accordance with Securities and Exchange Commission Staff Accounting BulletinNo. 104 (“SAB 104”), “Revenue Recognition in Financial Statements: RevenueRecognition”, which states that revenue should be recognized when the followingrevenue recognition criteria are met:  (1) 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 resulting receivableis reasonably assured. The following policies apply to the Company’s majorproduct sales categories for revenue recognition.

 

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

 

Sales to Distributors:  At times the Company provides incentives suchas stock rotation, price protection and other incentives to its distributors. Therefore,under the sell through method of revenue recognition the Company defersrecognition of revenue until such time that the distributor sells products toits customers based upon receipt of point-of-sale reports from thedistributors. Distributor payments received before revenue is recognized are recordedas deferred revenue. Unsold inventory held at distributors is included as acomponent of finished goods inventory.

 

The Company records royalty revenue when earned inaccordance with the underlying agreement. Royalties are based upon sales ofproducts commercialized from the Company’s licensed technology. Consultingrevenue is recognized as services are performed in accordance with the terms ofthe underlying consulting agreements.

 

***Loss Per Share***

 

Basic loss per share is computed by dividingthe net loss attributable to common stockholders for the period by the weightedaverage number of shares of common stock outstanding during the period. Dilutednet loss per share is computed based on the weighted average number of sharesof common stock and shares of common stock issuable upon the exercise of stockoptions and common stock warrants.

 

***Research andDevelopment***

 

Costs for research anddevelopment are expensed as incurred.

 

***Inventories***

 

Inventories, including inventory held atdistributors (See Note 4) are stated at the lower of cost on a first-in,first-out basis or market. This policy requires the Company to make estimatesregarding the market value of the Company’s inventory, including an assessmentof excess or obsolete inventory. The Company determines excess and obsoleteinventory based on an estimate of the future demand and estimated sellingprices for the Company’s products within a specified time horizon, generally 12to 24 months. The estimates the Company uses for expected demand are also usedfor near-term capacity planning and inventory purchasing and are consistentwith the Company’s revenue forecasts. Actual demand and market conditions may differfrom those projected by the Company’s management.

 

8

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If the Company’s unit demand forecast is less thanthe Company’s current inventory value, the Company will record additionalexcess inventory charges or write-downs to net realizable value which willdecrease the Company’s gross margin and net operating results in the future. Accordingly,during the three months ended March 31, 2006, the Company recorded aprovision of approximately $32,000 for slow moving, excess and obsoleteinventory.

 

***Purchasecommitment losses***

 

The Company accrues for estimated losses onnon-cancelable purchase orders of products, which may occur if the futuresale price declines below the committed purchase price. There are nooutstanding purchase commitments of product inventory and therefore noprovision was required at March 31, 2006.

 

***Property andEquipment***

 

Major replacements and betterments of equipment arecapitalized. Cost of normal maintenance and repairs is charged to expense asincurred. Depreciation is provided over the estimated useful lives of theassets using accelerated methods. Leasehold improvements are amortized overeither the term of lease or the estimated useful life of the improvement.

 

***Patents***

 

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

 

***Cash and CashEquivalents***

 

The Company considers allhighly liquid investments with an original maturity of three months or less tobe cash equivalents. Substantially all of the Company’s cash is held in highquality money market funds comprised of short-term, fixed income securitiesearning interest at 4.23% at March 31, 2006.

 

***AccountsReceivable***

 

The Company carries its trade receivables fromdirect customers less an allowance for doubtful accounts to ensure that tradereceivables are carried at net realizable value. On a periodic basis, theCompany evaluates the collectibility of its accounts receivable on a variety offactors, including length of time receivables are past due, indication ofcustomer willingness to pay, significant one-time events and historicalexperience. An additional reserve for individual accounts is recorded when theCompany becomes aware of a customer’s inability to meet its financialobligations, such as in the case of bankruptcy filings or substantialdeterioration in the customer’s operating results or financial position. If thefinancial condition of the Company’s customers were to deteriorate, resultingin an impairment of their ability to make payments, additional allowances may berequired. Accounts receivable are generally considered past due if any portionof the receivable balance is outstanding for more than 90 days. Ifcircumstances related to the Company’s customers change, estimates of therecoverability of receivables would be further adjusted.

 

9

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***Fair value offinancial instruments***

 

Carrying amounts of certain of the Company’sfinancial instruments, including cash and cash equivalents, accounts receivableand notes and accounts payable, approximate their fair values due to theirrelative short maturities and based upon comparable market informationavailable at the respective balance sheet dates. The Company does not hold orissue financial instruments for trading purposes.

 

***Stock BasedCompensation***

 

The Company has one stock-based compensation plan,the 1997 Employee, Director and Consultant Stock Option Plan (“Plan”) which isdescribed below. Prior to fiscal 2006, the Company accounted for the plan underthe recognition 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 (SFAS) No. 123, “Accountingfor Stock-Based Compensation”, (SFAS 123). Compensation costs related to stockoptions granted at fair value under those plans were not recognized in theconsolidated statements of income.

 

In December 2004, FASB issued SFAS 124 (revised2004), “Share-Based Payments”, (SFAS 123(R)). Under the new standard, companiesare no longer able to account for stock-based compensation transactions usingthe intrinsic value method in accordance with APB Opinion No. 25. Insteadcompanies are required to account for such transactions using a fair-valuemethod and recognize the expense in the consolidated statement of income.

 

Prior to January 1, 2006, the Company hadadopted only the disclosure provisions of Financial Accounting Standard No. 123(R),“Accounting For Stock-Based Compensation” (SFAS 123(R)). It applied APB OpinionNo. 25, “Accounting For Stock Issued To Employees”, and relatedinterpretations in accounting for its plan and did not recognize compensationexpense for its stock-based compensation plan.

 

Effective January 1, 2006, the Company adopted SFAS123(R) using the modified-prospective-transition method. Under this transitionmethod, stock compensation costs recognized beginning January 1, 2006includes (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, and (b) compensation cost for all stock-based payments grantedon or subsequent to January 1, 2006, based on the grant date fair valueestimated in accordance with the provisions of SFAS 123(R). Results for priorperiods have not been restated.

 

***Stock BasedCompensation***

 

The Company’s net loss for the three months ended March 31,2006 was larger by approximately $75,000 more than if the Company had continuedto account for share-based compensation under APB Opinion No. 25. Basicand diluted loss per share for the same period was $0.01 higher, due to theCompany’s adopting SFAS 123(R).

 

**1997 Employee, Director and Consultant Stock Option Plan**

 

**In May 1997,the Company adopted an incentive stock option plan for employees, directors andconsultants. The Company’s board of directors authorized a maximum of 600,000shares of common stock for issuance under the plan, which in 2001 was increasedto 2,100,000 shares, increased in 2002 to 3,100,000 shares and furtherincreased in 2003 to 4,100,000 shares. Pursuant to the plan, the board may grantoptions to employees, directors, or consultants at its discretion. Optionsgranted under the plan to individuals with less than 10% ownership are to befor 100% of the fair value of the common stock on the date of grant and expire10 years from the date of grant. Options granted under the plan to individualswith greater than 10% ownership are to be for 110% of the fair value of thecommon stock on the date of grant and expire five years from the date of grant.**

 

10

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**Accountingfor Stock Compensation**

 

Stock-basedcompensation costs are generally based on the fair value calculated from theBlack-Scholes option-pricing model on the date of grant for stock options. RSUfair values generally equal their intrinsic value on the date of grant.

 

Thefair values of stock grants are amortized as compensation expense over theoptions’ vesting period. Compensation expense recognized is shown in theoperating activities section of the consolidated statements of cash flow.

 

Inanticipation of adopting SFAS 123(R), the Company evaluated the assumptionsused in the Black-Scholes model. The Company continues to calculate theexpected volatility based solely on historical volatility. The Company believesthe historical volatility provides the best estimate of future stock pricevolatility.

 

Theexpected term was previously and is currently calculated based on an analysisof vesting periods and contractual life. The Company believes that thisanalysis provides a better estimate of option term periods.

 

TheCompany continues to base the estimate of risk-free rate on the U.S. Treasuryyield curve in effect at the time of grant. The Company has never paid cashdividends and does not currently intend to pay cash dividends, and thus hasassumed a 0% dividend yield.

 

***Stock Based Compensation***

 

Aspart of the requirements of SFAS 123(R), the Company is required toestimate potential forfeitures of stock grants and adjust compensation costrecorded accordingly. The estimate of forfeitures will be adjusted over therequisite service period to the extent that actual forfeitures differ, or areexpected to differ, from such estimates. Changes in estimated forfeitures willbe recognized through a cumulative catch-up adjustment in the period of changeand will also impact the amount of stock compensation expense to be recognizedin future periods.

 

Asummary of the Company’s stock compensation activity with respect to the fiscalquarter ended March 31, 2006 follows:

 
| **Stock Options**                 | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding  at December 31, 2005 |       | 2,495,060  |       | $                                       | 5.4939     |                                                 |       |                            |       |   |
| Granted                                |       | 106,500    |       | 0.9799                                  |       |                                                 |       |                            |       |
| Exercised                              |       | -0-        |       |                                    |       |                                                 |       |                            |       |
| Cancelled or  expired                  |       | (25,000    | )          | 5.2000                                  |       |                                                 |       |                            |       |
| Outstanding  at March 31, 2006    |       | 2,576,560  |       | $                                       | 5.3102     |                                                 | 6.6881     |                            | $          | 56,930.00 |   |
|                                   |       |       |       |                                    |       |                                                 |       |                            |       |
| Vested at March 31,  2006         |       | 2,269,560  |       | $                                       | 5.8648     |                                                 | 6.3239     |                            | $          | 56,930.00 |   |
|                                   |       |       |       |                                    |       |                                                 |       |                            |       |
| Exercisable  at March 31, 2006    |       | 2,269,560  |       | $                                       | 5.8648     |                                                 | 6.3239     |                            | $          | 56,930.00 |   |

 

11

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Theweighted average fair value per share of stock-based payments granted toemployees during the three months ended March 31, 2006 was $0.78. Althoughno options were exercised during the three months ended March 31, 2006, thetotal intrinsic value of exercisable stock options was $56,930 during the sameperiod. In addition, since no options vested in the first quarter ended March 31,2006, no fair value of vested options was calculated. Had we implementedSFAS 123(R), our stock-based compensation expense for the three monthsended March 31, 2005 would have been approximately $532,000.

 

Duringthe three months ended March 31, 2006, the Company issued 106,500 optionsto purchase shares under the Company’s Plan. No options were exercised for thethree months ended March 31, 2006.

 

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

 

AccountsReceivable at March 31, 2006 and December 31, 2005 are comprised ofthe following:

 
| ** **                            | ** ** | **2006**    | ** **  | **2005**      | ** ** |
|---------------------------------------|------------|-------------|-------------|---------------|------------|
| ** **                            | ** ** | ** **  | ** **  | **(Audited)** | ** ** |
| Distributor                           | ** ** | **$**       | **75,163**  |          | $          | 190,202 |   |
| Direct  customers                     | ** ** | **132,202** |        | 107,635       |       |
| ** **                            |       | **$**       | **207,365** |          | $          | 297,837 |   |
|                                  |       |        |        |          |       |
| Less  allowance for doubtful accounts | ** ** | **$**       | **(88,074** | **)**         | (145,000   | ) |
|                                  |       |        |        |          |       |
| Net accounts  receivable              | ** ** | **$**       | **119,291** |          | $          | 152,837 |   |

 

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

 

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

 
| ** **                                                      | ** ** | **March 31,** | ** **    | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------|---------------|-----------------------|------------|
| ** **                                                      | ** ** | **2006**           | ** **    | **2005**              | ** ** |
| ** **                                                      | ** ** | ** **         | ** **    | **(Audited)**         | ** ** |
|                                                            |       |               |          |                  |       |
| Raw  materials                                                  | ** ** | **$**              | **-0-**       |                  | $          | -0- |   |
| Finished  goods held by Apogee                                  | ** ** | **2,111,007**      |          | 2,297,795             |       |
| Finished  goods held by distributors                            | ** ** | **448,103**        |          | 943,423               |       |
|                                                            |       |               |          |                  |       |
| ** **                                                      |       | **$**              | **2,559,110** |                  | $          | 3,241,218 |   |
| Less  allowance for slow moving, excess  And obsolete inventory | ** ** | **(1,945,525**     | **)**         | (1,913,254            | )          |
|                                                            |       |               |          |                  |       |
| Inventory -  net                                                | ** ** | **$**              | **613,585**   |                  | $          | 1,327,964 |   |

 

12

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

 

Property and equipment at March 31, 2006 and December 31, 2005 are comprisedof the following:

 
| ** **                     | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|--------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                     | ** ** | **2006**           | ** **  | **2005**              | ** ** |
| ** **                     | ** ** | ** **         | ** **  | **(Audited)**         | ** ** |
|                           |       |               |        |                  |       |
| Equipment                      | ** ** | **$**              | **55,544**  |                  | $          | 48,091 |   |
| Software                       | ** ** | **32,943**         |        | 32,943                |       |
| Furniture  and fixtures        | ** ** | **19,943**         |        | 22,515                |       |
| Leasehold  improvements        | ** ** | **22,954**         |        | 22,954                |       |
|                           |       |               |        |                  |       |
| ** **                     |       | **$**              | **131,384** |                  | $          | 126,503 |   |
|                           |       |               |        |                  |       |
| Less  accumulated depreciation | ** ** | **(83,697**        | **)**       | (86,570               | )          |
|                           |       |               |        |                  |       |
| ** **                     |       | **$**              | **47,687**  |                  | $          | 39,933 |   |

 

Depreciation expense was $4,882 for the three monthsended March 31, 2006.

 

The estimated useful lives of the classes of physical assets were asfollows:

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

 

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

 
| ** **              | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|-------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **              | ** ** | **2006**           | ** **  | **2005**              | ** ** |
| ** **              | ** ** | ** **         | ** **  | **(Audited)**         | ** ** |
|                    |       |               |        |                  |       |
| Accrued  audit expenses | ** ** | **$**              | **40,000**  |                  | $          | 69,000 |   |
| Accrued  legal expenses | ** ** | **67,000**         |        | 86,000                |       |
| Accrued  taxes          | ** ** | **20,000**         |        | 20,000                |       |
| Other  accrued expenses | ** ** | **31,000**         |        | 39,000                |       |
|                    |       |               |        |                  |       |
| ** **              |       | **$**              | **158,000** |                  | $          | 214,000 |   |

 

13

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

 

During September 2004, the Company entered intoa funding agreement with United Binational Industrial Research and Development(“BIRD”) Foundation of Israel. This agreement will provide funds to the Companyfor industrial research and development activities. The agreement will provideup to a maximum of $560,000 of which the Company may receive $280,000, andanother partner in the agreement will receive the remainder. The Company hasrecorded $101,379 in deferred contract revenue and for the twelve months ended December 31,2004 recorded $23,101 as an offset to research and development expenses. Therewas no revenue recorded under this agreement for the fiscal year ended December 31,2005 or the three months ended March 31, 2006.

 

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

 

***Stock Options***

 

During the three months ended March 31, 2006,the Board of Directors awarded to certain employees options to purchase 106,500shares at exercise prices ranging from $.77 to $1.30 per share. These optionswere granted under the 1997 Employee, Director and Consultant Stock Option Plan.The options vest over five years beginning at the first anniversary of the dateof grant.

 

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

 

The Company rents its facility from an entitycontrolled by a stockholder for $4,400 per month pursuant to a lease thatexpired December 31, 2005. Currently, the Company is renting the facility ona month-to-month basis.

 

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

 

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

 

Royalty income was recognized during the period inwhich the royalties were earned. Royalties were reported to us by ST on aquarterly “Royalty Schedule,” which was received within 30 days of quarter end.Royalties were determined based upon either a percentage of selling prices or aflat rate depending on the particular product item sold in the reportingquarter. The license agreement has no expiration date; however, either party may cancelthe agreement upon certain advance notices as defined in the agreement. Inconjunction with the SigmaTel

 

Transaction, Apogee sold the rights to theroyalties received under the license agreement to SigmaTel, as well as, all therights title and interest in the related intellectual property.

 

14

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**11.****                     Concentrations**

 

**During the three monthsended March 31, 2006, the Company derived approximately 76% of its revenueas a result of sell through by three distributors.**

** **

During the three months ended March 31, 2005,the Company derived approximately 72% of its total revenue and 79% of productrevenue from three distributors.

 

Three of the Company’s customers accounted forapproximately 91% of the total accounts receivable balance at March 31,2006.

 

Four of the Company’s customers accounted forapproximately 87% of the total accounts receivable balance at March 31,2005.

 

**During the three months ended March 31,2006, the Company derived approximately 97% of its revenue from distributorslocated in Asia and Europe.**

** **

**During the three months ended March 31,2005, the Company derived approximately 91% of its total and product revenuefrom distributors located in Asia and Europe.**

** **

**The Company maintains its cashaccounts with high quality financial institutions. Balances usually exceed themaximum coverage ($100,000) provided by the Federal Deposit InsuranceCorporation on insured depositor accounts.**

 

15

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

 

**GENERAL**

** **

The following Management’sDiscussion and Analysis of the Company’s Financial Condition and Results ofOperations for the three-month periods ended March 31, 2006 and March 31,2005 should be read in conjunction with the Company’s Financial Statements andrelated Notes included elsewhere in this Quarterly Report on Form 10-QSB.This discussion contains, in addition to historical statements, forward-lookingstatements that involve risks and uncertainties. The Company’s actual resultscould differ significantly from the results discussed in the forward-lookingstatements. Factors that could cause or contribute to such differences includethe factors discussed in the section titled “Certain Risk Factors That May AffectFuture Results of Operations And Our Common Stock Price” as well as otherfactors described in the Company’s Annual Report on Form 10-KSB for theyear ended December 31, 2005. The Company does not intend to update anysuch forward-looking statements.

 

**OVERVIEW**

** **

Apogeehas historically designed, developed, and marketed integrated circuit (“IC”)products incorporating our proprietary DDX® audio amplifier technology to theconsumer market. In addition, under licensing agreements with third parties, wegranted rights to our intellectual property for use in royalty bearing audio ICproducts. Apogee is currently in the final stages of the process of evolvingfrom an audio focused enterprise to a provider of sensors and medical deviceproducts based upon its acquired Micro-Electromechanical Systems (“MEMS”)MEMS/Nanotechnologies. We released our first sensor products in December 2005targeted for the consumer, automotive and industrial markets and we arecurrently developing a MEMS based device for transdermal drug delivery for themedical market.

 

From 1981 until 1995, Apogee was in the business of engineering,manufacturing and marketing high quality, high-end patented ribbon loudspeakersystems for use in home audio and video entertainment systems. Since 1995, wehave focused on the development and commercialization of our proprietaryall-digital, high efficiency audio amplifier technology, known as DDX®. Our DDXdevelopment efforts were directed toward the licensing of our technology andthe design and development of DDX based IC’s. Apogee signed an exclusivelicensing agreement for audio applications with STMicroelectronics NV (“ST”) inFebruary 2001, which was subsequently transitioned to a non-exclusivelicense in 2005. Under this licensing agreement with ST, Apogee developed andprovided intellectual property to be used in royalty bearing products producedby ST. Apogee started the development of DDX-based IC products in 1996. Thefirst IC product was released in late 2000 and since that time we have releasedover 20 additional IC products. Apogee marketed and sold its semiconductorproducts to audio manufacturers using a worldwide sales and distributionnetwork. We utilized ST and another third party supplier to produce oursemiconductor products.

 

Asset forth in our Current Report on Form 8-K as filed on October 11,2005, we completed a transaction with SigmaTel, Inc. (“SigmaTel”) on October 5,2006, whereby certain assets of our audio division were sold, including the DDXtechnology and the associated royalties from our license agreement with ST, toSigmaTel for approximately $9.4 million plus a one-year earn-out of potentiallyup to $4.5 million. No assurance can be given that this earn-out will berealized, and based on our reports received to date, the revenue generated fromthis earn-out is likely to be minimal, if anything at all. As part of thetransition a significant portion of Apogee’s engineering and marketing staffrelated to the audio division left the Company after they were offeredpositions at SigmaTel. We have chosen to exit the audio business and by theterms of a non-compete with SigmaTel, signed in connection with our sale ofassets to them, we can no longer compete in the Class D audio/amplifierbusiness for a period of two years.

 

Subsequent to the sale of the audio division, we reorganized theCompany’s remaining MEMS division into two business groups, the Sensor ProductsGroup and the Medical Products Group. The Sensor Products Group will focus onthe design, development and marketing of proprietary MEMS/Nanotechnology basedsensors for the consumer, industrial and automotive markets. In December 2005,we introduced our first sensor products, a family of miniature pressuresensors, trademarked under the SensilicaTM brand name. These sensors arepresently being sampled to potential customers. We intend to sell these sensordevices as stand-alone die and as packaged solutions in a similar manner asemployed in the marketing and sale of our former audio IC products. The MedicalProducts Group is currently focused on the design, development and marketing ofMEMS based devices to provide enhanced delivery of a range of therapies throughthe skin, or transdermally. We have demonstrated the feasibility of oursolution by performing efficacy tests with model drugs and have performedrelated testing to support the commercialization of our transdermal deliverydevice. Depending upon the results of our technology and product developmentactivities, we may: (i) license our technology to third party medicaldevice or pharmaceutical companies, (ii) develop, have made and marketthrough distributors our own medical products, or (iii) partner with thirdparty pharmaceutical companies to commercialize our products.

 

For the immediate future a meaningful portion of our revenue willresult from the sale our remaining audio inventory. We expect that futurerevenue will initially be the result of sensor sales, potential licensingrevenues resulting from the grant rights to its intellectual property, andconsulting work from product or intellectual property development for thirdparties. It is likely that our MEMS-based medical products will take longer tocommercialize, but the same business model will likely apply. Although thesales and marketing

 

16

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staff is not the same, we plan to leverage our past experience with aworldwide network of direct sales staff, independent sales representatives anddistributors to support our Sensor Products Group and in conjunction with thiswe also intend to add new sales channels for our emerging medical products asappropriate.

 

Inour former business, we outsourced the manufacturing, assembly and preliminarytesting of our products. We intend to follow the same business model withrespect to our sensor and medical products businesses. Our cost of revenueincludes the third-party manufacturing, testing and assembly costs as well ascosts associated with shipping. Research and development expenses consistprimarily of salaries and related overhead costs associated with engineeringactivities as well as other materials and related services used in thedevelopment of our semi-conductor chips. Selling, general and administrativeexpenses consist primarily of employee compensation and overhead charges aswell as expenses directly associated with the marketing of our past andpotential products. We expect our business structure to remain largely thesame.

 

AtMarch 31, 2006, we had an accumulated deficit of approximately $13.4 million,as compared to a deficit of $12.7 million as of December 31, 2005. Ourhistorical net losses and accumulated deficit (since 1995) result primarilyfrom the costs associated with our efforts to design, develop and market itsDDX technology as well as costs associated with our efforts to develop newproducts using our analog and digital circuit designs and MEMS technology.

 

As of March 31, 2006, wehad 14 employees compared to 36 employees for the same period in 2005. Thisreduction in employees is a direct result of the audio business sale toSigmaTel, Inc. in October 2005.

 

During the three-monthperiod ended March 31, 2006, we derived approximately 76% of our revenueas a result of sell through by three of our distributors. As of March 31,2006, Apogee recognized substantially all of the deferred revenue,approximately $252,000, related to one of our former distributors. At December 31,2005, we had formally terminated this distributor contract. At March 31,2006 it was determined that we would have no continuing involvement with thisdistributor as it related to the audio business. All of the revenue wasattributable to the audio division. Prior to the SigmaTel transaction, weutilized a network of sales representatives and distributors, as well as salesoffices in China, Hong Kong, Japan and Taiwan, to support our worldwide salesand marketing activities. Subsequent to the selling of the audio business in October 2005,we closed our locations in China, Hong Kong and Taiwan. In addition, in January 2006,we closed the Long Island, New York office**.**

 

**SELECTEDCONSOLIDATED FINANCIAL DATA**

 

Thefollowing selected financial data for the three-month periods ended March 31,2006 and 2005 have been derived from our unaudited financial statements. Anytrends reflected by the following table may not be indicative of futureresults.

 
| ** **                                | ** ** | **For the Three Months ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| ** **                                | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Statement of  Operations Data:            | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Revenue                                   |       | $                                                                  | 985,398    |   | $ | 1,114,740 |   |
| Costs and  expenses                       |       | 1,746,529                                                          |       | 2,557,421 |   |
| Other income  (expense)                   |       | 32,129                                                             |       | 4,397 |   |
| Net loss                                  |       | $                                                                  | (729,002   | ) | $ | (1,438,284 | ) |
|                                      |       |                                                               |       |   |   |
| Shares  outstanding                       |       | 11,968,332                                                         |       | 11,838,332 |   |
|                                      |       |                                                               |       |   |   |
| Balance  Sheet Data:                      |       |                                                               |       |   |   |
| Total assets                              |       | $                                                                  | 6,112,641  |   | $ | 3,990,034 |   |
| Stockholders’  equity                |       | $                                                                  | 4,885,135  |   | $ | 1,116,376 |   |
| Loss per  share (basic and fully diluted) |       | $                                                                  | (0.06      | ) | $ | (0.12 | ) |

 

**RESULTS OFOPERATIONS OF THE COMPANY**

 

Thefollowing table sets forth the percentage of total revenue represented bycertain revenue and expense items for the three-month periods ended March 31,2006 and 2005. The table and the discussion below should be read in conjunctionwith the consolidated financial statements and notes thereto that appearelsewhere in this report.

 

17

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| ** **                         | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Product  sales                     |       | 100.00                                                             | %          | 90.94 | % |
| Royalties                          |       | 0.00                                                               |       | 9.06 |   |
| Consulting/licensing               |       | 0.00                                                               |       | 0.00 |   |
|                               |       |                                                               |       |   |   |
| Cost of  sales                     |       | 73.60                                                              |       | 86.78 |   |
| Research and  development          |       | 40.04                                                              |       | 70.88 |   |
| Sales,  general and administrative |       | 63.60                                                              |       | 71.76 |   |
|                               |       |                                                               |       |   |   |
| Operating  loss                    |       | (77.24                                                             | )%         | (129.42 | )% |
| Other income  (expense)            |       | 3.26                                                               |       | 0.39 |   |
|                               |       |                                                               |       |   |   |
| Net loss                           |       | (73.98                                                             | )%         | (129.03 | )% |

 

**Revenue**

 

On October 5, 2005, we completed atransaction with SigmaTel, Inc. whereby certain assets of the audiodivision were sold, including the DDX® technology and the associated royaltiesfrom its license agreement with ST for approximately $9.4 million, resulting ina gain of approximately $8.9 million, plus a one-year earn-out of potentiallyup to $4.5 million. As a result, we will formally discontinue our residual audiodivision after completing the sale of our remaining audio division assets. Basedon our experience to date, it is unlikely that any of the earn-out will bereceived and if any is received it will be a minimal amount. We derive ourrevenue from three sources: (1) product sales, which consist ofmerchandise sales made either directly to original equipment manufacturers orsell through point of sale (“POS”) by distributors. All shipments are fulfilledfrom our warehouses in Hong Kong and/or Norwood, Massachusetts and revenue isreported net of returns; (2) royalty revenue, which formerly consisted ofroyalties paid by STMicroelectronics which have now been sold as part ofthe transaction with SigmaTel. The Company may in the future receiveroyalties under its remaining audio licensing agreements and from newagreements contemplated under its two new business groups, and (3) consultingincome related to the development of custom products for third parties. SeeNote 2 of the condensed consolidated financial statements – RevenueRecognition.

 

Total revenue declined byapproximately $129,600 or 12% to $985,400 for the three months ended March 31,2006 from approximately $1.115 million for the three months ended March 31,2005.

 

During the three-month period ended March 31, 2006, werecognized revenue from product sales of approximately $985,400, a decrease ofapproximately $28,600 or 3% from product revenue recognized of approximately$1.014 million for the three months ended March 31, 2005. Product salesconsisted of semiconductor products sold directly to end users or POS revenueby our distributors.

 

Subsequent to the transaction with SigmaTel, we no longerrecognize royalties under the ST Licensing Agreement. As a result, no royaltyrevenue was recorded for the three months ended March 31, 2006. For thesame period in 2005 we recognized royalty revenue of approximately $101,000. Duringboth the first quarter ended March 31, 2006 and 2005 we did not record anyconsulting/licensing revenue.

 

Totalrevenue for the three months ended March 31, 2006 and 2005 consisted of:

 
| ** **       | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------|------------|----------|------------|----------|------------|
|             |       |     |       |     |       |
| Product  Revenue |       | $        | 985,398    |     | $          | 1,013,787 |   |
| Royalties        |       | -0-      |       | 100,953  |       |
| Consulting       |       | -0-      |       | -0-      |       |
|             |       |     |       |     |       |
| Total:           |       | $        | 985,398    |     | $          | 1,114,740 |   |

 

Revenue from DDX products is expected to continue to diminishover the next few quarters as DDX inventory is sold and deferred revenue isrecognized through the POS reporting by distributors. In addition, licensing revenuefrom the ST Licensing Agreement has been assigned to SigmaTel in conjunction withthe sale of certain DDX assets to SigmaTel.

 

It is anticipated that nominal revenue from MEMS’ relatedproducts will be generated by the end of 2006.

 

18

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**Cost of Revenue**

 

Costof revenue decreased as a result of reduced product revenue to approximately$725,000 for the three months ended March 31, 2006, compared toapproximately $967,000 for the three months ended March 31, 2005. Cost ofrevenue primarily consists of purchasing finished semiconductor chips and costsassociated with assembly, testing and shipping of those products as well ascustoms and storage fees associated with warehousing a large portion of oursemiconductor products in Asia. For the three months ended March 31, 2006we recorded a gross margin from product revenue of approximately 26%, comparedto a gross margin of approximately 13% for the three months ended March 31,2005. Additionally, from an analysis of sales to inventory on hand and/or onorder management determined that it was necessary to establish reserves forslow moving, excess and/or obsolete inventories held at our facility or at ourdistributors. These provisions are reported as part of the cost of revenue.For the three-month period ended March 31, 2006, we recorded a provisionof approximately $32,000, compared to a provision of approximately $243,000 forthe three months ended March 31, 2005. Both at March 31, 2006 and2005 the total reserve for slow moving, excess and obsolete inventory wasapproximately $1.9 million. We continue to monitor our inventory and we believethe reserves currently in place are adequate, but we will continue tore-evaluate on a quarterly basis or more frequently if market conditionswarrant.

 

**Research and Development (“R&D”)Expenses**

 

TheCompany’s research and development (“R&D”) expenses consist primarily ofsalaries, development material costs, external consulting and service costsrelated to the design of new products and the refinement of existing products. Researchand development expenses decreased by approximately $395,000 or 50% toapproximately $395,000 from approximately $790,000 for the three months ended March 31,2005. This decrease was the result of the transaction with SigmaTel and thetransfer of our audio related R&D staff to SigmaTel. Human resource costsdecreased by approximately $375,000 or 67% to approximately $183,000 for thethree months ended March 31, 2006 compared to approximately $558,000 forthe same period in 2005. For the three months ended March 31, 2005, humanresource costs associated with our former audio division were approximately$420,000.

 

Withthe sale of our former audio division to SigmaTel, we expanded the developmentof both our sensor and medical device products. Expenses associated with thedevelopment of new products and the refinement of existing products increasedto approximately $176,000 for the three months ended March 31, 2006,compared to approximately $42,000 for the same period in 2005. We will continueto invest in the development of our sensor and medical device products. In January 2006,we consolidated our MEMS division to our home office in Norwood, Massachusettsand closed the Long Island Office. We anticipate that we will continue tocommit resources to research and development activities and R&D costs areexpected to increase in the future.

 

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

 

Selling expenses consist primarilyof salaries and related expenses for personnel engaged in the marketing andselling of the Company’s products, as well as costs related to trade shows,product literature, travel and other promotional support costs. In addition,selling expenses included costs related to the operation of Apogee’s Hong Kong,Taiwan and Japan (2006) sales offices. General and administrative costs consistprimarily of executive and administrative salaries, professional fees and otherassociated corporate expenses. Selling, General & Administrative (“SG&A”)expenses were approximately $627,000 for the three months ended March 31,2006 compared to approximately $800,000 for the three months ended March 31,2005. This represents a decrease of approximately $173,000 or 22%. The decreasein SG&A, described below, was attributable primarily to the closing of theHong Kong and Taiwan offices as well as decreased professional fees, travel andhuman resource costs.

 

Human resource costs decreasedapproximately $54,000 or 14% to $325,000 for the three months ended March 31,2006 compared to approximately $379,000 for the three months ended March 31,2005. This decrease reflects the reduction in staffing and subsequent closingof the Hong Kong office as a result of the sale of the Audio Division toSigmaTel, Inc. in October 2005. As of March 31, 2006, Apogeeemployed a total of 14 employees, 13 domestically and 1 in our Japanese office.With our adoption of SFAS 123R, the human resource expense for the three monthsended March 31, 2006 was increased by approximately $25,000. As of March 31,2005 we employed a total of 36 employees, 28 domestically with 6 employees inHong Kong and 1 employee each in Japan and Taiwan.

 

Professional expenses increased byapproximately $11,000 or 9% to approximately $133,000 for the three monthsended March 31, 2006, compared to approximately $122,000, for the threemonths ended March 31, 2005. Of this increase approximately $54,000 was asa result of an increase in legal expenses, partially offset by a decrease inthe use of third party marketing consultants. Legal expenses increased toapproximately $92,000 for the three-month period ended March 31, 2006,compared to approximately $34,000 for the three months ended March 31,2005. Accounting expenses remained constant at approximately $28,000 for thethree months ended March 31, 2006, compared to approximately $29,000 forthe same period in 2005.

 

Otherexpenses contributing to the decrease in SG&A were reduced internationaltravel, closing of the Hong Kong, China and Taiwan Offices as well as reducedcommissions and distribution expense. Travel expense decreased by approximately$59,000 or 69% to approximately $27,000 for the three months ended March 31,2006, compared to approximately $86,000 for the same period in 2005. As aresult of the audio division sale of assets to SigmaTel, we closed the TaiwanOffice effective as of December 31, 2005 and the Hong Kong Officeeffective as of February 28, 2006. Expenses associated with the Hong KongOffice, net of human resources were

 

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approximately$9,000 for the three months ended March 31, 2006, compared toapproximately $35,000 of expenses, net of human resources, for the same periodin 2005, an overall decrease of approximately $26,000 or 74%.

 

Operatingexpenses are expected to increase over the next few quarters due to theaddition of staff to support our Sensor and Medical Product groups.

 

**Interest Income (Expense)**

 

Interest income includes incomefrom Apogee’s cash and cash equivalents and from investments and expensesrelated to its financing activities. During the three months ended March 31,2006, we generated interest income of approximately $54,000 compared tointerest income of approximately $4,000 during the same period in 2005. Thisincrease was primarily due to interest on the net cash received ofapproximately $5.7 million as a result of the SigmaTel Transaction. Theapproximately $20,000 in other expense resulted from a loss on the disposal offixed assets and additional expenses in connection with the SigmaTeltransaction.

 

**Net Loss**

 

Apogee’s net loss for thethree months ended March 31, 2006 was approximately $729,000 or $0.06 perbasic and diluted common share, compared to a net loss of approximately $1.4million or $0.12 per basic and diluted common share for the three months ended March 31,2005.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Ourprincipal source of liquidity at March 31, 2006 consisted of approximately$4.7 million in cash and cash equivalents. Cash equivalents consist ofcertificates of deposits, which are highly liquid and have original maturitiesof no more than 90 days. This compares to approximately $749,000 at March 31,2005. In addition, as of March 31, 2006, we had working capital ofapproximately $4.3 million, compared to working capital of approximately$799,000 at March 31, 2005. This increase in cash was the result of theSigmaTel Transaction whereby on October 5, 2005, we received approximately$8.6 million, net of expenses, from the SigmaTel Transaction as a result of thesale of certain assets of our audio division.

 

Netcash used in operating activities for the three-month period ended March 31,2006 decreased to approximately $830,000 compared to approximately $1.1 millionin the three-month period ended March 31, 2005. The decrease was primarilydue to a decrease in the net loss as a result of decreased spending followingthe SigmaTel transaction and the transfer of the DDX related engineering andsales staff. As of March 31, 2006, inventory, net of reserves wasapproximately $614,000 compared to inventory, net of reserves, of approximately$2.4 million as of March 31, 2005. This trend is likely to continue as wesell off the remaining DDX inventory. Net accounts receivable was approximately$614,000 at March 31, 2006 down from approximately $1.3 million at March 31,2005. As of March 31, 2006 we had reserves against bad debt ofapproximately $88,000 compared to a reserve of $120,000 as of March 31,2005. This decrease in the reserve was the result of an approximately $57,000write off of a receivable from one of our distributors. Given the currentaccounts receivable we believe that the remaining reserve is sufficient at thistime.

 

Net cash used in investingactivities for the three months ended March 31, 2006 was approximately$9,000, compared to approximately $23,000 for the three months ended March 31,2005.

 

No cash was provided byfinancing activities for the three months ended March 31, 2006 and March 31,2005.

 

Webelieve that cash flow from operations as well as the funds from the audiodivision sale, as well as amounts that may be raised from time to time inprivate offerings of its common stock or debt financings will be sufficient tosupport operations and fund capital equipment requirements at least through March 2007.

 

**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 our financialstatements. The significant accounting policies which we believe are the mostcritical to aid in fully understanding and evaluating our reported financialresults include the following:

 

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**Revenue Recognition**

** **

Apogeerecognizes revenue in accordance with Securities and Exchange Commission StaffAccounting Bulletin No. 104 (“SAB 104”), “Revenue Reco gnition inFinancial Statements: Revenue Recognition”, which states that revenue should berecognized when the following revenue recognition criteria are met:  (1) persuasive evidence of anarrangement exists; (2) the product has been shipped and the customertakes ownership and assumes the risk of loss; (3) the selling price isfixed or determinable; and (4) collection of the resulting receivable isreasonably assured. The following policies apply to Apogee’s two major productsales categories for revenue recognition. Sales to end users (OEM):  Revenue is recognized under our standardterms and conditions of sale, title and risk of loss transfer to the customerat the time products are shipped from our warehouse or delivered to thecustomer’s representative/freight forwarder. Sales to Distributors:  From time to time we provide stock rotationrights, price protection and other incentives to its Distributors. See Note 2 –Summary of Significant Accounting Policies of the Consolidated FinancialStatements. As a result of these incentives, Apogee has adopted a policy ofdeferring recognition of revenue until the distributor sells products to itscustomers based upon receipt of point-of-sale reports from the distributors. Weaccrue the estimated cost of post-sale obligations including product warrantyreturns, based on historical experience. To date we have experienced minimalwarranty 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 estimated credit losses based upon our historicalexperience and any specific customer collection issues that we have identified.While we have not had any significant credit losses to date, we cannotguarantee that we will continue to avoid credit losses in the future. If thefinancial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired. Since our accounts receivable are highly concentrated in a smallnumber of customers, a significant change in the liquidity or financial positionof any one of these customers could have a material adverse impact on thecollectibility of our accounts receivable, our liquidity or our future resultsof operations.

 

**Inventory**

 

Apogeestates its inventory at the lower of cost (first-in, first-out) or market**.**This policy requires that we make certainestimates regarding the market value of the inventory, including an assessmentof excess or obsolete inventory. Apogee had determined excess and obsoleteinventory based on estimated future demands and estimated selling prices forour products within a specified time frame, which was generally 12 months. Theestimates used for expected demand were also used for short-term capacityplanning and inventory purchasing and were consistent with revenue forecasts.In addition to the current inventory at March 31, 2006 of approximately$614,000, net of reserve, consisting of $166,000 held at Apogee and $448,000held at distributors. This compares to inventory at December 31, 2005, netof reserves, of approximately $1.3 million consisting of $719,000 held atdistributors with the remaining $609,000 held at Apogee. The inventory levelwas established based on expected demand and not from firm customer purchasecommitments prior to the SigmaTel Transaction. As of March 31, 2006 thetotal allowance for slow moving, excess and obsolete inventory wasapproximately $1.9 million. Currently, we believe that our reserves aresufficient given our current inventory level. However, if we are unable to sellthe inventory in a relatively short period of time it, we will be required totake additional excess inventory charges or write-downs to net realizablevalue, which will decrease the gross margin as well as the net operatingresults in the future.

 

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

 

**Stock Compensation**

 

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

 

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

 

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

** **

There are anumber of important factors that could cause our actual results to differmaterially from those indicated or implied by forward-looking statements.Factors that could cause or contribute to such differences include thosediscussed below, as well as those discussed elsewhere in this Form 10-QSB.We disclaim any intention or obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwiseexcept as may be required by law.

 

**RISKSRELATED TO OUR BUSINESS**

 

**WE HAVE A HISTORY OF LOSSES, EXPECT FUTURELOSSES AND MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY.**

 

Asof March 31, 2006, we had stockholders’ equity of approximately $4.9million, an accumulated deficit of approximately $13.4 million and workingcapital of approximately $4.2 million. We recorded a loss of approximately$729,000 for the three months ended March 31, 2006. In the fiscal yearended December 31, 2005, we recorded an operating loss of approximately$5.5 million with a net profit of approximately $3.0 million from a gain ofapproximately $8.9 million. This net profit resulted from the sale of the DDXDivision to SigmaTel, Inc. on October 5, 2005, for approximately $9.4million, plus a one-year earn-out of potentially up to $4.5 million. Noassurance can be given that this earn-out will be realized and based on ourreports received to date the revenue generated from this earn-out is likely tobe minimal, if we receive anything at all. Our results in the fiscal year endedDecember 31, 2005 compare to an operating loss of approximately $3.4million and a net loss of approximately $3.4 million for the fiscal year ended December 31,2004. We will need to generate revenue to sustain profitability and positivecash flow. Our ability to generate future revenue and sustain profitabilitywill depend on a number of factors, many of which are described throughout thisrisk factor section. If we are unable to achieve and sustain profitability, theCompany’s share price would likely decline.

 

**WE WILL NEED TO RAISE ADDITIONAL CAPITAL OR SELLASSETS IN ORDER TO CONTINUE TO PERFORM RESEARCH AND DEVELOPMENT ANDOPERATE OUR BUSINESS, AND SUCH TRANSACTIONS MAY NOT BE AVAILABLE TO US ONFAVORABLE TERMS, IF AT ALL.**

 

Becausewe have historically had losses and only a limited amount of cash has beengenerated from operations, we have funded our operating activities to dateprimarily from the sale of securities. In order to continue to fund thedevelopment of our business, we will need additional capital, either throughthe sale of securities or through the sale of assets. We cannot be certain thatany such financing or asset sales will be available on acceptable terms, or atall. Moreover, additional equity financing, if available, would likely bedilutive to the holders of our common stock, and debt financing, if available,would likely involve restrictive covenants. If we sell assets that arecurrently used in the conduct of our business, those assets would no longer beavailable to us as a potential source of revenue generation, as is the casewith the October 5, 2005 sale of assets. If we cannot raise sufficientadditional capital through means available to us, it would adversely affect ourability to achieve our business objectives.

 

**THE COMPANY HAS ONLY A SMALL NUMBER OF CUSTOMERS, ANDTHE LOSS OF THESE CUSTOMERS WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’SBUSINESS.**

 

Wederived approximately 76% of our revenue as a result of sell through to endcustomers by three distributors during the three months ended March 31,2006 as compared to approximately 72% of total revenue and  79% of product revenue as a result of sellthrough to end customers by three distributors during the three months ended March 31,2005. With the sale of the audio business, Apogee’s traditional consumerelectronic customer will not be supported with audio products after the sale ofits remaining inventory. We are working to develop new customers for our sensorand medical products but we can not guarantee that we will be able to succeedin these efforts.

 

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**AS A RESULT OF THE SALE OF OUR AUDIO BUSINESS THECOMPANY WILL NOT RECEIVE ROYALTIES FROM ST AND AUDIO PRODUCT REVENUE WILLEVENTUALLY END. AS A RESULT OUR ABILITY TO ACHIEVE OR SUSTAIN REVENUE GROWTHWILL BE HARMED IF WE ARE UNABLE TO FIND CUSTOMERS AND TO DEVELOP AND SELL OURSENSOR AND MEDICAL PRODUCTS.**

 

Apogee historically derived revenue from audio IC product sales, royaltiespursuant to our license agreement with ST and others and consulting revenuesfrom contracted audio product development. With the sale of our audio assets toSigmaTel in October 2005, we will no longer be receiving license revenueand future audio IC sales will diminish as we sells off our remaining inventory.The revenues from the earn-out with SigmaTel appear unlikely to materialize. Apogeereleased new sensor products in December 2005 and expects to generaterevenue from the sale of these products in 2006. However, we may not haveany revenues if we are unable to fnd customers and to develop and our sensor products.Due to the long time required to develop and approve our medical products, wedo not expect to receive income in the near future.

 

**THERE IS A NEW EUROPEAN-BASED ENVIRONMENTAL DIRECTIVETO ELIMINATE HAZARDOUS MATERIALS IN ELECTRONIC PRODUCTS, AND AS SUCH, WE MAY NOTBE ABLE TO SELL OUR INVENTORY AND MAY HAVE INVENTORY THAT CAN ONLY BE SOLDIN LIMITED MARKETS.**

 

TheIC industry is responding to the European directive of Restriction of HazardousSubstances (“RoHS”) that will become effective in July 2006. As a resultof this directive, semiconductor companies are working to remove lead and otherhazardous materials used in their IC products. Apogee transitioned our ICproducts to conform to the RoHS standard during the first half of 2005. However,we have significant inventory that does not comply with this standard. Consequently,this inventory may not be sold timely or at all, although management hasprovided reserves for this possibility.

 

**OUR BUSINESS IS CONCENTRATED IN A LIMITED NUMBER OFMARKETS AND ANY SIGNIFICANT CHANGE IN THESE MARKETS COULD HAVE A MATERIALADVERSE EFFECT ON THE COMPANY’S BUSINESS.**

 

Approximately97% of our revenue for the three months ended March 31, 2006 was a resultof revenue from our former audio business to customers located in Asia. Thiscompares to approximately 91% for both our total and product revenue tocustomers located in Asia and Europe, for the 3 months ended March 31,2005. We have entered into a non-compete in connection with the sale of assetsto SigmaTel, Inc., except for permissible sales of our audio IC inventory.We will need to develop new markets and add new sales channels in order toeffectively market the new sensor and medical products.

 

**OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE;THEREFORE, OUR SUCCESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS IN ATIMELY FASHION.**

 

Thelife cycle of the technology and any future products developed by us may belimited by the emergence of new products and technologies, changes in customerpreferences and other factors. Our future performance will depend on ourability to consistently:

 

•                  identifyemerging technological trends in our market;

 

•                  identifychanging customer requirements;

 

•                  developor maintain competitive technology, including new product offerings;

 

•                  improvethe performance, features andreliability of our products, particularly in response to technological changeand competitive offerings;

 

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

 

•                  protectour intellectual property.

 

 

Wemay not succeed in developing and marketing new products that respond totechnological and competitive developments and changing customer needs, andsuch products may not gain market acceptance or be incorporated into thetechnology or products of third parties. Any significant delay or failure todevelop new enhanced technologies, including new product offerings, and anyfailure of the marketplace to accept any new technology and product offeringswould have a material adverse effect on our business, financial condition andresults of operations.

 

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**FAILURE TO COMPLY WITH LAWS AND GOVERNMENT REGULATIONSCOULD ADVERSELY AFFECT OUR ABILITY TO OPERATE OUR BUSINESS.**

 

Some of our activities are regulated by federal andstate statutes and government agencies. The expected manufacturing, processing,formulation, packaging, labeling, distribution and advertising of our products,and disposal of waste products arising from these activities, are subject to regulationby one or more federal agencies, including the FDA, the Drug EnforcementAgency, which we refer to as the “DEA,” the Federal Trade Commission, theConsumer Product Safety Commission, the U.S. Department of Agriculture, theOccupational Safety and Health Administration, and the Environmental ProtectionAgency (“EPA,”), as well as by foreign governments in countries where wedistribute some of our products.

 

Noncompliance with applicable FDA policies orrequirements could subject us to enforcement actions, such as suspensions ofmanufacturing or distribution, seizure of products, product recalls, fines,criminal penalties, injunctions, failure to approve pending drug productapplications or withdrawal of product marketing approvals. Similar civil or criminalpenalties could be imposed by other government agencies, such as the DEA, theEPA or various agencies of the states and localities. These enforcementactions, if they were to occur, could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows.

 

The FDA has the authority and discretion to withdrawapprovals and review the regulatory status of marketed products at any time. Forexample, the FDA may require an approved marketing application for any drugproduct marketed if new information reveals questions about a drug’s safety orefficacy. All drugs must be manufactured in conformity with current GoodManufacturing Practices and drug products subject to an approved applicationmust be manufactured, processed, packaged, held and labeled in accordance withinformation contained in the approved application.

 

**WE HAVE RECENTLY REDUCED OUR WORKFORCE CONSIDERABLY;IF WE ARE UNABLE TO HIRE OR RETAIN KEY PERSONNEL, WE MAY NOT BE ABLE TOOPERATE OUR BUSINESS SUCCESSFULLY.**

 

Wemay not be successful in recruiting and retaining executive officers andother key management and technical personnel. The competition for employeeswith the necessary high level of technical expertise to design, market and sellour products is intense, particularly in eastern Massachusetts and Asia. As aresult of the October 2005 sale of certain assets to SigmaTel, we willneed to hire a number of additional technical personnel if we are to sustainthe development of new products and our ability to sell those products. Becausecompetition for highly skilled technical personnel is so intense, companies inApogee’s industry are subject from time to time to complaints brought bycompetitors alleging interference with contractual relations or wrongful hiringof employees. Such lawsuits may be costly, may divert managementattention and resources from the operation of our business, and may thereforeadversely affect our financial condition and results of operations. Inaddition, the loss of the management and technical expertise of our seniormanagement could seriously harm us. Our employees may also be recruitedaway from us by our competitors. We do not have in place employment contractsfor members of our senior management, including the CFO and COO.

 

**WE DO NOT HAVE MANUFACTURING CAPABILITIES, AND AS ARESULT, WE WILL RELY ON OUTSIDE MANUFACTURERS TO PRODUCE OUR PRODUCTS.**

 

Wehave no manufacturing capabilities, nor do we have plans to establish any suchcapabilities. Accordingly, we utilize outside manufacturers and assembly andtest companies to produce our products. There are significant risks associatedwith our reliance on these manufacturers that can adversely affect ourbusiness, operating results and financial condition. These risks include:

 

•                  theability to maintain manufacturing relationships, the failure of which couldresult in significant delays in product introduction due to the time necessaryto establish new relationships;

 

•                  delaysin production or shortages in product delivery as a result of productionproblems at outside contractors;

 

•                  theloss of manufacturing priority that may limit our ability to obtainproducts on schedule;

 

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

 

•                  inabilityto control manufacturing yield that could increase production costs, therebyreducing sales potential and operating margins; and

 

•                  lackof access or control over new process and manufacturing technologies tomaintain product competitiveness in the market.

 

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**OUR PRODUCTS USE NEW TECHNOLOGY AND MAY HAVEMANUFACTURING DEFECTS OR OTHER CHARACTERISTICS THAT ARE ONLY DETECTED AFTERINSTALLATION IN CUSTOMER APPLICATIONS, WHICH MAY HARM OUR BUSINESS.**

 

Ourproducts are based on recently developed technology and are manufactured usingstate-of-the-art manufacturing processes. Our approach to product qualificationand testing may not fully evaluate or identify product characteristics ordefects that could adversely affect the product’s ability to operate in theintended application. If such defects or characteristics are discovered afterinstallation, product revenue might be significantly delayed and our ability tomaintain existing customers and to retain new customers may be seriouslyaffected.

 

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

 

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

 

**COMPETITION IN THE SENSOR AND MEDICAL INDUSTRY COULDPREVENT US FROM ACHIEVING PROFITABILITY.**

 

Thesensor and medical device industries are highly competitive, and we expect theintensity of the competition to increase. Many of our competitors have greaterfinancial, technical, research, marketing, sales, distribution, service andother resources than we do. Moreover, our competitors may offer broaderproduct lines and have greater name recognition than we do, and may offerdiscounts as a competitive tactic, forcing intense pricing pressure on ourproducts. In addition, several development stage companies are currentlycreating or developing technologies and products that compete with or are beingdesigned to compete with our technologies and products. Our competitors may developor market technologies or products that are more effective or more commerciallyattractive than our current or future products, or that may render ourtechnologies or products less competitive or obsolete. Accordingly, ifcompetitors introduce superior technologies or products and we cannot makeenhancements to our technologies and products necessary for them to remaincompetitive, our competitive position, and in turn, our business,revenues and financial condition, will be seriously harmed.

 

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

 

InMay 2004, the Company acquired the intellectual property and otherintangibles and hired staff from Standard MEMS, Inc. Acquisitionstypically entail many risks and could result in difficulties in integrating theoperations and personnel of companies that we acquire or the technologies andproducts that we acquire. If we are not able to successfully integrate ouracquisitions, we may not obtain the advantages that the acquisitions wereintended to create, which could adversely affect our results of operations,financial condition and cash flows. In addition, in connection withacquisitions, we could experience disruption in our business or employee base.There is also a risk that key employees of companies that we acquire or keyemployees necessary to successfully commercialize technologies and productsthat we acquire may seek employment elsewhere, including with ourcompetitors.

 

**OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.**

 

Wehave changed our primary line of business, and, as a result, we will experiencefluctuations in our quarterly operating results as we have in the past and itis likely that these fluctuations will continue in the future. Thesefluctuations are caused by many factors, including, but not limited to:

 

•                  availabilityand pricing from our suppliers;

 

•                  changesin the demand for our products by customers;

 

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

 

•                  rateand success of new customer development;

 

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•                  changesin our pricing policies or those of our competitors;

 

•                  successin attracting, retaining and motivating qualified personnel;

 

•                  changesin general economic conditions; and

 

•                  obsolescenceof inventory.

 

Asubstantial portion of our operating expenses is related to personnel,facilities, and sales and marketing programs and are fixed. Our expense levelis based in part on our expectations of future orders and sales, which areextremely difficult to predict. Accordingly, we may not be able to adjustour fixed expenses quickly enough to address any significant shortfall indemand for our products in relation to our expectations.

 

Fluctuationsin our operating results may also result in fluctuations in our commonstock price. In such event, the trading price of our common stock would likelysuffer and adversely affect our ability to raise capital and the value of yourinvestment in the Company.

 

**RISKSRELATED TO OUR INTELLECTUAL PROPERTY**

 

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

 

Ourbusiness depends, in part, on our ability to protect our intellectual property.We rely primarily on patent, copyright, trademark and trade secret laws toprotect our proprietary technologies. We cannot be sure that such measures willprovide meaningful protection for our proprietary technologies and processes. Wehave acquired a portfolio of MEMS intellectual property and the Company ispresently reviewing this portfolio to determine which of the acquired rightscan be protected and will be most useful in its business. We cannot be surethat any existing or future patents will not be challenged, invalidated orcircumvented, or that any rights granted thereunder would provide us meaningfulprotection. The failure of any patents to provide protection to our technologywould make it easier for our competitors to offer similar products.

 

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

 

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

 

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

 

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

 

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**RISKSRELATING TO OUR COMMON STOCK**

 

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

 

Thestock markets have experienced extreme price and volume fluctuations that haveaffected and continue to affect the market prices of equity securities of manytechnology companies. These fluctuations often have been unrelated ordisproportionate to the operating performance of those companies. We expectthat the market price of our Common Stock will fluctuate as a result ofvariations in our quarterly operating results, or for other reasons that arenot related to the performance of our business. These fluctuations may beexaggerated if the trading volume of our Common Stock is low. In addition, dueto the technology-intensive nature of our business, the market price for ourCommon Stock may rise and fall in response to various factors, including:

 

•  announcements of technological innovations or new products, orcompetitive developments;

 

•  investor perceptions and expectations regarding our or our competitors’products;

 

•  acquisitions or strategic alliances by us or our competitors; and

 

•  the gain or loss of a significant customer or order.

 

Inaddition, market fluctuations, as well as general economic, political andmarket conditions such as recessions, interest rate changes or internationalcurrency fluctuations, may negatively impact the market price of ourCommon Stock.

 

**NEITHER OURDISCLOSURE CONTROLS AND PROCEDURES NOR OUR INTERNAL CONTROL OVER FINANCIALREPORTING CAN PREVENT ALL ERRORS OR FRAUD, AND IN THE PAST THESE CONTROLS ANDPROCEDURES WERE NOT EFFECTIVE AND RESULTED IN RESTATEMENTS TO OUR FINANCIALRESULTS.**

 

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

 

The design of any system ofcontrols is based in part on certain assumptions about the likelihood offuture events and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Furthermore,controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with policies or procedures. While weseek to design our controls and procedures to provide reasonable assurance thatinformation required to be disclosed in our periodic filings is timelydisclosed, these inherent limitations expose us to breakdowns in such controlsand procedures. For example, while our certifying officers believed that thedesign of our controls and procedures would ensure that material informationrelated to the Company would be made known to them on a timely basis, in lightof the circumstances underlying the restatement, these controls and proceduresfor the financial statement periods covered by the restatement were noteffective. We have made certain changes to our internal control over financialreporting that are designed to address these circumstances, although even theseimprovements to our controls and procedures cannot ensure that all errors orfraud will be prevented.

 

**ITEM 3 – CONTROLS AND PROCEDURES**

 

(a)          Evaluation of DisclosureControls and Procedures. The Company’s chief executive officer and principalfinancial officer have reviewed and evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Exchange Act Rules 13d-15_(e) and15d-15_(e)) as of the end of the period covered by this quarterly report. Basedon that evaluation, the chief executive officer and principal financial officerhave concluded that the Company’s current disclosure controls and

 

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procedures are adequate and effective toensure that material information relating to the Company was made known to themby others, particularly during the period in which this Quarterly Report on Form 10-QSBwas being prepared.

 

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

 

**PART II- OTHER INFORMATION**

** **

**ITEM 1 -LEGAL PROCEEDINGS**

 

None.

 

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

 

None.

 

**ITEM 3 - DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

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

 

None.

 

**ITEM 5 -OTHER INFORMATION**

 

None.

 

**ITEM 6 -EXHIBITS**

 

(a)               Exhibits:

 

See Exhibit Index

 

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**SIGNATURES**

 

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

 
| ** **              | **APOGEE  TECHNOLOGY, INC.**                              |
|-------------------------|----------------------------------------------------------------|
|                    |                                                           |
| Date: May 15, 2006 | By:                                                            | /s/ | Herbert M. Stein |   |
|                    | Name: Herbert M. Stein                                         |
|                    | Title: Chairman of the Board,                                  |
|                    | President, Chief Executive Officer                             |
|                    | (principal executive officer)                                  |
|                    |                                                           |
|                    |                                                           |
| ** **              | **APOGEE  TECHNOLOGY, INC.**                              |
|                    |                                                           |
| Date: May 15, 2006 | By:                                                            | /s/ | Paul J. Murphy |   |
|                    | Name: Paul J. Murphy                                           |
|                    | Title: Chief Financial Officer and Vice President of Finance   |
|                    | (principal financial officer and principal accounting officer) |

 

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FORM-10-QSB

 

MARCH 31, 2006

 

**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                      |
| 31.1        |       | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 by Chief Executive Officer Regarding Facts and Circumstances Relating to  Exchange Act Filings.                                 |
|        |       |                                                                                                                                                                                                      |
| 31.2        |       | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 by Chief Financial Officer Regarding Facts and Circumstances Relating to  Exchange Act Filings.                                 |
|        |       |                                                                                                                                                                                                      |
| 32.1        |       | Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 by Chief Executive Officer and Principal Financial Officer Regarding  Facts and Circumstances Relating to Exchange Act Filings. |

 

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