**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 31,2005**

 

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

 

**For the transition period from                                         to                            **

 

**Commission file number 000-30656**

 

**APOGEE TECHNOLOGY, INC.**

(Exactname of registrant as specified in its charter)

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

 

**129 MORGANDRIVE, NORWOOD, MASSACHUSETTS 02062**(Address of principalexecutive offices)

 

**(781) 551-9450**(Issuer’s telephonenumber, including area code)

 

**NOTAPPLICABLE.**(Former name, formeraddress 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 theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes o No ý

 

Statethe number of shares of each of the Issuer’s classes of common equity, as ofthe latest practicable date:  As of August 1,2005, there were 11,838,332 shares of Common Stock, $.01 par value per share,outstanding.

 

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

 

 

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**APOGEE TECHNOLOGY, INC.**

 

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

**QUARTER ENDED MARCH 31, 2005 and RESTATED MARCH 31,2004**

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

 

2

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

 

CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                                                                                      | ** ** | **MARCH 31,  2005** | ** **    | **DECEMBER 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|---------------|-----------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **(Unaudited)**          | ** **    | **(Audited)**               | ** ** |
| **ASSETS**                                                                                                                                                      |       |                     |          |                        |       |
| ** **                                                                                                                                                      |       |                     |          |                        |       |
| **Current assets**                                                                                                                                              |       |                     |          |                        |       |
| Cash and cash equivalents                                                                                                                                       | ** ** | **$**                    | **748,800**   | ** **                  | **$**      | **1,886,883** | ** ** |
| Accounts receivable, net of allowance for  doubtful accounts of $120,000 and $105,000, respectively                                                             |       | **345,539**              | ** **    | **533,113**                 | ** ** |
| Inventories, net                                                                                                                                                | ** ** | **2,381,977**            | ** **    | **2,725,308**               | ** ** |
| Prepaid expenses and other current assets                                                                                                                       | ** ** | **196,200**              | ** **    | **252,728**                 | ** ** |
|                                                                                                                                                            |       |                     |          |                        |       |
| Total current assets                                                                                                                                            | ** ** | **3,672,516**            | ** **    | **5,398,032**               | ** ** |
|                                                                                                                                                            |       |                     |          |                        |       |
| **Property and equipment, net of accumulated  depreciation of $391,314 and $376,951, respectively**                                                             |       | **93,719**               | ** **    | **103,189**                 | ** ** |
|                                                                                                                                                            |       |                     |          |                        |       |
| **Other assets**                                                                                                                                                |       |                     |          |                        |       |
| Patents, net of accumulated amortization of  $133,970 and $127,442, respectively                                                                                |       | **223,799**              | ** **    | **211,901**                 | ** ** |
|                                                                                                                                                            |       |                     |          |                        |       |
| ** **                                                                                                                                                      | ** ** | **$**                    | **3,990,034** | ** **                  | **$**      | **5,713,122** | ** ** |
|                                                                                                                                                            |       |                     |          |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                   |       |                     |          |                        |       |
|                                                                                                                                                            |       |                     |          |                        |       |
| **Current liabilities**                                                                                                                                         |       |                     |          |                        |       |
| Accounts payable and accrued expenses                                                                                                                           | ** ** | **$**                    | **1,059,646** | ** **                  | **$**      | **1,107,111** | ** ** |
| Deferred distributor revenue                                                                                                                                    | ** ** | **1,741,326**            | ** **    | **1,955,563**               | ** ** |
| Deferred contract revenue                                                                                                                                       | ** ** | **72,686**               | ** **    | **95,788**                  | ** ** |
|                                                                                                                                                            |       |                     |          |                        |       |
| Total current liabilities                                                                                                                                       | ** ** | **2,873,658**            | ** **    | **3,158,462**               | ** ** |
|                                                                                                                                                            |       |                     |          |                        |       |
| **Commitments and Contingencies**                                                                                                                               | ** ** | **—**               | ** **    | **—**                  | ** ** |
| ** **                                                                                                                                                      | ** ** | ** **               | ** **    | ** **                  | ** ** |
| **Stockholders’ equity**                                                                                                                                   |       |                     |          |                        |       |
| Common stock, $.01 par value; 20,000,000  shares authorized, 11,838,332 issued and outstanding at March 31, 2005  and December 31, 2004, respectively |       | **118,383**              | ** **    | **118,383**                 | ** ** |
| Additional paid-in capital                                                                                                                                      | ** ** | **18,073,223**           | ** **    | **18,073,223**              | ** ** |
| Accumulated deficit                                                                                                                                             | ** ** | **(17,075,230**          | **)**         | **(15,636,946**             | **)**      |
|                                                                                                                                                            |       |                     |          |                        |       |
| Total stockholders’ equity                                                                                                                                 | ** ** | **1,116,376**            | ** **    | **2,554,660**               | ** ** |
| ** **                                                                                                                                                      | ** ** | **$**                    | **3,990,034** | ** **                  | **$**      | **5,713,122** | ** ** |

 

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

 

3

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**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

 

CONSOLIDATED STATEMENTSOF OPERATIONS (Unaudited)

 
| ** **                                                          | ** ** | **THREE MONTHS ENDED  MARCH 31,** | ** **     |
|---------------------------------------------------------------------|------------|----------------------------------------|----------------|
| ** **                                                          | ** ** | **2005**                               | ** **     | **2004** | ** ** |
| ** **                                                          | ** ** | ** **                             | ** **     | **(Restated)** | ** ** |
| **Revenues**                                                        | ** ** | ** **                             | ** **     | ** ** | ** ** |
| Product sales                                                       | ** ** | **$**                                  | **1,013,787**  | ** ** | **$** | **1,639,463** | ** ** |
| Royalties                                                           | ** ** | **100,953**                            | ** **     | **205,577** | ** ** |
| Consulting                                                          | ** ** | **—**                             | ** **     | **304,484** | ** ** |
|                                                                |       |                                   |           |   |   |
| ** **                                                          | ** ** | **1,114,740**                          | ** **     | **2,149,524** | ** ** |
| **Costs and expenses**                                              | ** ** | ** **                             | ** **     | ** ** | ** ** |
| Product sales                                                       | ** ** | **967,342**                            | ** **     | **1,009,864** | ** ** |
| Research and development                                            | ** ** | **790,140**                            | ** **     | **712,366** | ** ** |
| Selling, general and administrative                                 | ** ** | **799,939**                            | ** **     | **649,336** | ** ** |
|                                                                |       |                                   |           |   |   |
| ** **                                                          | ** ** | **2,557,421**                          | ** **     | **2,371,566** | ** ** |
|                                                                |       |                                   |           |   |   |
| **Operating loss**                                                  | ** ** | **(1,442,681**                         | **)**          | **(222,042** | **)** |
| ** **                                                          | ** ** | ** **                             | ** **     | ** ** | ** ** |
| **Other income (expense)**                                          | ** ** | ** **                             | ** **     | ** ** | ** ** |
| Interest/other income                                               | ** ** | **4,397**                              | ** **     | **5,315** | ** ** |
| Interest expense                                                    | ** ** | **—**                             | ** **     | **—** | ** ** |
| ** **                                                          | ** ** | **4,397**                              | ** **     | **5,315** | ** ** |
|                                                                |       |                                   |           |   |   |
| Net Loss                                                            | ** ** | **$**                                  | **(1,438,284** | **)** | **$** | **(216,727** | **)** |
|                                                                |       |                                   |           |   |   |
| **Basic and diluted loss per common share**                         | ** ** | **$**                                  | **(0.12**      | **)** | **$** | **(0.02** | **)** |
|                                                                |       |                                   |           |   |   |
| **Weighted average common shares outstanding -  basic and diluted** | ** ** | **11,838,332**                         | ** **     | **11,337,781** | ** ** |

 

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

 

4

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** **

**APOGEE TECHNOLOGY, INC. AND SUBSIDIARY**

 

CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)

 
| ** **                                                                              | ** ** | **THREE MONTHS ENDED MARCH 31,** | ** **     |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------|----------------|
| ** **                                                                              | ** ** | **2005**                              | ** **     | **2004** | ** ** |
| ** **                                                                              | ** ** | ** **                            | ** **     | **(Restated)** | ** ** |
| **Cash flows from operations**                                                          |       |                                  |           |   |   |
| Net loss                                                                                | ** ** | **$**                                 | **(1,438,284** | **)** | **$** | **(216,727** | **)** |
| *Adjustments to reconcile net (loss) income  to net cash used in operating activities:* |       |                                  |           |   |   |
| Provision for doubtful accounts                                                         | ** ** | **15,000**                            | ** **     | **5,000** | ** ** |
| Provision for slow moving, excess and  obsolete inventory                               | ** ** | **243,229**                           | ** **     | **(21,107** | **)** |
| Depreciation and amortization                                                           | ** ** | **20,891**                            | ** **     | **23,121** | ** ** |
| *Changes in operating assets and  liabilities:*                                         |       |                                  |           |   |   |
| Accounts receivable                                                                     | ** ** | **172,574**                           | ** **     | **296,543** | ** ** |
| Inventories                                                                             | ** ** | **100,103**                           | ** **     | **40,012** | ** ** |
| Prepaid expenses and other current assets                                               | ** ** | **56,529**                            | ** **     | **(26,746** | **)** |
| Accounts payable and accrued expenses                                                   | ** ** | **(47,465**                           | **)**          | **(541,328** | **)** |
| Deferred product revenue                                                                | ** ** | **(214,237**                          | **)**          | **(403,544** | **)** |
| Deferred contract revenue                                                               | ** ** | **(23,103**                           | **)**          | **(50,000** | **)** |
|                                                                                    |       |                                  |           |   |   |
| Net cash used in operating activities                                                   | ** ** | **(1,114,763**                        | **)**          | **(894,776** | **)** |
|                                                                                    |       |                                  |           |   |   |
| **Cash flows from investing activities**                                                |       |                                  |           |   |   |
| Purchases of property and equipment                                                     | ** ** | **(4,894**                            | **)**          | **(7,647** | **)** |
| Patent costs                                                                            | ** ** | **(18,426**                           | **)**          | **(15,483** | **)** |
| ** **                                                                              | ** ** | ** **                            | ** **     | ** ** | ** ** |
| Net cash used in investing activities                                                   | ** ** | **(23,320**                           | **)**          | **(23,130** | **)** |
|                                                                                    |       |                                  |           |   |   |
| **Cash flows from financing activities**                                                |       |                                  |           |   |   |
| Proceeds from issuances of common stock,  net of issuance expenses                      | ** ** | **—**                            | ** **     | **80,703** | ** ** |
|                                                                                    |       |                                  |           |   |   |
| Net cash provided by financing activities                                               | ** ** | **—**                            | ** **     | **80,703** | ** ** |
|                                                                                    |       |                                  |           |   |   |
| **Decrease in cash and cash equivalents**                                               | ** ** | **(1,138,083**                        | **)**          | **(837,203** | **)** |
|                                                                                    |       |                                  |           |   |   |
| Cash and cash equivalents - beginning                                                   | ** ** | **1,886,883**                         | ** **     | **2,524,209** | ** ** |
|                                                                                    |       |                                  |           |   |   |
| **Cash and cash equivalents - ending**                                                  | ** ** | **$**                                 | **748,800**    | ** ** | **1,687,006** | ** ** |
|                                                                                         |            |                                       |                |  |  |  |  |

 

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

 

5

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**APOGEETECHNOLOGY, INC. AND SUBSIDIARY**

 

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2005 AND RESTATEDMARCH 31, 2004

 

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

 

***The Company***

 

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

 

***Basis of Presentation***

 

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

 

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

 

***Liquidity***

 

TheCompany’s consolidated financial statements have been prepared assuming theCompany will continue as a going concern. Because the Company has had recurring losses, there is substantial doubtas to the Company’s ability to continue as a going concern. The Companybelieves that its current working capital will be sufficient to fund itscapital and operational requirements at least through June 30, 2006.  See Note 13 – Subsequent Events - $2 millionfinancing. 

 

Thecontinuance of the Company is highly dependent upon its ability to successfullydevelop and market both its DDX digital amplifier and MEMS technologies andraise additional funds for such purposes. The Company may also consider thesale of assets to raise additional funds. There can be no assurance, however, that the Company will be able toraise the funds that it needs to continue its operations or that additionalfunds will be available to the Company on acceptable terms, if at all.  The financial statements do not include anyadjustments to reflect the possible future effects of recoverability andclassification of assets or the amounts and classification of liabilities thatmay result from the possible inability of the Company to continue as a goingconcern.

 

InMay 2005, the Company received proceeds from unsecuredinterest-bearing loans in the amounts of $250,000 from David Spiegel, ashareholder and $25,000 from Herbert Stein, Chief Executive Officer, Presidentand Chairman of the Board. These loans are payable upon demandand are not subject to any premium or penalty for prepayment. The loaninterest rate is 6% per annum, payable monthly in arrears on the outstandingbalance.

 

SeeNote 13 - Subsequent Events - for information on the $2 million financingcompleted on August 11, 2005.

 

6

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

 

***RevenueRecognition***

 

The Company recognizes revenue in accordance with Securities andExchange Commission Staff Accounting Bulletin No. 104 (“SAB 104”), “RevenueRecognition in Financial Statements: Revenue Recognition”, which states thatrevenue should be recognized when the following revenue recognition criteriaare met:  (1) persuasive evidence ofan arrangement exists; (2) the product has been shipped and the customertakes ownership and assumes the risk of loss; (3) the selling price isfixed or determinable; and (4) collection of the resulting receivable isreasonably assured.  The followingpolicies apply to the Company’s two major product sales categories for revenuerecognition.  Sales to end users:  Revenue is recognized under the Company’sstandard terms and conditions of sale, title and risk of loss transfer to thecustomer at the time products are shipped either directly to the customer orthe customer’s representative/freight forwarder.  Sales to Distributors:  From time to time the Company providescertain incentives such as stock rotation, price protection and otherincentives to its Distributors.  As aresult of these incentives, the Company has adopted a policy of deferring recognitionof revenue until the distributor sells products to its customers based uponreceipt of point-of-sale reports from the distributors. See Note 12 -Restatement.  The Company accrues theestimated cost of post-sale obligations including product warranty returns,based on historical experience.  To datethe Company has experienced minimal warranty returns and has recorded awarranty provision of $10,000.

 

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

 

***Loss Per Share***

 

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

 

***Research andDevelopment***

 

Costs for research and development are expensed asincurred.

 

***Inventorie******s***

 

Inventories are stated at the lower of coston a first-in, first-out basis or market. This policy requires the Company to make estimates regarding the marketvalue of the Company’s inventory, including an assessment of excess or obsoleteinventory.  The Company determines excessand obsolete inventory based on an estimate of the future demand and estimatedselling prices for the Company’s products within a specified time horizon,generally 12 to 24 months. The estimates the Company uses for expected demandare also used for near-term capacity planning and inventory purchasing and areconsistent with the Company’s revenue forecasts.  Actual demand and market conditions maydiffer from those projected by the Company’s management.  If the Company’s unit demand forecast is lessthat the Company’s current inventory value, the Company will be required totake additional excess inventory charges or write-downs to net realizable valuewhich will decrease the Company’s gross margin and net operating results in thefuture.  During the three months ended March 31,2005, the Company recorded a provision for excess inventory of approximately$243,000 to account for slow moving, excess and obsolete inventory both atApogee’s warehouse and inventory at the distributors, as well as inventories tobe delivered on non-cancelable purchase commitments***.***

 

7

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***Purchasecommitment losses***

 

TheCompany accrues for estimated losses on non-cancelable purchase orders.  The estimated losses result from anticipatedfuture sale of products for sales prices less than the estimated cost tomanufacture.  For the three months ended March 31,2005, the Company recorded an additional $150,000 (as part of the totalprovision of $243,000) excess and obsolescence provision against non-cancelablepurchase commitments of approximately $934,000.

 

***Property andEquipment***

 

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

 

***Patents***

 

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

 

***Use of Estimatesin Financial Statements***

 

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

 

***Cash and Cash Equivalents***

 

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

 

***Accounts Receivable***

 

TheCompany carries its accounts receivable from direct customers at cost less anallowance for doubtful accounts to ensure that trade receivables are carried atnet realizable value.  On a periodicbasis, the Company evaluates the collectibility of its accounts receivable on avariety of factors, including length of time receivables are past due,indication of customer willingness to pay, significant one-time events andhistorical experience. An additional reserve for individual accounts isrecorded when the Company becomes aware of a customer’s inability to meet itsfinancial obligations, 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 maybe required.  Accounts receivable aregenerally considered past due if any portion of the receivable balance isoutstanding for more than 90 days.   Ifcircumstances related to the Company’s customers change, estimates of therecoverability of receivables would be further adjusted.

 

***Fair value offinancial instruments***

 

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

 

8

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

 

The Company has adopted only the disclosure provisions of FinancialAccounting Standard No. 123, “Accounting For Stock-Based Compensation”(FAS 123).  It applies APB Opinion No. 25,“Accounting For Stock Issued To Employees”, and related interpretations inaccounting for its stock-based compensation plan and does not recognizecompensation expense for this plan other than for certain options granted in2001.

** **

**The following tables illustrate the effect on netloss and loss per share if the Company had applied the fair value recognitionprovisions of FAS 123 to stock-based employee compensation.**

 
| ** **                     | ** **                                                                                                  | **Three Months Ended  March 31,** | ** **     |
|--------------------------------|-------------------------------------------------------------------------------------------------------------|----------------------------------------|----------------|
| ** **                     | ** **                                                                                                  | **2005**                               | ** **     | **2004** | ** ** |
| ** **                     | ** **                                                                                                  | ** **                             | ** **     | **(Restated)** | ** ** |
|                           |                                                                                                        |                                   |           |   |   |
| Net loss, as reported          | ** **                                                                                                  | **$**                                  | **(1,438,284** | **)** | $ | (216,727 | ) |
|                           |                                                                                                        |                                   | ** **     |   |   |
| Deduct:                        | Total  stock-based employee compensation expense determined under fair value based  method for all awards * |                                   | **(531,775**   | **)** | (689,532 | ) |
|                           |                                                                                                        |                                   | ** **     |   |   |
| Pro-forma net loss **          | ** **                                                                                                  | **$**                                  | **(1,970,059** | **)** | $ | (906,259 | ) |
|                           |                                                                                                        |                                   | ** **     |   |   |
| Loss per share:                |                                                                                                        |                                   | ** **     |   |   |
|                           |                                                                                                        |                                   | ** **     |   |   |
| As reported, basic and diluted | ** **                                                                                                  | **$**                                  | **(0.12**      | **)** | $ | (0.02 | ) |
|                           |                                                                                                        |                                   | ** **     |   |   |
| Pro-forma, basic and diluted   | ** **                                                                                                  | **$**                                  | **(0.17**      | **)** | $ | (0.08 | ) |
|                                |                                                                                                             |                                        |                |  |  |  |  |  |

 

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*****                           All awards refers to awardsgranted, modified, or settled in fiscal periods beginning after December 15,1994 - awards for which the fair value was required to be measured under FAS123.

 

********                   **Forpurposes of pro-forma disclosures, the estimated fair value of the options isamortized over the options’ vesting period. Pro-forma information regarding earnings and per share information isrequired by FAS 123, and has been determined as if the Company had accountedfor its employee stock options under the fair value method of thatStatement.  The fair value of theseoptions was estimated at the date of grant using a Black-Scholes option pricingmodel for years subsequent to 2000. Prior to 2001, the fair value of the options was valued using theminimum value method.

 

9

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

 

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

 
| ** **                                                   | ** ** | **March 31,  2005** | ** **    | **December 31,  2004** | ** ** |
|--------------------------------------------------------------|------------|--------------------------|---------------|-----------------------------|------------|
|                                                         | ** ** | **(Unaudited)**          | ** **    | ** **                  | ** ** |
|                                                         |       |                     |          |                        |       |
| Raw materials                                                | ** ** | **$**                    | **23,624**    |                        | $          | 24,539 |   |
| Finished goods                                               | ** ** | **2,223,303**            |          | 2,143,530                   |       |
| Finished goods held at distributors                          | ** ** | **1,555,995**            |          | 1,734,955                   |       |
|                                                         |       |                     |          |                        |       |
| ** **                                                   |       | **$**                    | **3,802,922** |                        | $          | 3,903,024 |   |
| Less reserve for slow moving, excess and  obsolete inventory |       | **(1,420,945**           | **)**         | (1,177,716                  | )          |
|                                                         |       |                     |          |                        |       |
| Net Inventory                                                | ** ** | **$**                    | **2.381,977** |                        | $          | 2,725,308 |   |

 

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

 

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

 
| ** **                    | ** ** | **March 31,  2005** | ** **  | **December 31,  2004** | ** ** |
|-------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
| ** **                    | ** ** | **(Unaudited)**          | ** **  | ** **                  | ** ** |
|                          |       |                     |        |                        |       |
| Equipment                     | ** ** | **$**                    | **391,764** |                        | $          | 390,342 |   |
| Software                      | ** ** | **35,634**               |        | 35,634                      |       |
| Furniture and fixtures        | ** ** | **34,681**               |        | 31,210                      |       |
| Leasehold improvements        | ** ** | **22,954**               |        | 22,954                      |       |
|                          |       |                     |        |                        |       |
| ** **                    |       | **$**                    | **485,033** |                        | $          | 480,140 |   |
| Less accumulated depreciation | ** ** | **(391,314**             | **)**       | (376,951                    | )          |
|                          |       |                     |        |                        |       |
| ** **                    |       | **$**                    | **93,719**  |                        | $          | 103,189 |   |

 

Depreciation expense was$14,363 for the three months ended March 31, 2005.

 

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

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

 

10

----

 

**6.****                          AccruedExpenses**

 
| ** **                            | ** ** | **March 31,  2005** | ** **  | **December 31,  2004** | ** ** |
|---------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
| ** **                            | ** ** | **(Unaudited)**          | ** **  | ** **                  | ** ** |
|                                  |       |                     |        |                        |       |
| Accrued audit and accounting expenses | ** ** | **$**                    | **153,800** |                        | $          | 165,000 |   |
| Accrued legal expenses                | ** ** | **11,463**               |        | 37,000                      |       |
| Other accrued expenses                | ** ** | **42,600**               |        | 10,000                      |       |
|                                  |       |                     |        |                        |       |
| ** **                            |       | **$**                    | **207,863** |                        | $          | 212,000 |   |

 

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

 

During September 2004, the Company entered intoa funding agreement with United Binational Industrial Research and Development(“BIRD”) Foundation of Israel.  Thisagreement will provide funds to the Company for industrial research anddevelopment activities.  The agreementwill provide up to a maximum of $560,000 of which the Company will receive$280,000, and another partner in the agreement will receive the remainder.  The Company has received $101,379 in deferredcontract revenue and recorded in the three month period ended March 31,2005, $23,101 as an offset to research and development expenses.

 

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

 

***Stock Options***

 

**During the three monthsended**March 31, 2005, the Board of Directors awarded to certain employeesoptions to purchase 30,000 shares at exercise prices ranging from $2.90 to$4.46 per share.  These options weregranted under the 1997 Employee, Director and Consultant Stock OptionPlan.  The options vest over five yearsbeginning at the first anniversary of the date of grant.

** **

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

 

The Company rents its facility from an entity controlled by astockholder for $4,400 per month pursuant to a lease that expires December 31,2005. See Note 13 – Subsequent Event – related party.

 

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

 

On February 13, 2001, the Company signed an exclusive licenseagreement with ST Microelectronics NV (“ST”) of the Netherlands.  The agreement calls for ST to use certainintellectual property rights owned or controlled by the Company tocommercialize and sell related products utilizing such technology.  In consideration for this license, ST paid tothe Company a one-time license fee of $1.6 million in cash and a $400,000credit for future design services completed in 2004.

 

The Company will also receive royalties based on certain formulas, asdefined in the agreement.  This agreementhas no expiration date; however, either party may cancel the agreement uponadvance notice in certain circumstances as defined in the agreement.  Total royalties received under this Agreementwere approximately $101,000 and $206,000 for the three months ended March 31,2005 and restated March 31, 2004, respectively.

 

On May 3, 2005, the Company signed an amendment to the licenseagreement with STMicroelectronics, whereby; 1) the DDX technology licenserights were changed from an exclusive license to a non-exclusive license, 2)the license royalty terms were modified and 3) terms related to Apogee interesttransfers were modified. The effective date for terms 1 and 3 above was January 1,2005 and for item 2 was January 1, 2004.

 

11

----

 

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

 

**During the three months ended March 31,2005, the Company derived approximately 72% of its total revenue from threedistributors.**

** **

**During the three months ended March 31,2005, the Company derived approximately 79% of product revenue from threedistributors.**

** **

**During the restated three monthsended**March 31, 2004, the Company derived approximately 71% (20% fromone distributor and 51% from two end users) of its total revenue from threecustomers.

** **

**During the restated three monthsended March 31 2004, the Company derived approximately 80% of its productrevenue from three distributors.**

** **

**Four of the Company’s customersaccounted for approximately 87% of the total accounts receivable balance at March 31,2005.**

** **

Three of the Company’s customers accounted forapproximately 81% of the total accounts receivable balance at March 31, 2004.

 

Substantially all of theCustomer sales were to end users or distributors located in Asia and Europe forboth the 3-month periods ended March 31, 2005 and restated March 31,2004.

 

**Two of the Company’s majorvendors accounted for approximately 98% of total purchases for the three monthsended March 31, 2005.**

** **

Two of the Company’s major vendors accounted forapproximately 98% of total purchases for the three months ended March 31, 2004.

 

**The Company maintains accountswith financial institutions.  Balancesusually exceed the maximum coverage ($100,000) provided by the Federal DepositInsurance Corporation on insured depositor accounts.**

 

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

 

**Restatement of Previously Reported Quarterly Financial Information**

** **

Asa result of management’s decision to change the accounting method forrecognizing product revenue to distributors to a sell through or point of salemethod and the internal investigation concerning the circumstances surroundingthe appropriate accounting for product revenue, the Audit Committee of theBoard of Directors has determined that the Company restate certain financialinformation previously reported in the Company’s Form 10-QSB for thequarters ended March 31, 2004, June 30, 2004 and September 30,2004.

 

The following table provides a reconciliation of amounts previouslyreported in the Company’s Form 10-QSB for the quarter ended March 31,2004 with amounts previously adjusted for the restatement as a result of thechange in accounting policy and as a result of the Audit Committee’sinvestigation.  In reviewing the restatedConsolidated Statement of Operations, it should be taken into considerationthat the restated financial information reflects unaudited adjustments.

 

12

----

 
| **BALANCE  SHEET**  |
|---------------------|
| **(in  thousands)** |

 
| ** **                                    | ** ** | **March 31, 2004 (Unaudited)** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|
| ** **                                    | ** ** | **Previously  Reported (1)**        | ** ** | **Restatement  Adjustment (2)** | ** ** | **Restated  Total** | ** ** |
| **ASSETS**                                    |       |                                |       |   |   |   |   |
|                                          |       |                                |       |   |   |   |   |
| **Current assets**                            |       |                                |       |   |   |   |   |
| Cash and cash equivalents                     | ** ** | **$**                               | **1,685**  | ** ** | **$** | **—** | ** ** | **$** | **1,685** | ** ** |
| Accounts receivable, net                      | ** ** | **3,682**                           | ** ** | **(2,163** | **)** | **1,519** | ** ** |
| Inventories, net                              | ** ** | **602**                             | ** ** | **2,248** | ** ** | **2,850** | ** ** |
| Prepaid expenses and other current assets     | ** ** | **204**                             | ** ** | **—** | ** ** | **204** | ** ** |
| Deferred tax asset                            | ** ** | **195**                             | ** ** | **(195** | **)** | **—** | ** ** |
|                                          |       |                                |       |   |   |   |   |
| Total current assets                          | ** ** | **6,368**                           | ** ** | **(110** | **)** | **6,258** | ** ** |
|                                          |       |                                |       |   |   |   |   |
| **Property and equipment, net**               | ** ** | **118**                             | ** ** | **0** | ** ** | **118** | ** ** |
|                                          |       |                                |       |   |   |   |   |
| **Other assets**                              |       |                                |       |   |   |   |   |
| Patent, net                                   | ** ** | **98**                              | ** ** | **—** | ** ** | **98** | ** ** |
| Other intangible assets                       | ** ** | **62**                              | ** ** | **(59** | **)** | **3** | ** ** |
|                                          |       |                                |       |   |   |   |   |
| ** **                                    | ** ** | **$**                               | **6,646**  | ** ** | **$** | **(169** | **)** | **$** | **6,477** | ** ** |
|                                          |       |                                |       |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |       |                                |       |   |   |   |   |
|                                          |       |                                |       |   |   |   |   |
| **Current liabilities**                       |       |                                |       |   |   |   |   |
| Accounts payable and accrued expenses         | ** ** | **$**                               | **1,012**  | ** ** | **$** | **12** | ** ** | **$** | **1,024** | ** ** |
| Deferred distributor revenue                  | ** ** | **—**                          | ** ** | **1,556** | ** ** | **1,556** | ** ** |
| Deferred contract revenue                     | ** ** | **—**                          | ** ** | **—** | ** ** | **—** | ** ** |
|                                          |       |                                |       |   |   |   |   |
| Total current liabilities                     | ** ** | **1,012**                           | ** ** | **1,568** | ** ** | **2,580** | ** ** |
|                                          |       |                                |       |   |   |   |   |
| **Stockholders’ equity**                 |       |                                |       |   |   |   |   |
| Common stock                                  | ** ** | **113**                             | ** ** | **—** | ** ** | **113** | ** ** |
| Additional paid-in capital                    | ** ** | **16,252**                          | ** ** | **—** | ** ** | **16,252** | ** ** |
| Accumulated deficit                           | ** ** | **(10,731**                         | **)**      | **(1,737** | **)** | **(12,468** | **)** |
|                                          |       |                                |       |   |   |   |   |
| Total stockholders’ equity               | ** ** | **5,634**                           | ** ** | **(1,737** | **)** | **3,897** | ** ** |
|                                          |       |                                |       |   |   |   |   |
| ** **                                    | ** ** | **$**                               | **6,646**  | ** ** | **$** | **(169** | **)** | **$** | **6,477** | ** ** |

 

----

(1) Aspreviously reported in the Company’s Quarterly Report on Form 10-QSB forthe quarter ended March 31, 2004.

(2) Seeparagraph following restatement tables for a description of the restatementadjustments.

 

13

----

 

CONSOLIDATEDSTATEMENT OF OPERATIONS

(inthousands, except per share data)

 
| ** **                                                          | ** ** | **Three Months Ended March 31, 2004 (Unaudited)** | ** **  |
|---------------------------------------------------------------------|------------|--------------------------------------------------------|-------------|
| ** **                                                          | ** ** | **Previously  Reported (1)**                           | ** **  | **Restatement  Adjustment (2)** | ** ** | **Restated  Total** | ** ** |
| **Revenues**                                                        |       |                                                   |        |   |   |   |   |
| Product sales                                                       | ** ** | **$**                                                  | **1,697**   | ** ** | **$** | **(57** | **)** | **$** | **1,640** | ** ** |
| Royalties                                                           | ** ** | **375**                                                | ** **  | **(169** | **)** | **206** | ** ** |
| Consulting                                                          | ** ** | **254**                                                | ** **  | **50** | ** ** | **304** | ** ** |
|                                                                |       |                                                   |        |   |   |   |   |
| ** **                                                          | ** ** | **2,326**                                              | ** **  | **(176** | **)** | **2,150** | ** ** |
|                                                                |       |                                                   |        |   |   |   |   |
| **Costs and expenses**                                              |       |                                                   |        |   |   |   |   |
| Product sales                                                       | ** ** | **1,114**                                              | ** **  | **(103** | **)** | **1,011** | ** ** |
| Research and development                                            | ** ** | **711**                                                | ** **  | **—** | ** ** | **711** | ** ** |
| Selling, general and administrative                                 | ** ** | **819**                                                | ** **  | **(169** | **)** | **650** | ** ** |
|                                                                |       |                                                   |        |   |   |   |   |
| ** **                                                          | ** ** | **2,644**                                              | ** **  | **(272** | **)** | **2,372** | ** ** |
|                                                                |       |                                                   |        |   |   |   |   |
| **Operating loss**                                                  | ** ** | **(318**                                               | **)**       | **96** | ** ** | **(222** | **)** |
|                                                                |       |                                                   |        |   |   |   |   |
| **Other (expense) income**                                          |       |                                                   |        |   |   |   |   |
| Interest expense                                                    | ** ** | **—**                                             | ** **  | **—** | ** ** | **—** | ** ** |
| Interest income                                                     | ** ** | **5**                                                  | ** **  | **—** | ** ** | **5** | ** ** |
|                                                                |       |                                                   |        |   |   |   |   |
| ** **                                                          | ** ** | **5**                                                  | ** **  | **—** | ** ** | **5** | ** ** |
|                                                                |       |                                                   |        |   |   |   |   |
| **Net Income (Loss) before Taxes**                                  | ** ** | **(313**                                               | **)**       | **96** | ** ** | **(217** | **)** |
|                                                                |       |                                                   |        |   |   |   |   |
| **Income Tax Benefit**                                              | ** ** | **—**                                             | ** **  | **—** | ** ** | **—** | ** ** |
|                                                                |       |                                                   |        |   |   |   |   |
| **Net (Loss) Income**                                               | ** ** | **(313**                                               | **)**       | **96** | ** ** | **(217** | **)** |
|                                                                |       |                                                   |        |   |   |   |   |
| Accumulated deficit - beginning                                     | ** ** | **(10,418**                                            | **)**       | **(1,833** | **)** | **(12,251** | **)** |
|                                                                |       |                                                   |        |   |   |   |   |
| **Accumulated deficit - ending**                                    | ** ** | **$**                                                  | **(10,731** | **)** | **$** | **(1,737** | **)** | **$** | **(12,468** | **)** |
|                                                                |       |                                                   |        |   |   |   |   |
| **Basic and diluted loss per common share**                         | ** ** | **$**                                                  | **(0.03**   | **)** | **$** | **0.01** | ** ** | **$** | **(0.02** | **)** |
|                                                                |       |                                                   |        |   |   |   |   |
| **Weighted average common shares outstanding -  basic and diluted** |       | **11,338**                                             | ** **  |   | ** ** | **11,338** | ** ** |

 

----

(1) As previouslyreported in the Company’s Quarterly Report on Form 10-QSB for thequarter ended March 31, 2004.

(2) Seeparagraph following restatement tables for a description of the restatementadjustments.

 

14

----

 

**Restatement of Previously Reported Quarterly Financial Information**

** **

**The restated numbers reflect thechange in recognition of reporting of distributor revenue to a sell through orpoint of sale method of accounting. Based on reports from the Company’s distributors, the restated balancesheet reflects the inventory held at distributors and related shipments are nowreported as deferred distributor revenue. The related trade receivable was also adjusted to reflect thischange.  In addition, it was determinedthat since the restated fiscal year ended December 31, 2003 was notprofitable the deferred tax asset was no longer applicable. The restatedbalance sheet reflects this change.   Aspart of the overall review by management, it was determined that the originalAMEX listing fee should be expensed and not carried on the book as an “OtherIntangible Asset”.  This reclassificationis reflected in the reclassed balance sheets for FY 2004.  Royalties received from STMicroelectronicshave been adjusted to reflect the net effect of the various discounts given toST for specific customers originally reported under SG & A.  Consulting revenue has been adjusted toreflect completion of actual work as opposed to when funds were received.  Lastly, Apogee determined that inventoryreserves should be maintained and as such the restated income statementreflects reserves for both Apogee held inventory and inventory held at thedistributors.**

** **

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

 

InMay 2005, the Company received the proceeds from unsecured interestbearing loans in the amounts of $250,000 from David Spiegel, a shareholderand $250,000 from Herbert Stein, Chief Executive Officer, President andChairman of the Board. These loans are payable upon demand andare not subject to any premium or penalty for prepayment. The loaninterest rate is 6% per annum, payable monthly in arrears on the outstandingbalance.

 

OnJuly 22, 2005, the Company signed a consulting agreement with asemiconductor company to perform audio product development and relatedmarketing and sales activities.   Under the agreement, the Companywill receive payments of $205,000 per month for specificdeliverables.  The consulting fees paid to the Company under theagreement are subject to reimbursement and thus willbe recorded as a cash advance until such reimbursementconditions become definitive. The initial term of the consultingagreement is one month and can be extended by mutual consent.

 

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

 

15

----

 

**ITEM 2.  MANAGEMENT’S****DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION 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, 2005 and restated March 31,2004 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, 2004 including the restated year ended December 31,2003. The Company does not intend to update any such forward-lookingstatements.

 

**OVERVIEW**

 

The Companydesigns, develops, and markets silicon based products incorporating proprietarytechnologies.  The Company’s patentedall-digital, high efficiency Direct Digital Amplification (“DDX®”) technologyIntegrated Circuits (“ICs”) are used in a range of audio applicationsincluding:  home theater systems, poweredspeakers, car audio, commercial audio, and PC multi-media. The Company is developing new System-on-Chip(“SOC”) products using its analog and digitalcircuit designs and Micro-Electromechanical Systems (“MEMS”) technology for the consumer, automotive, communications and medicalmarkets. At the appropriate time, the Company will segment the financialreporting of the MEMS division.  Under alicensing agreement with STMicroelectronics NV (“ST”), the Company isdeveloping and providing intellectual property to be used in royalty bearingproducts produced by ST.  In addition,the Company is working under a development agreement with ST to develop andmarket new semiconductor products that leverage Apogee’s DDX technology and ST’sintellectual property and semiconductor design, development and manufacturingcapability. The Company generates revenue from the saleof ICs, IC related products, consulting work for third parities as well asroyalties and license fees earned under its agreement with ST and other thirdparties.  The Company markets itsproducts using a worldwide network of direct sales staff, independent salesrepresentatives and distributors.  The Company incurred a net loss ofapproximately $1.4 million or ($0.12) per share for the three months ended March 31,2005, as compared to a restated net loss of approximately $217,000 of ($0.02)per share for the restated three months ended March 31, 2004.  As of March 31, 2005, the Company had anaccumulated deficit of approximately $17 million, as compared to a deficit ofapproximately $15.6 million at December 31, 2004.  The Company’s net losses and accumulateddeficit (since 1995) result primarily from research costs associated with theCompany’s efforts to develop and market its DDX technology.  The Company employed 34 people as of March 31,2005.

 

During the three-monthperiod ended March 31, 2005, the Company derived approximately 72% of itstotal revenue and approximately 79% of product revenue from three distributors,respectively.   The Company utilizes anetwork of sales representatives and distributors, as well as sales offices inHong Kong, Taiwan, China and Japan to support the Company’s worldwide sales andmarketing activities.

 

**SELECTEDCONSOLIDATED FINANCIAL DATA**

 

Thefollowing selected financial data for the three-month period ended March 31,2005 and restated March 31, 2004 have been derived from the Company’sunaudited financial statements.  Anytrends reflected by the following table may not be indicative of futureresults.

 

16

----

 

| ** **                               | ** ** | **For the Three Months ended  March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                       | ** ** | **2004** | ** ** |
| ** **                               | ** ** | ** **                                     | ** ** | **(Restated)** | ** ** |
| Statement of Operations Data:            | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Revenue                                  |       | $                                              | 1,114,740  |   | $ | 2,149,524 |   |
| Costs and expenses                       |       | 2,557,421                                      |       | 2,371,566 |   |
| Other income (expense)                   |       | 4,397                                          |       | 5,315 |   |
| Net Loss                                 |       | $                                              | (1,438,284 | ) | $ | (216,727 | ) |
|                                     |       |                                           |       |   |   |
| Shares Outstanding                       |       | 11,838,332                                     |       | 11,337,781 |   |
|                                     |       |                                           |       |   |   |
| Balance Sheet Data:                      |       |                                           |       |   |   |
| Total Assets                             |       | $                                              | 3,990,034  |   | $ | 6,477,698 |   |
| Stockholders’ equity                |       | $                                              | 1,116,376  |   | $ | 3,897,111 |   |
| Loss per share (basic and fully diluted) |       | $                                              | (0.12      | ) | $ | (0.02 | ) |

 

**RESULTS OFOPERATIONS OF THE COMPANY**

 

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

 

| ** **                        | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|-----------------------------------|------------|------------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                       | ** ** | **2004** | ** ** |
| ** **                        | ** ** | ** **                                     | ** ** | **(Restated)** | ** ** |
|                              |       |                                           |       |   |   |
| Product Sales                     |       | 90.94                                          | %          | 76.27 | % |
| Royalties                         |       | 9.06                                           |       | 9.56 |   |
| Consulting/Licensing              |       | 0.00                                           |       | 14.17 |   |
|                              |       |                                           |       |   |   |
| Cost of Sales                     |       | 86.78                                          |       | 46.98 |   |
| Research and Development          |       | 70.88                                          |       | 33.14 |   |
| Sales, General and Administrative |       | 71.76                                          |       | 30.21 |   |
|                              |       |                                           |       |   |   |
| Operating Loss                    |       | (129.42                                        | )%         | (10.33 | )% |
| Other Income (Expense)            |       | 0.39                                           |       | 0.25 |   |
|                              |       |                                           |       |   |   |
| Net Loss                          |       | (129.03                                        | )%         | (10.08 | )% |

 

Three Months Ended March 31,2005 compared with restated Three Months Ended March 31, 2004.

 

Revenue

 

**The Company derives its revenue from three sources: (1) productsales, which consist of merchandise sales made either directly to originalequipment manufacturers or through Point of Sale (POS) by distributors.  All shipments are fulfilled from the Company’swarehouses in Hong Kong and/or Norwood, Massachusetts and revenue is reportednet of returns;**(2) royalty revenue, which consistsof royalties paid by STMicroelectronics under the terms of the licensingagreement signed in February 2001 and (3) consulting income relatedto the development of custom ICs for STMicroelectronics and other third partieswho are developing DDX and non-DDX based solutions.  Should it be determined that segmentreporting is required, both revenue recognized and expenses incurred by the MEMS division willbe segmented at the appropriate time.  See Note 2 of the financial statements – Revenue Recognition.

 

17

----

 

Totalrevenue decreased by approximately 48% or $1.0 million to $1.1 million for thethree months ended March 31, 2005 from approximately $2.1 million for therestated three months ended March 31, 2004.

 

Revenuefrom the sale of the Company’s products, consisting of semiconductors, as wellas related evaluation and reference boards, decreased by approximately 38% or$600,000 to approximately $1.0 million for the three months ended March 31,2005 from approximately $1.6 million for the restated three months ended March 31,2004. This decrease in product revenue was primarily due to a reduction insales of the Company’s semiconductor products. Sell through by distributors in 2005 increased slightly over 2004. Mostof the approximately $600,000 decrease in total product sales related tounexpected weakness in demand from its key customers.

 

Revenuefrom non-product related items accounted for approximately 9% of total revenuefor the three months ended March 31, 2005, compared to revenue fromnon-product related items of approximately 24% for the restated three monthsended March 31, 2004.  During thethree months ended March 31, 2005, the Company recorded royalties underthe ST agreement of approximately $101,000, compared to royalties ofapproximately $206,000 for the restated three months ended March 31,2004.  This represents a year-to-yeardecrease of approximately $105,000 or 51%.  During the first quarter ended March 31, 2005, the Company did notrecord any consulting/licensing revenue. For the restated three months ended March 31, 2004 the Companyrecorded approximately $304,000 of consulting/licensing revenue.

 

Total revenue for the three months ended March 31, 2005 andrestated 2004 consisted of:

 
| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
|            |       |     |       |     |       |
| Product Revenue |       | $        | 1,013,787  |     | $          | 1,639,463 |   |
| Royalties       |       | 100,953  |       | 205,577  |       |
| Consulting      |       | —   |       | 304,484  |       |
|            |       |     |       |     |       |
| Total:          |       | $        | 1,114,740  |     | $          | 2,149,524 |   |

 

Costof Revenue

 

Costof revenue was approximately $967,000 or 87% of revenue for the three monthsended March 31, 2005 compared to approximately $1 million or 47% ofrevenue for the restated three months ended March 31, 2004, a decrease of$33,000 or 3%.  Cost of revenue primarilyconsists of purchasing finished semiconductor chips and costs associated withassembly, testing and shipping of those products as well as customs and storagefees associated with warehousing a large portion of the Company’s semiconductorproducts in Asia.  In addition, theCompany has established reserves for slow moving, excess and obsoleteinventories held at Apogee and at its distributors.  These provisions are reported as part of theCost of Revenue.  Provisions for thethree months ended March 31, 2005 were approximately $243,000 compared toa reduction in the reserve of approximately $21,000 for the restated threemonths ended March 31, 2004.  Thisdecrease in cost of revenue is primarily attributable to decreased sales of theCompany’s semiconductor products as well as increased reserves for slow moving,excess and obsolete inventory.  For thethree months ended March 31, 2005, the Company had gross margins beforeinventory reserve provisions of approximately 29% compared to 37% in the sameperiod in 2004, as restated. This was due to price erosion on the sale ofexisting products, not offset by sales of higher margin newer products.Although the Company increased its reserve, no inventory write-off was recordedfor either the three months ended March 31, 2005 or the restated threemonths ended March 31, 2004.  TheCompany is monitoring its inventory and as of March 31, 2005, the Companybelieves the reserves in place are adequate but will continue to re-evaluate ona quarterly basis or more frequently if market conditions warrant.

 

Research and Development (“R&D”)Expenses

 

Research and developmentexpenses consist primarily of salaries and related expenses in the design,development and technical support of the Company’s products in addition tosupport of current and potential customers in the development of consumerproducts utilizing DDX semiconductor products as well as the development ofMEMS technology.  Research anddevelopment expenses for the three months ended March 31, 2005 wereapproximately $790,000, an increase of approximately $78,000 or 11% fromapproximately $712,000 for the restated three months ended March 31,2004.  The increase in the R & Dexpense was primarily due to the acquisition of the MEMS Division and increasedhuman resource costs partially offset by a reduction in the use of vendors.  Costs related to human resources for Researchand Development increased to approximately $558,000, an increase ofapproximately $91,000 or 20% from approximately $467,000 for the restated threemonths ended March 31, 2004.  In May of2004 the Company acquired the intellectual property and other intangibles fromStandard MEMS, Inc.  In addition,the Company hired

 

18

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several former key employeesof Standard MEMS, Inc.  This newdivision accounted for approximately $138,000 in human resource expenditure forthe three months ended March 31, 2005. During the three months ended March 31, 2005 fees paid to vendorswere approximately $89,000, a decrease of approximately $104,000 or 54% fromthe restated three months ended March 31, 2004 of $193,000.  At March 31, 2005, the Company’sresearch and development team consisted of 22 engineers and technical supportstaff compared to 20 for the same period in 2004.  During the three months ended March 31,2005 the Company introduced two new semiconductor products, the DDXi-2051 andthe DDXi-2161 all-in-one, digital and power amplifier products. The Companycontinues to invest in the development of its next generation IC’s and MEMSdevices, as well as, the continuation of support to both existing and potentialcustomers.  Due to the technical natureof the Company’s products, engineering and design support are critical parts ofthe Company’s strategy during both the development of its products and thesupport to its customers from product design to final production.  Management anticipates that it will continueto commit resources to research, development and design activities.  It expects these expenses to increase.

 

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

 

Sellingexpenses consist primarily of salaries and related expenses for personnelengaged in the marketing and selling of the Company’s products, as well ascosts related to trade shows, product literature, travel and other promotionalsupport costs. In addition, selling expenses include costs related to theCompany’s Hong Kong and Taiwan sales offices as well as support of a new salesorganization in Japan.  General andadministrative costs consist primarily of executive and administrativesalaries, professional fees and other associated corporate expenses. Selling,General & Administrative (“SG&A”) expenses were approximately$800,000 for the three months ended March 31, 2005, compared toapproximately $649,000 for the restated three months ended March 31,2004.  This represents an increase ofapproximately $151,000 or 23%.  Theincrease in SG&A was attributable principally to support for the Company’sHong Kong office, increased human resource costs including the Japan CountryManager and increased professional fees. Human resource costs increased approximately $18,000 or 6% toapproximately $343,000 for the three months ended March 31, 2005, comparedto $325,000 for the restated three months ended March 31, 2004.  This increase was primarily due to highercompensation, as well as, an increase in staffing in the Asian salesoffices.  At March 31, 2005 theCompany’s foreign sales offices employed seven people up from six employees at March 31,2004.  In October 2004, the Companyhired a Vice President of Marketing and Sales; increasing the SG&A staffdomestically to seven employees for the three months ended March 31, 2005,the same number as of March 31, 2004. The Company plans to adjust its sales presence consistent with its salesforecasts and goals.  Professionalexpenses increased approximately $69,000 or 77% to approximately $158,000 forthe three months ended March 31, 2005 compared to approximately $89,000for the restated three months ended March 31, 2005, primarily due to theaddition of a sales consultant in Japan, increased costs for the salesassociate in Taiwan, the retaining of an investor relations firm in December 2004,as well as, increased legal and accounting expenses.  In addition, travel expenses for the threemonths ended March 31, 2005 increased by approximately $36,000 or 57% toapproximately $100,000 from approximately $64,000 for the restated three monthsended March 31, 2004.  The increasein travel was primarily due to the Company’s support of both current andpotential customers with new designs as well as continued support of existingdesigns. The Company expects that selling, general and administrative expenseswill increase in absolute dollars in future periods as the Company expands itssales channels, marketing efforts and administrative infrastructure.

 

InterestIncome (Expense)

 

Interestincome, net of expense, includes income from the Company’s cash and cashequivalents and from investments and expenses related to its financingactivities.  During the three monthsended March 31, 2005, the Company generated net interest income ofapproximately $4,000 compared to net interest income of approximately $5,000for the restated three months ended March 31, 2004.  This decrease in net interest income for thethree months ended March 31, 2005 was primarily due to reduced interest onreduced cash as of March 31, 2005.

 

Net Loss

 

The Company’s net loss forthe three months ended March 31, 2005 was approximately $1.4 million or$0.12 per basic and diluted common share, compared to a loss of approximately$217,000 or $0.02 per basic and diluted common share for the restated threemonths ended March 31, 2004.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company’s principalsource of liquidity at March 31, 2005 consisted of approximately $749,000in cash and short-term investments and no debt. This compares to approximately $1.9 million in cash and cash equivalentsat December 31, 2004.  This decreasein cash was due to increased working capital requirements.

 

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Netcash used in operating activities increased to approximately $1.1 million forthe three months ended March 31, 2005 from approximately $895,000 for therestated three months ended March 31, 2004. The increase was mainly due toan increase in net loss and increases in allowances for doubtful account, slowmoving, excess and obsolete inventory and accounts receivable reserves.  As of March 31, 2005, inventory wasapproximately $2.4 million, net of reserves, compared to inventory ofapproximately $2.7 million, net of reserves, as of March 31, 2004,restated.  Net accounts receivable wasapproximately $346,000 at March 31, 2005, down from approximately $533,000at March 31, 2004, restated.  Thisdecrease in accounts receivable was due to decreased shipments of the Company’ssemiconductor products and decreased royalties due under the STMicroelectronicsLicense Agreement.  As of March 31,2005, two major customers accounted for approximately 69% of the total accountsreceivable balance. The Company increased its reserve against bad debts to $120,000as of March 31, 2005 from $105,000 as of December 31, 2004.  The Company believes this reserve issufficient at this time.

 

Net cash used in investingactivities for the three months ended March 31, 2005 was approximately thesame for both the three months ended March 31, 2005 and the restated threemonths ended March 31, 2004 at $23,000.

 

There was no cash providedby financing activities for the three months ended March 31, 2005,compared to approximately $81,000 provided by financing activities for therestated three months ended March 31, 2004.  During the restated three-month period ended March 31,2004, the Company received approximately $81,000 net in cash from the exerciseof options by eight employees.  TheCompany believes that cash flow from operations and amounts that may be raisedfrom time to time in private offerings of its common stock as well as theamounts received in debt financings (See Note 13) will be sufficient to supportoperations and fund capital equipment requirements at least through June 30,2006.

 

The Companybelieves that its current working capital will be sufficient to fund itscapital and operational requirements at least through June 30, 2006.  See Note 13 – Subsequent Events- $2 millionfinancing. The continuance of the Company is highly dependent upon its abilityto successfully develop and market both its DDX digital amplifier and MEMStechnologies and raise additional funds for such purposes. The Company may alsoconsider the sale of assets to raise additional funds.  There can be no assurance, however, that theCompany will be able to raise the funds that it needs to continue itsoperations or that additional funds will be available to the Company onacceptable terms, if at all. Except as otherwise disclosed therein, theaccompanying consolidated financial statements do not include any adjustmentsto reflect the possible future effects of recoverability and classification ofassets or the amounts and classification of liabilities that may result fromthe possible inability of the Company to continue as a going concern.

 

InMay 2005, the Company received proceeds from unsecuredinterest-bearing loans in the amounts of $250,000 from David Spiegel, ashareholder and $250,000 from Herbert Stein, Chief Executive Officer, Presidentand Chairman of the Board. These loans are payable upon demandand are not subject to any premium or penalty for prepayment. The loaninterest rate is 6% per annum, payable monthly in arrears on the outstandingbalance.

 

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

** **

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

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

 

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

 

20

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estimateduseful lives.  Useful lives are based onmanagement’s estimates over the period that such assets will generate revenue.Intangible assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying value of an asset may not be recoverable.Future adverse changes in market conditions or poor operating results ofunderlying capital investments or intangible assets could result in losses oran inability to recover the carrying value of such assets, thereby possiblyrequiring an impairment charge in the future.

 

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

 

RevenueRecognition

 

Apogee recognizes revenue in accordance with Securities and ExchangeCommission Staff Accounting Bulletin No. 104 (“SAB 104”), “RevenueRecognition in Financial Statements: Revenue Recognition, which states thatrevenue should be recognized when the following revenue recognition criteriaare met:  (1) persuasive evidence ofan arrangement exists; (2) the product has been shipped and the customertakes ownership and assumes the risk of loss; (3) the selling price isfixed or determinable; and (4) collection of the resulting receivable isreasonably assured.  The followingpolicies apply to the Company’s two major product sales categories for revenuerecognition.  Sales to end users:  Revenue is recognized under the Company’sstandard terms and conditions of sale, title and risk of loss transfer to thecustomer at the time products are shipped from the company’s warehouse ordelivered to the customer’s representative/freight forwarder.  Sales to Distributors:  From time to time the Company provides stockrotation rights, price protection and other incentives to its Distributors.  As a result of these incentives, the Companyhas adopted a policy of deferring recognition of revenue until the distributorsells products to its customers based upon receipt of point-of-sale reportsfrom the distributors.  See Footnote 12Restatement. The Company accrues the estimated cost of post-sale obligationsincluding product warranty returns, based on historical experience.  To date the Company has experienced minimalwarranty returns.

 

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

 

AccountsReceivable

 

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

 

Inventory

 

Apogeestates its inventory at the lower of cost (first-in, first-out) or market**. **This policyrequires that the Company make certain estimates regarding the market value ofthe inventory, including an assessment of excess or obsolete inventory.  The Company determines excess and obsoleteinventory based on an estimated future demand and estimated selling prices forthe Company’s products within a specified time frame which is generally 12months.  The estimates used for expecteddemand are also used for short-term capacity planning and inventory purchasingand are consistent with revenue forecasts. In addition to current inventory ofapproximately $2.4 million, net of reserves, consisting of $1 million held atApogee and $1.4 million held at distributors, the Company has inventorypurchase commitments of approximately $934,000 at March 31, 2005.  This compares to inventory, net of reserves,of approximately $2.7 million consisting of approximately $1.5 million held atdistributors with the remaining $1.2 million at Apogee at December 31,2004.  The current inventory level andpurchase commitments are maintained due to expected demand and not necessarilybuilt for firm purchase commitments for the current customers.  Due to the 13 week delivery lead time, it isnecessary

 

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tocarry a high level of inventory in comparison to past sales.  Actual demand and market conditions may bedifferent from those projected by management. If the unit demand forecast is less than current inventory value, theCompany will be required to take additional excess inventory charges orwrite-downs to net realizable value which will decrease the gross margin aswell as the net operating results in the future.  During the three months ended March 31,2005, the Company recorded a provision for excess or obsolete inventory ofapproximately $243,000. If actual market conditions are less than favorablethan those projected by management, additional allowances may be required.

 

Valuationof Long-Lived Assets

 

Property,plant and equipment, patents, trademarks and other intangible assets areamortized over their estimated useful lives. Useful lives are based onmanagement’s estimates over the period that such assets will generate revenue.Intangible assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying value of an asset may not berecoverable. Future adverse changes in market conditions or poor operatingresults of underlying capital investments or intangible assets could result inlosses or an inability to recover the carrying value of such assets, therebypossibly requiring an impairment charge in the future.

 

**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.

 

**RISKS RELATED TO OUR BUSINESS**

 

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

** **

**As of March 31, 2005, theCompany had a net worth of approximately $1 million and an accumulated deficitof approximately $17 million.  TheCompany recorded a loss of approximately $1.4 for the three-month period ended March 31,2005.  The Company recorded a net loss ofapproximately $3.4 million for the year ended December 31, 2004, and arestated net loss of approximately $270,000 in 2003.  The Company will need to generate revenue toachieve and sustain profitability and positive cash flow.  The Company’s ability to generate futurerevenue and achieve and sustain profitability will depend on a number offactors, many of which are described throughout this risk factor section.  If we are unable to achieve and sustainprofitability, the Company’s share price would likely decline.**

 

**THE COMPANY HAS ONLY A SMALL NUMBEROF CUSTOMERS, AND THE LOSS OF THESE CUSTOMERS WOULD HAVE A MATERIAL ADVERSEEFFECT ON THE COMPANY’S BUSINESS.**

 

During thethree months ended March 31, 2005, the Company derived approximately 72%of its total revenue and 79% of product revenue were from three customers,respectively.  The loss of any of theCompany’s customers would have a material adverse effect on its business,financial condition and results of operations. The Company intends to diversify its customer base in the coming monthsin order to reduce its dependence on a small number of customers.  The Company may not be able to succeed inthese efforts.

 

**OUR BUSINESS IS CONCENTRATED IN ALIMITED NUMBER OF MARKETS AND ANY SIGNIFICANT CHANGE IN THESE MARKETS COULDHAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’S BUSINESS.**

 

Substantiallyall of the Company’s total and product revenue for the three months ended March 31,2005 were to customers in Asia and Europe. The Company is working to develop new customers and markets in order todiversify the market applications of its products.

 

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

** **

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

 

**NEITHER OUR DISCLOSURECONTROLS AND PROCEDURES NOR OUR INTERNAL CONTROL OVER FINANCIAL REPORTING CANPREVENT ALL ERRORS OR FRAUD, AND IN THE PAST THESE CONTROLS AND PROCEDURES WERENOT EFFECTIVE AND RESULTED IN RESTATEMENTS TO OUR FINANCIAL RESULTS.**

 

Our management does notexpect that our disclosure controls and procedures or our internal control overfinancial reporting will prevent all errors or fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system will be attained.Furthermore, the design of a control system must reflect the fact that thereare resource constraints and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in acost-effective control system, no evaluation of controls can provide absoluteassurance that all misstatements due to error or fraud, if any, may occur andnot be detected on a timely basis. These inherent limitations include the possibilitythat judgments in decision-making can be faulty and that breakdowns can occurbecause of errors or mistakes. Our controls and procedures can also becircumvented by the individuals acts of some persons, by collusion of two ormore people or by management override of the controls. The design of any systemof controls is based in part on certain assumptions about the 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.

 

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

 

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

 
| • | identify  emerging technological trends in our market;                                                                                           |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|   |
| • | identify  changing consumer requirements;                                                                                                        |
|   |
| • | develop  or maintain competitive technology, including new product offerings;                                                                    |
|   |
| • | improve  the performance, features and reliability of our products, particularly in  response to technological change and competitive offerings; |
|   |
| • | bring  technology to market quickly at cost-effective prices, and                                                                                |
|   |
| • | protect  our intellectual property.                                                                                                              |

 

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

 

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

 

We havehistorically incurred net losses from operations and may continue to do so inthe future.  We have funded our operatingactivities to date primarily from the sale of securities and debt financing.  We will likely require additional capital inthe future, which may be in the form of additional sales of securities oradditional debt financings.  Theadditional capital may not be readily available on favorable terms, if atall.  Any sale of securities would resultin dilution to our current stockholders’ ownership in the Company.

 

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

 

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

 

**OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.**

** **

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

 

•                  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;

 

•                  changesin our pricing policies or those of our competitors;

 

•                  successin attracting, retaining and motivating qualified personnel;

 

•                  changesin general economic conditions; and

 

•                  obsolescenceof our inventory.

 

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

 

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

 

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

 

We may not besuccessful in recruiting and retaining executive officers and other keymanagement and technical personnel.  Thecompetition for employees with the necessary high level of technical expertiseto design and market our products is intense, particularly in easternMassachusetts.  We will need to hire anumber of additional technical personnel if we are to increase the rate atwhich we develop new 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 becostly, may divert management attention and resources from the operation of ourbusiness, and may therefore adversely affect our financial condition andresults of operations.  In addition, theloss of the management and technical expertise of our senior management couldseriously harm us.  The Company does nothave in place employment contracts for some members of its senior management,including the COO and Vice President of Engineering.

 

**THERE IS A NEW EUROPEAN DIRECTIVE TOELIMINATE HAZARDOUS MATERIALS IN ELECTRONIC PRODUCTS AND AS SUCH WE MAY NOTBE ABLE TO TRANSITION OUR IC PRODUCTS TIMELY TO MEET CUSTOMER NEEDS AND MAY HAVEINVENTORY THAT CAN ONLY BE SOLD IN LIMITED MARKETS.**

 

The IC industry isresponding to the European directive of Restriction of Hazardous Substances(RoHS) that will become effective in July  2006.  As a result of this directive, semiconductorcompanies are working to remove lead and other hazardous materials used intheir IC products. The Company expects to transition all of its IC products toconform to the RoHS standard during the first half of 2005. However, theCompany may not be able to meet customer delivery requirements to support the2005 consumer electronic design cycle. In addition, the Company currently hasinventory to support European customers that may have to be sold in othermarkets.  Any excess inventory may not beable to be sold timely or at all.

 

**WE DO NOT HAVEMANUFACTURING CAPABILITIES, AND AS A RESULT, WE RELY ON OUTSIDE FOUNDRIES TOMANUFACTURE OUR SEMICONDUCTOR PRODUCTS.**

** **

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

 
| • | the ability  to maintain foundry relationships, the failure of which could result in  significant delays in product introduction due to the time necessary to  establish new relationships; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                        |
| • | delays in  production or shortages in product delivery as a result of production  problems at outside contractors;                                                                          |
|   |                                                                                                                                                                                        |
| • | the loss of  foundry priority that may result in limiting our ability to obtain products  on schedule;                                                                                      |
|   |                                                                                                                                                                                        |
| • | limited  control over product quality that could result in product returns and the  loss of customers;                                                                                      |
|   |                                                                                                                                                                                        |
| • | inability to  control manufacturing yield that could increase production costs, thereby  reducing sales potential and operating margins, and                                                |
|   |                                                                                                                                                                                        |
| • | lack of  access or control over new process and manufacturing technologies to maintain  product competitiveness in the market.                                                              |

 

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

 

Our productsare based on recently developed technology and are manufactured usingstate-of-the-art manufacturing processes. Our approach to product qualification and testing may not fully evaluateor identify product characteristics or defects that could adversely

 

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affect theproduct’s ability to operate in the intended application.  If such defects or characteristics arediscovered after installation, product revenue might be significantly delayedand our ability to maintain existing customers and to retain new customers maybe seriously affected.

 

**OUR ABILITY TO ACHIEVE REVENUE GROWTH WILL BE HARMED IF WEARE UNABLE TO PERSUADE THE MARKET TO ADOPT OUR AMPLIFIER AND MEMS TECHNOLOGIES.**

 

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

 

**INTENSE COMPETITION IN THE SEMICONDUCTOR AND MEMS INDUSTRYCOULD PREVENT US FROM ACHIEVING PROFITABILITY.**

 

Thesemiconductor and MEMS industry is 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 broader product lines and have greater namerecognition than we do, and may offer discounts as a competitive tactic.  In addition, several development stage companiesare currently creating or developing technologies and products that competewith or are being designed to compete with our technologies and products.  Our competitors may develop or markettechnologies 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, if competitors introducesuperior technologies or products and we cannot make enhancements to ourtechnologies and products necessary for them to remain competitive, ourcompetitive position, and in turn, our business, revenues and financialcondition, will be seriously harmed.

 

**OUR BUSINESS COULD SUFFER IF WE EXPERIENCE DIFFICULTIES ININTEGRATING 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 our competitors.

 

**RISKS RELATED TO OUR INTELLECTUAL PROPERTY**

 

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

 

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

 

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

 

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

 

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

 

Irrespectiveof the validity or successful assertion of various claims of infringement,misappropriation or misuse of other parties’ proprietary rights, we wouldlikely incur significant costs and diversion of our management and personnelresources with respect to the defense of such claims, which could seriouslyharm our business.  If any claims oractions are asserted against us, we may seek to obtain a license under a thirdparty’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 the intellectual property of ourstrategic customers into our designs, and we have certain obligations withrespect to the non-use and non- disclosure of such intellectual property.  We cannot be sure that the steps taken by usto prevent our, or our customers’, misappropriation or infringement of theintellectual property will be successful.

 

**RISKS RELATING TO OUR COMMON STOCK**

** **

**FACTORS UNRELATED TO OUR BUSINESS COULD NEGATIVELY IMPACT THEMARKET PRICE OF OUR COMMON STOCK.**

 

The stock marketshave experienced extreme price and volume fluctuations that have affected andcontinue to affect the market prices of equity securities of many technologycompanies.  These fluctuations often havebeen unrelated or disproportionate to the operating performance of those companies.  We expect that the market price of our CommonStock will fluctuate as a result of variations in our quarterly operatingresults, or for other reasons that are not related to the performance of ourbusiness.  These fluctuations may beexaggerated if the trading volume of our Common Stock is low.  In addition, due to the technology-intensivenature of our business, the market price for our Common Stock may rise and fallin response to various factors including:

 

•   announcements of technologicalinnovations or new products, or competitive developments;

 

•   investor perceptions andexpectations regarding our or our competitors’ products;

 

•   acquisitions or strategicalliances by us or our competitors; and

 

•   the gain or loss of asignificant customer or order.

 

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

 

**ITEM3 – QUANTITATIVE****ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company’s financial instruments include: cash, cash equivalents,accounts receivable and accounts payable. At March 31, 2005, the carrying value of the Company’s cash, cashequivalents, accounts receivable and accounts payable approximate fair valuesgiven the short maturity of these instruments.

 

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

 

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

 

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**ITEM4 – CONTROLS****ANDPROCEDURES**

 

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

 

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

 

**PART II**- OTHER INFORMATION

** **

**ITEM 1****- LEGAL PROCEEDINGS**

 

In November 2004,Apogee commenced an action against National Hybrid, Inc. (Hybrid) inthe United States District Court for the Eastern District of NewYork, claiming that as part of Hybrid’s procurement of the tangible assetsfrom the secured lien holder of the bankrupt Standard MEMS, Inc.(SMI), Hybrid had inadvertently obtained copies of files, containing inpart, the intangible assets purchased by Apogee in May of 2004 as part ofits MEMS acquisition. In November 2004, the court directed Hybrid not tosell, destroy or otherwise dispose of these files.  In response, Hybrid filed a counterclaim in February 2005, stating thatthey were the owner of the files. The court has delayed any furtheractions on this matter until January 2006 since the parties arenow working to resolve the issue.  TheCompany believes Hybrid’s claims are without merit. TheCompany expects to resolve this issue with Hybrid, now held in estate due tothe death of the prior owner, in 2005, and further does not believe theresolution will be material to its business.

 

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

 

During the first quarterended March 31, 2005 there were no shares of the Company’s Common Stockissued.

 

Duringthe first quarter ended March 31, 2005, the Company granted options to twoemployees to purchase up to 30,000 shares of the Company’s Common Stock atexercise prices ranging from $2.90 per share to $4.46 per share under the Plan.

 

**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: August 19, 2005 | By: /s/                             | Herbert M. Stein |   |
|                       | Name: Herbert M. Stein              |
|                       | Title:  Chairman of the Board,      |
|                       | President,  Chief Executive Officer |

 

 
| ** **                 | **APOGEE  TECHNOLOGY, INC.**        |
|----------------------------|-------------------------------------|
| ** **                 | ** **                          |
| Date: August 19, 2005 | By: /s/                             | Paul J. Murphy |   |
|                       | Name: Paul J. Murphy                |
|                       | Title:  Chief Financial Officer and |
|                       | Vice  President of Finance          |

 

 

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FORM-10-QSB

MARCH 31, 2005

 

**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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