**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-QSB**

**(Mark One)**

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

 

**For the quarterly periodended September 30, 2006**

** **

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

** **

**For the transition periodfrom                   to**

** **

**Commission file number001-10456**

** **

** **

**APOGEE TECHNOLOGY, INC.**

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

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

 

**129MORGAN DRIVE, 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 lastreport)

 

Check whether the issuer:(1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes   x    No  o

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

State the number ofshares outstanding of each of the Issuer’s classes of common equity, as of thelatest practicable date:  As of October 31, 2006, there were 11,968,332shares of Common Stock, $.01 par value per share, outstanding.

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

 

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**APOGEETECHNOLOGY, INC.**

**INDEXOF INFORMATION CONTAINED IN FORM 10-QSB FOR THE PERIODS ENDED SEPTEMBER 30, 2006 ANDSEPTEMBER 30, 2005**

 
| **PART I. FINANCIAL  INFORMATION**                                                                                                                       |   |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                                                                          |   |   |   |
| Item  1. Financial Statements                                                                                                                                 |   |   |   |
| Consolidated Balance Sheets at September 30, 2006  (unaudited) and December 31, 2005 (audited)                                                           |   | 3      |   |
| Consolidated Statements of Operations and Accumulated  Deficit for the Three and Nine Months Ended September 30, 2006 and September  30, 2005 (all unaudited) |   | 4      |   |
| Consolidated Statements of Cash Flows for the Three  and Nine Months Ended September 30, 2006 and September 30, 2005 (all  unaudited)                         |   | 5      |   |
| Notes to Consolidated Financial Statements (all  unaudited)                                                                                                   |   | 6      |   |
|                                                                                                                                                          |   |   |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                           |   | 15     |   |
|                                                                                                                                                          |   |   |   |
| Item 3. Controls and Procedures                                                                                                                               |   | 28     |   |
|                                                                                                                                                          |   |   |   |
| **PART II.  OTHER INFORMATION**                                                                                                                          |   |   |   |
|                                                                                                                                                          |   |   |   |
| Item  1. Legal Proceedings                                                                                                                                    |   | 29     |   |
|                                                                                                                                                          |   |   |   |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                          |   | 29     |   |
|                                                                                                                                                          |   |   |   |
| Item 3. Defaults Upon Senior Securities                                                                                                                       |   | 29     |   |
|                                                                                                                                                          |   |   |   |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                                                                  |   | 29     |   |
|                                                                                                                                                          |   |   |   |
| Item  5. Other Information                                                                                                                                    |   | 29     |   |
|                                                                                                                                                          |   |   |   |
| Item 6.  Exhibits                                                                                                                                             |   | 29     |   |
|                                                                                                                                                          |   |   |   |
| Signatures                                                                                                                                                    |   | 30     |   |

 

2

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**PART IFINANCIAL INFORMATION**

**Item1. Financial Statements**

**APOGEE TECHNOLOGY, INC. ANDSUBSIDIARYCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                              | ** ** | **SEPTEMBER 30,** | ** **    | **DECEMBER 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|---------------|-----------------------|------------|
| ** **                                                                                                                                              | ** ** | **2006**               | ** **    | **2005**              | ** ** |
| ** **                                                                                                                                              | ** ** | **(Unaudited)**        | ** **    | **(Audited)**         | ** ** |
| **ASSETS**                                                                                                                                              | ** ** | ** **             | ** **    | ** **            | ** ** |
| ** **                                                                                                                                              | ** ** | ** **             | ** **    | ** **            | ** ** |
| **Current assets**                                                                                                                                      | ** ** | ** **             | ** **    | ** **            | ** ** |
| Cash and cash equivalents                                                                                                                               | ** ** | **$**                  | **2,991,632** | ** **            | **$**      | **5,512,974** | ** ** |
| Accounts  receivable, net of allowance for doubtful accounts of $13,245 and $145,000,  in 2006 and 2005 respectively                                    | ** ** | **389,052**            | ** **    | **152,837**           | ** ** |
| Inventories, net                                                                                                                                        | ** ** | **—**             | ** **    | **1,327,964**         | ** ** |
| Prepaid expenses  and other current assets                                                                                                              | ** ** | **22,609**             | ** **    | **123,462**           | ** ** |
|                                                                                                                                                    |       |                   |          |                  |       |
| Total current  assets                                                                                                                                   | ** ** | **3,403,293**          | ** **    | **7,117,237**         | ** ** |
|                                                                                                                                                    |       |                   |          |                  |       |
| **Property and equipment, net**                                                                                                                         | ** ** | **50,688**             | ** **    | **39,932**            | ** ** |
|                                                                                                                                                    |       |                   |          |                  |       |
| **Other assets**                                                                                                                                        | ** ** | ** **             | ** **    | ** **            | ** ** |
| Escrow account                                                                                                                                          | ** ** | **422,218**            | ** **    | **409,480**           | ** ** |
| Patents                                                                                                                                                 | ** ** | **171,600**            | ** **    | **149,536**           | ** ** |
|                                                                                                                                                    |       |                   |          |                  |       |
| ** **                                                                                                                                              | ** ** | **$**                  | **4,047,799** | ** **            | **$**      | **7,716,185** | ** ** |
|                                                                                                                                                    |       |                   |          |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                          | ** ** | ** **             | ** **    | ** **            | ** ** |
|                                                                                                                                                    |       |                   |          |                  |       |
| **Current liabilities**                                                                                                                                 | ** ** | ** **             | ** **    | ** **            | ** ** |
| Accounts payable  and accrued expenses                                                                                                                  | ** ** | **$**                  | **559,349**   | ** **            | **$**      | **766,930** | ** ** |
| Deferred  distributor revenue                                                                                                                           | ** ** | **—**             | ** **    | **1,337,022**         | ** ** |
| Deferred  contract revenue                                                                                                                              | ** ** | **—**             | ** **    | **72,686**            | ** ** |
|                                                                                                                                                    |       |                   |          |                  |       |
| Total current  liabilities                                                                                                                              | ** ** | **559,349**            | ** **    | **2,176,638**         | ** ** |
|                                                                                                                                                    |       |                   |          |                  |       |
| **Commitments and Contingencies**                                                                                                                       | ** ** | **—**             | ** **    | **—**            | ** ** |
| ** **                                                                                                                                              | ** ** | ** **             | ** **    | ** **            | ** ** |
| **Stockholders’ equity**                                                                                                                           | ** ** | ** **             | ** **    | ** **            | ** ** |
| Common stock,  $.01 par value; 20,000,000 shares authorized, 11,968,332 shares issued and  outstanding at September 30, 2006 and December 31, 2005 | ** ** | **119,683**            | ** **    | **119,683**           | ** ** |
| Additional  paid-in capital                                                                                                                             | ** ** | **18,104,423**         | ** **    | **18,104,423**        | ** ** |
| Deferred stock  compensation                                                                                                                            | ** ** | **348,698**            | ** **    | **—**            | ** ** |
| Accumulated  deficit                                                                                                                                    | ** ** | **(15,084,354**        | **)**         | **(12,684,559**       | **)**      |
|                                                                                                                                                    |       |                   |          |                  |       |
| Total  stockholders’ equity                                                                                                                        | ** ** | **3,488,450**          | ** **    | **5,539,547**         | ** ** |
| ** **                                                                                                                                              | ** ** | **$**                  | **4,047,799** | ** **            | **$**      | **7,716,185** | ** ** |

 

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

3

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**APOGEE TECHNOLOGY, INC. ANDSUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT(UNAUDITED)**

** **
| ** **                                                          | ** ** | **THREE MONTHS ENDED  September 30,** | ** **      | **NINE MONTHS ENDED  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|-----------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                             | ** **      | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                        | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                                                       | ** ** | **$**                                                | **509,015**     |                                                | $          | 1,157,789 | ** ** | **$** | **1,833,961** |   | $ | 3,326,238 |   |
| Royalties                                                           |       | **—**                                           |            | 212,397                                             |       | **1,250** |   | 473,328 |   |
| Consulting                                                          |       | **—**                                           |            | 150,000                                             | ** ** | **—** |   | 150,000 |   |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **509,015**                                          |            | 1,520,186                                           | ** ** | **1,835,211** |   | 3,949,566 |   |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Costs and expenses**                                              | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                                                       | ** ** | **354,160**                                          |            | 1,122,084                                           | ** ** | **1,351,248** |   | 2,975,312 |   |
| Research and  development                                           | ** ** | **421,189**                                          |            | 785,403                                             | ** ** | **1,421,501** |   | 2,308,410 |   |
| Selling, general and  administrative                                | ** ** | **816,508**                                          |            | 1,158,569                                           | ** ** | **1,975,102** |   | 3,251,653 |   |
|                                                                |       |                                                 |            |                                                |       |   |   |   |   |
| ** **                                                          | ** ** | **1,591,857**                                        |            | 3,066,056                                           | ** ** | **4,747,851** |   | 8,535,375 |   |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating loss**                                                  | ** ** | **(1,082,842**                                       | **)**           | (1,545,870                                          | )          | **(2,912,640** | **)** | (4,585,809 | ) |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other (expense) income**                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                |       |                                                 |            |                                                |       |   |   |   |   |
| SigmaTel earn-out                                                   | ** ** | **299,090**                                          |            | —                                              | ** ** | **383,198** |   | — |   |
| Interest/other expense                                              | ** ** | **(1,754**                                           | **)**           | (35,552                                             | )          | **(24,205** | **)** | (38,930 | ) |
| Interest income                                                     | ** ** | **46,346**                                           |            | 4,814                                               | ** ** | **153,852** |   | 10,865 |   |
|                                                                |       |                                                 |            |                                                |       |   |   |   |   |
| ** **                                                          | ** ** | **343,682**                                          |            | (30,738                                             | )          | **512,845** |   | (28,065 | ) |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net loss**                                                        | ** ** | **(739,160**                                         | **)**           | (1,576,608                                          | )          | **(2,399,795** | **)** | (4,613,874 | ) |
|                                                                |       |                                                 |            |                                                |       |   |   |   |   |
| Accumulated deficit -  beginning                                    | ** ** | **(14,345,194**                                      | **)**           | (18,674,212                                         | )          | **(12,684,559** | **)** | (15,636,946 | ) |
|                                                                |       |                                                 |            |                                                |       |   |   |   |   |
| **Accumulated deficit - ending**                                    | ** ** | **$**                                                | **(15,084,354** | **)**                                               | $          | (20,250,820 | ) | **$** | **(15,084,354** | **)** | $ | (20,250,820 | ) |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic and diluted loss per  common share**                        | ** ** | **$**                                                | **(0.06**       | **)**                                               | $          | (0.13 | ) | **$** | **(0.20** | **)** | $ | (0.39 | ) |
| ** **                                                          | ** ** | ** **                                           | ** **      | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Weighted average common shares outstanding -  basic and diluted** | ** ** | **11,968,332**                                       |            | 11,838,332                                          | ** ** | **11,968,332** |   | 11,838,332 |   |

 

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

4

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**APOGEE TECHNOLOGY, INC. ANDSUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

** **
| ** **                                                                     | ** ** | **NINE MONTHS ENDED SEPTEMBER 30,** | ** **     |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------------|----------------|
| ** **                                                                     | ** ** | **2006**                                                | ** **     | **2005** | ** ** |
|                                                                           |       |                                                    |           |   |   |
| **Cash flows from operations**                                                 | ** ** | ** **                                              | ** **     | ** ** | ** ** |
| Net loss                                                                       | ** ** | **$**                                                   | **(2,399,795** | **)** | $ | (4,613,874 | ) |
| *Adjustments  to reconcile net loss to net cash used in operating activities:* | * *   | * *                                                | * *       | * * | * * |
| Provision for  doubtful accounts                                               | ** ** | **(131,755**                                            | **)**          | 40,000 |   |
| Provision for  slow moving, excess and obsolete inventory                      | ** ** | **(27,504**                                             | **)**          | 576,238 |   |
| Depreciation and  amortization                                                 | ** ** | **12,894**                                              |           | 70,053 |   |
| Stock  compensation expense                                                    | ** ** | **348,698**                                             |           | — |   |
| Disposal of  property and equipment                                            | ** ** | **13,201**                                              |           | — |   |
| *Changes  in operating assets and liabilities:*                                | * *   | * *                                                | * *       | * * | * * |
| Accounts  receivable                                                           | ** ** | **(136,278**                                            | **)**          | 27,656 |   |
| Inventories                                                                    | ** ** | **1,355,468**                                           |           | 397,171 |   |
| Prepaid expenses  and other current assets                                     | ** ** | **100,854**                                             |           | 190,774 |   |
| Accounts payable  and accrued expenses                                         | ** ** | **(188,501**                                            | **)**          | 598,643 |   |
| Deferred note  financing costs                                                 | ** ** | **—**                                              |           | (367,525 | ) |
| Deferred note  other                                                           | ** ** | **—**                                              |           | (306,000 | ) |
| Deferred product  revenue                                                      | ** ** | **(1,337,022**                                          | **)**          | (231,554 | ) |
| Deferred  contract revenue                                                     | ** ** | **(72,686**                                             | **)**          | (23,103 | ) |
|                                                                           |       |                                                    |           |   |   |
| Net cash used in  operating activities                                         | ** ** | **(2,462,426**                                          | **)**          | (3,641,521 | ) |
|                                                                           |       |                                                    |           |   |   |
| **Cash flows used in investing  activities**                                   | ** ** | ** **                                              | ** **     | ** ** | ** ** |
| Purchases of  property and equipment                                           | ** ** | **(36,851**                                             | **)**          | (63,626 | ) |
| Patent costs                                                                   | ** ** | **(22,065**                                             | **)**          | (74,251 | ) |
|                                                                           |       |                                                    |           |   |   |
| Net cash used in  investing activities                                         | ** ** | **(58,916**                                             | **)**          | (137,877 | ) |
|                                                                           |       |                                                    |           |   |   |
| **Cash flows from financing  activities**                                      | ** ** | ** **                                              | ** **     | ** ** | ** ** |
| Proceeds from  loan                                                            |       |                                                    |           | 2,000,000 |   |
| Proceeds from  officer loan                                                    |       | **—**                                              |           | 250,000 |   |
| Proceeds from  shareholder loan                                                |       | **—**                                              |           | 250,000 |   |
| Proceeds from  advance                                                         |       |                                                    |           | 205,000 |   |
|                                                                           |       |                                                    |           |   |   |
| Net cash  provided by financing activities                                     |       | **—**                                              |           | 2,705,000 |   |
|                                                                           |       |                                                    |           |   |   |
| **Decrease in cash and cash  equivalents**                                     | ** ** | **(2,521,342**                                          | **)**          | (1,074,398 | ) |
|                                                                           |       |                                                    |           |   |   |
| Cash and cash  equivalents — beginning                                    | ** ** | **5,512,974**                                           |           | 1,886,883 |   |
|                                                                           |       |                                                    |           |   |   |
| **Cash and cash equivalents — ending**                                    | ** ** | **$**                                                   | **2,991,632**  |   | $ | 812,485 |   |

 

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

5

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

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

***The Company***

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

On October 5, 2005, Apogee completed a transaction withSigmaTel, Inc. (“SigmaTel”), whereby certain assets of the audio divisionwere sold, including the DDX technology and the associated royalties from itslicense agreement with STMicroelectronics (“ST”).  These assets were soldto SigmaTel for approximately $9.4 million, resulting in a gain ofapproximately $8.9 million plus a one-year earn-out that was potentially up to$4.5 million (the “SigmaTel Transaction”). Of this potential earn-out, werecorded approximately $299,000 and $383,200 for the three and nine monthsended September 30, 2006.  As theone-year anniversary of the SigmaTel transaction occurred on October 5, 2006,no additional earn-out will be recorded. The Company and certain of its principal stockholders also entered intoan indemnification agreement in the event that certain terms of the SigmaTeltransaction are violated. The Company is authorized to indemnify the principalstockholders in the event any one or more of them has to satisfy anyobligations thereunder. In addition, the Company’s engineering and marketingstaff related to the audio division were offered positions at SigmaTel as apart of the SigmaTel Transaction.

Although the Company retained some of its audio division relatedagreements (with the exception of the royalty rights from the license agreementwith ST) and its audio IC inventory, the Company intends to cease theoperations of its audio division upon completion of the sale or disposition ofthe remaining inventory for which an allowance has been recorded.   As of September 30, 2006, we have availablefor sale approximately $1.9 million of DDX related inventory for disposal.  There is no carrying value on the balancesheet since the reserve for slow moving, excess and obsolete inventory equalscurrent inventory levels of $1.9 million.

Subsequent to the sale of the audio division, we organized our MEMSdivision into two business groups, the Sensor Products Group and the MedicalProducts Group. The Sensor Products Group will focus on the design, developmentand marketing of proprietary MEMS/Nanotechnology based sensors for theconsumer, industrial and automotive markets. In December 2005, we introducedour first sensor products, a family of miniature pressure sensors, trademarkedunder the SensilicaTM brand name. These sensors are presently being sampled topotential customers. We intend to sell these sensor devices as stand-alone dieand as packaged solutions in a similar manner as we employed in the marketingand sale of our former audio IC products.

The Medical Products Group is focused on creating value added productsto address unmet medical needs by commercializing nanotechnology based drugencapsulation and therapeutic delivery products. We have demonstrated thefeasibility of our drug delivery device by performing efficacy tests with modeldrugs in laboratory settings. We are currently establishing manufacturing andregulatory strategies to support commercialization of our transdermal andintradermal lines of products for both Food and Drug Administration (“FDA”)regulated and non FDA-regulated applications. Depending upon the results of ourtechnology and product development activities, we may: (i) license ourtechnology to third party medical device or pharmaceutical companies,(ii) develop, have made and market through distributors our own medicaldevice products, or (iii) partner with third party pharmaceuticalcompanies to commercialize our products.

***Basis of Presentation***

***Consolidated Financial Statements***

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

In the opinion of the Company’s management, all adjustments, consistingof normal recurring accruals considered necessary for a fair presentation, havebeen included in the accompanying unaudited financial statements. Operatingresults for the three and nine months ended September 30, 2006 are notnecessarily indicative of the results that may be expected for the fullyear ending December 31, 2006.

6

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***Going Concern***

The accompanying consolidated financial statements have been preparedon a going concern basis which contemplates the realization of assets and satisfactionof liabilities in the normal course of business. As shown in the consolidatedfinancial statements, we have incurred continuing losses and negative cashflows from operations. Net losses were approximately $2.4 million and negativecash flows from operations were approximately $2.5 million for the nine monthsended September 30, 2006. This raises substantial doubt about the Company’sability to continue as a going concern.

The Company sold certain tangible and intangible assets associated withits audio business in 2005 and has approximately $3.0 million of cash atSeptember 30, 2006. The Company has reduced, in the short-term, its operatingexpenses for payroll and related costs, rents and third party consulting fees.The Company believes that its current working capital and amounts that may beraised to support operations will be sufficient to fund its capital andoperational requirements at least through June 30, 2007.

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

***Use of Estimates inFinancial Statements***

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

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

***Revenue Recognition***

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

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

Sales to Distributors:  At times the Company provides incentivessuch as stock rotation, price protection and other incentives to itsdistributors. Therefore, under the sell through method of revenue recognitionthe Company defers recognition of revenue until such time that the distributorsells products to its customers based upon receipt of point-of-sale reportsfrom the distributors. Distributor payments received before revenue isrecognized are recorded as deferred revenue. Unsold inventory held atdistributors is included as a component of finished goods inventory.  At September 30, 2006 all deferred revenuehas been recognized.   If and whenmaterial amounts of our sensor and medical products items are shipped to theCompany’s distributors, the stated Revenue Recognition Policy will be resumed.

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

***Loss Per Share***

Basic loss per share iscomputed by dividing the net loss attributable to common stockholders for theperiod by the weighted average number of common stock outstanding during theperiod.  Diluted net loss per share iscomputed based on the weighted average number of common stock and dilutivepotential common stock outstanding.  Thecalculation of diluted net loss per share excluded potential common stock ifthe effect is anti-dilutive.  Potentialcommon stock consists of incremental common stock issuable upon the exercise ofstock options and common stock issuable upon the exercise of common stockwarrants.

7

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***Research andDevelopment***

Costs for research and development are expensed as incurred.

***Inventories***

Inventories, including inventory held at distributors, are stated atthe lower of cost on a first-in, first-out basis or market. See Footnote4.  This policy requires the Company to make estimates regarding themarket value of the Company’s inventory, including an assessment of excess or obsoleteinventory. The Company determines excess and obsolete inventory based on anestimate of the future demand and estimated selling prices for the Company’sproducts within a specified time horizon, generally 12 to 24 months.

Previously, during the six-month period ended June 30, 2006, theCompany had recorded a provision of approximately $32,000 for slow moving,excess and obsolete inventory of which approximately $11,000 had been writtenoff against this reserve.  During thethree months ended September 30, 2006, the Company recorded a recovery ofprevious reserve provisions for slow moving, excess and obsolete inventory ofapproximately $49,000 to adjust for current inventory levels.  As of September 30, 2006 the Company has areserve for slow moving, excess and obsolete inventory of approximately $1.9million representing 100% of inventory. In addition, during the three months ended September 30, 2006, as partof the recognizing of the deferred revenue, we recorded in Cost of Sales theremaining unsold distributor inventory of approximately $348,000.

***Purchase commitmentlosses***

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

***Property andEquipment***

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

***Patents***

Costs incurred to register and obtain patents are capitalized andamortized on a straight-line basis over five years, their estimated usefullives.  In the quarter ended September30, 2006, the Company submitted five U.S. patent applications.

***Cash and CashEquivalents***

The Company considers all highly liquid investments with an originalmaturity of three months or less to be cash equivalents. Substantially all ofthe Company’s cash is held in high quality money market funds comprised ofshort-term, fixed income securities earning interest at a thirty-day yield ofat September 30, 2006 of 4.92%.

***Accounts Receivable***

The Company carries its trade receivables from direct customers less anallowance for doubtful accounts to ensure that trade receivables are carried atnet realizable value. On a periodic basis, the Company evaluates thecollectibility of its accounts receivable on a variety of factors, includinglength of time receivables are past due, indication of customer willingness topay, significant one-time events and historical experience. An additionalreserve for individual accounts is recorded when the Company becomes aware of acustomer’s inability to meet its financial obligations, such as in the case ofbankruptcy filings or substantial deterioration in the customer’s operatingresults or financial position. If the financial condition of the Company’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required. Accounts receivableare generally considered past due if any portion of the receivable balance isoutstanding for more than 90 days. The earn-out payment due Apogee, as part ofthe SigmaTel transaction is due for payment within forty-five days followingthe end of the one-year anniversary of the closing of that transaction.  See Footnote 3 — Accounts Receivable. SigmaTel has indicated that on or before November 19, 2006, Apogee will receiveapproximately $383,000 as a final earn-out payment.

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***Fair value offinancial instruments***

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

***Stock BasedCompensation***

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

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

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

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

Included in the Company’s net loss for the three and nine months endedSeptember 30, 2006 was a compensation charge of approximately $251,000 and$349,000, respectively, due to the adoption of SFAS 123(R).  In addition,the basic and diluted loss per share was approximately $.02 and $.03, higherfor the three months and nine months ended September 30, 2006, respectively,due to the adoption of SFAS 123(R).

**Accounting for Stock Compensation**

Stock-based compensation costs are generally based on the fair valuecalculated from the Black-Scholes option-pricing model on the date of grant forstock options.  The fair values of stockgrants are amortized as compensation expense over the options’ vesting period.Compensation expense recognized is shown in the operating activitiessection of the consolidated statements of cash flow.

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

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

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

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***Stock BasedCompensation***

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

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

| Stock Options                     | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual    Term** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------------------------------------------------------------|------------|
| Outstanding at  December 31, 2005 |       | 2,495,060  |       | $                                       | 5.4939     |                                                             | 0          |   |
| Granted                                |       | 681,500    |       | 0.9349                                  |       | 0                                                                |       |
| Exercised                              |       | 0          |       | 0                                       |       | 0                                                                |       |
| Cancelled or expired                   |       | (218,960   | )          | 3.3826                                  |       |                                                             |       |
| Outstanding at  September 30, 2006     |       | 2,957,600  |       | $                                       | 4.6181     |                                                             | 6.7510     |   |
|                                   |       |       |       |                                    |       |                                                             |       |
| Vested at  September 30, 2006     |       | 2,519,900  |       | $                                       | 5.2441     |                                                             | 6.2754     |   |
|                                   |       |       |       |                                    |       |                                                             |       |
| Exercisable at  September 30, 2006     |       | 2,519,900  |       | $                                       | 5.2441     |                                                             | 6.2754     |   |

 

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

|                                 | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                      | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of Exercise** | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Prices**                      | ** ** | **Outstanding**              | ** ** | **Life**                     | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
|                            |       |                         |       |                         |       |   |   |   |   |   |   |
| $0.25 — 1.69               |       | 1,019,400                    |       | 7.8159                       |       | $ | 0.9556 |   | 581,700 |   | $ | 0.9119 |   |
| $2.71 — 6.590              |       | 1,299,200                    |       | 5.5232                       |       | $ | 5.4017 |   | 1,299,200 |   | $ | 5.4017 |   |
| $8.45 — 12.15              |       | 639,000                      |       | 7.5688                       |       | $ | 8.8675 |   | 639,000 |   | $ | 8.8675 |   |
|                            |       |                         |       |                         |       |   |   |   |   |   |   |
| Total at September 30,  2006    |       | 2,957,600                    |       | 6.7510                       |       | $ | 4.6181 |   | 2,519,900 |   | $ | 5.2441 |   |

 

During the nine months ended September 30, 2006, the Company grantedoptions to purchase 681,500 shares of its common stock at a weighted averagefair market value of $0.7488.  No optionswere exercised during the nine months ended September 30, 2006.  Duringthe nine months ended September 30, 2006, options to purchase 335,000 shares ofApogee common stock vested. ** **The weighted average fair value ofthese options was $0.7889.  Total stock-based compensation expense for thenine months ended September 30, 2006 was approximately $349,000.  Had weimplemented SFAS 123(R) during the nine months ended September 30, 2005,our stock-based compensation expense for such period would have beenapproximately $1.5 million.

During the three months ended September 30, 2006, the Company issued540,000 options to purchase shares under the Company’s Plan.  No optionswere exercised for the nine months ended September 30, 2006.

***Recent AccountingPronouncements***

In September 2006, the FASB issued SFAS No. 157, “*Fair Value Measurements.*” SFAS 157 definesfair value, establishes a framework for measuring fair value in GAAP, and expandsdisclosures about fair value measurements. SFAS 157 applies under otheraccounting pronouncements that require or permit fair value measurements, theFASB having previously concluded in those accounting pronouncements that fairvalue is the relevant measurement attribute. Accordingly, SFAS 157 does notrequire any new fair value measurements, but may change current practice forsome entities. SFAS 157 is effective for fiscal years beginning after December15, 2006. Our adoption of SFAS No. 157 is not expected to have a materialeffect on our consolidated financial position or results of operations.

In September 2006, the FASB also issued SFAS No. 158, *“Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106,and 132(R)”*. SFAS 158 requires an employer to recognize theoverfunded or underfunded status of a defined benefit postretirement plan(other than a multiemployer plan) as

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an asset or liability in its statement of financial position and torecognize changes in that funded status in the year in which the changes occurthrough comprehensive income. SFAS 158 also requires an employer to measure thefunded status of a plan as of the date of its year-end statement of financialposition, with limited exceptions. An employer with publicly traded equitysecurities is required to initially recognize the funded status of a definedbenefit postretirement plan and to provide the required disclosures as of theend of the fiscal year ending after December 15, 2006. Because we do not have adefined benefit pension plan or other qualifying post retirement plan, ouradoption of SFAS No. 158 is not expected to have a material effect on ourconsolidated financial position or results of operations.

**3.****          AccountsReceivable**

Accounts Receivable at September 30, 2006 and December 31, 2005are comprised of the following:

|                                      | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                           | ** ** | **2006**               | ** **  | **2005**              | ** ** |
| ** **                           | ** ** | **(Unaudited)**        | ** **  | **(Audited)**         | ** ** |
| Distributor                          | ** ** | **$**                  | **11,139**  |                  | $          | 190,202 |   |
| Direct  customers*                   | ** ** | **389,233**            |        | 107,635               |       |
| ** **                           | ** ** | **$**                  | **400,372** |                  | $          | 297,837 |   |
|                                 |       |                   |        |                  |       |
| Less allowance for doubtful accounts | ** ** | **(11,320**            | **)**       | (145,000              | )          |
|                                 |       |                   |        |                  |       |
| Net accounts  receivable             | ** ** | **$**                  | **389,052** |                  | $          | 152,837 |   |

 

*                    $383,198of the 2006 amount is from the earn-out due Apogee as part of the SigmaTeltransaction.

**4.****           Inventories**

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

|                                                                | ** ** | **September 30,** | ** **    | **December 31,** | ** ** |
|----------------------------------------------------------------|------------|------------------------|---------------|-----------------------|------------|
| ** **                                                     | ** ** | **2006**               | ** **    | **2005**              | ** ** |
| ** **                                                     | ** ** | **(Unaudited)**        | ** **    | **(Audited)**         | ** ** |
|                                                           |       |                   |          |                  |       |
| Raw materials                                                  | ** ** | **$**                  | **0**         |                  | $          | 0 |   |
| Finished goods  held by Apogee                                 | ** ** | **1,885,750**          |          | 2,297,795             |       |
| Finished goods  held by distributors                           | ** ** | **0**                  |          | 943,423               |       |
|                                                           |       |                   |          |                  |       |
| ** **                                                     | ** ** | **$**                  | **1,885,750** |                  | $          | 3,241,218 |   |
| Less allowance for slow moving, excess and obsolete  inventory | ** ** | **(1,885,750**         | **)**         | (1,913,254            | )          |
|                                                           |       |                   |          |                  |       |
| Inventory — net                                           | ** ** | **$**                  | **0**         |                  | $          | 1,327,964 |   |

 

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

Property and equipment at September 30, 2006 and December 31, 2005are comprised of the following:

|                               | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                    | ** ** | **2006**               | ** **  | **2005**              | ** ** |
| ** **                    | ** ** | **(Unaudited)**        | ** **  | **(Audited)**         | ** ** |
|                          |       |                   |        |                  |       |
| Equipment                     | ** ** | **$**                  | **66,031**  |                  | $          | 48,091 |   |
| Software                      | ** ** | **32,943**             |        | 32,943                |       |
| Furniture and  fixtures       | ** ** | **20,560**             |        | 22,515                |       |
| Leasehold  improvements       | ** ** | **22,954**             |        | 22,954                |       |
|                          |       |                   |        |                  |       |
| ** **                    | ** ** | **$**                  | **142,488** |                  | $          | 126,503 |   |
|                          |       |                   |        |                  |       |
| Less accumulated depreciation | ** ** | **(91,800**            | **)**       | (86,570               | )          |
|                          |       |                   |        |                  |       |
| ** **                    | ** ** | **$**                  | **50,688**  |                  | $          | 39,933 |   |

 

Depreciation expense was$4,764 and $12,894 for the three and nine months ended September 30, 2006.

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

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

 

**6.****             AccruedExpenses**

|                        | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **             | ** ** | **2006**               | ** **  | **2005**              | ** ** |
| ** **             | ** ** | **(Unaudited)**        | ** **  | **(Audited)**         | ** ** |
|                   |       |                   |        |                  |       |
| Accrued audit expenses | ** ** | **$**                  | **82,000**  |                  | $          | 69,000 |   |
| Accrued legal expenses | ** ** | **53,000**             |        | 86,000                |       |
| Accrued taxes          | ** ** | **0**                  |        | 20,000                |       |
| Other accrued expenses | ** ** | **36,000**             |        | 39,000                |       |
|                   |       |                   |        |                  |       |
| ** **             | ** ** | **$**                  | **171,000** |                  | $          | 214,000 |   |

 

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

During September 2004, the Company entered into a fundingagreement with United Binational Industrial Research and Development (“BIRD”)Foundation of Israel. This agreement was to provide funds to the Company forindustrial research and development activities. The Company has recorded $101,379 in deferred contract revenue and forthe twelve months ended December 31, 2004 recorded $23,101 as an offset toresearch and development expenses. There was no revenue recorded under thisagreement for the fiscal year ended December 31, 2005 or the six monthsended June 30, 2006.  On July 27, 2006 Apogee refunded approximately$63,000 thus satisfying its obligation in full to the Bird Foundation under theAgreement.   The remaining $10,000 in deferred contract revenue wasapplied against Research and Development expense.

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

***Stock Options***

During the three months ended September 30, 2006, the Board ofDirectors awarded employees options to purchase in the aggregate 110,000 and350,000 shares at an exercise price of $0.80 and $0.95, respectively pershare.  In addition, the Board of Directors awarded to each of fourmembers of the Board of Directors options to purchase 20,000 shares at anexercise price of $0.95 per share.  These options were granted under the1997 Employee, Director and Consultant Stock Option Plan. The options grantedto the employees and directors vest over five years beginning at the firstanniversary of the date of grant except for the 300,000 options granted to theChief Executive Officer, for which the Board of Directors approved  immediate vesting.

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

The Company rents its facility from an entity controlled by astockholder for $4,400 per month pursuant to a lease that expiredDecember 31, 2005. Currently, the Company is renting the facility on amonth-to-month basis.  In addition, seeFootnote 12 — Indemnification Agreements with our Executives.

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**10.****        LicenseAgreement**

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

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

**11.****        Concentrations**

During the three months ended September 30, 2006, the Company derivedapproximately 12% of its revenue from one end user and 86% as a result of sellthrough by three distributors.

During the nine months ended September 30, 2006, the Company derivedapproximately 81% of its revenue as a result of sell through by fivedistributors.

During the three months ended September 30, 2005, the Company derivedapproximately 12% of its total revenue from one end user and 41% of totalrevenue as a result of sell through by two distributors.

During the three months ended September 30, 2005, the Company derivedapproximately 16% of its product revenue from one end user and 64% of productrevenue as a result of sell through by three distributors.

During the nine months ended September 30, 2005, the Company derivedapproximately 25% of its total revenue from two end users and 43% of totalrevenue as a result of sell through by two distributors.

During the nine months ended September 30, 2005, the Company derivedapproximately 22% of its product revenue from one end user and 44% of productrevenue as a result of sell through by two distributors.

During the three months ended September 30, 2006, the Company derivedapproximately 88% of its revenue from distributors and end users located inAsia.

During the nine months ended September 30, 2006, the Company derivedapproximately 88% of its revenue from distributors and end users located inAsia.

During the three months ended September 30, 2005, the Company derivedapproximately 84% of its total revenue from end users and distributors locatedin Asia and Europe.

During the three months ended September 30, 2005, the Company derivedapproximately 91% of its product revenue from end users and distributorslocated in Asia and Europe.

During the nine months ended September 30, 2005, the Company derivedapproximately 86% of its total revenue from end users and distributors locatedin Asia and Europe.

During the nine months ended September 30, 2005, the Company derivedapproximately 88% of its product revenue from end users and distributorslocated in Asia and Europe.

One of the Company’s customers accounted for approximately 96% of thetotal accounts receivable balance at September 30, 2006.

Four of the Company’s customers accounted for approximately 73% of thetotal accounts receivable balance at September 30, 2005.

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

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**12.****         ****    Indemnification Arrangementswith our Executives**

The Company has been assuming and will continue to assume the legalcosts and related expenses of Herbert M. Stein, in connection with the civilcase in the Circuit Court of the Fifteenth Judicial Circuit in and for PalmBeach County, Florida entitled *Joseph Shamy v. Herbert M.Stein, case No.: 50 2005 CA 007719 XXXXMB. *To date we have incurred approximately $220,000 toward thisindemnification.

**13.        SubsequentEvents — Notification from the American Stock Exchange**

Asdisclosed in Apogee’s Current Report on Form 8-K, filed on November 6, 2006,Apogee was notified on November 1, 2006 that it does not meet certain continuedlisting standards, as set forth in Part 10 of the AMEX Company Guide (the “CompanyGuide”), and has therefore become subject to the procedures and requirements ofSection 1009 of the Company Guide.  As Apogee’s shareholders’ equity wasapproximately $3.97 million as of June 30, 2006 and is approximately$3.48 million as of this report, the Company is not in compliance with Section 1003(a) (ii) of the Company Guide as it has shareholders’ equity of less than $4million and losses from continuing operations and/or net losses in three out ofits four most recent fiscal years.  Apogee is also not in compliance withSection 1003 (a) (iii) of the Company Guide as it has shareholders’ equity ofless than $6 million and losses from continuing operations in its five mostrecent fiscal years.

Accordingto the AMEX notice, Apogee must submit a plan by December 1, 2006, advising ofthe action it has taken, or will take, to bring Apogee into compliance withSections 1003(a) (ii) and 1003(a) (iii) of the Company Guide within a maximumof 12 months.

Ifthe plan is accepted, Apogee will be permitted to continue its listing duringthe plan period, but such continued listing will be subject to periodic reviewto determine whether Apogee is making progress consistent with the plan.

Apogeeintends to issue a formal plan to AMEX before December 1, 2006 to address theissues raised by the AMEX.

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

**GENERAL**

The following Management’sDiscussion and Analysis of the Company’s Financial Condition and Results ofOperations for the three- and nine-month periods ended September 30, 2006 andSeptember 30, 2005 should be read in conjunction with the Company’s FinancialStatements and related Notes included elsewhere in this Quarterly Report onForm 10-QSB. This discussion contains, in addition to historicalstatements, forward-looking statements that involve risks and uncertainties.The Company’s actual results could differ significantly from the resultsdiscussed in the forward-looking statements. Factors that could cause orcontribute to such differences include the factors discussed in thesection of this Quarterly Report titled “Certain Risk Factors ThatMay Affect Future Results of Operations And Our Common Stock Price” aswell as other factors described in the Company’s Annual Report onForm 10-KSB for the year ended December 31, 2005. The Company doesnot intend to update any such forward-looking statements.

**OVERVIEW**

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

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

As set forth in ourCurrent Report on Form 8-K as filed on October 11, 2005, we completeda transaction with SigmaTel, Inc. (“SigmaTel”) on October 5,2005.  In this transaction, certain assets of our audio division weresold, including the DDX technology and the associated royalties from ourlicense agreement with ST, to SigmaTel for approximately $9.4 million plus aone-year potential earn-out that was up to $4.5 million.  Of the potential$4.5 million in earn-out, we recorded approximately $383,000.  As the earn-out period expired on October 5,2006, we are not entitled to any additional earn-out.  As part of thetransition, a significant portion of Apogee’s engineering and marketing staffrelated to the audio division left the Company after they were offeredpositions at SigmaTel. We have chosen to exit the audio business and by theterms of a non-compete with SigmaTel, signed in connection with our sale ofassets to them, we can no longer compete in the Class D audio/amplifierbusiness for a period of two years.

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

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

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

At September 30, 2006, wehad an accumulated deficit of approximately $15.1 million, as compared to adeficit of $12.7 million as of December 31, 2005.  Our historical netlosses and accumulated deficit (since 1995) result primarily from the costsassociated with our efforts to design, develop and market our DDX technology aswell as costs associated with our efforts to develop new products using ouranalog and digital circuit designs and MEMS technology.

As of September 30, 2006,we had 11 employees compared to 36 employees for the same period in 2005. Thisreduction in employees is a direct result of the audio business sale toSigmaTel, Inc. in October 2005.

During the three-monthperiod ended September 30, 2006, we derived approximately 12% of our revenuefrom one end user and 86% as a result of sell through by three distributors ofour audio products.  During the nine-month period ended September 30,2006, we derived approximately 81% of our revenue as a result of sell throughby five of our distributors.  As of September 30, 2006, Apogee recognizedall of the deferred revenue related to six of our former distributors. AtDecember 31, 2005, we had formally terminated these distributor contracts.At September 30, 2006 it was determined that we would have no continuinginvolvement, under the terms of a distributor agreement, with thesedistributors as they related to the audio business. For the three and ninemonths ended September 30, 2006, all of our revenue was attributable to theaudio division. Prior to the SigmaTel transaction, we utilized a network ofsales representatives and distributors, as well as sales offices in China, HongKong, Japan and Taiwan, to support our worldwide sales and marketingactivities.  Subsequent to the selling of the audio business inOctober 2005, we closed our locations in China, Hong Kong andTaiwan.  In an effort to consolidate operations and further reduceoverhead, we closed our Long Island, New York office in January 2006 and ourJapanese operations in July 2006.

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**SELECTEDCONSOLIDATED FINANCIAL DATA**

The following selectedfinancial data for the three- and nine-month periods ended September 30, 2006and 2005 have been derived from our unaudited financial statements. Any trendsreflected by the following table may not be indicative of future results.
| ** **                               | ** ** | **For the Three-Month Period  Ended  September 30,** | ** ** | **For the Nine-Month Period  Ended  September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                                 | ** ** | **2005**                                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | ** **                                                               | ** ** | ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statement of Operations  Data:           |       |                                                                     |       |                                                                    |       |   |   |   |   |
| Revenue                                  |       | $                                                                        | 509,015    |                                                                    | $          | 1,520,186 |   | $ | 1,835,211 |   | $ | 3,949,566 |   |
| Costs and expenses                       |       | (1,591,857                                                               | )          | (3,066,056                                                              | )          | (4,747,851 | ) | (8,535,375 | ) |
| Other Income (expenses)                  |       | 343,682                                                                  |       | (30,738                                                                 | )          | 512,845 |   | (28,065 | ) |
| Net Loss                                 |       | $                                                                        | (739,160   | )                                                                       | $          | (1,576,608 | ) | $ | (2,399,795 | ) | $ | (4,613,874 | ) |
|                                     |       |                                                                     |       |                                                                    |       |   |   |   |   |
| Shares Outstanding                       |       | 11,968,332                                                               |       | 11,838,332                                                              |       | 11,968,332 |   | 11,838,332 |   |
|                                     |       |                                                                     |       |                                                                    |       |   |   |   |   |
| Balance Sheet Data:                      |       |                                                                     |       |                                                                    |       |   |   |   |   |
| Total Assets                             |       | $                                                                        | 4,047,799  |                                                                    | $          | 4,148,235 |   | $ | 4,047,799 |   | $ | 4,148,235 |   |
| Stockholders’ equity  (deficiency)  |       | $                                                                        | 3,488,450  |                                                                    | $          | (2,059,214 | ) | $ | 3,488,450 |   | $ | (2,059,214 | ) |
| Loss per share (basic and fully diluted) |       | $                                                                        | (0.06      | )                                                                       | $          | (0.13 | ) | $ | (0.20 | ) | $ | (0.39 | ) |

 

**RESULTSOF OPERATIONS OF THE COMPANY**

The following table setsforth the percentage of total revenue represented by certain revenue andexpense items for the three- and nine-month periods ended September 30, 2006and 2005. 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  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                               | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Product Sales                        |       | 100.00                                                                 | %          | 76.16                                                                 | %          | 99.93 | % | 84.22 | % |
| Royalties                            |       | 0                                                                      |       | 13.97                                                                 |       | 0 |   | 11.98 |   |
| Consulting                           |       | 0                                                                      |       | 9.87                                                                  |       | 0.07 |   | 3.80 |   |
|                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Cost of Sales                        |       | (69.58                                                                 | )          | (73.81                                                                | )          | (73.63 | ) | (75.33 | ) |
| Research and  Development            |       | (82.75                                                                 | )          | (51.66                                                                | )          | (77.46 | ) | (58.45 | ) |
| Selling, General and  Administrative |       | (160.40                                                                | )          | (76.21                                                                | )          | (107.62 | ) | (82.33 | ) |
|                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Operating Loss                       |       | (212.73                                                                | )%         | (101.68                                                               | )%         | (158.71 | )% | (116.11 | )% |
| Other Income (Expense)               |       | 67.52                                                                  |       | (2.02                                                                 | )          | 27.94 |   | (0.71 | ) |
|                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net Loss                             |       | (145.21                                                                | )%         | (103.70                                                               | )%         | (130.77 | )% | (116.82 | )% |

 

**Revenue**

We derive our revenuefrom three sources: (1) product sales, which consist of merchandise salesmade either directly to original equipment manufacturers or sell through pointof sale (“POS”) by distributors. All shipments are fulfilled from ourcontracted warehouse in Hong Kong and/or from our Norwood, Massachusetts officeand is reported net of returns; (2) royalty revenue, which formerlyconsisted of royalties paid by STMicroelectronics which have now been sold aspart of the transaction with SigmaTel and (3) consulting incomerelated to contractual services or development activities for thirdparties.  The Company may in thefuture receive royalties under its remaining audio licensing agreements andfrom new agreements contemplated under its two new business groups.  See Footnote 2 — Revenue Recognition.

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Total revenue declined byapproximately $1.0 million or 67% to approximately $509,000 for the threemonths ended September 30, 2006, compared to approximately $1.5 million for thethree months ended September 30, 2005.  Total revenue declined by approximately$2.1 million or 54% to approximately $1.8 million for the nine months endedSeptember 30, 2006, compared to approximately $3.9 million for the nine monthsended September 30, 2005.  This decline in revenue is directly related tothe sale of certain assets of the audio division, including the DDX® technologyand the associated royalties to SigmaTel in October 2005.

During the three- andnine-month periods ended September 30, 2006, we recognized revenue from productsales of approximately $509,000 and $1.8 million, respectively, a decrease ofapproximately $799,000 or 61% and $1.6 million or 47% from product revenuerecognized of approximately $1.3 million and $3.5 million for the three- andnine-month periods ended September 30, 2005, respectively.   During the three months ended September 30,2006, we recorded as revenue the remaining deferred product revenue ofapproximately $434,000.  Of this amount,approximately $283,000 was attributed to one distributor after we determinedthat there was no longer any continuing involvement.  The balance was recognized either through POSactivity reports received from our former distributors or due to the immaterialbalances of deferred revenue associated with two distributors.  Product sales consisted of semiconductorproducts sold directly to end users or POS revenue by our distributors.  Subsequent to the transaction with SigmaTel,we no longer recognize, or are eligible to receive, royalties under the STLicensing Agreement. As a result, no royalty revenue was recorded for the threeand nine months ended September 30, 2006 under the ST LicensingAgreement.  For the three and nine months ended September 30, 2006, wedid, however, record royalty revenue of $1,250 as a result of an agreement withQSound Labs, Inc.  For the same periods in 2005 we recognized royaltyrevenue of approximately $212,000 and $473,000, respectively, primarily relatedto the ST Licensing Agreement.  Inaddition, for the three and nine months ended September 30, 2006, no consultingrevenue was recorded.  For the sameperiods in 2005 we recorded $150,000 in consulting revenue.

Total revenue for thethree and nine months ended September 30, 2006 and 2005 consisted of:
| ** **      | ** ** | **For the Three-Month Period  Ended  September 30,** | ** ** | **For the Nine-Month Period  Ended  September 30,** | ** ** |
|-----------------|------------|--------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **      | ** ** | **2006**                                                                 | ** ** | **2005**                                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **      | ** ** | ** **                                                               | ** ** | ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product Revenue |       | $                                                                        | 509,015    |                                                                    | $          | 1,157,789 |   | $ | 1,833,961 |   | $ | 3,326,238 |   |
| Royalties       |       | 0                                                                        |       | 212,397                                                                 |       | 1,250 |   | 473,328 |   |
| Consulting      |       | 0                                                                        |       | 150,000                                                                 |       | 0 |   | 150,000 |   |
|            |       |                                                                     |       |                                                                    |       |   |   |   |   |
| Total:          |       | $                                                                        | 509,015    |                                                                    | $          | 1,520,186 |   | $ | 1,835,211 |   | $ | 3,949,566 |   |

 

Revenue from the sale ofDDX products is expected to continue over the short term as the remaining DDXinventory is sold. In addition, licensing revenue from the ST LicensingAgreement has been assigned to SigmaTel in conjunction with the sale of certainDDX assets to SigmaTel.  Accordingly, we expect that the declines in ourrevenues will continue until such time as we are able to generate revenues fromthe sale of our sensor products or medical device products.

**Cost ofRevenue**

Cost of revenue decreasedas a result of reduced product revenue to approximately $354,000 and $1.4million for the three and nine months ended September 30, 2006, respectively,compared to approximately $1.1 million and $3.0 million for the three and ninemonths ended September 30, 2005.  Cost of revenue from our former DDXbusiness primarily consists of purchasing finished semiconductor chips andstorage fees associated with warehousing a large portion of our semiconductorproducts in Asia. For the three and nine months ended September 30, 2006 werecorded a gross margin from product revenue of approximately 30% and 26%,compared to a gross margin of approximately 3% and 11% for the three and ninemonths ended September 30, 2005, respectively. This increase in gross marginfrom product revenue was due to an adjustment to Cost of Goods for recovery ofa previous reserve provision.

Previously during thesix-month period ended June 30, 2006, we recorded a provision of approximately$32,000 for slow moving, excess and obsolete inventory of which approximately$11,000 had been written off against this reserve.  Subsequently, during the three months endedSeptember 30, 2006, we recorded a recovery of previous reserve provisions of approximately$49,000 to adjust for current inventory levels.   During the three and nine months ended September 30, 2005, werecorded a provision of $255,000 and $576,000, respectively.   AtSeptember 30, 2006 the total reserve for slow moving, excess and obsoleteinventory was approximately $1.9 million compared to a total reserve ofapproximately $1.8 million at September 30, 2005.  At September 30, 2006 our reserve againstslow moving, excess and obsolete inventory represents 100% of current inventorylevels.

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

The Company’s researchand development (“R&D”) expenses consist primarily of salaries, developmentmaterial costs, external consulting and service costs related to the design ofnew products and the refinement of existing products. Research and developmentexpenses decreased to approximately $421,000 and $1.4 million for the three andnine months ended September 30, 2006, respectively, compared to approximately$785,000 and $2.3 million for the three and nine months ended September 30,2005.  This decrease of approximately $364,000 or 46% and $900,000 or 38%,respectively, was the result of the transaction with SigmaTel and the transferof our audio related R&D staff to SigmaTel. Human resource costs decreasedby approximately $380,000 or 68% and $1.1 million or 67% to approximately$181,000 and $548,000 for the three and nine months ended September 30, 2006,respectively, compared to approximately $561,000 and $1.7 million for the sameperiods in 2005. For the three and nine months ended September 30, 2005, humanresource costs associated with our former audio division were approximately$440,000 and $1.3 million, respectively.  With our adoption ofSFAS 123(R), the human resource expense for the three and nine monthsended September 30, 2006 was increased by approximately $10,000 and $68,000,respectively.

With the sale of ourformer audio division to SigmaTel, we have expanded the development of both oursensor and medical device products. Expenses associated with the development ofnew products and the refinement of existing products increased to approximately$410,000 and $1.3 million for the three and nine months ended September 30,2006, respectively, compared to approximately $274,000 and $702,000 for thesame periods in 2005.  In an effort to support and expand the developmentof both our medical device and sensor products, we incurred professional feesof approximately $175,000 and $408,000 for the three and nine months endedSeptember 30, 2006, respectively, compared to approximately $89,000 and$297,000 for the same periods in 2005.  In addition, due to the technicalnature of both the medical device and sensor components, we incurredapproximately $32,000 and $261,000 in developmental wafer and micro needle maskrelated costs for the three and nine months ended September 30,2006.   Of this amount we expensed approximately $146,000 in wafersrelated to our sensor business.   We will continue to invest in thedevelopment of our sensor and medical device products. During the fourthquarter of 2006 we anticipate the completion of a laboratory facility at ourNorwood headquarters to support our medical product research and developmentactivities. Our investment in laboratory equipment and the renovation of ourfacility is expected to be approximately $180,000.  We anticipate that this new capability willallow us to have greater efficiency and productivity as well as better controlof expenses.   In January 2006, we consolidatedour MEMS division to our home office in Norwood, Massachusetts and closed theLong Island office. We anticipate that we will continue to commit resources toresearch and development activities and R&D costs are expected to increasein the future.

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

Selling expenses consist primarilyof salaries and related expenses for personnel engaged in the marketing andselling of the Company’s products, as well as costs related to trade shows,product literature, travel and other promotional support costs. In addition,selling expenses had included costs related to the operation of Apogee’s HongKong, Taiwan, China and Japan sales offices. Subsequent to the SigmaTeltransaction, the Taiwan and China offices were closed.  In February 2006 we closed our Hong Kongoffice and in July 2006 we closed our Japanese office.  General andadministrative costs consist primarily of executive and administrativesalaries, professional fees and other associated corporate expenses. Selling,General and Administrative (“SG & A”) expenses were approximately $817,000and $2.0 million for the three and nine months ended September 30, 2006compared to approximately $1.2 million and $3.3 million for the three and ninemonths ended September 30, 2005. This represents a decrease of approximately$342,000 or 30% and $1.3 million or 39% for the respective periods. Thedecrease in SG&A, described below, was attributable primarily to theclosing of the Hong Kong and Taiwan offices as well as decreased selling anddistribution costs, professional fees, travel and human resource costs.

Human resource costsincreased approximately $97,000 or 26% to approximately $479,000 for the threemonths ended September 30, 2006 compared to approximately $382,000 for thethree months ended September 30, 2005. This increase is primarily theresult of our adoption of SFAS 123(R). For the nine months ended September 30, 2006 human resource costsremained relatively constant at approximately $1.1 million with a smalldecrease of approximately $42,000 or 4%. With our adoption of SFAS 123(R), the human resource expense forthe three and nine months ended September 30, 2006 was increased byapproximately $241,000 and $281,000, respectively.  This decrease, net of stock basedcompensation expense, reflects the reduction in staffing and subsequent closingof the Taiwan office in 2005, the Hong Kong office in February 2006 and theJapanese office in July 2006, as a result of the sale of the audio division toSigmaTel, Inc. in October 2005. As of September 30, 2006, Apogeeemployed a total of 11 employees, all operating out of our Norwoodoffice.  As of September 30, 2005 we employed a total of 36 employees, 28domestically with 6 employees in Hong Kong and 1 employee each in Japan andTaiwan.

Professional expensesdecreased by approximately $255,000 or 50% and $701,000 or 60% to approximately$257,000 and $499,000 for the three and nine months ended September 30, 2006,compared to approximately $512,000 and $1.2 million for the three and ninemonths ended September 30, 2005, respectively.  Of this decreaseapproximately $322,000 and $808,000 was the result of decreased legal andaccounting fees as a result of becoming compliant with our filings required bythe Securities Exchange Act of 1934, as amended, and the completion of theAudit Committee’s investigation and subsequent restatement of Apogee’sfinancial statements.  These decreases for both the three months and ninemonths ended September 30, 2006 were partially offset by an increase in legalfees associated with the indemnification activities, described in Footnote 12to the accompanying financial statements, which were approximately $126,000 and$157,000 for the three and nine months ended September 30, 2006.  For the three and nine months ended 

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September 30, 2006, weincurred legal expenses, net of the indemnification expense, of approximately$80,000 and $217,000 compared to legal expenses of approximately $106,000 and$616,000 for the same periods in 2005, respectively.  For the three and nine months ended September30, 2006, we incurred accounting expenses of approximately $25,000 and $75,000compared to accounting expenses of approximately $324,000 and $424,000 for thesame periods in 2005.  A decrease in third party marketing consultantsaccounted for the remainder of the decrease for both the three and nine monthsended September 30, 2006, partially offset by the payment of fees to our Boardof Directors.

Other expensescontributing to the decrease in SG&A were reduced international travel,closing of the Hong Kong, China and Taiwan Offices as well as reducedcommissions and distribution expense. Travel expense decreased by approximately$48,000 or 81% and $163,000 or 74% to approximately $11,000 and $58,000 for thethree and nine months ended September 30, 2006, compared to approximately$59,000 and $221,000 for the same periods in 2005. As a result of the audiodivision sale of assets to SigmaTel, we closed the Taiwan Office effective asof December 31, 2005 and the Hong Kong Office effective as ofFebruary 28, 2006. Expenses associated with the Hong Kong Office, net ofhuman resources were approximately $2,000 and $13,000 for the three and ninemonths ended September 30, 2006, compared to approximately $22,000 and $104,000for the same periods in 2005.  The other major contributor to the decreasein SG&A is the reduction in the distribution and commission expensedirectly related to the decrease in revenue resulting from the sale of theaudio division to SigmaTel.  Distribution and commission expense declinedby approximately $45,000 or 93% and $95,000 or 92% to approximately $3,000 and$9,000 for the three and nine months ended September 30, 2006, respectively,compared to approximately $48,000 and $104,000 for the same periods in 2005.

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

**Interest/OtherIncome (Expense)**

Interest income includesincome from Apogee’s cash and cash equivalents. During the three and ninemonths ended September 30, 2006, we generated interest income of approximately$46,000 and $154,000 compared to interest income of approximately $5,000 and$11,000 during the same periods in 2005. This increase was primarily due to interest on the net cash received ofapproximately $5.7 million as a result of the SigmaTel transaction.  In addition, during the three and nine months ended September 30, 2006 werecorded approximately $299,000 and $383,000, respectively of income as aresult of the final earn-out due us in connection with the SigmaTeltransaction.  The approximately $23,000 in other expense resulted from aloss on the disposal of fixed assets and additional expenses in connection withthe SigmaTel transaction.

**Net Loss**

Apogee’s net loss for thethree months ended September 30, 2006 was approximately $739,000 or $0.06 perbasic and diluted common share, compared to a net loss of approximately $1.6million or $0.13 per basic and diluted common share for the three months endedSeptember 30, 2005.  For the nine months ended September 30, 2006 theCompany reported a loss of approximately $2.4 million or $0.20 per basic anddiluted common share, compared to a net loss of approximately $4.6 million or$0.39 per basic and diluted common share for the nine months ended September 30,2005.

**LIQUIDITYAND CAPITAL RESOURCES**

Our principal source ofliquidity at September 30, 2006, consisted of approximately $3.0 million incash and cash equivalents.  We considerall highly liquid investments with an original maturity of three months or lessto be cash equivalents.   Substantiallyall of our cash is held in high quality money market funds comprised ofshort-term, fixed income securities earning interest at 4.92% at September 30,2006. This compares to approximately $812,000 in cash and cash equivalents asof September 30, 2005. In addition, as of September 30, 2006, we had workingcapital of approximately $2.8 million, compared to a working capital deficiencyof approximately $2.4 million at September 30, 2005. This increase in cash was theresult of the SigmaTel transaction whereby on October 5, 2005, we receivedapproximately $8.6 million, net of expenses, as a result of the sale of certainassets of our audio division.

Net cash used inoperating activities for the nine-month period ended September 30, 2006decreased to approximately $2.5 million compared to approximately $3.6 millionin the nine-month period ended September 30, 2005. The decrease was primarilydue to a decrease in the net loss as a result of decreased spending following theSigmaTel transaction and the transfer of the DDX related engineering and salesstaff. As of September 30, 2006, reserves for slow moving, excess and obsoleteinventory was increased to 100% of the remaining DDX inventory.  This compares to inventory, net of reserves,of approximately $1.8 million as of September 30, 2005. Net accounts receivablewas approximately $389,000 at September 30, 2006 down from approximately$465,000 at September 30, 2005. Of this amount approximately $383,000 isearn-out due to us as part of the SigmaTel transaction. As of September 30,2006 we had reserves against bad debt of approximately $13,000 compared to areserve of $145,000 as of September 30, 2005. Given the current accountsreceivable we believe that the remaining reserve is sufficient at this time.

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Net cash used ininvesting activities for the nine months ended September 30, 2006 wasapproximately $59,000, compared to approximately $138,000 for the nine monthsended September 30, 2005.

No cash was provided by financing activities for thenine months ended September 30, 2006 compared to approximately $2.5 millionprovided by financing activities for the nine months ended September 30,2005.  During the nine-month period endedSeptember 30, 2005, the Company received the proceeds from unsecured interestbearing loans in the amounts of $250,000 from David Spiegel, a shareholderand $250,000 from Herbert Stein, Chief Executive Officer, President andChairman of the Board. These loans were payable upon demand andwere not subject to any premium or penalty for prepayment. The loaninterest rate is 6% per annum, payable monthly in arrears on the outstandingbalance.   On August 11, 2005, the Company entered intoagreements with Laurus Master Fund, Ltd., whereby the Company received $2.0million in gross proceeds (with net proceeds of approximately $1.8 million)through the sale of a 120 day secured term note.  In accordance with the terms of the note, thenote was payable by the Company in cash during the first 120 days following theissuance of the note, and after the 120 day period it was payable in the amountof $62,500 per month in cash or convertible into the common stock, $0.01 parvalue per share, of the Company at a fixed conversion price of $1.05 per share.In connection with the financing, the Company paid certain costs and expensesof Laurus and has issued an immediately exercisable warrant with termsrestricting exercise. The Laurus warrant provides for the purchase of 85,000shares of common stock at a price of $1.22 per share. The warrant expires sevenyears after issuance. A finder for the transaction received a fee of 5% of thegross proceeds of the offering, together with a seven year warrant to purchasean aggregate of 8,500 shares of common stock immediately exercisable at a priceof $1.22 per share. This offering was conducted as a private placement pursuantto the exemption from registration provided by Section 4(2) of the SecuritiesAct of 1933, as amended, and the rules and regulations promulgated thereunder.With respect to the transaction with Laurus, the Company 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.  On December 5, 2005, we amended theterms of the 85,000 common share warrants with Laurus, whereby the registrationrights associated with the warrant were terminated in consideration of areduced exercise price, from $1.22 to $1.15, and the insertion of a cashlessexercise provision.  On October 5, 2005proceeds from the SigmaTel transaction were used to repay the approximately$2.1 million owed to Laurus Master Fund, Ltd. and the $500,000 loans to Mr.Herbert Stein and Mr. David Spiegel, as well as payment of certain expensesrelated to the transaction.

We believe that cash flowfrom operations as well as the funds from the audio division sale, as well asamounts that may be raised from time to time in private offerings of ourcommon stock or debt financings will be sufficient to support operations andfund capital equipment requirements at least through June 30, 2007.** **See Footnote 13 — SubsequentEvents — Notification from the American Stock Exchange.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

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

**RevenueRecognition**

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

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

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**AccountsReceivable**

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

**Inventory**

Apogee states itsinventory at the lower of cost (first-in, first-out) or market**.** This policy requires that we make certainestimates regarding the market value of the inventory, including an assessmentof excess or obsolete inventory. Apogee had determined excess and obsoleteinventory based on estimated future demands and estimated selling prices forour products within a specified time frame, which was generally 12 months. Theestimates used for expected demand were also used for short-term capacityplanning and inventory purchasing and were consistent with revenueforecasts.   During the three monthsended September 30, 2006, we maintained our reserve for slow moving, excess andobsolete inventory to 100% of current Apogee held inventory levels.  In addition, we wrote-off the remaining unsolddistributor inventory of approximately $348,000.  The inventory at September 30, 2006 entirelyconsisting of Apogee held inventory was approximately $1.9 million before theallowance for slow moving, excess and obsolete inventory provision.  As of September 30, 2006 the total allowancefor slow moving, excess and obsolete inventory was approximately $1.9 millionor 100% of current Apogee held inventory levels.  This compares to inventory atDecember 31, 2005, net of reserves, of approximately $1.3 millionconsisting of $719,000 held at distributors with the remaining $609,000 held atApogee.

**Valuationof Long-Lived Assets**

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

**StockCompensation**

Prior to fiscal 2006, weaccounted for stock-based compensation plans under the recognition andmeasurement provisions of APB Opinion No. 25. Effective January 1,2006, we adopted the provisions of SFAS 123(R) using the modified-prospective-transitionmethod. SFAS 123(R) requires companies to recognize the fair-value ofstock-based compensation transactions in the statement of income. The fairvalue of our stock-based awards is estimated at the date of grant using the Black-Scholesoption pricing model. The Black-Scholes valuation calculation requires us toestimate key assumptions such as future stock price volatility, expected terms,risk-free rates and dividend yield. Expected stock price volatility is based onimplied volatility from traded options on our stock in the marketplace andhistorical volatility of our stock. We use historical data to estimate optionexercises and employee terminations within the valuation model. The expectedterm of options granted is derived from an analysis of historical exercises andremaining contractual life of stock options, and represents the period of timethat options granted are expected to be outstanding. The risk-free rate isbased on the U.S. Treasury yield curve in effect at the time of grant. We havenever paid cash dividends, and do not currently intend to pay cash dividends,and thus have assumed a 0% dividend yield. If our actual experience differssignificantly from the assumptions used to compute our stock-based compensationcost, or if different assumptions had been used, we may have recorded toomuch or too little stock-based compensation cost. In addition, we are requiredto estimate the expected forfeiture rate of our stock grants and only recognizethe expense for those shares expected to vest. If the actual forfeiture rate ismaterially different from our estimate, our stock-based compensation expensecould be materially different.

**OffBalance Sheet Arrangements**

We have no off balancesheet arrangements including special purpose entities.

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

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

**RISKSRELATED TO OUR BUSINESS**

**WE HAVEA HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE OR SUSTAINPROFITABILITY.**

As of September 30, 2006,we had stockholders’ equity of approximately $3.5 million, an accumulateddeficit of approximately $15.1 million and working capital of approximately$2.8 million. We recorded a loss of approximately $739,000 and $2.4 million forthe three and nine months ended September 30, 2006.  In the fiscal yearended December 31, 2005, we recorded an operating loss of approximately$5.5 million with a net profit of approximately $3.0 million from a gain ofapproximately $8.9 million. This net profit resulted from the sale of the DDXassets to SigmaTel, Inc. on October 5, 2005, for approximately $9.4million, plus a one-year earn-out of potentially up to $4.5 million.  A total of approximately $299,000 and$383,000 was realized for the three and nine months ended September 30,2006.  Since the one-year earn-outexpired on October 5, 2006, no additional earn-out will be realized. We willneed to generate revenue to sustain profitability and positive cash flow. Ourability to generate future revenue and sustain profitability depends on anumber of factors, many of which are described throughout this risk factorsection, including our ability to develop and generate revenues from the salesof our sensor and medical device products, which are at a very early stage ofdevelopment.  We cannot assure you when, if ever, we will generatemeaningful revenues from the sales of these products under development. If weare unable to achieve and sustain profitability, the Company’s share pricewould likely decline.

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

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

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

We derived approximately81% of our revenue as a result of sell through to end customers by fivedistributors during the nine months ended September 30, 2006 as compared toapproximately 68% of total revenue as a result of sales by two end users andthe sell through to end customers by two distributors during the nine monthsended September 30, 2005.  As of September 30, 2005 we derivedapproximately 66% of product revenue as a result of sales to one end user andthe sell through to end customers by two distributors.  With the sale ofthe audio business, our traditional consumer electronic customer will not besupported with audio products after the sale of our remaining inventory. We areworking to develop customers for our sensor and medical products but we cannotguarantee that we will be able to succeed in these efforts, but there can be noassurance that we will be able to add new distributors to support our sensorand medical device products.

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

Apogee historicallyderived revenue from audio IC product sales, royalties pursuant to our licenseagreement with ST and others and consulting revenues from contracted audioproduct development. With the sale of our audio assets to SigmaTel inOctober 2005, we will no longer be receiving license revenue and futureaudio IC sales will diminish as we sells off our remaining inventory.  We have recorded approximately $299,000 and$383,000 in revenue from the one-year earn-out with SigmaTel.  Since the earn-out period expired on October5, 2006, no additional earn-out will be realized.  Apogee released newsensor products in December 2005. However, we may not have any revenues if we are unable to findcustomers and to develop and our sensor products. Due to the long time requiredto develop and approve our medical products, we do not expect to receive incomein the near future.

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

Approximately 88% of ourrevenue for the nine months ended September 30, 2006, was a result of revenuefrom our former audio business to customers located in Asia. This compares toapproximately 86% of total revenue and 88% of product revenue to customerslocated in Asia and Europe, for the nine months ended September 30, 2005. Wehave entered into a non-compete in connection with the sale of assets toSigmaTel, Inc., except for permissible sales of our audio IC inventory. Wewill need to develop new markets and add new sales channels in order toeffectively market our new sensor and medical device products.

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

We may not besuccessful in recruiting and retaining executive officers and other keymanagement and technical personnel. The competition for employees with the necessaryhigh level of technical expertise to design, market and sell our products isintense, particularly in eastern Massachusetts and Asia. As a result of theOctober 2005 sale of certain assets to SigmaTel, we will need to hire anumber of additional technical personnel if we are to sustain the developmentof new products and our ability to sell those products. Because competition forhighly skilled technical personnel is so intense, companies in Apogee’sindustry are subject from time to time to complaints brought by competitorsalleging interference with contractual relations or wrongful hiring ofemployees. Such lawsuits may be costly, may divert managementattention and resources from the operation of our business, andmay therefore adversely affect our financial condition and results ofoperations. In addition, the loss of the management and technical expertise ofour senior management could seriously harm us. Our employees may also berecruited away from us by our competitors. We do not have in place employmentcontracts for members of our senior management, including the CFO, COO and ourVice Presidents.

**OURMARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE; THEREFORE, OUR SUCCESSDEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS IN A TIMELY FASHION.**

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

·                      identifyemerging technological trends in our market;

·                      identifychanging customer requirements;

·                      develop ormaintain competitive technology, including new product offerings;

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

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

·                      protect ourintellectual property.

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

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

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

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

The FDA has the authorityand discretion to withdraw approvals and review the regulatory status of marketedproducts at any time. For example, the FDA may require an approvedmarketing application for any drug product marketed if new information revealsquestions about a drug’s safety or efficacy. All drugs must be manufactured inconformity with current Good Manufacturing Practices and drug products subjectto an approved application must be manufactured, processed, packaged, held andlabeled in accordance with information contained in the approved application.

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

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

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

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

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

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

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

·                      lack ofaccess or control over new process and manufacturing technologies to maintainproduct competitiveness in the market.

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

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

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

The sensor and medicaldevice industries are highly competitive, and we expect the intensity of thecompetition to increase. Many of our competitors have greater financial,technical, research, marketing, sales, distribution, service and otherresources than we do. Moreover, our competitors may offer broader productlines and have greater name recognition than we do, and may offer discountsas a competitive tactic, forcing intense pricing pressure on our products. Inaddition, several development stage companies are currently creating ordeveloping technologies and products that compete with or are being designed tocompete with our technologies and products. Our competitors may develop ormarket technologies or products that are more effective or more commerciallyattractive than our current or future products, or that may render ourtechnologies or products less competitive or obsolete. Accordingly, ifcompetitors introduce superior technologies or products and we cannot makeenhancements to our technologies and products necessary for them to remaincompetitive, our  competitive position, and in turn, our business,revenues and financial condition, will be seriously harmed.

**OURQUARTERLY OPERATING RESULTS MAY FLUCTUATE.**

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

·                      availabilityand pricing from our suppliers;

·                      changes inthe demand for our products by customers;

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

·                      rate andsuccess of new customer development;

·                      changes inour pricing policies or those of our competitors;

·                      success inattracting, retaining and motivating qualified personnel;

·                      changes ingeneral economic conditions; and

·                      obsolescenceof inventory.

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

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

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**RISKSRELATED TO OUR INTELLECTUAL PROPERTY**

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

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

We also generally enterinto confidentiality agreements with our employees and strategic partners, andgenerally control access to and distribution of our documentation and otherproprietary information. Despite these precautions, it may be possible fora third party to copy or otherwise obtain and use our products or technologywithout authorization, develop similar technology independently or designaround our patents. In addition, effective copyright, trademark and tradesecret protection may be unavailable or limited in certain foreigncountries in which we operate.

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

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

Irrespective of thevalidity or successful assertion of various claims of infringement, misappropriationor misuse of other parties’ proprietary rights, we would likely incursignificant costs and diversion of our management and personnel resources withrespect to the defense of such claims, which could seriously harm our business.If any claims or actions are asserted against us, we may seek to obtain alicense under a third party’s intellectual property rights. We cannot be surethat under such circumstances a license would be available on commerciallyreasonable terms, if at all. Moreover, we often incorporate the intellectualproperty of our strategic customers into our designs, and we have certainobligations with respect to the non-use and non- disclosure of suchintellectual property. We cannot be sure that the steps taken by us to preventour or our customers’ misappropriation or infringement of the intellectualproperty will be successful.

**RISKSRELATING TO OUR COMMON STOCK**

**WE DO NOT CURRENTLY MEET THE LISTING REQUIREMENTS OF THEAMERICAN STOCK EXCHANGE (THE “AMEX”), AND IF WE CONTINUE TO FAIL TO MEET SUCHREQUIREMENTS, WE MAY BE DELISTED FROM THE AMEX.**

Ourcommon stock is quoted on the AMEX. In order to continue to be included in theAMEX, we must meet the AMEX maintenance criteria.  As Apogee’s shareholders’ equity wasapproximately $3.97 million as of June 30, 2006 and $3.48 million asof this report, the Company is not in compliance with Section 1003 (a)(ii) of the Company Guide as it has shareholders’ equity of less than $4million and losses from continuing operations and/or net losses in three out ofits four most recent fiscal years.  Apogee is also not in compliance withSection 1003 (a) (iii) of the Company Guide as it has shareholders’ equity ofless than $6 million and losses from continuing operations in its five mostrecent fiscal years.

Accordingto the AMEX notice, Apogee must submit a plan by December 1, 2006, advising ofthe action it has taken, or will take, to bring Apogee into compliance withSections 1003(a) (ii) and 1003(a) (iii) of the Company Guide within a maximumof 12 months.  There is no assurance thatthis plan, as devised by the Company, will be acceptable to the AMEX.  Even if the plan is accepted, Apogee will bepermitted to continue its listing during the plan period, but such continuedlisting will be subject to periodic review to determine whether Apogee ismaking progress consistent with the plan.

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If ourcommon stock were delisted, in order to have our common stock relisted on theAMEX, we would be required to meet the criteria for initial listing, which aremore stringent than the maintenance criteria. Accordingly, we cannot assurethat if we were delisted, we would be able to have our common stock relisted onthe AMEX, and most likely our common stock would be quoted on the Over theCounter Bulletin Board. In addition, if our common stock were delisted from theAMEX, it might become more difficult for us to raise additional capital andaccomplish our business objectives through the sale of our common stock orsecurities convertible into our common stock, due to increased costs andpotential diminished liquidity in the market for our common stock.

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

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

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

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

·           acquisitionsor strategic alliances by us or our competitors; and

·           thegain or loss of a significant customer or order.

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

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

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

The design of any systemof controls is based in part on certain assumptions about the likelihoodof future events and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Furthermore,controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with policies or procedures.

While we seek to designour controls and procedures to provide reasonable assurance that informationrequired to be disclosed in our periodic filings is timely disclosed, theseinherent limitations expose us to breakdowns in such controls and procedures.

**ITEM3. CONTROLS AND PROCEDURES**

(a)              Evaluationof Disclosure Controls and Procedures. The Company’s chief executive officerand principal financial officer have reviewed and evaluated the effectivenessof the Company’s disclosure controls and procedures (as defined in Exchange ActRules 13d-15(e) and 15d-15(e)) as of the end of the period covered bythis quarterly report. Based on that evaluation, the chief executive officerand principal financial officer have concluded that the Company’s currentdisclosure controls and procedures are adequate and effective to ensure thatmaterial information relating to the Company was made known to them by others,particularly during the period in which this Quarterly Report onForm 10-QSB was being prepared.

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

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**PART II - OTHER INFORMATION**

**ITEM1. LEGAL PROCEEDINGS**

None.

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

None.

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

None.

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

None.

**ITEM5. OTHER INFORMATION**

None.

**ITEM6. EXHIBITS**

(a)          Exhibits:

See Exhibit Index

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**SIGNATURES**

In accordance with therequirements of the Securities Exchange Act of 1934, as amended, the registranthas caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                          | ** ** | **APOGEE TECHNOLOGY, INC.**                                | ** **           |
|--------------------------|------------|-----------------------------------------------------------------|----------------------|
|                     |       |                                                            |                 |
| Date: November  14, 2006 |       | By:                                                             | /s/ Herbert M. Stein |   |
|                     |       | Name: Herbert M. Stein                                          |                 |
|                     |       | Title: Chairman of the Board,                                   |                 |
|                     |       | President, Chief Executive Officer                              |                 |
|                     |       | (principal executive officer)                                   |                 |
|                     |       |                                                            |                 |
|                     |       |                                                            |                 |
| ** **               | ** ** | **APOGEE TECHNOLOGY, INC.**                                | ** **           |
|                     |       |                                                            |                 |
| Date: November  14, 2006 |       | By:                                                             | /s/ Paul J. Murphy   |   |
|                     |       | Name: Paul J. Murphy                                            |                 |
|                     |       | Title: Chief Financial Officer and Vice President of  Finance   |                 |
|                     |       | (principal financial officer and principal  accounting officer) |                 |

 

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FORM-10-QSB

**SEPTEMBER30, 2006**

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

 

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