10QSB

Page 1 of  6

             SECURITIES AND EXCHANGE COMMISSION
                              
                   Washington, D.C. 20549
                              
                         Form 10-QSB

X          Quarterly report pursuant to Section 13 or 15(d)
                                                    of the
                                                    Securitie
                                                    s
                                                    Exchange
                                                    Act of
            1934

     For the quarterly period ended December 31, 1996 or

     Transition report pursuant to Section 13 or 15(d) of the
     Securities Exchange Act 1934

     For the transition period from
     to                             .

     Commission File Number 0-16106

                      APA Optics, Inc.
  (exact name of small business issuer as specified in its
                          charter)

     Minnesota
41-1347235
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
 incorporation or organization)

         2950 N.E. 84th Lane, Blaine, Minnesota 55449
    (Address of principal executive offices and zip code)

     Issuer's telephone number, including area code: (612)
784-4995

Indicate whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was
required to file such reports), and (2) has been subject to
the filing requirement  for the past 90 days.

                     Yes      X        No
                              
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date:
                              
     Class:
Outstanding at December 31, 1996
Common stock, par value $.01
8,304,624


Page 2 of 6

                PART 1, FINANCIAL INFORMATION
                              
ITEM 1, FINANCIAL STATEMENTS

                      APA OPTICS, INC.
                  CONDENSED BALANCE SHEETS


ASSETS
December 31               March 31

1996                        1996

                           
CURRENT ASSETS:
(Unaudited)                 (Audited) *
Cash and short-term investments
$4,312,813                $2,256,309
Accounts receivable
779,565                    406,852
Inventories:
  Raw materials
18,158                      24,806
 Work-in-process & finished goods
141,427                    105,993
Costs in excess of billings on
 research contracts
0                    210,658
Prepaid expenses
35,247                      30,305
Bond reserve funds
43,750                      66,667
TOTAL CURRENT ASSETS
5,330,960                 3,101,590

PROPERTY AND EQUIPMENT, NET
1,394,095                1,157,570

OTHER ASSETS
2,826,666                   497,189


$ 9,551,721              $ 4,756,349

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt
$    152,517                $   100,000
Accounts payable
75,579                     112,857
Accrued expenses
106,861                      91,264
TOTAL CURRENT LIABILITIES
334,957                     304,121

LONG-TERM DEBT
3,938,575                    345,000

SHAREHOLDERS' EQUITY
Undesignated shares; 5,000,000 shares
 authorized; none issued
- ---                             ---
Common stock, $.01 par value; 15,000,000
 shares authorized; 8,304,624 & 7,990,000
 issued
83,046                       79,900
Paid-in capital
8,208,943                  6,930,826
Retained earnings (deficit)
(3,013,800)               (2,903,498)

5,278,189                 4,107,228

$  9,551,721             $  4,756,349

* Derived from audited financial statements


Page 3 of 6


                      APA OPTICS, INC.
             CONDENSED STATEMENTS OF OPERATIONS
                         (UNAUDITED)

 
                              
  Three months ended                     Nine months ended
                              
     December 31                             December 31

1996                     1995               1996
1995

                                                
REVENUES                                          $   666,014
$   592,018         $1,877,068         $1,866,863

COSTS AND EXPENSES:
 Cost of sales and
 services
522,583                456,282           1,321,651
1,449,017

 Selling, general &
 administrative
135,582                112,774              442,071
392,133
 Research & development                              86,115
0                  312,121                 2,467

744,280                569,056           2,075,843
1,843,617
Gain/Loss from Operations:                         (78,266)
22,962            (198,775)              23,246

INTEREST INCOME & EXPENSE:
 Interest Income
84,927                   19,703               200,470
37,613
 Interest Expense
(45,753)                  (8,521)             (110,567)
(27,907)

39,174                    11,182                 89,903
9,706
INCOME (LOSS)
 BEFORE INCOME TAXES                       (39,092)
34,144               (108,872)            32,952
INCOME TAX EXPENSE
 (BENEFIT)
930                        250                    1,430
750

NET INCOME (LOSS)                        $     (40,022)
$     33,894             $ (110,302)       $   32,202

EARNINGS (LOSS) PER
COMMON & COMMON EQUIVALENT
SHARE (EXHIBIT 11)                         $          (.00)
$          .00              $      (.01)       $        .00


WEIGHTED AVERAGE SHARES
OUTSTANDING                                    8,304,624
8,029,569             8,155,944        7,651,545









Page 4 of 6

                       APA OPTICS, INC.
             CONDENSED STATEMENTS OF CASH FLOWS
                         (UNAUDITED)



Nine Months Ended

December 31

1996              1995


                        
OPERATING ACTIVITIES
Net income (loss)
$  (110,302)             $    32,202
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
  Depreciation and amortization
333,863                  303,708
     Changes in operating assets and liabilities:
      Accounts receivable
(372,713)                 (63,009)
      Inventories and prepaid expenses
(10,811)                    1,622
      Costs in excess of billings on research contracts
210,658                       ---
      Accounts payable and accrued expenses
30,836                  (15,271)
      Other assets
(20,429)               (194,534)
Net cash provided by (used in) operating
  activities
61,102                    64,718

INVESTING ACTIVITIES
Purchases of property and equipment
(284,388)                 (13,888)
Net cash (used in) investing activities
(284,388)                 (13,888)

FINANCING ACTIVITIES
Proceeds from the sale of common stock
1,281,263              1,810,991
Long-term debt proceeds
3,472,483                      ---
Earnest money deposit  on bond financing
(315,000)                     ---
Debt placement costs
(253,721)                     ---
Bond reserve funds
(1,776,327)                     ---
Repayment of long-term debt
(128,908)               (95,000)
Net cash provided by financing activities
2,279,790             1,715,991

Increase in cash
2,056,504              1,766,821

Cash at Beginning of Period
2,256,309                401,034

Cash at End of Period
$ 4,312,813          $ 2,167,855
Supplemented schedule of non-cash transactions:
Land and corresponding deferred revenue
$    250,000          $           ---

           NOTE TO CONDENSED FINANCIAL STATEMENTS
                              
1.   In the opinion of management, the information furnished
  reflects all adjustments which are necessary to a fair
  statement of the results of the interim periods presented.
  All adjustments were of a normal recurring nature. The
  results of any interim period are not necessarily indicative
  of results for the full year.

Page 5 of 6

               ITEM 2. MANAGEMENT'S DISCUSSION
             AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
                              
Results of Operations:

     Revenues for the third quarter of fiscal 1997 ended
December 31, 1996 were $666,014, an increase of 12% from the
third quarter of fiscal 1997 ended December 31, 1995. The
third quarter revenues of fiscal 1997 are down 1% as compared
to the second quarter of fiscal 1997. Revenues for the first
three quarters of fiscal 1997 are up one percent as compared
to the first three quarters of  fiscal 1996.

     For the third quarter of fiscal 1997, the Company is
reporting a loss of $40,022 as compared to a loss of  $6,763
in the second quarter of fiscal 1997. For the first three
quarters of fiscal 1997, the Company is reporting a loss of
$110,302 as compared to a profit of 32,202 for the first
three quarters of fiscal 1996. Although the Company has a
loss for the first nine months of fiscal 1997 as compared to
a profit for the first nine months of fiscal 1996, the
Company's  gross profit margin increased from 22% in fiscal
1996 to 30% in fiscal 1997. The main reason for the increased
losses in spite of the increased gross profit margin in 1997,
is the significant increase in internal research and
development and administrative costs  relative to the move
toward product manufacturing. Research and development costs
have increased from $ 2,467 for the first nine months of
fiscal 1996 to $312,121 for the first nine months of fiscal
1997. The Company plans to continue these IR&D costs
attributed to further development of the WDM  receiver  in
the following quarters.

Liquidity and Capital Resources:

     The Company's cash balance at December 31, 1996 is
$4,312,813 compared to $2,256,309 at March 31, 1996. The
Company's account receivable balance has increased to
$779,565 at December 31, 1996 compared to $406,852 at March
31, 1996, primarily due to the delay in payment on government
contracts. These payments were received early in the fourth
quarter of fiscal 1997.  The cash increase can be attributed
to the Company completing additional financing with Aberdeen,
South Dakota. The Company continues construction of the
Aberdeen facility and plans to complete construction by March
1997.








Page 6 of 6
                 PART II. OTHER INFORMATION
                              
ITEMS 1 - 5.    Not Applicable.

ITEM 6.  Exhibits and Reports on Form 8-K.

(a)  Exhibit 11:   Statement RE:   Computation of per share
  earnings.

(b)  Exhibit 27: Financial Data Schedules

     There were no reports on Form 8-K filed during the three
months ended December 31, 1996.



                         Signatures
                              
In accordance with the requirements of the Securities
Exchange Act of 1934, the issuer has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.




APA OPTICS, INC.

  February 7, 1997
s/s Anil K. Jain

                Date
Anil K. Jain

President

Principal Executive Officer

Treasurer & Principal Financial

Officer


 February 7, 1997
s/s Randal J. Becker

                Date
Randal J. Becker

Principal  Accounting Officer







                              
                              
                              
                              

EX-27

 

<ARTICLE> 5
       
                             
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          MAR-31-1997
<PERIOD-END>                               DEC-31-1996
<CASH>                                       4,312,813
<SECURITIES>                                         0
<RECEIVABLES>                                  779,565
<ALLOWANCES>                                         0
<INVENTORY>                                    159,585
<CURRENT-ASSETS>                             5,330,960
<PP&E>                                       1,394,095
<DEPRECIATION>                                 333,863
<TOTAL-ASSETS>                               9,551,721
<CURRENT-LIABILITIES>                          334,957
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                        83,046
<OTHER-SE>                                   5,195,143
<TOTAL-LIABILITY-AND-EQUITY>                 9,551,721
<SALES>                                      1,877,068
<TOTAL-REVENUES>                             1,877,068
<CGS>                                        1,321,651
<TOTAL-COSTS>                                1,321,651
<OTHER-EXPENSES>                               754,192
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                             110,567
<INCOME-PRETAX>                              (108,872)
<INCOME-TAX>                                     1,430
<INCOME-CONTINUING>                          (110,302)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 (110,302)
<EPS-PRIMARY>                                    (.01)
<EPS-DILUTED>                                    (.01)
        

 

EX-11

                         Exhibit 11

                      APA OPTICS, Inc.
                              
                              
                  Statement RE: Computation
                    of Per Share Earnings
                              
                                                     Three
   months ended                         Nine months ended

December 31                                  December 31

1996                  1995                      1996
1995

Average common
   shares outstanding                            8,304,624
7,986,007              8,155,944           7,651,545

Dilutive stock options
  and warrants (A)
0                  43,562                           0
0

Total
8,304,624             8,029,569              8,155,944
7,651,545

Net income (loss)                                 $  (40,022)
$  33,894            $ (110,302)           $  32,202

Per share amount
$(.00)                    $.00                      $(.01)
$.00

(A) Calculated using the "treasury stock" method.