UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
 
 FORM
        10-KSB
 
  ̈
              Annual
                  Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934
 
 
 x
                    Transition Report
                          Pursuant to Section 13 or 15(d) of the Securities Exchange
                          Act of
                          1934For
                          the transition period from April 1,
                          2007       to      September
                          30, 2007.
 
 Commission
        File Number 0-16106
 
 APA
        ENTERPRISES, INC.
 (Exact
        Name of Registrant as Specified in its Charter)
 
 Minnesota
              41-1347235(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification No.)
 
 5480
        Nathan Lane North, Suite 120
 Plymouth,
        Minnesota 55442
 (763)
        476-6866
 (Address,
        including ZIP code and telephone number, including area code, of
        registrant’s
 principal
        executive office)
 
 Securities
        registered pursuant to Section 12(b) of the Act:
 
 Common
        Stock, par value $.01 per share
 (Title
        of class)
 
 Series
        B Preferred Share Purchase Rights
 (Title
        of class)
 
 Securities
        registered pursuant to Section 12(g) of the Act:
 
 Indicate
        by check mark if the registrant is required to file reports pursuant to Section
        13 or section 15(d) of the Exchange Act.
 
 xYES  
 ̈NO
 
 Indicate
        by check mark. Has the registrant (1) filed all reports required to be filed
        by
        Section 13 or 15(d) of the Exchange Act during the preceding 12 months and
        (2)
        has been subject to the filing requirements for the past 90
        days.
 
 xYES 
 ̈NO
 
 Indicate
        by check mark. Is disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K not contained herein, and will not be contained, to the best
        of
        registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K.
 
 xYES    ̈NO
  
 1
  Indicate
        by check mark. Is the registrant a shell company (as defined in Rule 12b-2
        of
        the Exchange Act).
 
  ̈YES    xNO
 
 The
        registrant’s revenues for the transition period covered by this report (April 1,
        2007 – September 30, 2007) were $10,296,680.
 
 The
        aggregate market value of the voting and non-voting equity held by
        non-affiliates of the registrant, computed by reference to the price at which
        the common equity was last sold as of December 12, 2007 was approximately
        $9,831,675.
 
 The
        number of shares of common stock outstanding as of December 17, 2007 was
        11,872,331.
 
 Documents
        Incorporated by Reference:
 
 Portions
        of our proxy statement for the annual shareholders meeting to be held in
        February 27, 2008 are incorporated by reference into Part III.
  2
  APAENTERPRISES,
        INC.
 TRANSITION
        REPORT ON FORM 10-KSB
 TABLE
        OF CONTENTS
 
 
 PART
                  I
              
              4ITEM
                  1.
              DESCRIPTION
                  OF BUSINESS.
              4ITEM
                  2.
              PROPERTY
              14ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              14ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
              14PART
                  II
              
              15ITEM
                  5.
              MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS
              15ITEM
                  6.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION
              16ITEM
                  7.
              FINANCIAL
                  STATEMENTS
              25ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE
              48ITEM
                  8A.
              CONTROLS
                  AND PROCEDURES
              48ITEM
                  8B.
              OTHER
                  INFORMATION
              48PART
                  III
              
              49ITEM
                  9.
              DIRECTORS
                  AND EXECUTIVE OFFICERS OF THE
                  REGISTRANT
              49ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
              49ITEM
                  11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                  AND RELATED STOCKHOLDER MATTERS
              49ITEM
                  12.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND
                  DIRECTOR INDEPENDENCE
              50PART
                  IV
              
              50ITEM
                  13.
              EXHIBITS
              50ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              50SIGNATURES
              51SCHEDULE
                  II – VALUATION AND QUALIFYING
                  ACCOUNTS
              52REPORT
                  OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
                  FIRM ON SCHEDULE
              53EXHIBIT
                  INDEX
              54
  3
 Table
            of Contents
  PART
        I
 
 ITEM
                  1.
              DESCRIPTION
                  OF BUSINESS.
 
 General
        Development of Business.
 
 APA
        Enterprises, Inc. (“APA” or the
“Company”), formerly APA Optics, Inc., is a Minnesota corporation which was
        founded in 1979.  Our corporate headquarters is located at 5480 Nathan
        Lane North, Suite 120, Plymouth, MN 55442 and our corporate website is www.apaenterprises.com.
        The information available on our website is not part of this
        Report.
 
 The
        Company previously reported its
        operations activities in two segments, Optronics (comprising the activities
        in
        Blaine, Minnesota, Aberdeen, South Dakota, and India) and APA Cables and
        Networks, Inc. (“APACN”). In 2007, the Company discontinued all activity in the
        Optronics segment and its business now consists solely of the business of
        APACN.
 
 Description
        of Business
 
 APA
        is a
        manufacturer and seller of telecommunications equipment.  Through
        APACN, APA provides telecommunications service providers, as well as commercial
        and industrial original equipment manufacturers (“OEM’s”) a suite of modular,
        highly-configurable passive connectivity solutions. To date, APA has been
        able
        to successfully establish itself as a value-added supplier to its target
        market
        of independent telephone companies and cable television operators as well
        as
        OEMs who value a high level of engineering services as part of their procurement
        process. APACN has expanded its product offerings and broadened its customer
        base since its inception four years ago.
 
 APA
        continues to invest in the expansion of its sales and engineering programs
        in
        the broadband service provider market for the development of increased revenue
        in the future.
 
 APA
        offers a broad range of telecommunications equipment and products Its broad
        range of product offerings include the design and manufacture of standard
        and
        custom connectivity products such as fiber distribution systems, optical
        components, Outside Plant (“OSP”) cabinets, and fiber and copper cable
        assemblies that serve the communication service provider including
        Fiber-to-the-Home (“FTTH”), large enterprise, and OEM markets. APA maintains a
        range of engineering and technical knowledge in-house that works closely
        with
        customers to develop, customize and enhance products from design through
        production. Most products are produced at APA’s plant in Plymouth, Minnesota
        with support from a network of global manufacturing partners. APACN produces
        these products on both a quick-turn and scheduled delivery basis.
 
 Products
 
 ·
              Fiber
                  Distribution
                  Central Office Frame Systems APA Fiber Distribution Systems (“FDS”)
                  are high density, easy access fiber distribution panels and cable
                  management systems that are designed to reduce installation time,
                  guarantee bend radius protection and improve traceability. In the
                  144-port
                  count configuration, APA is the industry leader for density, saving
                  the
                  customer expensive real estate in the central office. The product
                  line
                  fully supports a wide range of panel configurations, densities,
                  connectors, and adapters that can be utilized on a stand-alone
                  basis or
                  integrated into the panel system. The unique interchangeable building
                  block design delivers feature solutions which are able to meet
                  the needs
                  of a broad range of network deployments.
  4
 Table
            of Contents
  ·
              Fiber
                  Distribution
                  Outside Plant Cabinets  APA’s Fiber Scalability Center
                  (“FSC”) is a modular and scalable fiber distribution platform designed
                  for
                  “grow-as-you-go cost containment” as fiber goes beyond the control of a
                  central office and closer to the user. This allows rollout of FTTH
                  services by communication service providers without a large initial
                  expense. Each outside plant cabinet stores feeder and distribution
                  splices, splitters, connectors and slack cable neatly and compactly,
                  utilizing field-tested designs to maximize bend radius protection,
                  connector access, ease of cable routing and physical protection,
                  thereby
                  minimizing the risk of fiber damage. The FSC product has been designed
                  to
                  scale with the application environment as demand requires and to
                  reduce
                  service turn-up time for the end-user.
 
 ·
              Optical
                  Components  APA packages optical components for signal
                  coupling, splitting, termination, multiplexing, demultiplexing
                  and
                  attenuation to seamlessly integrate with the APACN Fiber Distribution
                  products in the central office and outside plant environments.
                  This
                  value-added packaging allows the customer to source from a single
                  supplier
                  and reduce space requirements. The products are built and tested
                  to meet
                  the strictest industry standards ensuring customers trouble-free
                  performance in extreme outside plant environments.
 
 ·
              Cable
                  Assemblies  APA manufactures high quality fiber and
                  copper assemblies with an industry-standard or customer-specified
                  configuration.  Industry-standard assemblies built include but
                  are not limited to: single mode fiber, multimode fiber, multi-fiber,
                  CATV
                  node assembly, DS1 Telco, DS 3 (734/735) coax, Category 5e and
                  6, SCSI,
                  Token Ring, and V.35.  In addition, APACN’s engineering services
                  team works alongside the engineering design departments of our
                  OEM
                  customers to design and manufacture custom solutions for both in-the-box
                  as well as network connectivity assemblies specific to that customer’s
                  product line.
 
 
 Marketing
        and Distribution
 
 APA
        markets its products in the United States through a direct field sales force
        supported by an internal customer sales and support team.  This
        internal team works proactively with the outside sales force to maintain
        a high
        level of customer contact through regular communication of product availability,
        order processing and status along with and delivery information. APACN works
        closely with its target customers to configure the Company’s product platform to
        the client’s unique requirements.  Our high level of customer service
        helps bring new products to markets with the design input from our customers
        and
        network of consulting engineering firms. To ensure we cover all markets we
        leverage our internal customer support team with a combination of manufacturer
        representative organizations
 
 Competition
 
 Competitors
        for the FDS and FSC
        markets, include but are not limited to, ADC Telecommunications, Inc., Corning
        Cabling Systems, Inc., OFS (Furukawa Electric North America, Inc.), Telect
        Inc.,
        Alcatel, Inc., and Tyco Electronics, Inc.  Nearly all of these firms
        are substantially larger than APACN and as a result may be able to procure
        pricing for necessary components and labor at much lower prices. Competition
        for
        the custom fiber and copper termination services for cable assemblies is
        intense. Competitors range from small, family-run businesses to very large
        contract manufacturing facilities. APA believes that it has a competitive
        advantage with customers who require quick-turn, high-performance customized
        products, and that it is at competitive disadvantage with customers who
        principally seek large volume commodity products.
  5
 Table
            of Contents
  Sources
        of Materials and Outsourced Labor
 
 Numerous
        purchased materials,
        components, and labor, are used in the manufacturing of the Company’s products.
        Most of these are readily available from multiple suppliers. However, some
        critical components and outsourced labor are purchased from a single or a
        limited number of suppliers.  The loss of access to some components
        and outsourced labor would have an adverse effect on our ability to deliver
        products on a timely basis and on our financial performance.
 
 
 Patents
        and Intellectual Property
 
 As
        of
        September 30, 2007, we had 12 patents issued in the United States and two
        pending patent applications inside and outside the United States that relate
        to
        the now discontinued Optronics business. These patents have been reviewed
        by an
        independent outside intellectual property broker.  It was determined
        there is no immediate market for these patents and the Company has ceased
        paying
        maintenance fees for these patents.
 
 Major
        Customers
 
 Three
        customers comprised approximately
        22% of sales for the six months ended September 30, 2007. Two customers
        comprised approximately 23% of total sales for the twelve months ended March
        31,
        2007.  No single customer accounted for more than 10% of the Company’s
        sales in fiscal 2006.
 
 
 Backlog
 
 Backlog
        reflects purchase order commitments for our products received from customers
        that have yet to be fulfilled. Backlog orders are generally shipped within
        three
        months. The Company had backlogs of $1,396,000as ofSeptember
        30, 2007,$1,183,000as ofMarch 31, 2007and $1,383,000 as ofMarch 31, 2006.
 
 Research
        and Development
 
 We
        believe that the communication industry environment is constantly evolving
        and
        our success depends on our awareness of and ourresponse to these
        changes.  Our focus is to analyze the environment and technology and
        work to develop products that simplify our customers’ lives by developing
        innovative high quality products utilizing modular design wherever possible.
        We
        believe our design and engineering teams are highly responsive and nimble.
        We
        have empowered this group to take calculated risks which result in our ability
        to bring products to market in a manner that we believe is faster than some
        of
        our larger competitors. Our financial resources are not unlimited so we make
        special effort to target areas where we see niche
        opportunities.
  6
 Table
            of Contents
  Employees
 
 As
        of
        September 30, 2007, the Company had 107 full-time employees, mainly in Plymouth,
        MN. Our future performance is dependent on our ability to attract, train,
        and
        retain highly qualified personnel. The loss of one or more key employees
        could
        negatively impact the Company.
 
 Factors
        That May Affect Future Results
 
 The
        statements contained in this Annual
        Report on Form 10-KSB that are not purely historical are “forward-looking
        statements” within the meaning of the Private Securities Litigation Reform Act
        of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the
        Securities Exchange Act of 1934, including, without limitation, statements
        regarding the Company’s expectations, hopes, beliefs, anticipations,
        commitments, intentions and strategies regarding the future. Forward-looking
        statements include, but are not limited to, statements contained in “Item 1.
        Description of Business” and “Item 6. Management's Discussion and Analysis or
        Plan of Operation.” Actual results could differ from those projected in any
        forward-looking statements for the reasons, among others, detailed below.
        We
        believe that many of the risks detailed here are part of doing business in
        the
        industry in which we compete and will likely be present in all periods reported.
        The fact that certain risks are characteristic to the industry does not lessen
        the significance of the risk. The forward-looking statements are made as
        of the
        date of this Report on Form 10-KSB and we assume no obligation to update
        the
        forward-looking statements or to update the reasons why actual results could
        differ from those projected in the forward-looking statements.
 
 Our
        Results of
        Operations
 
 Unless
        we generate significant revenue growth, our expenses and negative cash flow
        will
        significantly harm our financial position.
 
 We
        have
        not been profitable since fiscal 1990. As of September 30, 2007, we had an
        accumulated deficit of approximately $40 million. We may incur operating
        losses
        for the foreseeable future, and these losses may be substantial. Further,
        we may
        continue to incur negative operating cash flow in the future. We have funded
        our
        operations primarily through the sale of equity securities and borrowings.
        The
        discontinuation of the Optronics business unit will result in a significant
        reduction in cash outflow in the form of fixed costs associated with
        manufacturing, sales and marketing, product development and administrative
        expenses. We will need to demonstrate continued growth in revenues while
        containing costs and operating expenses if we are to achieve
        profitability.
 
 
 Our
        Products and
        Introduction of New Products
 
 We
        must introduce new products and product enhancements to increase
        revenue.
 
 The
        successful operation of our business depends on our ability to anticipate
        market
        needs and develop and introduce new products and product enhancements that
        respond to technological changes or evolving industry standards on a timely
        and
        cost-effective basis. Our products are complex, and new products may take
        longer
        to develop than originally anticipated. These products may contain defects
        or
        have unacceptable manufacturing yields when first introduced or as new versions
        are released. Our products could quickly become obsolete as new technologies
        are
        introduced or as other firms introduce lower cost alternatives. We must continue
        to develop leading-edge products and introduce them to the commercial market
        quickly in order to be successful. Our failure to produce technologically
        competitive products in a cost-effective manner and on a timely basis will
        seriously harm our business, financial condition and results of
        operations.
  7
 Table
            of Contents
  Our
        products may infringe on the intellectual property rights of
        others.
 
 Our
        products are sophisticated and rely on complicated manufacturing
        processes.
 
 We
        may make additional strategic changes in our product portfolio, but our
        strategic changes and restructuring programs may not yield the benefits that
        we
        expect.
 
 The
        impact of potential changes to our product portfolio and the effect of such
        changes on our business, operating results and financial condition, are unknown
        at this time.  If we acquire other businesses in our areas of
        strategic focus, assimilating these businesses and their products, services,
        technologies and personnel into our operations may be
        challenging.  These difficulties could disrupt our ongoing business,
        distract our management and workforce, increase our expenses and adversely
        affect our operating results and financial condition.  In addition to
        these integration risks, if we acquire new businesses, we may not realize
        all of
        the anticipated benefits of these acquisitions, and we may not be able to
        retain
        key management, technical and sales personnel after an
        acquisition.  Divestitures or elimination of existing businesses or
        product lines could also have disruptive effects and may cause us to incur
        material expenses.
 
 Manufacturing
        and
        Operations
 
 Our
        dependence on outside
        manufacturers may result in product delivery delays.
 
 We
        have
        increased our reliance on the use of contract manufacturers to make our
        products. If these contract manufacturers do not fulfill their obligations
        or if
        we do not properly manage these relationships, our existing customer
        relationships may suffer.
 
 We
        may be required to rapidly increase our manufacturing capacity to deliver
        our
        products to our customers in a timely manner.
 
 We
        have
        limited experience in rapidly increasing our manufacturing capacity or in
        manufacturing products at high volumes. If demand for our products significantly
        increases, we may be required to hire, train and manage additional manufacturing
        personnel and improve our production processes in order to increase our
        production capacity. There are numerous risks associated with rapidly increasing
        capacity, including:
 
 ·
              Difficulties
                  in achieving adequate yields from new manufacturing lines,
 
 ·
              Difficulty
                  maintaining the precise manufacturing processes required by our
                  products
                  while increasing capacity,
 
 ·
              The
                  inability to timely procure and install the necessary equipment,
                  and
 
 ·
              Lack
                  of availability of qualified manufacturing personnel.
 
 If
        we
        apply our capital resources to expanding our manufacturing capacity in
        anticipation of increased customer orders, we run the risk that the projected
        increase in orders will not be realized. If anticipated levels of customer
        orders are not received, we will not be able to generate positive gross margins
        and profitability.
 
 We
        are dependent upon skilled employees; If we lose the services of our key
        personnel our ability to execute our operating plan, and our operating results,
        may suffer.
  8
 Table
            of Contents
  Our
        future performance depends in part upon the continued service and contributions
        of key management, engineering, sales and marketing personnel, many of whom
        would be difficult to replace quickly. If we lose any of these key personnel,
        our business, operating results and financial condition could be materially
        adversely affected or delay the development or marketing of existing or future
        products.  Competition for these personnel is intense and we may not
        be able to retain or attract such personnel. Our success will depend in part
        upon our ability to attract and retain additional personnel with the highly
        specialized expertise necessary to generate revenue and to engineer, design
        and
        support our products and services.
 
 Markets
        and Market
        Conditions
 
 Demand
        for our products is subject to significant fluctuation. Adverse market
        conditions in the communications equipment industry and any slowdown in the
        United States economy may harm our financial condition.
 
 Demand
        for our products is dependent on several factors, including capital expenditures
        in the communications industry. Capital expenditures can be cyclical in nature
        and result in protracted periods of reduced demand for component parts.
        Similarly, periods of slow economic expansion or recession can result in
        periods
        of reduced demand for our products. Such periods of reduced demand will harm
        our
        business, financial condition and results of operations. Changes to the
        regulatory requirements of the telecommunications industry could also affect
        market conditions, which could also reduce demand for our products.
 
 Our
        industry is highly competitive and subject to pricing pressure.
 
 Competition
        in the communications equipment market is intense. We have experienced and
        anticipate experiencing increasing pricing pressures from current and future
        competitors as well as general pricing pressure from our customers as part
        of
        their cost containment efforts.   Many of our competitors have
        more extensive engineering, manufacturing, marketing, financial and personnel
        resources than we do.  As a result, these competitors may be able to
        respond more quickly to new or emerging technologies and changes.
 
 Declining
        average selling prices for our fiber optic products will require us to reduce
        production costs to effectively compete and market these products.
 
 Market
        pressure for lower prices for our category of products continues to be strong.
        We expect this trend to continue. To achieve profitability in this environment
        we must continually decrease our costs of production as well as improve the
        value proposition of the products we offer. In order to reduce our production
        costs, we will continue to pursue one or more of the following:
 
 ·
              Seek
                  lower cost suppliers of raw materials or components.
 
 ·
              Work
                  to further automate our assembly process.
 
 ·
              Develop
                  value-added solutions.
 
 ·
              Seek
                  offshore sources for manufacturing and assembly services.
 
 We
        will
        also seek to form strategic alliances with companies that can supply these
        services. Decreases in average selling prices also require that we increase
        unit
        sales to maintain or increase our revenue. There can be no guarantee that
        we
        will achieve these objectives. Our inability to decrease production costs
        or
        increase our unit sales could seriously harm our business, financial condition
        and results of operations.
  9
 Table
            of Contents
  Our
        markets are characterized by rapid technological changes and evolving
        standards.
 
 The
        markets we serve are characterized by rapid technological change, frequent
        new
        product introductions, changes in customer requirements and evolving industry
        standards. In developing our products, we have made, and will continue to
        make,
        assumptions with respect to which standards will be adopted within our industry.
        If the standards that are actually adopted are different from those that
        we have
        chosen to support, our products may not achieve significant market
        acceptance.
 
 Conditions
        in global markets could affect our operations.
 
 We
        source
        key materials and products globally and as such are subject to the risks
        of
        conducting business internationally. Those risks include but are not limited
        to:
 
 ·
              local
                  economic and market conditions;
 
 ·
              political
                  and economic instability;
 
 ·
              fluctuations
                  in foreign currency exchange rates;
 
 ·
              tariffs
                  and other barriers and restrictions;
 
 ·
              geopolitical
                  and environmental risks; and
 
 ·
              changes
                  in diplomatic or trade relationships and natural disasters.
 
 We
        cannot
        predict whether our business operations and reliance in these markets will
        be
        affected adversely by these conditions.
 
 Our
        profitability can be adversely affected due to increased raw material
        costs
 
 Our
        manufacturing costs may be impacted by unanticipated increases in raw material
        costs during the time span between the cost quotes and actual procurement
        of raw
        materials. The impact can be significant for purchase orders requiring multiple
        scheduled deliveries. Whereas we may be able to approach some of the customers
        for costs adjustments, there is no assurance that we would be successful
        in
        obtaining these adjustments. Failure to obtain price adjustments would result
        in
        decreased profitability and/or losses.
 
 Our
        inventory of raw material and supplies may incur significant
        obsolescence
 
 Our
        market demands rapid turn around from receipt of purchase orders to shipping
        of
        the products. We maintain significant inventory of raw materials and supplies
        to
        meet this demand resulting in risk of inventory obsolescence. Whereas we
        anticipate and make provisions for a reasonable fraction of inventory
        obsolescence, a significant higher level of obsolescence can adversely impact
        our profitability.
 
 Our
        Customers
 
 Our
        sales could be negatively impacted if one or more of our key customers
        substantially reduce orders for our products.
  10
 Table
            of Contents
 
 If
        we
        lose a significant customer, our sales and gross margins would be negatively
        impacted. In addition, the loss of sales may require us to record impairment,
        restructuring charges or exit a particular business or product
        line.
 
 Consolidation
        among our customers could result in our losing a customer or experiencing
        a
        slowdown as integration takes place.
 
 It
        is
        likely that there will be increased consolidation among our customers in
        order
        for them to increase market share and achieve greater economies of
        scale.  Consolidation is likely to impact our business as our
        customers focus on integrating their operations and choosing their equipment
        vendors. After a consolidation occurs, there can be no assurance that we
        will
        continue to supply the surviving entity.
 
 Customer
        payment defaults could have an adverse effect on our financial condition
        and
        results of operations.
 
 As
        a result of competitive conditions
        in the telecommunications market, some of our customers may experience financial
        difficulties.   It is possible that customers from whom we expect
        to derive substantial revenue will default or that the level of defaults
        will
        increase. Any material payment defaults by our customers would have an adverse
        effect on our results of operations and financial condition.
 
 Performance
        Requirements and
        Performance of our Products
 
 Our
        products may have defects that are not detected before delivery to our
        customers.
 
 Some
        of
        the Company’s products are designed to be deployed in large and complex networks
        and must be compatible with other components of the system, both current
        and
        future. Our customers may discover errors or defects in our products only
        after
        they have been fully deployed. In addition, our products may not operate
        as
        expected over long periods of time. If we are unable to fix errors or other
        problems, we could lose customers, lose revenues, suffer damage to our brand
        and
        reputation, and lose our ability to attract new customers or achieve market
        acceptance. Each of these factors would negatively impact cash flow and would
        seriously harm our business, financial condition and results of
        operations.
 
 Product
        defects could cause us to lose customers and revenue or to incur unexpected
        expenses.
 
 If
        our
        products do not meet our customers’ performance requirements, our customer
        relationships may suffer.  Also, our products may contain
        defects.  Any failure or poor performance of our products could result
        in:
 
 ·
              delayed
                  market acceptance of our products;
 
 ·
              delays
                  in product shipments;
 
 ·
              unexpected
                  expenses and diversion of resources to replace defective products
                  or
                  identify the source of errors and correct them;
 
 ·
              damage
                  to our reputation and our customer relationships;
 
 ·
              delayed
                  recognition of sales or reduced sales; and
 
 ·
              product
                  liability claims or other claims for damages that may be caused
                  by any
                  product defects or performance failures.
  11
 Table
            of Contents
  Intellectual
        Property
 
 If
        we are unable to adequately protect our intellectual property, third parties
        may
        be able to use our technology, which could adversely affect our ability to
        compete in the market.
 
 We
        rely
        principally on trade secret protection for our confidential and proprietary
        information.  We have taken security measures to protect our
        proprietary information and trade secrets, but these measures may not provide
        adequate protection.  While we seek to protect our proprietary
        information by entering into confidentiality agreements with employees,
        collaborators and consultants, we cannot assure you that our proprietary
        information will not be disclosed, or that we can meaningfully protect our
        trade
        secrets.  In addition, our competitors may independently develop
        substantially equivalent proprietary information or may otherwise gain access
        to
        our trade secrets.
 
 Intellectual
        property litigation could harm our business.
 
 It
        is
        possible that we may have to defend our intellectual property rights in the
        future.  In the event of an intellectual property dispute, we may be
        forced to litigate or otherwise defend our intellectual property
        assets.  Intellectual property litigation can be extremely expensive,
        and this expense, as well as the consequences should we not prevail, could
        seriously harm our business.
 
 If
        a
        third party claimed an intellectual property right to technology we use,
        we
        might be forced to discontinue an important product or product line, alter
        our
        products and processes, pay license fees or cease certain
        activities.  We may not be able to obtain a license to such
        intellectual property on favorable terms, if at all.
  12
 Table
            of Contents
  Executive
        Officers
 The
        following is a list of our executive officers, their ages, positions and
        offices
        as of September 30, 2007.
 
 Name
              Age
              PositionCheryl
                  Beranek Podzimek
              44
              Chief
                  Executive Officer/President of APA Enterprises, Inc.Bruce
                  G. Blackey
              56
              Chief
                  Financial Officer
 
 
 Cheryl
        Beranek
        Podzimek joined APACN in July 2003 as President. Ms. Podzimek was
        appointed CEO and President of APA Enterprises, Inc in June of 2007. Ms.
        Podzimek was previously President of Americable, which was acquired by APACN
        in
        June 2003. She served as President of Americable from 2002 to 2003. From
        2001 to
        2002 Ms. Podzimek was Chief Operating Officer of Americable. Previously,
        Ms.
        Podzimek held a variety of lead marketing positions with emerging high-growth
        technology companies.  She served as Vice President of Marketing from
        1996-2001 at Transition Networks, a manufacturer of network connectivity
        products, Director of Marketing from 1992 to 1996 at Tricord Systems, an
        early
        stage multi-processor based super server manufacturer, and Director of Marketing
        from 1988 to 1992 at Digi International, a designer and manufacturer of
        connectivity products. Earlier in her career Ms. Podzimek held marketing
        positions for non-profit organizations, including the City of Fargo, the
        Metropolitan Planning Commission of Fargo/Moorhead and North Dakota State
        University. Ms. Podzimek holds a Bachelor of Science Degree from Southwest
        Minnesota State University and a Masters of Science Degree from North Dakota
        State University.
 
 Bruce
        G.
        Blackey joined APA Enterprises in June of 2007 as Chief Financial
        Officer.  Mr. Blackey has extensive experience in finance and
        administration and has worked as an independent business consultant and interim
        CFO from 2001 to the present for several companies. Mr. Blackey held the
        position of CFO with Tiro Industries a contract manufacturing firm serving
        the
        cosmetic industry from 1997 to 2001. Prior to that he held the senior financial
        position with Conwed Plastics, a manufacturer of plastic netting from 1988
        to
        1997. Mr. Blackey holds a Bachelors of Science degree in Accounting from
        the
        Carlson School of Business, University of Minnesota.
  13
 Table
            of Contents
 
 ITEM
                  2.
              PROPERTY
 
 We
        own a
        24,000 square foot production facility in Aberdeen, South Dakota, which is
        partially leased and occupied. (See note S in the Financial Statements included
        in Item 7 of this Form 10-KSB.)
 
 APACN
        leases a 30,000 square foot facility in Plymouth, Minnesota consisting of
        office, manufacturing and warehouse space.
 
 On
        October 30, 2007 we purchased and immediately sold an industrial building
        at
        2950 N.E. 84th
        Lane,
        Blaine Minnesota that we leased from Jain-Olsen Properties as our former
        corporate offices. We exercised an option to buy the building in August 2007
        as
        contained in our lease. (See Note S in the Financial Statements included
        in Item
        7 this Form 10-KSB.)
 
 
 ITEM
                  3.
              LEGAL
                  PROCEEDINGS
 
 None
 
 ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS’
 
 On
        August
        23, 2007, the Company held its Annual Meeting of Shareholders.  At the
        meeting, the shareholders elected as directors Anil K. Jain (with 10,510,517
        shares voting for and 182,211 withheld), John G. Reddan (with 10,343,366
        shares
        voting for and 349,362 withheld), Ronald G. Roth (with 10,630,132 shares
        voting
        for and 62,596 withheld), Stephen A. Zuckerman (with 8,686,251 shares voting
        for
        and 2,006,477 withheld), Cheryl B. Podzimek (with 10,630,132 shares voting
        for
        and 62,596 withheld) and Donald R. Hayward (with 10,627,482 shares voting
        for
        and 6,246 withheld)
 
 The
        shareholders also approved the amendment of the Bylaws of the Company to
        permit
        uncertified shares (with 5,700,474 shares voting for; 243,943 against; 50,950
        abstain and 4,697,361 broker non-vote).
  14
 Table
            of Contents
  PART
        II
 
 ITEM
                  5.
              MARKETFOR
                  COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND
                  SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
 
 Our
        common stock is traded on The
        Nasdaq Global Market under the symbol “APAT.” The following table sets forth the
        quarterly high and low sales prices for our common stock for each quarter
        of the
        past two fiscal years as reported by Nasdaq.
 
 
 Transition
                  Period
                  Ended September 30, 2007
              
              High
              
              
              LowQuarter
                  ended June 30, 2007
              
              $
              1.48
              
              
              $
              1.12Quarter
                  ended September 30, 2007
              
              
              1.17
              
              
              
              0.75Fiscal
                  2007
              
              High
              
              
              LowQuarter
                  ended June 30, 2006
              
              $
              2.23
              
              
              $
              1.25Quarter
                  ended September 30, 2006
              
              
              1.59
              
              
              
              1.21Quarter
                  ended December 31, 2006
              
              
              1.56
              
              
              
              1.25Quarter
                  ended March 31, 2007
              
              
              1.67
              
              
              
              1.21Fiscal
                  2006
              
              High
              
              
              LowQuarter
                  ended June 30, 2005
              
              $
              1.62
              
              
              $
              1.20Quarter
                  ended September 30, 2005
              
              
              1.48
              
              
              
              1.18Quarter
                  ended December 31, 2005
              
              
              1.35
              
              
              
              1.10Quarter
                  ended March 31, 2006
              
              
              2.01
              
              
              
              1.17
 
 There
        were approximately 318 holders of
        record of our common stock as of September 30, 2007.
 
 We
        have
        never paid cash dividends on our common stock. The loan agreement relating
        to
        certain bonds issued by the South Dakota Economic Development Finance Authority,
        paid off in fiscal 2007, restricted our ability to pay dividends. We do not
        intend in the foreseeable future to pay cash dividends on our common
        stock.
  15
 Table
            of Contents
 
 ITEM
                  6.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 
 Change
        in Year End
 
 In
        June
        2007, we elected to change our fiscal year end from March 31 to September
        30. In
        view of this change, this Item 6, Management’s Discussion and Analysis or Plan
        Operation (“MD&A”) compares the consolidated financial statements as of and
        for the six months ended September 30, 2007 (the transition period) with
        the
        consolidated financial statements as of and for the six months ended September
        30, 2006. References to 2007 refer to the transition period unless otherwise
        specified. We have included summary information from the consolidated financial
        statements for the six months ended September 30, 2006 in the MD&A for these
        periods for comparability purposes and also in Note B to the consolidated
        financial statements (see Item 7).  We are also including a discussion
        and analysis of our financial statements for the years ended March 31, 2007
        and
        2006.
 
 Throughout
        the MD&A, data for all
        periods except as of and for the six months ended September 30, 2006, are
        derived from our audited consolidated financial statements, which appear
        in this
        report.  All data as of and for the six months ended September 30,
        2006, are derived from our unaudited financial statements, which are not
        presented herein
 
 General
 
 The
        Company is exclusively focused on the growth of its sole subsidiary APA Cables
        and Networks, Inc. (APACN). During the quarter ended June 30, 2007 the Company
        discontinued its Optronics business.
 
 APACN
        is
        engaged in the design, manufacture, distribution, and marketing of a variety
        of
        fiber optics and copper components to the data communication and
        telecommunication industries.  APACN’s primary manufactured products
        include standard and custom fiber optic cable assemblies, copper cable
        assemblies, Outside Plant (OSP) cabinets, value–added fiber optics frames,
        panels and modules.
 
 Application
        of Critical Accounting Policies
 
 In
        preparing our consolidated financial
        statements, we make estimates, assumptions and judgments that can have a
        significant impact on our revenues, loss from operations and net loss, as
        well
        as on the value of certain assets and liabilities on our consolidated balance
        sheet. We believe that there are several accounting policies that are critical
        to an understanding of our historical and future performance, as these policies
        affect the reported amounts of revenues, expenses and significant estimates
        and
        judgments applied by management. While there are a number of accounting
        policies, methods and estimates affecting our consolidated financial statements,
        areas that are particularly significant include:
 
 ·
              Stock
                  option
                  accounting;
 
 ·
              Accounting
                  for income taxes;
                  and
 
 ·
              Valuation
                  and evaluating impairment of long-lived assets and goodwill.
  16
 Table
            of Contents
  Stock
        Option
        Accounting
 
 We
        adoptedStatement of Financial
        Accounting
        Standards No. 123—revised 2004 (“SFAS
        123R”),“Share-Based
        Payment,”using
        the modified prospective
        transition method, which requires the application of the accounting standard
        as
        ofApril 1,
        2006, the first day of
        our
        fiscal year 2007. Our consolidated financial statements as of and for the
        twelve
        months endedMarch 31,
        2007reflect the impact
        of
        SFAS 123R. The compensation expense impacted both basic and diluted loss
        per
        share by less than $0.01 forboth the six months
        endedSeptember 30, 2007and
        thetwelve months endedMarch
        31, 2007.The
        Company recorded$18,477 and$50,353respectively,of
        related compensation expense for thesix months endedSeptember
        30,
        2007and thetwelve
        month period endedMarch 31, 2007.As
        ofSeptember 30, 2007,$71,389of
        total unrecognized compensation
        expense related to non-vested awards is expected to be recognized over a
        weighted average period of approximately2.8years.
        In accordance with the modified
        prospective transition method, our consolidated financial statements for
        prior
        periods have not been restated and do not include the impact of compensation
        expense calculated under SFAS 123R.
 
 For
        purposes of determining estimated fair value of stock-based payment awards
        on
        the date of grant under SFAS 123(R), the Company used the Black-Scholes Model.
        The Black-Scholes Model requires the input of certain assumptions that require
        subjective judgment. Because employee stock options have characteristics
        significantly different from those of traded options, and because changes
        in the
        input assumptions can materially affect the fair value estimate, the existing
        models may not provide a reliable single measure of the fair value of the
        employee stock options. Management will continue to assess the assumptions
        and
        methodologies used to calculate estimated fair value of stock-based
        compensation. Circumstances may change and additional data may become available
        over time, which could result in changes to these assumptions and methodologies
        and thereby materially impact our fair value determination.
 
 
 Accounting
        for Income
        Taxes
 
 As
        part of the process of preparing our
        consolidated financial statements, we are required to estimate our income
        tax
        liability in each of the jurisdictions in which we do business. This process
        involves estimating our actual current tax expense together with assessing
        temporary differences resulting from differing treatment of items for tax
        and
        accounting purposes. These differences result in deferred tax assets and
        liabilities. We must then assess the likelihood that these deferred tax assets
        will be recovered from future taxable income and, to the extent we believe
        that
        recovery is not more likely than not or unknown, we must establish a valuation
        allowance.
 
 Management
        judgment is required in
        determining our provision for income taxes, our deferred tax assets andliabilities and any
        valuation allowance recorded against our deferred tax assets.AtSeptember
        30, 2007, we have recorded
        a full valuation
        allowance ofapproximately$13,956,000
        against our
        deferred tax assets, due to uncertainties related to our ability to utilize
        our
        deferred tax assets,consisting principally
        of certain net
        operating losses carried forward. The valuation allowance is based on our
        estimates of taxable income by jurisdiction and the period over which our
        deferred tax assets will be recoverable. The Company hadU.S.federal
        and state net operating
        loss (NOL) carry forwards ofapproximately $34,201,000
        which expire
        in fiscal years 2008 to 2027. Todate the Company has
        not completed a“Section
        382”analysis.  If
        certain
        ownership changes occurred underInternal Revenue Code
        Section 382, there may
        be further
        limitations on the usage of the net operating loss carry
        forwards.
 
 Realization
        of the NOL carry forwards
        and other deferred tax temporary differences are contingent on future taxable
        earnings. The deferred tax asset was reviewed for expected utilization using
        a
“more likely than not” approach as required by SFAS No. 109,
“Accounting for Income Taxes,” by assessing the available positive and negative
        evidence surrounding its recoverability.
  17
 Table
            of Contents
 
 We
        will continue to assess and evaluate
        strategies that will enable the deferred tax asset, or portion thereof, to
        be
        utilized, and will reduce the valuation allowance appropriately at such time
        when it is determined that the “more likely than not” approach is
        satisfied.
 
 During
        the fiscal year endedSeptember 30,
        2007, the Company recorded
        a deferred income tax expense of $48,540 for the book and income tax basis
        difference in goodwill on acquisitions.
 
 In
        June 2006, the Financial Accounting
        Standards Board (“FASB”)
        issued Interpretation No. 48,“Accounting
        for Uncertainty in Income
        Taxes”-
        an interpretation of FASB Statement
        No. 109,“Accounting
        for Income Taxes”(“FIN
        48”),
        which clarifies the accounting forincome tax
        provisions. FIN 48
        prescribes a recognition threshold and measurement attribute for recognition
        and
        measurement of a tax position taken or expected to be taken in a tax return.
        The
        interpretation requires that the Company recognize in the financial statements
        the impact of a tax position. Recognition is allowed if the tax position
        is more
        likely than not to be sustained on audit, based on the technical merits of
        the
        position. FIN 48 also provides guidance on derecognition, classification,
        interest and penalties, accounting in interim periods and disclosure. The
        provisions of FIN 48becameeffective
        forthe Company onApril
        1, 2007.The
        adoption of this statementdidnot
        have a material impact on the
        Company's consolidated financial position or results of
        operations.
 
 Valuation
        and evaluating
        impairment of long-lived assets and goodwill
 The
        Company records the excess of purchase cost over the fair value of net tangible
        assets of acquired companies as goodwill or other identifiable intangible
        assets. In accordance with Statement of Financial Accounting Standards ("SFAS")
        No. 142 "Goodwill and Other Intangible Assets," in the last quarter of each
        year, or as an event occurs or circumstances change that would more likely
        than
        not reduce the fair value of a reporting unit below its carrying amount,
        the
        Company completes the impairment testing of goodwill primarily utilizing
        a
        discounted cash flow method.
 
 Determining
        market values using a discounted cash flow method requires the Company to
        make
        significant estimates and assumptions, including long-term projections of
        cash
        flows, market conditions and appropriate discount rates. The Company's judgments
        are based on historical experience, current market trends, consultations
        with
        external valuation specialists and other information. While the Company believes
        that the estimates and assumptions underlying the valuation methodology are
        reasonable, different estimates and assumptions could result in a different
        outcome. The Company generally develops these forecasts based on recent sales
        data for existing products, planned timing of new product launches, and
        estimated expansion of the FTP market.
 
 If
        the carrying amount of a reporting unit exceeds its fair value, the Company
        measures the possible goodwill impairment loss based on an allocation of
        the
        estimate of fair value of the reporting unit to all of the underlying assets
        and
        liabilities of the reporting unit, including any previously unrecognized
        intangible assets. The excess of the fair value of a reporting unit over
        the
        amounts assigned to its assets and liabilities is the implied fair value
        of
        goodwill. An impairment loss is recognized to the extent that a reporting
        unit's
        recorded goodwill exceeds the implied fair value of goodwill. This test for
        the
        period ended September 30, 2007 resulted in no change to goodwill from the
        prior
        period.  The test for fiscal year ended March 31, 2007 indicated that
        goodwill related to APACN was impaired. Accordingly, the Company recognized
        a
        non-cash, pre-tax impairment charge of $852,000 ($519,717, after tax) in
        the
        quarter ended March 31, 2007.
  18
 Table
            of Contents
  The
        Company evaluates the recoverability of its long lived assets in accordance
        with
        SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived
        Assets.”  SFAS 144 required recognition of impairment of long lived
        assets in the event that events or circumstances indicate an impairment may
        have
        occurred and when the net book value of such assets exceeds the future
        undiscounted cash flow attributed to such assets.  We assess the
        impairment of long lived assets whenever events or changes in circumstances
        indicate that that the carrying value may not be recoverable.  No
        impairment of long-lived assets has occurred during the periods ended September
        30, 2007, March 31, 2007 and 2006.
 
 New
        Accounting
        Pronouncements
 
 In
        June 2006, the FASB ratified the
        consensuses of Emerging Issues Task Force (EITF) Issue No. 06-3,“How
        Taxes Collected from Customers and
        Remitted to Governmental Authorities Should Be Presented in the Income Statement
        (That Is, Gross versus Net Presentation)”(EITF 06-3).
        EITF 06-3
        indicates that the income statement presentation on either a gross basis
        or a
        net basis of the taxes within the scope of the Issue is an accounting policy
        decision. Our accounting policy is to present the taxes within the scope
        of
        EITF 06-3 on a net basis. The adoption of EITF 06-3 during the transition
        period endedSeptember 30,
        2007did
        not result in a change to our
        accounting policy and, accordingly, did not have a material effect on our
        consolidated financial statements.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
        No. 157 defines fair value, establishes a framework for measuring fair value
        and
        expands disclosures about fair value measurement but does not require any
        new
        fair value measurements. SFAS No. 157 is effective for financial statement
        issued for fiscal years beginning after November 15, 2007 and interim periods
        within those fiscal years. We are
        currently evaluating the impact of SFAS No. 157on our financial
        statements.
 
 In
        February 2007, the FASB issuedSFASNo. 159,“The
        Fair Value Option for Financial
        Assets and Financial Liabilities, including an amendment of FASB Statement
        No. 115, or SFAS No. 159.”SFAS
        No. 159 permits entities to
        choose to measure many financial instruments and certain other items at fair
        value at specified election dates. SFAS No. 159 applies to all entities,
        including not-for-profit organizations. The provisions of SFAS No. 159 are
        effective for fiscal years beginning afterNovember 15, 2007.
        We are currently evaluating the impact
        of SFAS No. 159 on our financial statements.
 
 Contractual
        Obligations
 
 Our
        contractual obligations and commitments are summarized in the table below
        (in
        000’s):
  Total
              
              
              Less
                  than
                1
                  Year
              
              
              1-3
                  years
              
              
              4-5
                  years
              
              
              After
                5
                  yearsLong-term
                  debt (1)
              
              $
              163
              
              
              $
              68
              
              
              $
              95
              
              
              $
              0
              
              
              $
              0Operating
                  leases
              
              
              1,720
              
              
              
              347
              
              
              
              839
              
              
              
              534
              
              
              
              0Total
                  Contractual Cash Obligations
              
              $
              1,883
              
              
              $
              415
              
              
              $
              934
              
              
              $
              534
              
              
              $
              0
  (1)  Includes
        fixed interest ranging from 0.62 to 8.45%.
  19
 Table
            of Contents
  Results
        of Operations
 
 Six
        months ended September
        30, 2007 compared to six months ended September 30, 2006
 
 Revenues
        for the six months ended September 30, 2007 increased 3% to $10,297,000 from
        sales of $9,963,000 for the comparable six month period in 2006. This increase
        is attributable to the continued acceptance of the Company’s products within the
        FTTH market resulting from increased sales and marketing activities during
        the
        most recent six months ended September 30, 2007.  Sales to broadband
        service providers and commercial data networks, include custom fiber
        distribution systems, associated cable assemblies and optical components,
        were
        $7,672,000 or 75% of revenue. Sales to OEMs, consisting primarily of fiber
        optic
        and copper cable assemblies produced to customer design specifications, were
        $2,625,000, or 25% of revenue. This compares to 76% for broadband and commercial
        data networks and 24% for OEMs in the prior comparable period for 2006. APA’s
        revenue growth is highly dependent upon capital expenditures in the
        communications equipment industry, our ability to develop and introduce new
        products, and our ability to acquire and retain business in a competitive
        industry.
 
 Gross
        profit for the six months ended September 30, 2007 was $3,218,000, or 31%
        of
        revenues, compared to $2,910,000, or 29% of revenues, in 2006. The increase
        of
        $308,000 or 11% over the prior year is attributable to product mix and the
        results of the continuing improvement in ongoing programs to reduce product
        costs through a combination of aggressive product re-design, process improvement
        and global sourcing of components and outside manufacturing.
 
 There
        have been no research and development expenses for the on-going
        business.
 
 S
        G &
A expenses for the six months ended September 30, 2007 were $3,685,000 compared
        to $2,954,000 for the comparable period in 2006. The increase of $731,000
        is the
        result of two factors: a significant investment in sales and marketing and
        the
        recognition of the severance agreement to Anil Jain in the amount of $397,000
        recorded in the first quarter of the transition period.  The Company
        expects to realize increased sales as a result of its investment in sales
        and
        marketing.
 
 There
        were no goodwill impairment charges for the period ended September 30, 2007
        and
        there were none for the comparable period in 2006.
 
 Gains
        on
        disposal of assets were $13,079 in fiscal year ending September 30, 2007
        as
        compared to losses of $2,162 in the comparable period for prior year
        2006.
 
 Loss
        from
        operations was $376,000 in 2007 compared to income of $98,000 in 2006. This
        is a
        direct reflection of the change in operating expenses of which is primarily
        attributable to the one time severance accrual for Anil Jain in the amount
        of
        $397,000 in 2007.  Excluding this one time expense, the operating loss
        would have been approximately $21,000.
 
 Interest
        income for 2007 declined $47,000 to $168,000 from $215,000 for the comparable
        period for 2006. This is attributable primarily to lower interest rates in
        the
        2007 period.  Interest expense for 2007 declined to $7,000 from
        $49,000 for 2006. This reflects the payoff of the Aberdeen loan. In 2007
        other
        expense of $31,000 reflected an adjustment to the cash surrender value of
        a life
        insurance policy on Anil Jain. In the comparable period for 2006 income of
        $21,000 resulted from short term rental of warehouse space.
 
 Income
        taxes of $52,000 for 2007 increased $9,000 from $43,000 for 2006. Income
        taxes
        are predominantly related to timing differences related to
        goodwill.
  20
 Table
            of Contents
  Net
        loss
        from continuing operations, before taxes, was $376,000 in 2007, or $.03,
        per
        diluted share compared to income of $98,000 in 2006, or $.01 per share. Again,
        excluding the one-time severance accrual of $397,000, amounting to $.03 per
        diluted share, the Company would have recorded income of $21,000, before
        taxes.
 
 Discontinued
        operations amounted to a
        loss of $915,000 for 2007 and $610,000 for the comparable period in 2006.
        The
        Company ceased all remaining operations related to the Optronics segment
        in June
        of 2007.  Substantially all employees related to the Optronics segment
        were terminated prior to June 30, 2007.  The loss from discontinued
        operations was comprised of the following for 2007:
 
 ·
              Blaine
                  land was sold for  $325,000 at a gain of $265,000
 
 ·
              APA
                  India was sold at a loss of $126,566
 
 ·
              APA
                  India incurred an operating loss of $64,780.
 
 ·
              Closure
                  of Optronics resulted in recognition as a current expense all future
                  lease
                  payments on the Blaine facility of $418,044. In addition, other
                  Optronics
                  cost related to discontinuation were the write off of all remaining
                  inventory at $109,871 the write down of fixed assets of $233,383,
                  severance costs of $78,109 and general operating expenses of $149,067.
 
 In
        2006
        the costs related exclusively to the operations of the Optronics segment
        and the
        consolidated operations of the India operation.
 
 The
        Company’s net loss amounted to
        $1,290,000 or $.11 per share for 2007. This is in comparison to a loss of
        $512,000 or $.04 per share in the comparable period in 2006. This was an
        increase of $778,000 over the comparable period.
 
 Results
        of Operations
 
 Year
        ended March 31, 2007
        compared to year ended March 31, 2006
 
 Revenues
        for the year ended March 31, 2007 were $18,364,000 versus $15,879,000 in
        the
        year ended 2006, an increase of $2,485,000 or 16%.  The increase is
        principally attributable to an increased acceptance of the Company’s products
        within the FTTH market resulting from increased marketing and sales activities
        during the fiscal years 2006 and 2007. Sales to broadband service providers
        and
        commercial data networks, include custom fiber distribution systems, associated
        cable assemblies and optical components, were $13,959,000 or 76% of revenue.
        Sales to OEMs, consisting primarily of fiber optic and copper cable assemblies
        produced to customer design specifications, were $4,405,000, or 24% of revenue.
        This compares to 67% for broadband and commercial data networks and 33% for
        OEMs
        in the prior year. APA’s revenue growth is highly dependent upon capital
        expenditures in the communications equipment industry, our ability to develop
        and introduce new products, and our ability to acquire and retain business
        in a
        competitive industry.
 
 Gross
        profit for the year ended in 2007 was $5,265,000 as compared to $4,513,000
        in
        2006 an increase of $752,000 or 17%.  The increase of 1% margin
        reflects the improved product mix and results of ongoing programs to reduce
        the
        cost of products through a combination of product re-design, process improvement
        and global sourcing of components and outside manufacturing.
  21
 Table
            of Contents
  There
        have been no research and development expenses for on going
        business.
 
 S,
        G & A expenses were $5,839,000
        for the year ending March 31, 2007 as compared to $5,838,000 in
        2006.  The staffing levels and operational costs during these periods
        did not materially change.
 
 Goodwill
        impairments charges relate solely to the wholly owned subsidiary
        APACN.  In fiscal 2007 we posted a goodwill impairment charge of
        $852,000 to properly reflect the carrying value of the assets. The Company
        believes the impairment results from the less-than-expected performance of
        the
        assets acquired in the CSP and Americable acquisitions to date.  We
        did not post an impairment charge in fiscal 2006.
 
 Losses
        on
        disposal of assets were $1,400 in fiscal year ending March 31, 2007 as compared
        to gains of $3,600 in the prior year.
 
 Loss
        from
        operations was $1,427,000 for the year ending March 31, 2007, and increased
        from
        a loss of $1,321,000 for 2006. Excluding the goodwill impairment charge,
        the
        operating loss for the period ended March 31, 2007 would have been approximately
        $575,000. This reduction in loss is attributable to the 16% increase in sales
        and the resulting margin earned of approximately $752,000.
 
 Interest
        income increased approximately $58,000 to $379,000 in fiscal 2007 from $321,000
        in 2006 due to an increase in investment rates of interest. Interest expense
        decreased approximately $42,000 to $49,000 in fiscal 2007 from $91,000 in
        2006
        due to the bonds held by the South Dakota Economic Development and Finance
        Authority being paid off in October 2006.  Other income and expenses,
        net, decreased approximately $166,000 to $21,000 in 2007 from $187,000 in
        2006.
 
 Income
        taxes increased by $513,000 to a
        $237,000 tax benefit for 2007 from $276,000 of income tax expense in 2006.
        The
        fluctuation relates primarily to the tax benefit resulting from the goodwill
        impairment charge in 2007.
 
 Loss
        from continuing operations was
        $838,000 or $.07 per share for 2007, decreased $342,000 from $1,180,000 or
        $.10
        per share for 2006.  After adjusting for the goodwill impairment of
        $520,000, (net of tax) the Company would have had a loss of $318,000 or $.03
        per
        share.
 
 Discontinued
        operations had a loss of $1,309,000 for 2007 or $.11 per share and $2,169,000
        or
        $.18 per share for the comparable period in 2006. The Company ceased all
        remaining operations related to the Optronics segment in June of
        2007.  The discontinued operations consisted of the Optronics segment
        and the India operation. As part of discontinued operations, gains on disposal
        of assets at Optronics were $435,000 in fiscal year ended March 31, 2007
        as
        compared to $1,195,000 in fiscal year ended March 31, 2006. A gain of $345,000
        was recognized on the sale of two patents in June 2006.
 
 Net
        loss
        decreased $1,202,000 to $2,147,000, or $.18 cents per share in fiscal 2007
        with
        the wind down of the Optronics and India operations, as compared to a net
        loss
        of $3,349,000, or $.28 cents per share, in fiscal 2006.
  22
 Table
            of Contents
  Liquidity
        and Capital Resources
 
 As
        of
        September 30 2007, our principal source of liquidity was our cash, cash
        equivalents and available for sale securities. Those sources total $6,130,000,
        compared $6,716,000 and $8,843,000 at March 31, 2007 and March 31, 2006
        respectively. Our cash is invested in money market accounts and high quality
        auction rate securities to obtain maximum return and retain short term
        liquidity. We believe we have sufficient funds for operations for at least
        the
        next twelve months
 
 Operating
        Activities
 
 Net
        cash
        consumed by operating activities for the six months ended September 30, 2007
        totaled $902,000. This was due primarily to our net loss from operations
        for the
        period of $1,290,000 and an increase in both accounts receivable of $629,000
        and
        inventory of $266,000. This was offset by non-cash charges for depreciation
        of
        $214,000, a loss on sale of assets $126,000, a severance accrual for Anil
        Jain
        and personnel associated with the Optronics segment discontinuation of $360,000
        and an accrual for the lease termination of $376,000.
 
 Net
        cash
        consumed by operating activities for the twelve months ended March 31, 2007,
        totaled $1,351,000. This was due primarily to the net loss from operations
        for
        the period of $2,147,000 and reducing our accounts payable and accrued expenses
        by $361,000 and prepaid expenses by $135,000 and sale of assets $433,000.
        This
        was offset by non cash items; depreciation of $651,000, a goodwill impairment
        charge of $852,000 and a reduction in inventory of $347,000. Deferred income
        taxes of $243,000 were a use of working capital although non-cash.
 
 Net
        cash
        consumed by operating activities for the twelve months ended March 31, 2006,
        totaled $3,273,000. This was due primarily to the net loss from operations
        for
        the period of $3,349,000 and gain on sale of assets of $1,198,000, an increase
        of accounts receivable of $446,000 and investment in inventory of $566,000.
        This
        was offset by depreciation of $1,061,000 and an increase of prepaid expenses
        of
        $136,000 and accounts payable $808,000 to working capital. Deferred income
        taxes
        of $272,000 were source of working capital although non-cash.
 
 Investing
        Activities
 
 For
        the
        six months ended September 30, 2007, we recovered $514,000 from the sale
        of
        assets most of which were associated with discontinued operations. During
        the
        same period we purchased $2,350,000 and sold $4,975,000 of available for
        sale
        securities. This reduced our position in available for sale securities by
        $2,625,000. These funds were reinvested in money market accounts. During
        this
        same period we made a significant investment in our IT structure along with
        manufacturing equipment totaling $232,000 resulting in a net increase in
        cash
        from investing activities. For the year 2008 we do not anticipate selling
        any
        significant fixed assets. The Company will continue to invest in the necessary
        and appropriate manufacturing equipment to help maintain a competitive position
        in manufacturing capability.
 
 In
        the
        fiscal year ended March 31, 2007, we netted approximately $2,770,000 in positive
        cash flow from investing activities. Investments in property and equipment
        of
        $581,000 including a new enterprise IT system at APACN and continued facility
        construction in India were offset in-part by $627,000 cash received from
        the
        sales of patents and excess equipment largely in our Optronics division.
        During
        the same period we purchased $17,300,000 and sold $20,025,000 of available
        for
        sale securities. This reduced our position in available for sale securities
        by
        $2,725,000 and these funds were reinvested in money market
        accounts.
  23
 Table
            of Contents
  In
        fiscal
        2006 we netted approximately $2,884,000 in positive cash flows from investing
        activities after accounting for the purchase of property and equipment of
        $428,000 and $1,937,000 proceeds from the sale of assets, including proceeds
        of
        $1,900,000 of MOCVD equipment and licensing of two patents. During the same
        period we purchased $14,550,000 and sold $15,925,000 of available for sale
        securities. This reduced our position in available for sale securities by
        $1,375,000 and these funds were reinvested in money market
        accounts.
 
 Financing
        Activities
 
 For
        the
        six months ended September 30, 2007 we used a net of $34,000 to make scheduled
        debt principal payments.
 
 In
        fiscal
        2007 we used a net $873,000 in financing activities that was applied primarily
        towards the payment of long-term debt relating to our facility in Aberdeen,
        South Dakota.
 
 Construction
        of our manufacturing facility in Aberdeen utilized certain economic incentive
        programs offered by the State of South Dakota and the City of Aberdeen. In August 2006, the Company
        paid
        $872,000into an escrow account to retire the
        bonds. These funds, reflected as Bond Reserve Funds, were used to make final
        payment on the bonds onOctober 1, 2006,
        the next bond redemption date. The
        payment was made pursuant to a Notice of Default and Acceleration received
        by
        the Company. The primary reason for the notice was related to the Company
        ceasing all of itsSouth
        Dakotaoperations in the
        latter part of fiscal year 2006 as part of its consolidation of manufacturing
        operations. The Company made timely interest and principal payments, and
        the
        reason for the notice was not related to the payments.
 
 In
        fiscal
        2006, we used $99,000 in financing activities, primarily to pay down long-term
        debt relating to our facility in Aberdeen, South Dakota.
 
 The
        Company believes that its current cash, short-term investments and cash flow
        from operations will be sufficient to meet its working capital and investment
        requirements for the next 12 months. However, future growth, including potential
        acquisitions, may require the Company to raise capital through additional
        equity
        or debt financing. There can be no assurance that any such financing would
        be
        available on commercially acceptable terms.
  24
 Table
            of Contents
  ITEM
                  7.
              FINANCIALSTATEMENTS
 
 REPORT
        OF INDEPENDENT
        REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 Board
        of
        Directors and Shareholders
 APA
        Enterprises, Inc.
 
 We
        have audited the accompanying
        consolidated balance sheets of APA Enterprises, Inc. and subsidiaries as
        of
        September 30, 2007, March 31, 2007 and March 31, 2006, and the related
        consolidated statements of operations, shareholders’ equity and cash flows for
        the six months ended Septem­ber 30, 2007 and the years ended
        March 31, 2007 and 2006.  These consolidated financial
        state­ments are the responsibility of the Company’s
        management.  Our responsibility is to express an opinion on these
        consolidated financial statements based on our audits.
 
 We
        conducted our audits in accordance
        with the standards of the Public Company Accounting Oversight Board (United
        States).  Those standards require that we plan and perform the audit
        to obtain reasonable assurance about whether the financial statements are
        free
        of material mis­statement.  The Company is not required to have,
        nor were we engaged to perform, an audit of its internal control over financial
        reporting.  Our audit included consideration of internal control over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circum­stances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting.  Accordingly, we express no such opinion.  An
        audit also includes examining, on a test basis, evidence supporting the amounts
        and disclosures in the financial statements, assessing the accounting principles
        used and significant estimates made by management, as well as evaluating
        the
        overall financial statement presentation.  We believe that our audits
        provide a reasonable basis for our opinion.
 
 In
        our opinion, the consolidated
        financial statements referred to above present fairly, in all material respects,
        the consolidated financial position of APA Enterprises, Inc. and subsidiaries
        as
        of September 30, 2007, March 31, 2007 and March 31, 2006 and the
        consolidated results of its operations and its cash flows for the six months
        ended September 30, 2007 and the years ended March 31, 2007 and 2006,
        in conformity with accounting principles generally accepted in the United
        States
        of America.
 
 As
        discussed in Note C to the consolidated financial statements, the Company
        has
        restated March 31, 2007 and 2006 consolidated financial statements to reflect
        the reclassification of its Auction Rate Securities from cash and cash
        equivalents to available for sale securities. As discussed in Note A to the
        consolidated financial statements, the Company adopted Financial Accounting
        Standards Board Statement No. 123 (R), Share-Based Payments
        effective April 1, 2006.
 
 /s/
        Grant
        Thornton LLP
 
 
 Minneapolis,
        Minnesota
 December
        21, 2007
  25
 Table
            of Contents
  APA
        Enterprises, Inc.
 
 CONSOLIDATED
        BALANCE SHEETS
 
 
 September
                  30,2007
              
              
              March
                  31, 2007
              
              
              March
                  31, 2006ASSETS
              
              
              
              
              (Restated)
              
              
              (Restated)CURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              3,304,645
              
              
              $
              1,266,176
              
              
              $
              668,344Available
                  for sale securities
              
              
              2,825,000
              
              
              
              5,450,000
              
              
              
              8,175,000Accounts
                  receivable, net
              
              
              2,418,651
              
              
              
              1,697,811
              
              
              
              1,853,428Inventories
              
              
              1,595,282
              
              
              
              1,312,681
              
              
              
              1,685,472Other
                  current assets
              
              
              102,473
              
              
              
              138,199
              
              
              
              139,802Current
                  assets of discontinued operations
              
              
              -
              
              
              
              367,325
              
              
              
              454,482Total  current
                  assets
              
              
              10,246,051
              
              
              
              10,232,192
              
              
              
              12,976,528PROPERTY,
                  PLANT AND EQUIPMENT, net
              
              
              1,773,739
              
              
              
              1,656,011
              
              
              
              1,592,536PROPERTY,
                  PLANT AND EQUIPMENT, DISCONTINUED OPERATIONS
              
              
              -
              
              
              
              554,879
              
              
              
              1,030,876OTHER
                  ASSETSGoodwill
              
              
              2,570,511
              
              
              
              2,570,511
              
              
              
              3,422,511Other
              
              
              281,589
              
              
              
              307,122
              
              
              
              225,147Notes
                  receivable
              
              
              469,678
              
              
              
              -
              
              
              
              -Long
                  term assets of discontinued operations
              
              
              -
              
              
              
              401,843
              
              
              
              345,973TOTAL
                  OTHER ASSETS
              
              
              3,321,778
              
              
              
              3,279,476
              
              
              
              3,993,631TOTAL
                  ASSETS
              
              $
              15,341,568
              
              
              $
              15,722,558
              
              
              $
              19,593,571
 
 
 The
        accompanying notes are an integral part of these financial
        statements.
  26
 Table
            of Contents
  APA
        Enterprises, Inc.
 
 CONSOLIDATED
        BALANCE SHEETS –Continued
 
 
 September
                  30,2007
              
              
              March
                  31, 2007
              
              
              March
                  31, 2006LIABILITIES
                  AND SHAREHOLDERS’ EQUITYCURRENT
                  LIABILITIESCurrent
                  maturities of long term debt
              
              $
              68,215
              
              
              $
              69,528
              
              
              $
              22,481Accounts
                  payable
              
              
              1,176,280
              
              
              
              916,509
              
              
              
              1,237,066Accrued
                  compensation
              
              
              958,023
              
              
              
              815,626
              
              
              
              691,568Accrued
                  expenses
              
              
              107,209
              
              
              
              93,251
              
              
              
              66,176Current
                  liabilities of discontinued operations
              
              
              205,885
              
              
              
              115,812
              
              
              
              1,705,904Total  current
                  liabilities
              
              
              2,515,612
              
              
              
              2,010,726
              
              
              
              3,723,195LONG-TERM
                  DEBT, net of current maturities
              
              
              95,207
              
              
              
              128,071
              
              
              
              18,480DEFERRED
                  RENT
              
              
              85,059
              
              
              
              78,116
              
              
              
              -DEFERRED
                  INCOME TAXES
              
              
              77,701
              
              
              
              29,161
              
              
              
              272,454OTHER
                  LONG TERM LIABILITIES
              
              
              150,470
              
              
              
              -
              
              
              
              -LONG
                  TERM OBLIGATIONS OF DISCONTINUED OPERATIONS
              
              
              204,832
              
              
              
              -
              
              
              
              -Total
                  Liabilities
              
              
              3,128,881
              
              
              
              2,246,074
              
              
              
              4,014,129SHAREHOLDERS’
                  EQUITYUndesignated
                  shares, 4,999,500 authorized shares: no shares issued and
                  outstanding
              
              
              -
              
              
              
              -
              
              
              
              -Preferred
                  stock, $.01 par value;  500 shares; no shares
                  outstanding
              
              
              -
              
              
              
              -
              
              
              
              -Common
                  stock. $ .01 par value; 50,000,000 authorized shares; 11,872,331
                  shares
                  issued and outstanding at September 30, 2007, March 31, 2007 and
                  March 31,
                  2006
              
              
              118,723
              
              
              
              118,723
              
              
              
              118,723Additional
                  paid-in capital
              
              
              52,037,207
              
              
              
              52,018,729
              
              
              
              51,968,366Accumulated
                  other comprehensive loss
              
              
              -
              
              
              
              (8,164
              )
              
              
              (2,153
              )Accumulated
                  deficit
              
              
              (39,943,243
              )
              
              
              (38,652,804
              )
              
              
              (36,505,494
              )TOTAL
                  SHAREHOLDERS’ EQUITY
              
              
              12,212,687
              
              
              
              13,476,484
              
              
              
              15,579,442TOTAL
                  LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              15,341,568
              
              
              $
              15,722,558
              
              
              $
              19,593,571
 
 
 The
        accompanying notes are an integral part of these financial
        statements.
  27
 Table
            of Contents
 
 APA
        Enterprises, Inc.
 
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 
 Six
                  MonthsEndedSeptember 30,
              
              
              Years
                  Ended March 31,2007
              
              
              2007
              
              
              2006Revenues
              
              $
              10,296,680
              
              
              $
              18,363,836
              
              
              $
              15,879,309Cost
                  of revenues
              
              
              7,079,023
              
              
              
              13,098,972
              
              
              
              11,365,954Gross
                  profit
              
              
              3,217,657
              
              
              
              5,264,864
              
              
              
              4,513,355Operating
                  expenses:Selling,
                  general and administrative
              
              
              3,684,694
              
              
              
              5,838,513
              
              
              
              5,838,239Goodwill
                  impairment charge
              
              
              -
              
              
              
              852,000
              
              
              
              -(Gain)
                  loss on sale of assets, net
              
              
              (13,079
              )
              
              
              1,435
              
              
              
              (3,598
              )3,671,615
              
              
              
              6,691,948
              
              
              
              5,834,641Loss
                  from continuing operations
              
              
              (453,958
              )
              
              
              (1,427,084
              )
              
              
              (1,321,286
              )Interest
                  income
              
              
              167,881
              
              
              
              378,977
              
              
              
              321,239Interest
                  expense
              
              
              (7,148
              )
              
              
              (49,079
              )
              
              
              (90,818
              )Other
                  income(expense), net
              
              
              (30,754
              )
              
              
              21,476
              
              
              
              186,578129,979
              
              
              
              351,374
              
              
              
              416,999Loss
                  from continuing operations before income taxes
              
              
              (323,979
              )
              
              
              (1,075,710
              )
              
              
              (904,287
              )Income
                  tax expense (benefit)
              
              
              51,640
              
              
              
              (237,493
              )
              
              
              275,571Net
                  loss from continuing operations
              
              
              (375,619
              )
              
              
              (838,217
              )
              
              
              (1,179,858
              )Net
                  loss from discontinued operations
              
              
              (1,071,010
              )
              
              
              (1,743,961
              )
              
              
              (3,363,687
              )Gain
                  on disposal of assets of discontinued operations
              
              
              156,190
              
              
              
              434,868
              
              
              
              1,194,697Total
                  loss from discontinued operations
              
              
              (914,820
              )
              
              
              (1,309,093
              )
              
              
              (2,168,990
              )Net
                  loss
              
              $
              (1,290,439
              )
              
              $
              (2,147,310
              )
              
              $
              (3,348,848
              )Net
                  loss per share (basic and diluted):Continuing
                  operations
              
              $
              (0.03
              )
              
              $
              (0.07
              )
              
              $
              (0.10
              )Discontinued
                  operations
              
              $
              (0.08
              )
              
              $
              (0.11
              )
              
              $
              (0.18
              )Total
              
              $
              (0.11
              )
              
              $
              (0.18
              )
              
              $
              (0.28
              )Weighted
                  average shares outstandingBasic
                  and diluted
              
              
              11,872,331
              
              
              
              11,872,331
              
              
              
              11,872,331
 
 
 The
        accompanying notes are an integral part of these financial
        statements.
  28
 Table
            of Contents
  APA
        Enterprises, Inc.
 
 CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY
 
 Six
        months ended September 30, 2007 and years ended March 31, 2007 and
        2006
 
 Undesignated
              
              
              Preferred
                  stock
              
              
              Common
                  stock
              
              
              Additional
                paid-in
              
              
              Accumulated
                  other comprehensive
              
              
              Accumulated
              
              
              Total
                shareholders’Shares
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              capital
              
              
              loss
              
              
              deficit
              
              
              equityBalance
                  at March 31, 2005
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,872,331
              
              
              $
              118,723
              
              
              $
              51,959,702
              
              
              $
              382
              
              
              $
              (33,156,646
              )
              
              $
              18,922,161Change
                  in options issued as   compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,664
              
              
              
              -
              
              
              
              -
              
              
              
              8,664Foreign
                  currency translation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,535
              )
              
              
              -
              
              
              
              (2,535
              )Net
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,348,848
              )
              
              
              (3,348,848
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,351,383
              )Balance
                  at March 31, 2006
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,872,331
              
              
              
              118,723
              
              
              
              51,968,366
              
              
              
              (2,153
              )
              
              
              (36,505,494
              )
              
              
              15,579,442Stock
                  based compensation expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              50,363
              
              
              
              -
              
              
              
              -
              
              
              
              50,363Foreign
                  currency translation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,011
              )
              
              
              -
              
              
              
              (6,011
              )Net
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,147,310
              )
              
              
              (2,147,310
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,153,321
              )Balance
                  at March 31, 2007
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,872,331
              
              
              
              118,723
              
              
              
              52,018,729
              
              
              
              (
                8,164
              )
              
              
              (38,652,804
              )
              
              
              13,476,484Stock
                  based compensation expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              18,478
              
              
              
              -
              
              
              
              -
              
              
              
              18,478Foreign
                  currency translation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,164
              
              
              
              -
              
              
              
              8,164Net
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,290,439
              )
              
              
              (1,290,439
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,282,275
              )Balance
                  at September 30, 2007
              
              
              -
              
              
              
              -
              
              
              $
              -
              
              
              
              11,872,331
              
              
              $
              118,723
              
              
              $
              52,037,207
              
              
              $
              -
              
              
              $
              (39,943,243
              )
              
              $
              12,212,687
 
 
 The
        accompanying notes are an integral part of these financial
        statements.
  29
 Table
            of Contents
  APA
        Enterprises, Inc.
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 Six
                  months ended September
                  30,
              
              
              Years
                  ended March 31,2007
              
              
              2007
              
              
              2006(Restated)
              
              
              (Restated)Cash
                  flows from operating activities:Net
                  loss
              
              $
              (1,290,439
              )
              
              $
              (2,147,310
              )
              
              $
              (3,348,848
              )Adjustments
                  to reconcile net loss to cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              213,697
              
              
              
              651,399
              
              
              
              1,061,199Deferred
                  income taxes
              
              
              48,540
              
              
              
              (243,293
              )
              
              
              272,454(Gain)
                  loss on sale of assets
              
              
              126,408
              
              
              
              (433,433
              )
              
              
              (1,198,295
              )Stock-based
                  compensation expense
              
              
              18,478
              
              
              
              50,363
              
              
              
              8,664Goodwill
                  impairment charge
              
              
              -
              
              
              
              852,000
              
              
              
              -Severance
                  accrual
              
              
              360,826
              
              
              
              -
              
              
              
              -Lease
                  termination accrual
              
              
              376,032
              
              
              
              -
              
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable, net
              
              
              (628,536
              )
              
              
              69,423
              
              
              
              (446,235
              )Inventories
              
              
              (265,910
              )
              
              
              346,553
              
              
              
              (566,190
              )Prepaid
                  expenses and other assets
              
              
              104,548
              
              
              
              (135,206
              )
              
              
              136,111Accounts
                  payable and accrued expenses
              
              
              34,000
              
              
              
              (361,400
              )
              
              
              807,697Net
                  cash used in operating activities
              
              
              (902,356
              )
              
              
              (1,350,904
              )
              
              
              (3,273,443
              )Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (232,322
              )
              
              
              (581,446
              )
              
              
              (427,631
              )Purchase
                  of available for sale securities
              
              
              (2,350,000
              )
              
              
              (17,300,000
              )
              
              
              (14,550,000
              )Sale
                  of available for sale securities
              
              
              4,975,000
              
              
              
              20,025,000
              
              
              
              15,925,000Proceeds
                  from sale of assets
              
              
              513,805
              
              
              
              626,807
              
              
              
              1,936,756Net
                  cash provided by investing activities
              
              
              2,906,483
              
              
              
              2,770,361
              
              
              
              2,884,125Cash
                  flows from financing activities:Payment
                  of long-term debt
              
              
              (34,177
              )
              
              
              (872,854
              )
              
              
              (98,862
              )Net
                  cash used in financing activities
              
              
              (34,177
              )
              
              
              (872,854
              )
              
              
              (98,862
              )Foreign
                  currency translation
              
              
              21,326
              
              
              
              (6,011
              )
              
              
              (2,535
              )Increase
                  (decrease) in cash balances of discontinued operations
              
              
              47,193
              
              
              
              57,240
              
              
              
              (104,433
              )Increase
                  (decrease) in cash and cash equivalents
              
              
              2,038,469
              
              
              
              597,832
              
              
              
              (595,148
              )Cash
                  and cash equivalents at beginning of year
              
              
              1,266,176
              
              
              
              668,344
              
              
              
              1,263,492Cash
                  and cash equivalents at end of year
              
              $
              3,304,645
              
              
              $
              1,266,176
              
              
              $
              668,344Supplemental
                  cash flow information: Cash paid during the year for:Interest
              
              $
              7,148
              
              
              $
              41,841
              
              
              $
              90,816Income
                  Taxes
              
              
              3,120
              
              
              
              5,800
              
              
              
              3,117Noncash
                  investing and financing:Withdrawal
                  of bond reserve funds, net
              
              
              -
              
              
              
              469,626
              
              
              
              -Note
                  receivable for sale of India operations
              
              
              502,213
              
              
              
              -
              
              
              
              -Capital
                  expenditures included in accounts payable
              
              
              132,380
              
              
              
              -
              
              
              
              -Debt
                  incurred for purchase of equipment
              
              
              -
              
              
              
              179,118
              
              
              
              -Debt
                  relieved in exchange for land
              
              
              -
              
              
              
              -
              
              
              
              120,000
 
 
 The
        accompanying notes are an integral part of these financial
        statements.
  30
 Table
            of Contents
  APA
        Enterprises, Inc.
 
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Six
        months ended September 30, 2007 and years ended March 31, 2007 and
        2006
 
 NOTE
        A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Nature
                  of
                  Business
 
 APA
                  Enterprises, Inc., formerly APA Optics, Inc., (the Company) is
                  a
                  manufacturer of a broad range of standard and custom passive connectivity
                  products to customers throughout the United States with a concentration
                  in
                  Minnesota. These products include fiber distribution systems, optical
                  components, Outside Plant (“OSP”) cabinets, and fiber and copper cable
                  assemblies that serve the communication service provider, including
                  Fiber-to-the-Home (“FTTH”), large
                  enterprise,
                  and original equipment manufacturers (“OEMs”) markets.
 
 Principles
                  of
                  Consolidation
 
 The
                  consolidated financial statements include the accounts of APA Enterprises,
                  Inc. and its wholly-owned subsidiary. All significant inter-company
                  accounts and transac­tions have been eliminated in consolidation.
 
 Foreign
                  Currency
                  Translation
 
 The
                  Company used the United States dollar as its functional currency.
                  India’s
                  financial statements were translated into U.S. dollars at the year
                  end
                  exchange rate, while income and expenses were translated at the
                  average
                  exchange rates during the year.  There were no significant
                  foreign exchange translation gains or losses during periods ended
                  September 30, 2007, March 31, 2007 and 2006.
 
 Revenue
                  Recognition
 
 Revenue
                  is recognized when persuasive evidence of an arrangement exists,
                  the
                  product has been delivered, the fee is fixed, acceptance by the
                  customer
                  is reasonably certain and collection is probable. The Company records
                  freight revenues billed to customers as revenue and the related
                  cost in
                  cost of revenues. Taxes collected from customers and remitted to
                  governmental authorities are presented on a net basis.
 
 Cash
                  and Cash
                  Equivalents
 
 The
                  Company considers all highly liquid investments with original maturities
                  of three months or less to be cash equivalents. Cash equivalents
                  at
                  September 30, 2007 and March 31, 2007 consist entirely of short-term
                  money market accounts.  Cash equivalents are stated at cost,
                  which approximates fair value.
 
 Cash
                  of approximately $47,000 and $104,000was on deposit in foreign
                  financial
                  institutions at March 31, 2007 and 2006. No cash was in foreign
                  financial
                  institutions as of September 30, 2007. The Company maintains cash
                  balances
                  at several financial institutions, and at times, such balances
                  exceed
                  insured limits. The Company has not experienced any losses in such
                  accounts and believes it is not exposed to any significant credit
                  risk on
                  cash.
  31
 Table
            of Contents
  NOTE
        A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
 
 Available
                  for Sale
                  Securities
 
 Available-for-Sale
        Securities consist of Auction Rate Securities (“ARS”) with underling investments
        in AAA rated securities with varying maturities and interest rates are reset
        for
        periods not exceeding 30 days.  The Company has not experienced any
        impairment of value of its securities and believes it is not exposed to
        significant credit risk on its investments.
 
 Accounts
                  Receivable
 
 Credit
                  is extended based on the evaluation of a customer’s financial condition
                  and, generally, collateral is not required.  Accounts
                  outstanding longer than the contractual payment terms are considered
                  past
                  due.  The Company determines its allowance by considering a
                  number of factors, including the length of time trade receivables
                  are past
                  due, the Company’s previous loss history, the customer’s current ability
                  to pay its obligation to the Company, and the condition of the
                  general
                  economy and the industry as whole.  The Company writes off
                  accounts receivable when they become uncollectible; payments subsequently
                  received on such receivables are credited to the allowance for
                  doubtful
                  accounts.  The allowance for uncollectible accounts was $78,973,
                  $78,500 and $77,831 at September 30, 2007, March 31, 2007 and 2006.
 
 Inventories
 
 Inventories
                  consist of finished goods, raw materials and work in process and
                  are
                  stated at the lower of average cost (which approximates the first-in,
                  first-out method) or market. Cost is determined using material
                  costs,
                  labor charges, and allocated manufacturing overhead charges.
 
 Property,
                  Plant and
                  Equipment
 
 Property,
                  plant and equipment are stated at cost, less accumulated depreciation
                  and
                  amortiza­tion.  Depreciation and amortization are provided
                  on the straight-line method for book and tax purposes over the
                  follow­ing estimated useful lives of the assets:
 
 YearsBuilding
              20Equipment
              3
–
                  7Leasehold
                  improvements
              7
–
                  10 or life of lease
 
 Goodwill
 
 The
                  Company records the excess of purchase cost over the fair value
                  of net
                  tangible assets of acquired companies as goodwill or other identifiable
                  intangible assets and tests for impairment annually and under certain
                  circumstances. The Company performs such testing of goodwill and
                  other
                  indefinite-lived intangible assets in the fourth quarter of each
                  year or
                  as events occur or circumstances change that would more likely
                  than not
                  reduce the fair value of a reporting unit below its carrying amount.
                  The
                  Company compares the fair value of the reporting units to the carrying
                  value of the reporting units for goodwill impairment testing. Fair
                  value
                  is determined using a discounted cash flow method.
 
 The
                  Company completed its annual impairment testing of goodwill in
                  the fourth
                  quarter of the years ended March 31, 2006 and 2007 and as of September
                  30,
                  2007. This testing indicated that goodwill recorded as of March
                  31, 2007
                  for the APACN subsidiary was impaired, principally due to weakness
                  in
                  operating results of
  32
 Table
            of Contents
  NOTE
        A  –  SUMMARY OF SIGNIFICANT ACCOUNTING
        POLICIES  –  Continued
 
 
 this
                  subsidiary. The Company recognized the related non-cash, pre-tax
                  impairment charge of $852,000 ($519,717 after tax) for the year
                  ended
                  March 31, 2007. For the year ended March 31, 2006 and for the six
                  months
                  ended September 30, 2007 no impairment was recorded.
 
 Stock-Based
                  Compensation
 The
        Company has various incentive and non-qualified stock option plans which
        are
        used as an incentive for directors, officers, and other employees, as described
        more fully in Note N.  EffectiveApril
        1, 2006, the Company adopted
        FASB Statement No.
        123(R),“Share-Based
        Payment,“(SFAS
        123(R)) which requires an entity
        to reflect an expense, instead of pro forma disclosures in its financial
        footnotes, the cost of employee services received in exchange for an award
        of
        equity instruments based on the grant date fair value of the award. Statement
        123(R) supersedes the Company’s
        previous accounting under Accounting
        Principles Board Opinion No. 25,“Accounting
        for Stock Issued to
        Employees.”
 
 The
        Company adopted SFAS 123(R) using
        the modified prospective transition method, which provides that the
        Company’s
        consolidated financial statements for
        prior periods have not been restated to reflect, and do not include, the
        impact
        of SFAS 123(R). As required by SFAS 123(R), the following pro forma table
        illustrates the effect on net loss as if the fair-value-based approach of
        SFAS 123(R) hadapplied the fair value method,to stock-based
        employee
        compensation for the following fiscal year:
 
 March
                  31,2006Net
                  loss to common shareholders – as reported
              
              $
              (3,348,848
              )Less:
                  Total stock-based employee compensation expense determined under
                  fair
                  value method for all awards, net of related tax effects
              
              
              108,472Net
                  loss – pro forma
              
              $
              (3,457,320
              )Basic
                  and diluted net loss per common share – as reported
              
              $
              (.28
              )Basic
                  and diluted net loss per common share – pro forma
              
              $
              (.29
              )
 
 
 SFAS
        123(R) requires companies to estimate the fair value of share-based payment
        awards on the date of grant using an option-pricing model. The value of the
        portion of the award that is ultimately expected to vest is recognized as
        expense over the requisite service periods using the straight-line attribution
        model. The Company recorded $18,478 of related compensation expense for the
        six
        months ended September 30, 2007.  The related compensation expense for
        the year ended March 31, 2007 was $50,363.  The Company recorded
        compensation expense of $8,664, for the year ended March 31, 2006 for
        performance options.  Stock-based compensation expense is included in
        selling, general and administrative expense.  There was no tax benefit
        from recording this non-cash expense.  The impact of this compensation
        expense on both basic and diluted loss per share was less than $0.01 for
        the six
        months ended September 30, 2007.  As of September 30, 2007, $71,389 of
        total unrecognized compensation expense related to non-vested awards is expected
        to be recognized over a weighted average period of approximately
        2.8 years.
  33
 Table
            of Contents
  NOTE
        A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
 The
        total
        fair value of options vested during the six months ended September 30, 2007,
        and
        the years ended March 31, 2007 and 2006 was $13,998, $64,545 and
        $136,786.  The Company uses the Black-Scholes-Merton (“Black-Scholes”)
        option-pricing model as a method for determining the estimated fair value
        for
        employee stock awards.  This is the same option-pricing model used in
        prior years to calculate pro forma compensation expense under SFAS 123 footnote
        disclosures.  Compensation expense for employee stock awards is
        recognized on a straight-line basis over the requisite service period of
        the
        award.
 The
        Company estimates the fair value of stock option awards based on the following
        assumptions for the periods ended:
  September
                  30,2007
              
              
              March
                  31, 2007
              
              
              March
                  31, 2006Expected
                  volatility
              
              
              51
              %
              
              
              64
              %
              
              
              75
              %Expected
                  life (in years)
              
              5
                  years
              
              
              5
                  years
              
              
              5
                  yearsExpected
                  dividends
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Risk-free
                  interest rate
              
              
              4.42
              %
              
              
              4.78
              %
              
              
              3.90
              %
 
 The
        weighted average fair value of options granted during the six months ended
        September 30, 2007, and the years ended March 31, 2007 and 2006 was $ 0.59,
        $0.75 and $1.39.   The Company’s approach to estimating expected
        volatility on its stock awards granted during the year considers both the
        historical volatility in the trading market for its common stock and a look
        back
        period equal to the expected life of the grants.  Expected volatility
        is one of several assumptions in the Black-Scholes model used by the Company
        to
        make an estimate of the fair value of options granted under the Company’s stock
        plans. The Company uses a forfeiture rate of 10%.
 In
        estimating the expected term, both exercise behavior and post-vesting
        termination behavior were included in the analysis, as well as consideration
        of
        outstanding options.  The risk-free interest rate used in the
        Black-Scholes option valuation model is the historical yield on U.S. Treasury
        zero-coupon issues with equivalent remaining terms. The Company does not
        pay any
        cash dividends on the Company’s common stock and does not anticipate paying any
        cash dividends in the foreseeable future.  Consequently, an expected
        dividend yield of zero is used in the Black-Scholes option valuation
        model.
 
 Fair
        Value of Financial
        Instruments
 
 Due
                  to their short-term nature, the carrying value of current financial
                  assets
                  and liabilities approximates their fair values. The fair value
                  of
                  long-term obligations, if recalculated based on current interest
                  rates,
                  would not significantly differ from the recorded amounts.
 
 Net
        Loss Per
        Share
 
 Basic
                  and diluted net loss per share are computed by dividing net loss
                  by the
                  weighted average number of common shares outstanding.
 
 Common
                  stock options and warrants to purchase 586,830, 583,150 and 633,780
                  shares
                  of com­mon stock with a weighted average exercise price of $2.48,
                  $2.56 and $2.96 were outstanding during the six months ended September
                  30,
                  2007, and the years ended March 31, 2007 and 2006, respectively,
                  but were
                  excluded from the calculation of net loss per share because they
                  were
                  antidilutive.  Had the Company not incurred net losses during
                  the six months ended September 30, 2007, and the years March 31,
                  2007 and
                  2006, the Company would not have assumed any conversion of stock
                  options.
  34
 Table
            of Contents
  NOTE
        A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
 Use
                  of
                  Estimates
 
 The
        preparation of consolidated financial statements in conformity with accounting
        principles generally accepted in the United States of America requires
        management to make estimates and assump­tions that affect the reported
        amounts of assets and liabilities, related revenues and expenses and
        disclo­sure about contingent assets and liabilities at the date of the
        financial statements.  Actual results may differ from those estimates
        used by management.
 
 Impairment
        of Long-Lived
        Assets
 
 The
        Company evaluates the recoverability of its long-lived assets, including
        goodwill, and requires recognition of impairment of long-lived assets if
        events
        or circumstances indicate impairment may have occurred and when the net book
        value of such assets exceeds the future undiscounted cash flows attributed
        to
        such assets.  The Company assesses the impairment of long-lived assets
        whenever events or changes in circumstances indicate that the carrying value
        may
        not be recoverable.  No impairment of long-lived assets has occurred
        during any of the periods presented.
 
 Income
        Taxes
 
 The
        Company records income taxes in accordance with the liability method of
        accounting.  Deferred taxes are recognized for the estimated taxes
        ultimately payable or recoverable based on enacted tax law.  The
        Company establishes a valuation allowance to reduce the deferred tax asset
        to an
        amount that is more likely than not to be realizable.  Changes in tax
        rates are reflected in the tax provision as they occur.
 
 Recently
        Issued Accounting
        Standards
 
 In
        June 2006, the FASB ratified the
        consensuses of Emerging Issues Task Force (EITF) Issue No. 06-3,“How
        Taxes Collected from Customers and
        Remitted to Governmental Authorities Should Be Presented in the Income Statement
        (That Is, Gross versus Net Presentation)”(EITF 06-3).
        EITF 06-3
        indicates that the income statement presentation on either a gross basis
        or a
        net basis of the taxes within the scope of the Issue is an accounting policy
        decision. Our accounting policy is to present the taxes within the scope
        of
        EITF 06-3 on a net basis. The adoption of EITF 06-3 during the transition
        period endedSeptember 30,
        2007did
        not result in a change to our
        accounting policy and, accordingly, did not have a material effect on our
        consolidated financial statements.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
        No. 157 defines fair value, establishes a framework for measuring fair value
        and
        expands disclosures about fair value measurement but does not require any
        new
        fair value measurements. SFAS No. 157 is effective for financial statement
        issued for fiscal years beginning after November 15, 2007 and interim periods
        within those fiscal years. The
        Company iscurrently
        evaluating the impact of SFAS No. 157on our financial
        statements.
 
 In
        February 2007, the FASB issuedSFASNo. 159,“The
        Fair Value Option for Financial
        Assets and Financial Liabilities, including an amendment of FASB Statement
        No. 115, or SFAS No. 159.”SFAS
        No. 159 permits entities to
        choose to measure many financial instruments and certain other items at fair
        value at specified election dates. SFAS No. 159 applies to all entities,
        including not-for-profit organizations. The provisions of SFAS No. 159 are
        effective for fiscal years beginning afterNovember 15, 2007.The
        Company iscurrently evaluating
        the impact of SFAS
        No. 159 on our financial statements.
  35
 Table
            of Contents
  NOTE
        B – TRANSITIONAL REPORTING RESULTS OF OPERATIONS
 
 InJune2007,
        theCompany elected to
        change the fiscal
        year end from March 31 to September 30. In view of this change, the following
        presents the unaudited consolidated statements of operationsfor the six months
        endedSeptember 30, 2007(the
        transition period) with theunauditedsix
        months endedSeptember 30, 2006.
 
 Consolidated
                  Statement of Operations:Six
                  months ended September 30,(Unaudited)2007
              
              
              2006Revenues
              
              $
              10,296,680
              
              
              $
              9,963,271Gross
                  Profit
              
              
              3,217,657
              
              
              
              2,909,526Net
                  income (loss) before taxes
              
              
              (323,979
              )
              
              
              140,812Income
                  taxes
              
              
              51,640
              
              
              
              43,250Net
                  income (loss) from continuing operations
              
              
              (375,619
              )
              
              
              97,562Net
                  loss from discontinued operations
              
              
              (914,820
              )
              
              
              (610,013
              )Net
                  loss
              
              $
              (1,290,439
              )
              
              $
              (512,451
              )Net
                  income (loss) per share (basic and diluted):
 Continuing
                  operations
              
              $
              (0.03
              )
              
              $
              0.01Discontinued
                  operations
              
              
              (0.08
              )
              
              
              (0.05
              )Total
              
              $
              (0.11
              )
              
              $
              (0.04
              )
  36
 Table
            of Contents
  NOTE
        C – RESTATEMENTS
 
 The
        Company changed its classification of investments in auction rate securities,
        previously classified as cash and cash equivalents, to available for sale
        securities for each of the periods presented in the accompanying consolidated
        balance sheets and statements of cash flows. Auction rate securities are
        variable rate bonds tied to short-term interest rates with maturities on
        the
        face of the securities in excess of 90 days. Auction rate securities have
        interest rate resets through a modified Dutch auction, at predetermined
        short-term intervals, usually every 1, 7, 28 or 35 days. The Company had
        historically classified auction rate securities as cash and cash equivalents
        if
        the period between the interest rate resets was 90 days or less, which was
        based
        on our ability to either liquidate our holdings or roll our investments over
        to
        the next reset period. The Company reevaluated the classification of these
        investments considering the maturity dates associated with the underlying
        bonds
        and determined classification as a cash equivalent was not appropriate. As
        a
        result, the Company reclassified $5,450,000 and $8,175,000 of auction rate
        securities held at March 31, 2007 and 2006 from cash and cash equivalents
        to
        available for sale securities. As of September 30, 2007, the Company has
        $2,825,000 of auction rate securities classified as short-term investments.
        All
        auction rate securities are available for sale and are reported at fair
        value.  In addition to the balance sheet restatement, the Company has
        made corresponding adjustments to the accompanying statement of cash flows
        to
        reflect the gross purchases and sales of these securities as investing
        activities. These restatements had no impact on the results of operations
        of the
        Company.
 
 The
        effects of the restatement of the
        Consolidated Balance Sheets at March 31, 2007 and 2006, respectively are
        reflected in the following tables:
 
 For
                  the Year Ended March 31, 2007As
                  Reported
              
              
              Adjustment
              
              
              As
                  RestatedCash
                  and cash equivalents
              
              $
              6,763,369
              
              
              $
              (5,450,000
              )
              
              $
              1,313,369Available
                  for sale securities
              
              
              -
              
              
              
              5,450,000
              
              
              
              5,450,000
 
 For
                  the Year Ended March 31, 2006As
                  Reported
              
              
              Adjustment
              
              
              As
                  RestatedCash
                  and cash equivalents
              
              $
              8,947,777
              
              
              $
              (8,175,000
              )
              
              $
              772,777Available
                  for sale securities
              
              
              -
              
              
              
              8,175,000
              
              
              
              8,175,000
 
 The
        effects of the restatement of the Consolidated Statements of Cash Flow for
        the
        years ended March 31, 2007, 2006 and 2005, respectively, are reflected in
        the
        following table:
 
 For
                  the Year Ended March 31, 2007As
                  Reported
              
              
              Adjustment
              
              
              As
                  RestatedCash
                  Flows from Operating ActivitiesNet
                  cash (used for) operating activities
              
              $
              (1,356,915
              )
              
              $
              -
              
              
              $
              (1,356,915
              )Cash
                  Flows from Investing ActivitiesPurchases
                  of available for sale securities
              
              
              -
              
              
              
              (17,300,000
              )
              
              
              (17,300,000
              )Sale
                  of available for sale securities
              
              
              -
              
              
              
              20,025,000
              
              
              
              20,025,000Net
                  cash provided from investing activities
              
              
              45,361
              
              
              
              2,725,000
              
              
              
              2,770,361Cash
                  Flows from Financing ActivitiesNet
                  cash used for financing activities
              
              
              (872,854
              )
              
              
              -
              
              
              
              (872,854
              )Net
                  (Decrease) Increase in Cash and Cash Equivalents
              
              
              (2,184,408
              )
              
              
              2,725,000
              
              
              
              540,592Cash
                  and Cash Equivalents, beginning of year
              
              
              8,947,777
              
              
              
              (8,175,000
              )
              
              
              772,777Cash
                  and Cash Equivalents, end of year
              
              $
              6,763,369
              
              
              $
              (5,450,000
              )
              
              $
              1,313,369
  37
 Table
            of Contents
  
 For
                  the Year Ended March 31, 2006As
                  Reported
              
              
              Adjustment
              
              
              As
                  RestatedCash
                  Flows from Operating ActivitiesNet
                  cash (used for) operating activities
              
              $
              (3,275,978
              )
              
              $
              -
              
              
              $
              (3,275,978
              )Cash
                  Flows from Investing ActivitiesPurchases
                  of available for sale securities
              
              
              -
              
              
              
              (14,550,000
              )
              
              
              (14,550,000
              )Sale
                  of available for sale securities
              
              
              -
              
              
              
              15,925,000
              
              
              
              15,925,000Net
                  cash provided from investing activities
              
              
              1,509,125
              
              
              
              1,375,000
              
              
              
              2,884,125Cash
                  Flows from Financing ActivitiesNet
                  cash (used for) financing activities
              
              
              (98,862
              )
              
              
              -
              
              
              
              (98,862
              )Net
                  (Decrease) Increase in Cash and Cash Equivalents
              
              
              (1,865,715
              )
              
              
              1,750,000
              
              
              
              (490,715
              )Cash
                  and Cash Equivalents, beginning of year
              
              
              10,813,492
              
              
              
              (9,550,000
              )
              
              
              1,263,492Cash
                  and Cash Equivalents, end of year
              
              $
              8,947,777
              
              
              $
              (8,175,000
              )
              
              $
 
 For
                  the Year Ended March 31, 2005As
                  Reported
              
              
              Adjustment
              
              
              As
                  RestatedCash
                  Flows from Operating ActivitiesNet
                  cash (used for) operating activities
              
              $
              (2,246,925
              )
              
              $
              -
              
              
              $
              (2,246,925
              )Cash
                  Flows from Investing ActivitiesPurchases
                  of available for sale securities
              
              
              -
              
              
              
              (1,300,000
              )
              
              
              (1,300,000
              )Sale
                  of available for sale securities
              
              
              -
              
              
              
              2,150,000
              
              
              
              2,150,000Net
                  cash (used for) provided from investing activities
              
              
              (249,229
              )
              
              
              850,000
              
              
              
              600,771Cash
                  Flows from Financing ActivitiesNet
                  cash (used for) financing activities
              
              
              (235,264
              )
              
              
              -
              
              
              
              (235,264
              )Net
                  (Decrease) Increase in Cash and Cash Equivalents
              
              
              (2,731,418
              )
              
              
              850,000
              
              
              
              (1,881,418
              )Cash
                  and Cash Equivalents, beginning of year
              
              
              13,544,910
              
              
              
              (10,400,000
              )
              
              
              3,144,910Cash
                  and Cash Equivalents, end of year
              
              $
              10,813,492
              
              
              $
              (9,550,000
              )
              
              $
              1,263,492
 
 NOTE
        D – DISCONTINUED OPERATIONS
 
 The
        Optronics business segment (GaN products) continued to experience lower than
        expected demand for its products and services during the year ended March
        31,
        2007 and continued to record operating losses.  This caused management
        to critically evaluate the long term viability of the business and after
        careful
        deliberation elected to cease operations and discontinue the
        business.  Regarding operations in India, with the discontinuation of
        GaN products and the logistics and time constraints for APACN’s’ fiber patch
        cords, the benefit has been less than expected.  As a result India was
        no longer a viable sourcing option and actions were taken to control ongoing
        costs and recover the investment in the subsidiary.  In addition, the
        Company elected to close its Blaine facility because it was primarily dedicated
        to the Optronics segment.
 
 Sale
        of India
        Operations
 
 On
        June
        28, 2007, the Company sold APA Optronics (India) Private Limited ("APA India")
        to an entity owned by the former chief executive officer of the Company,
        Dr.
        Anil K. Jain.  The purchase price of $504,499 was paid by
        delivery of a five year promissory note.  The note is secured by a
        pledge of Company stock by Dr. Jain, a pledge by Dr. Jain of payments under
        his
        Separation Agreement with the Company, and a personal guaranty by Dr. Jain.
        The
        purchase price was determined by the independent directors to be fair and
        reasonable to the Company.  The current portion of the note receivable
        is presented within “prepaid expenses and other” and the long term portion is
        reflected as note receivable on the balance sheet.  The Company
        recorded a loss of approximately $127,000 on the sale that is presented in
        discontinued operations in the consolidated statements of
        operations.
  38
 Table
            of Contents
  Discontinuance
        of Optronics
        Segment
 
 The
        Company ceased all remaining operations related to the Optronics segment
        in June
        of 2007.  Substantially all employees related to the Optronics segment
        were terminated prior to June 30, 2007.  The Company recorded expense
        of $78,109 for one time termination benefits.  The decision to close
        its facility in Blaine, Minnesota, that was fully dedicated to the Optronics
        segment, occurred in June of 2007.  The Company recorded a charge of
        $418,044 for remaining contract obligations costs through November of 2009
        as
        the facility will not provide any economic benefit to the Company in the
        future.
        A portion of the contract obligation, $171,000, is reflected as a current
        liability of discontinued operations, the balance $204,000, is included in
        long
        term liabilities of discontinued operations (see also Note S). The Company
        recorded asset impairment charges of $367,928 related to the write-off of
        inventory and write-down of fixed assets to their realizable
        value.  The assets remaining that will not be retained will be sold or
        disposed of.
 
 Operating
        results related to the discontinuance of the Optronics segment, including
        APA
        India, for the six months ended September 30, 2007 and 2006 and for they
        years
        ended March 31, 2007 and 2006, which have been reclassified and presented
        in our
        consolidated statements of income as discontinued operations, are summarized
        below:
  Six
                  Months Ended September 30,2007
              
              
              2006Net
                  Sales
              
              $
              28,324
              
              
              $
              83,919Cost
                  of goods sold
              
              
              231,420
              
              
              
              303,881Gross
                  profit
              
              
              (203,096
              )
              
              
              (219,962
              )Operating
                  expenses
              
              
              711,724
              
              
              
              390,051Loss
                  from discontinued operations
              
              $
              (914,820
              )
              
              $
              (610,013
              )
 
 Years
                  Ended March 31,2007
              
              
              2006Net
                  Sales
              
              $
              196,342
              
              
              $
              76,8949Cost
                  of goods sold
              
              
              648,471
              
              
              
              1,073,145Gross
                  profit
              
              
              (452,129
              )
              
              
              (996,251
              )Operating
                  expenses
              
              
              856,964
              
              
              
              1,172,739Loss
                  from discontinued operations
              
              $
              (1,309,093
              )
              
              $
              (2,168,990
              )
 
 
 NOTE
        E – SEVERANCE AGREEMENT
 Effective
        June 28, 2007 Anil K. Jain ceased to be Chief Executive Officer (principal
        executive officer), Chief Financial Officer (principal financial and accounting
        officer), and Chairman of the Board of Directors of the Company.
 Pursuant
        to the terms of an Amended and Restated Agreement Regarding
        Employment/Compensation Upon Change In Control dated September 15, 2005,
        Dr.
        Jain will be paid his current salary ($190,000 per year) for 24 months after
        the
        date of termination of his employment, payable quarterly.  As a
        result, the Company has recorded a severance charge of $397,000 in the statement
        of operations and the short term portion of the liability is include in accrued
        compensation and the long term portion of the liability is included in other
        long term liabilities.  This severance provision applies notwithstanding
        the absence of a "change of control”.
  39
 Table
            of Contents
  NOTE
        F – CLOSING OF THE ABERDEEN FACILITY
 
 The
        Company ceased all of its operations in its Aberdeen facility during the
        later
        part of fiscal year 2006 as a part of its consolidation of manufacturing
        operations. The Company-owned facility, located approximately on a 10-acre
        parcel, is designated for lease or sale after sub-division of the land into
        two
        5-acre parcels. The Company does not have a formal plan for leasing or selling
        the facility and thus the building remains classified as property, plant
        and
        equipment as of September 30, 2007.
 
 The
        Company plans to retain the 5-acre vacant land for potential future use.
        Subsequent to September 30, 2007 the Company leased a portion of this facility
        (see Note S). The facility was
        built using proceeds from bonds issued by the South Dakota Economic Development
        and Finance Authority. In August 2006, the Company paid $871,911 into an
        escrow
        account to retire the bonds. These funds, reflected as Bond Reserve Funds,
        were
        used to make final payment on the bonds onOctober 1, 2006,
        the next bond redemption date. The
        payment was made pursuant to a Notice of Default and Acceleration received
        by
        the Company. The primary reason for the notice was related to the Company
        ceasing all of itsSouth
        Dakotaoperations in the
        latter part of fiscal year 2006 as part of its consolidation of manufacturing
        operations. The Company made timely interest and principal payments, and
        the
        reason for the notice was not related to the payments.
 
 NOTE
        G – SALE OF METAL ORGANIC CHEMICAL VAPOR DEPOSITION (MOCVD)
        OPERATIONS
 
 In
        March
        2006, the Company sold certain equipment and related intellectual property
        related to its MOCVD operations to an unrelated party for a total consideration
        of $1.9 million in cash and a license back of the technology within a specified
        field of use.  The asset purchase agreement includes an additional
        consulting agreement for up to $100,000 over the course of one
        year.  The Company recorded a gain of approximately $1.2 million on
        the sale in the fourth quarter of fiscal 2006 which has been presented as
        a
        discontinued operation.
 
 NOTE
        H – INVENTORIES
  Inventories
        consist of the following at
  September
                  30,
              
              
              March
                  31,
              
              
              March
                  31,2007
              
              
              2007
              
              
              2006Raw
                  materials
              
              $
              1,422,374
              
              
              $
              1,072,081
              
              
              $
              1,474,146Work-in-process
              
              
              50,468
              
              
              
              23,525
              
              
              
              33,083Finished
                  Goods
              
              
              122,440
              
              
              
              217,075
              
              
              
              178,243$
              1,595,282
              
              
              $
              1,312,681
              
              
              $
              1,685,472
 
 NOTE
        I  – PROPERTY, PLANT AND EQUIPMENT
 
 Property,
                  plant and equipment consist of the following at:
 
 September
                  30,
              
              
              March
                  31,
              
              
              March
                  31,2007
              
              
              2007
              
              
              2006Land
              
              $
              56,195
              
              
              $
              56,195
              
              
              $
              56,195Buildings
              
              
              1,679,424
              
              
              
              1,679,424
              
              
              
              1,679,424Manufacturing
                  Equipment
              
              
              602,432
              
              
              
              610,777
              
              
              
              613,904Office
                  Equipment
              
              
              1,163,221
              
              
              
              1,046,268
              
              
              
              780,816Leasehold
                  Improvements
              
              
              184,015
              
              
              
              159,006
              
              
              
              150,4093,685,287
              
              
              
              3,551,670
              
              
              
              3,280,748Less
                  accumulated depreciation and amortization
              
              
              1,911,548
              
              
              
              1,895,659
              
              
              
              1,688,212$
              1,773,739
              
              
              $
              1,656,011
              
              
              $
              1,592,536
  40
 Table
            of Contents
  NOTE
        J – LONG-TERM DEBT
 
 The
                  following is a summary of the outstanding debt at:
 
 September
                  30,
              
              
              March
                  31,
              
              
              March
                  31,2007
              
              
              2007
              
              
              2006Long
                  term debt
              
              $
              163,422
              
              
              $
              197,599
              
              
              $
              40,961Less:
                  current maturities
              
              
              68,215
              
              
              
              69,528
              
              
              
              22,481$
              95,207
              
              
              $
              128,071
              
              
              $
              18,480
 
 The
        above
        debt was secured by certain equipment of the Company.
 
 Scheduled
        maturities of the Company’s long-term debt are as follows:
 
 Years
                  ending September
                  30,2008
              
              $
              68,2152009
              
              
              62,1262010
              
              
              33,081$
              163,422
 
 NOTE
        K  – EMPLOYEE BENEFIT PLAN
 
 The
        Company maintains a contributory
        401(k) profit sharing benefit plan covering all employ­ees.  The
        Company matches 50% of the first 6% of the employee’s salary that was
        contributed by the employee to the plan.  The Company’s contributions
        under this plan were $72,765, $127,000 and $114,000 for the periods ended
        September 30, 2007 and March 31, 2007 and 2006,
        respectively.
  41
 Table
            of Contents
 
 NOTE
        L – INCOME TAXES
 
 Deferred
        taxes recognize the impact of temporary differences between the amounts of
        the
        assets and liabilities recorded for financial statement purposes and such
        amount
        measured in accordance with tax laws.  Realization of net operating
        loss carry forward and other deferred tax temporary differences are contingent
        upon future taxable earnings.  The Company’s deferred tax asset was
        reviewed for expected utilization using a “more likely than not” approach as
        required by SFAS 109 by assessing the available positive and negative factors
        surrounding its recoverability.  Accordingly, the Company has recorded
        a full valuation allowance at September 30, 2007 and March 31, 2007 and 2006,
        respectively.
 
 Significant
        components of deferred income tax assets and liabilities are as follows
        at:
 
 September
                  30
              
              
              March
                  31
              
              
              March
                  312007
              
              
              2007
              
              
              2006Current
                  deferred income tax assets:Inventories
              
              $
              129,463
              
              
              $
              196,966
              
              
              $
              160,129Accrued
                  expenses
              
              
              478,294
              
              
              
              199,945
              
              
              
              194,841607,757
              
              
              
              396,911
              
              
              
              354,970Long-term
                  deferred income tax assets:Intangibles
              
              
              31,550
              
              
              
              32,513
              
              
              
              12,766Net
                  operating loss carryforwards
              
              
              13,337,200
              
              
              
              13,502,995
              
              
              
              13,173,80113,368,750
              
              
              
              13,535,508
              
              
              
              13,186,567Total
                  deferred income tax assets
              
              
              13,976,507
              
              
              
              13,932,419
              
              
              
              13,541,537Long-term
                  deferred income tax liabilities:Property
                  and equipment depreciation
              
              
              20,022
              
              
              
              36,067
              
              
              
              151,104Goodwill
              
              
              77,701
              
              
              
              29,161
              
              
              
              272,45497,723
              
              
              
              65,228
              
              
              
              423,558Total
                  net deferred income taxes
              
              
              13,878,784
              
              
              
              13,867,191
              
              
              
              13,117,979Valuation
                  allowance
              
              
              (13,956,485
              )
              
              
              (13,896,352
              )
              
              
              (13,390,433
              )Total
              
              $
              (77,701
              )
              
              $
              (29,161
              )
              
              $
              (272,454
              )
  42
 Table
            of Contents
  NOTE
        L – INCOME TAXES–  Continued
 
 As
        of
        September 30, 2007, the Company has net operating loss carry forwards for
        federal and state income tax purposes of approximately $34,201,000 which
        expire
        in fiscal years 2008 to 2027. To date the Company has not completed a Section
        382 analysis.  If certain ownership changes occurred under Section
        382, there may be further limitations on the usage of the net operating loss
        carry forwards.
 
 The
        following is a reconciliation of the federal statutory income tax rate to
        the
        consolidated effective tax rate for period as of:
 
 Percent
                  of Pre-tax IncomeSeptember
                  30,
              
              
              March
                  31,
              
              
              March
                  31,2007
              
              
              2007
              
              
              2006Federal
                  statutory rate
              
              
              (34%)
              
              
              
              (34%)
              
              
              
              (34%)State
                  income taxes
              
              
              (5%)
              
              
              
              (5%)
              
              
              
              (5%)Permanent
                  differences
              
              
              3%
              
              
              
              9%
              
              
              
              7%Expiration
                  of net operating loss carryforwards
              
              
              35%
              
              
              
              -%
              
              
              
              -%Other
              
              
              -%
              
              
              
              (1%)
              
              
              
              1%Change
                  in valuation allowance
              
              
              5%
              
              
              
              21%
              
              
              
              40%Tax
                  rate
              
              
              4%
              
              
              
              (10%)
              
              
              
              9%
 
 Components
        of the income tax expense (benefit) are as follows for the periods
        ended:
 
 September
                  30,
              
              
              March
                  31,
              
              
              March
                  31,2007
              
              
              2007
              
              
              2006Current:Federal
              
              $
              -
              
              
              $
              -
              
              
              $
              -State
              
              
              3,100
              
              
              
              5,800
              
              
              
              3,1173,100
              
              
              
              5,800
              
              
              
              3,117Deferred:Federal
              
              
              94,741
              
              
              
              228,973
              
              
              
              1,301,731State
              
              
              13,932
              
              
              
              33,673
              
              
              
              193,949108,673
              
              
              
              262,646
              
              
              
              1,495,680Valuation
                  allowance
              
              
              (60,133
              )
              
              
              (505,939
              )
              
              
              (1,223,226
              )Income
                  tax expense (benefit)
              
              $
              51,640
              
              
              $
              (237,493
              )
              
              $
              275,571
 
 On
        June
        1, 2006, the Treasury issued final regulations concerning the deduction for
        income attributable to domestic production activities under Section 199.
        Section
        199 was enacted as part of the American Jobs Creation Act of
        2004.  The Company examined the effect of these regulations and
        concluded the impact to be immaterial until all net operating losses have
        been
        fully utilized.
 
 The
        Company adopted the provisions of
        FASB Interpretation 48,Accounting
        for
        Uncertainty in Income Taxes(“FIN 48”),
        onApril1,
        2007. Previously, the Company
        had accounted
        for tax contingencies in accordance with Statement of Financial Accounting
        Standards 5,Accounting
        for
        Contingencies. As required
        byFIN48,
        which clarifies Statement 109,Accounting
        for
        Income Taxes, the Company
        recognizes the financial statement benefit of a tax position only after
        determining that the relevant tax authority would more likely than not sustain
        the position following an audit. For tax positions meeting the
        more-likely-than-notthreshold,
        the amount recognized in the
        financial statements is the largest benefit that has a greater than 50 percent
        likelihood of being realized upon ultimate settlement with the relevant tax
        authority. At the adoption date, the Company appliedFIN48
        to all tax positions for which the
        statute of limitations remained open.Both prior and subsequent
        to the
        adoption of FIN 48, the Company had no liability for unrecognized tax
        benefits.
  43
 Table
            of Contents
 
 NOTE
        L – INCOME TAXES –  Continued
 
 The
        Company is subject to income taxes
        in theU.S.federal
        jurisdiction, and various states
        and foreign jurisdictions. Tax regulations within each jurisdiction are subject
        to the interpretation of the related tax laws and regulations and require
        significant judgment to apply. With few exceptions, the Company is no longer
        subject toU.S.federal,
        state and local, or non-U.S.
        income tax examinations by tax authorities for the years
        before
        1993.
 
 The
        Company recognizes interest accrued
        related to unrecognized tax benefits in interest expense and penalties in
        operating expenses for all periods presented.The Company did not
        recognize any
        interest or penalties during the periods endedSeptember 30, 2007,March
        31, 2007andMarch
        31, 2006.
 
 NOTE
          M – SHAREHOLDERS’ EQUITY
 
 The
        Board of Directors may, by
        resolution, establish from the undesignated shares different classes or series
        of shares and may fix the relative rights and preferences of shares in any
        class
        or series. The Company is authorized to issue 500 shares of preferred stock
        and
        50,000,000 shares of common stock at $.01 par value. The Company has not
        issued
        any shares of preferred stock.
 
 NOTE
          N – SHAREHOLDER RIGHTS PLAN
 
 Pursuant
        to the Shareholder Rights
        Plan each share of com­mon stock has attached to it a right, and each share
        of common stock issued in the future will have a right attached until the
        rights
        expire or are redeemed.  Upon the occurrence of certain change in
        control events, each right entitles the holder to purchase one one-hundredth
        of
        a share of Series B Junior Preferred Participating Share, at an exercise
        price
        of $80 per share, subject to adjustment.  The rights expire on
        November 10, 2010 and may be redeemed by the Company at a price of $.001
        per right prior to the time they become exercisable.
  44
 Table
            of Contents
  NOTE
          O – STOCK OPTIONS AND WARRANTS
 
 Stock
        Options
 
 The
        Company has various incentive and non-qualified stock option plans which
        are
        used as an incentive for directors, officers, and other
        employees.  Options are generally granted at fair market values
        determined on the date of grant and vesting normally occurs over a five-year
        period.  The maximum contractual term is normally six
        years.  The company issues new shares upon exercise of a stock option.
        The plans had 713,170 shares of common stock available for issue at September
        30, 2007.
 
 Option
        transactions under these plans during the two years ended March 31, 2007
        and the transition period ended September 30, 2007 are summa­rized as
        follows:
 
 Number
                  of shares
              
              
              Weighted
                  average exercise
                  price
              
              
              Weighted
                  average fair valueOutstanding
                  at March 31, 2005
              
              
              236,630
              
              
              $
              3.28Granted
              
              
              65,000
              
              
              
              1.39
              
              
              $
              0.88Canceled
              
              
              (25,160
              )
              
              
              3.75Outstanding
                  at March 31, 2006
              
              
              276,470
              
              
              
              2.80Granted
              
              
              40,000
              
              
              
              1.31
              
              
              $
              0.77Cancelled
              
              
              (83,320
              )
              
              
              4.60Outstanding
                  at March 31, 2007
              
              
              233,150
              
              
              
              1.90Granted
              
              
              20,000
              
              
              
              1.13
              
              
              $
              0.59Cancelled
              
              
              (
                16,320
              )
              
              
              3.50Outstanding
                  at September 30, 2007
              
              
              236,830
              
              
              
              1.72
 
 The
          number of shares exercisable at September 30, 2007 and March 31, 2007 and
          2006 was 111,530, 99,950 and 113,510 respectively, at a weighted average
          exercise price of $1.88, $2.30 and $3.83 per share, respectively.
  45
 Table
            of Contents
  NOTE
          O – STOCK OPTIONS AND WARRANTS– Continued
 The
                  following table summarizes information concerning currently outstanding
                  and exercisable stock options at September 30, 2007:
 
 Options
                  outstandingRange
                  of exercise prices
              
              
              Number
                  outstanding
              
              Weighted
                  average remaining contractual
                  life
              
              Weighted
                  average exercise
                  price
              
              
              Aggregate
                  intrinsic value$0.00-$1.29
              
              
              
              35,000
              
              5.39
                  years
              
              $
              1.19
              
              
              $
              41,6991.30-1.95
              
              
              
              141,000
              
              3.67
                  years
              
              
              1.50
              
              
              
              211,5001.96-2.93
              
              
              
              60,830
              
              1.82
                  years
              
              
              2.54
              
              
              
              154,545236,830
              
              3.45
                  years
              
              $
              1.72
              
              
              $
              407,744
 
 Options
                  exercisableRange
                  of exercise prices
              
              
              Number
                  outstanding
              
              Weighted
                  average remaining contractual
                  life
              
              Weighted
                  average exercise
                  price
              
              
              Aggregate
                  intrinsic value$0.00-$1.29
              
              
              
              15,000
              
              4.92
                  years
              
              $
              1.28
              
              
              $
              19,2001.30-1.95
              
              
              
              52,700
              
              3.27
                  years
              
              
              1.50
              
              
              
              78,9081.96-2.93
              
              
              
              43,830
              
              1.72
                  years
              
              
              2.54
              
              
              
              111,192111,530
              
              2.89
                  years
              
              $
              1.88
              
              
              $
              209,300
 
 Stock
        Warrants
 
 The
        following is a table of the
        warrants to purchase shares of the Company’s common stock:
 
 Warrants
                  outstanding
              
              
              Exercise
                  price per share
              
              
              Expiration
                  dateBalance
                  at March 31, 2005
              
              
              446,731
              
              
              $
              3.00
                –17.84
              
              
              
              2005
                – 2008Issued
              
              
              -
              
              
              
              -
              
              
              
              -Expired
              
              
              (89,421
              )
              
              
              6.00-17.84
              
              
              2006Balance
                  at March 31, 2006
              
              
              357,310
              
              
              
              3.00
                – 7.00
              
              
              
              2007
                – 2008Issued
              
              
              -
              
              
              
              -
              
              
              
              -Expired
              
              
              (7,310
              )
              
              
              7.00
              
              
              2007Balance
                  at March 31, 2007
              
              
              350,000
              
              
              
              3.00
              
              
              2008Issued
              
              
              -
              
              
              
              -
              
              
              
              -Expired
              
              
              -
              
              
              
              -
              
              
              
              -Balance
                  September 30, 2007
              
              
              350,000
              
              
              
              3.00
              
              
              2008
 
 All
        warrants are exercisable upon date of grant.
  46
 Table
            of Contents
  NOTE
        P  – COMMITMENTS
 
 The
        Company leases office and manufacturing facilities for its ongoing operations
        this lease is renewable and noncancelable.  In addition the Company
        had lease commitments for the Blaine building to a partnership consisting
        of two
        partners of which one is a major shareholder and director of the Company
        and the
        other partner is a significant shareholder.  An option to purchase the
        Blaine Building has been exercised (see Note R). Rental expense for the Company
        was $628,000, $459,000 and $585,000 for the six months ended September 30,
        2007
        and years ended March 31, 2007 and 2006, of which $84,000, $166,000 and
        $160,000 was paid to the partnership, respectively. The closure of the Optronics
        division housed in Blaine resulted in the Company recording a charge of $418,044
        for remaining contract obligations costs through November of 2009 as the
        facility will not provide any economic benefit to the Company in the future.
        This amount is reflected in the $621,000 rent for the six months ended September
        30, 2007.
 
 The
        following is a schedule of approximate minimum payments required under the
        capital and operating leases:
 
 Year
                  ending September 30
              
              Operating
                  leases2008
              
              $
              347,3002009
              
              
              352,0112010
              
              
              252,4832011
              
              
              234,7472012
              
              
              241,773Thereafter
              
              
              292,236Total
                  minimum lease payments
              
              $
              1,720,550
 
 
 
 In
        February, 2007 the Company’s subsidiary APACN began implementing a new
        enterprise system and entered into a contract to pay approximately $266,000
        over
        a 3 year period for software related to part number configuration and production
        scheduling.
 
 NOTE
        Q – CONCENTRATIONS
 
 Suppliers
 
 The
                  Company purchases raw materials, component parts and outsourced
                  labor from
                  many suppliers. Although many of these items are single-sourced,
                  the
                  Company has experienced no significant difficulties to date in
                  obtaining
                  adequate quantities. These circumstances could change, however,
                  and the
                  Company cannot guarantee that sufficient quantities or quality
                  of raw
                  materials, component parts and outsourced labor will be as readily
                  available in the future or, if available, that we will be able
                  to obtain
                  them at favorable prices. One vendor supplies approximately 10%
                  of total
                  raw material purchases
 
 Customers
 
 Three
                  customers comprised approximately 22% of total sales for the six
                  months
                  ended September 30, 2007; 11%, 7% and 4% respectively. Two customers
                  comprised approximately 23% of total sales for the year ended March
                  31,
                  2007, 11% and 12% respectively. No single customer accounted for
                  more than
                  10% of the Company’s sales for the years ended March 31, 2006.
  47
 Table
            of Contents
  NOTE
        R – CAPITALIZED
        INTERNAL USE SOFTWARE COSTS
 
 The
        Company capitalizes the cost of
        internal-use software that has a useful life in excess of one year.These
        costs consist of payments made to
        third parties.Subsequent
        additions, modifications or
        upgrades to internal-use software are capitalized only to the extent that
        they
        allow the software to perform a task it previously did not perform. Software
        maintenance and training costs are expensed in the period in which they are
        incurred. Capitalized internal use software costs are amortized on a
        straight-line basis over their estimated useful lives. Amortization expense
        relating to such capitalized software was $5,000,
        $3,000 and $0 for the six months
        endedSeptember 30,
        2007and the years endedMarch 31, 2007and
        2006, respectively. Unamortized
        capitalized internal use software costs, included in Office
        Equipment,atSeptember30,
        2007andMarch
        31, 2007were $431,000and$243,000,
        respectively.
 
 
 NOTE
        S – SUBSEQUENT EVENTS
 
 Blaine
                  Facility
 
 OnOctober
        30, 2007the Company purchased
        its previous
        corporate headquarters inBlainefor
        $1,500,000 under the provisions of
        its option to purchase as stated in its lease from Jain-Olsen Properties.
        The
        Company as owner of the building canceled the lease to itself. The lease
        was
        scheduled to run through November of 2009. The elimination of the lease resulted
        in the elimination ofapproximately $373,000
        of accrued obligations related to
        this lease in conjunction with the discontinuation of the Optronics segmentrecordedduring
        the fiscal quarter endedJune 30, 2007and
        will be taken into
        incomeduringthe
        three months endingDecember 31, 2007.The
        Company, on the same day,
        thensold the land and
        building for $1,450,000 incurring a loss of $52,000.
 
 Aberdeen
                  Facility
 
 OnOctober
        1, 2007the Companysuccessfully
        entered into a lease
        agreement for itsAberdeen,South
        Dakotafacility which allows
        the tenant first
        opportunity to purchase the building over the upcoming three year
        period.
 
  ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE
 
 None.
 
 ITEM
                  8A.
              CONTROLS
                  AND PROCEDURES
 
 The
        Company’s chief executive officer and chief financial officer have evaluated the
        Company’s disclosure controls and procedures (as defined in Exchange Act Rule
        13a-15(e)) as of the end of the period covered by this report. We have
        identified a material weakness related to the Company’s disclosure controls
        including classification of investments and other financial reporting areas
        that
        resulted in a restatement of the Company’s prior years’ balance sheets and
        statements of cash flows.  Based on such evaluation has concluded that
        the Company’s disclosure controls and procedures are not
        effective.  The Company is currently evaluating the appropriate
        changes in its control processes and financial reporting
        capabilities.
 
 During
        the fiscal quarter ended September 30, 2007, there was no change in the
        Company’s internal controls over financial reporting that materially affected,
        or is reasonably likely to materially affect, the Company’s controls over
        financial reporting.
 
 ITEM
                  8B.
              OTHER
                  INFORMATION
 
 There
        were no events during the quarter ended September 30, 2007 required to be
        disclosed on Form 8-K which were not so disclosed.
  48
 Table
            of Contents
  PARTIII
 
 ITEM
                  9.
              DIRECTORSANDEXECUTIVE OFFICERS OF THE REGISTRANT
 
 Information
        regarding executive officers is included in Part I of this Report and is
        incorporated in this Item 10 by reference.
 
 Information
        regarding directors and the information required by Items 11 and 13, below,
        is
        incorporated in this Report by reference to the proxy statement for our annual
        meeting of shareholders to be held in February 2008.
 
 ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
 
 Information
        required by Item 10 is incorporated in this Report by reference to the proxy
        statement for our annual meeting of shareholders to be held in February
        2008.
 
 ITEM
                  11.
              SECURITYOWNERSHIP
                  OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                  AND RELATED STOCKHOLDER MATTERS
 
 Certain
        information required by Item 11 is incorporated in this Report by reference
        to
        the proxy statement for annual meeting of shareholders to be held in February
        2008. The following table provides information about the Company’s equity
        compensation plans (including individual compensation arrangements) as of
        September 30, 2007.
 
 (a)
              (b)
              (c)Plan
                  category
              Number
                  of securities to be issued upon exercise of options, warrants or
                  rights
              Weighted-average
                  exercise price of outstanding options, warrants and rights
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))Equity
                  compensation plans approved by security holders
              236,830
              $1.72
              713,170Equity
                  compensation plans not approved by security holders
              350,000
              $3.00
              Not
                  applicable*Total
              586,830
              $2.48
              713,170
 
 *
        These
        securities are comprised solely of warrants that were not issued pursuant
        to any
        formal plan with an authorized number of securities available for
        issuance.
  49
 Table
            of Contents
 
 ITEM
                  12.
              CERTAIN
                  RELATIONSHIPSAND RELATED TRANSACTIONS, AND
                  DIRECTOR INDEPENDENCE
 
 Information
        required by Item 12 is incorporated in this Report by reference to the proxy
        statement for our annual meeting of shareholders to be held in February
        2008.
 
 PART
        IV
 
 ITEM
                  13.
              EXHIBITS
  (a)
              (1)
              The
                  following financial statements are filed herewith under Item 8.
 
 (i)
              Report
                  of Independent Registered Public Accounting Firm for the six months
                  ended
                  September 30,2007 and the years ended March 31, 2007, and 2006
 
 (ii)
              Consolidated
                  Balance Sheets as of September 30, 2007 and March 31, 2007
 
 (iii)
              Consolidated
                  Statements of Operations for the six months ended September 30,2007
                  and
                  the years ended
 March
        31,
        2007 and, 2006
 (iv)
              Consolidated
                  Statement of Shareholders’ Equity for the six months ended September 30,
                  2007 and the years ended March 31, 2007 and 2006
 
 (v)
              Consolidated
                  Statements of Cash Flows for the six months ended September 30,2007
                  and
                  the years ended March 31, 2007 and 2006
 
 (vi)
              Notes
                  to the Consolidated Financial Statements for the six months ended
                  September 30, 2007 and the years ended March 31, 2007 and 2006
  (2)
              Financial
                  Statement Schedules: See Schedule II on page following signatures.
 
 (b)
              Exhibits.
                  See Exhibit Index.
 
 ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
 
 Information
        required by Item 14 is incorporated in this Report by reference to the proxy
        statement for our annual meeting of shareholders to be held in February
        2008.
  50
 Table
            of Contents
  SIGNATURES
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized.
 
 APA
                  Enterprises, Inc.Date:
                  December 21, 2007
              
              By
              /s/
                  Cheryl Beranek
                  PodzimekCheryl
                  Beranek PodzimekPresident
                  and Chief Executive Officer
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the Registrant and in
        the
        capacities and on the dates indicated.
 
 Signature
              
              Title
              
              Date/s/
                  Cheryl Beranek Podzimek
              
              President,
                  Chief Executive Officer and
              
              December
                  21 , 2007Cheryl
                  Beranek Podzimek
              
              Director
                  (principal executive officer )/s/
                  Bruce G. Blackey
              
              Chief
                  Financial Officer (principal
              
              December
                  21, 2007Bruce
                  G. Blackey
              
              financial
                  and accounting officer)/s/
                  John G. Reddan
              
              Director
              
              December
                  21, 2007John
                  G. Reddan/s/
                  Ronald G. Roth
              
              Director
              
              December
                  21, 2007Ronald
                  G. Roth/s/
                  Anil K. Jain
              
              Director
              
              December
                  21, 2007Anil
                  K. Jain/s/
                  Stephen L. Zuckerman MD
              
              Director
              
              December
                  21, 2007Stephen
                  L. Zuckerman/s/
                  Donald R. Hayward
              
              Director
              
              December
                  21, 2007Donald
                  R. Hayward
  51
 Table
            of Contents
 
 SCHEDULE
        II – VALUATION AND QUALIFYING ACCOUNTS
 
 
 AdditionsDescription
              
              Balance
                  at
                Beginning
                of
                  Period
              
              
              Charged
                  to:
                Cost
                  and
                Expenses
              
              
              Charged
                  to:
                Other
                Accounts
              
              Deductions
              
              Balance
                  at
                End
                  of PeriodAllowance
                  for doubtful accountsSeptember
                  30, 2007
              
              $
              78,500
              
              
              $
              -
              
              
              $
              843
              (1)
              
              $
              370
              (2)
              
              $
              78,973March
                  31, 2007
              
              
              77,831
              
              
              
              -
              
              
              
              5,550
              (1)
              
              
              4,881
              (2)
              
              
              78,500March
                  31, 2006
              
              
              57,107
              
              
              
              18,000
              
              
              
              6,121
              (1)
              
              
              3,397
              (2)
              
              
              77,831
 
 (1)
        Represents recovery of bad debt and other adjustments
 (2)
        Represents write-offs of bad debt
  52
 Table
            of Contents
  REPORT
        OF INDEPENDENT REGISTERED CERTIFIED
 
 PUBLIC
        ACCOUNTINGFIRMON
        SCHEDULE
 
 
 To
        the Board of Directors and
        Shareholders
 
 APAEnterprises,
        Inc.
 
 We
        have
        audited in accordance with the standards of the Public Company Accounting
        Oversight Board (United States) the consolidated financial statements of
        APA
        Enterprises, Inc. and subsidiaries referred to in our report dated
        December 21, 2007, which is included in the annual report to security
        holders and incorporated by reference in Part II of this form.  Our
        audit was conducted for the purpose of forming an opinion on the basic financial
        statements taken as a whole.  The accompanying Schedule II is
        presented for purposes of complying with the rules of the Securi­ties and
        Exchange Commission and is not a required part of the basic financial
        statements.  This schedule has been subjected to the auditing
        procedures applied in the audit of the basic financial statements and, in
        our
        opinion, is fairly stated in all material respects to the basic financial
        statements taken as a whole.
 
 
 /s/
        GRANT THORNTON
        LLP
 
 Minneapolis,Minnesota
 December
        21,
        2007
  53
 Table
            of Contents
  EXHIBIT
        INDEX
  Number
              
              Description
              
              Page
                  Number or Incorporated by Reference to2.1
              
              Asset
                  Purchase Agreement between APACN and CSP, Inc.
              
              Exhibit
                  2.1 to Form 8-K filed March 31, 20032.1
              
              Asset
                  Purchase Agreement between APACN and Americable, Inc.
              
              Exhibit
                  2.1 to Form 8-K filed July 2, 20032.2
              
              Agreement
                  Not to Compete with Peter Lee as part of CSP asset
                  purchase
              
              Exhibit
                  2.2 to Form 8-K filed March 31, 20032.3
              
              Asset
                  Purchase Agreement between APA Enterprises, Inc. and Software Moguls
                  India
                  Private Limited and S M Infoexpert Private Limited
              
              Exhibit
                  2.3 to Registrant’s Report on Form 10-K for the fiscal year ended March
                  31, 20053.1
              
              Restated
                  Articles of Incorporation, as amended to date
              
              Exhibit
                  3.1 to Registrant’s Report on Form 10-Q for the quarter ended September
                  30, 20003.1
                  (a)
              
              Restated
                  Articles of Incorporation, as amended to date thru August 25,
                  2004
              
              Exhibit
                  3.1 to Registrant’s Report on Form 10-Q for the quarter ended September
                  30, 20043.2
              
              Bylaws,
                  as amended and restated to date
              
              Exhibit
                  3.2 to Registrant’s Report on Form 10-KSB for the fiscal year ended March
                  31, 19994.1(a)
              
              State
                  of South Dakota Board of Economic Development $300,000 Promissory
                  Note,
                  REDI Loan: 95-13-A
              
              Exhibit
                  4.1(a) to the Report on 10-QSB for the quarter ended June 30, 1996
                  (the
                  “June 1996 10-QSB”)4.1(b)
              
              State
                  of South Dakota Board of Economic Development Security Agreement
                  REDI Loan
                  No: 95-13-A dated May 28, 1996
              
              Exhibit
                  4.1(b) to the June 1996 10-QSB4.2(a)
              
              $700,000
                  Loan Agreement dated June 24, 1996 by and between Aberdeen Development
                  Corporation and APA Enterprises, Inc.
              
              Exhibit
                  4.2(a) to the June 1996 10-QSB4.2(b)
              
              $300,000
                  Loan Agreement dated June 24, 1996 between Aberdeen Development
                  Corporation and APA Enterprises, Inc.
              
              Exhibit
                  4.2(b) to the June 1996 10-QSB4.2(c)
              
              $250,000
                  Loan Agreement dated June 24, 1996 by and between Aberdeen Development
                  Corporation and APA Enterprises, Inc.
              
              Exhibit
                  4.2(c) to the June 1996 10-QSB
  54
 Table
            of Contents
 
 Number
              
              Description
              
              Page
                  Number or Incorporated by Reference to4.2(d)
              
              $300,000
                  Loan Agreement dated June 24, 1996 by and between Aberdeen Development
                  Corporation and APA Enterprises, Inc.
              
              Exhibit
                  4.2(d) to the June 1996 10-QSB4.2(e)
              
              Amended
                  Loan Agreement with Aberdeen Development Corporation and APA Enterprises,
                  Inc.
              
              Exhibit
                  4.2(e) to Registrants Report on Form 10-K for fiscal year ended
                  March 31,
                  20044.2(f)
              
              Purchase
                  Agreement for land with Aberdeen Development Corporation and APA
                  Enterprises, Inc.
              
              Exhibit
                  4.2(f) to Registrant’s Report on Form 10-K for the fiscal year ended March
                  31, 20054.3(a)
              
              Loan
                  Agreement between South Dakota Economic Development Finance and
                  APA
                  Enterprises, Inc.
              
              Exhibit
                  4.3(a) to the June 1996 10-QSB4.3(b)
              
              Mortgage
                  and Security Agreement – One Hundred Day Redemption from APA Enterprises,
                  Inc. to South Dakota Economic Development Finance Authority dated
                  as of
                  June 24, 1996
              
              Exhibit
                  4.3(b) to the June 1996 10-QSB4.4(a)
              
              Subscription
                  and Investment Representation Agreement of NE Venture,
                  Inc.
              
              Exhibit
                  4.4(a) to the June 1996 10-QSB4.4(b)
              
              Form
                  of Common Stock Purchase Warrant for NE Venture, Inc.
              
              Exhibit
                  4.4(b) to the June 1996 10-QSB4.5(a)
              
              Certificate
                  of Designation for 2% Series A Convertible Preferred Stock
              
              Exhibit
                  4.5(a) filed as a part of Registration Statement on Form S-3 (Commission
                  File No. 333-33968)4.5(b)
              
              Form
                  of common stock warrant issued in connection with 2% Series A Convertible
                  Preferred Stock
              
              Exhibit
                  4.5(b) filed as a part of Registration Statement on Form S-3 (Commission
                  File No. 333-33968)4.6
              
              Common
                  Stock Purchase Warrant issued to Ladenburg Thalmann & Co. Inc. to
                  purchase 84,083 shares
              
              Exhibit
                  4.6 to Registrant’s Report on Form 10-K for fiscal year ended March 31,
                  2000 (“2000 10-K”)4.7
              
              Share
                  Rights Agreement dated October 23, 2000 by and between the Registrant
                  and
                  Wells Fargo Bank Minnesota NA as Rights Agent
              
              Exhibit
                  1 to the Registration Statement on Form 8-A filed November 8,
                  20004.8
              
              Common
                  Stock Warrant Purchase Agreement with Peter Lee as part of CSP
                  asset
                  purchase
              
              Exhibit
                  4.8 to Form 8-K filed March 31, 200310.1(a)
              
              Sublease
                  Agreement between the Registrant and Jain-Olsen Properties and
                  Sublease
                  Agreement and Option Agreement between the Registrant and Jain-Olsen
                  Properties
              
              Exhibit
                  10.1 to the Registration Statement on Form S-18 filed with the
                  Chicago
                  Regional Office of the Securities and Exchange Commission on June
                  26,
                  1986
  55
 Table
            of Contents
 
 Number
              
              Description
              
              Page
                  Number or Incorporated by Reference to10.1(b)
              
              Amendment
                  and Extension of Sublease Agreement dated August 31, 1999
              
              Exhibit
                  10.1(b) to 2000 10-K10.1(c)
              
              Lease
                  Agreement between Registrant and Jain-Olsen Properties
              
              Exhibit
                  10.1(c) to Registrant’s Form 10Q-SB for quarter ended September 30,
                  2004*10.2(a)
              
              Stock
                  Option Plan for Nonemployee Directors
              
              Exhibit
                  10.3a to Registrant’s Report on Form 10-KSB for the fiscal year ended
                  March 31, 1994 (the “1994 10-KSB”)*10.2(b)
              
              Form
                  of option agreement issued under the Nonemployee Directors
                  Plan
              
              Exhibit
                  10.3b to 1994 10-KSB*10.3
              
              1997
                  Stock Compensation Plan
              
              Exhibit
                  10.3 to Registrant’s Report on Form 10-KSB for the fiscal year ended
                  March 31, 1997*10.4
              
              Insurance
                  agreement by and between the Registrant and Anil K. Jain
              
              Exhibit
                  10.5 to Registrant’s Report on Form 10-K for the fiscal year ended March
                  31, 1990*10.5
              
              Form
                  of Agreement regarding Repurchase of Stock upon Change in Control
                  Event
                  with Anil K. Jain and Kenneth A. Olsen
              
              Exhibit
                  10.1 to Registrant’s Report on Form 10-QSB for the quarter ended September
                  30, 1997 (“September 1997 10-QSB”)*10.6
              
              Form
                  of Agreement regarding Employment/Compensation upon Change in Control
                  with
                  Messrs. Jain and Olsen
              
              Exhibit
                  10.2 to the September 1997 10-QSB*10.7
              
              Form
                  of Agreement regarding Indemnification of Directors and Officers
                  with
                  Messrs. Jain, Olsen, Ringstad, Roth, Von Wald and
                  Zuckerman
              
              Exhibit
                  10.7 to Registrant’s Report on From 10-K for the fiscal year ended March
                  31, 2002.10.8
              
              Sublease
                  agreement between Newport and APACN
              
              Exhibit
                  10.8 to Registrant’s Report of Form 10-QSB for the quarter ended June 30,
                  200310.9
              
              Sublease
                  agreement between Veeco Compound Semiconductor and APA Enterprises,
                  Inc.
              
              Exhibit
                  10.9 to Registrant’s Report of Form 10-K for the fiscal year ended March
                  31, 200410.9(b)
              
              Amendment
                  to sublease between Veeco Compound Semiconductor and APA Enterprises,
                  Inc.
              
              Exhibit
                  10.9 (b) to Registrant’s Report on Form 10-QSB for the quarter ended
                  September 30, 2004*10.10
              
              Ken
                  Olsen Separation Agreement
              
              Exhibit
                  10.10 to Registrant’s Report on Form 10-K for the fiscal year ended March
                  31, 2004*10.11
              
              Stock
                  option agreement with Cheryl Podzimek, President of APACN
              
              Exhibit
                  10.11 to Registrant’s Report on Form 10-K for the fiscal year ended March
                  31, 2005  56
 Table
              of Contents
 Number
                
                Description
                
                Page
                    Number or Incorporated by Reference to10.12
                
                Agreements
                    on sale of MOCVD Assets
                
                Exhibit
                    10.12 to Registrant’s Report on for 8-K filed March 10,
                    200610.13
                
                Patent
                    and Technology and Revenue Sharing License Agreement
                
                Exhibit
                    10.13 to Registrant’s Report on for 8-K filed March 10,
                    200610.14
                
                Lease
                    agreement between Bass Lake Realty, LLC and APACN
                
                Exhibit
                    10.14 to Registrant’s Report of form 10-K for fiscal year ended March 31,
                    2006*10.15
                
                2007
                    Stock Compensation Plan
                
                Exhibit
                    10.15 to Registrant’s Registration Statement on Form S-8 POS filed on
                    August 24, 200710.16
                
                Amended
                    and Restated Agreement Regarding Employment/Compensation Upon
                    Change In
                    Control
                
                Exhibit
                    10.16 to Registrant’s Report on for 8-K filed June 29,
                    200710.17
                
                Supplemental
                    Separation Agreement with A. Jain
                
                Exhibit
                    10.17 to Registrant’s Report on for 8-K filed June 29,
                    200710.18
                
                Stock
                    Purchase Agreement
                
                Exhibit
                    10.18 to Registrant’s Report on for 8-K filed June 29,
                    200710.19
                
                Promissory
                    Note
                
                Exhibit
                    10.19 to Registrant’s Report on for 8-K filed June 29,
                    200710.20
                
                Guaranty-AK
                    Jain
                
                Exhibit
                    10.20 to Registrant’s Report on for 8-K filed June 29,
                    200710.21
                
                Stock
                    Pledge Agreement
                
                Exhibit
                    10.21 to Registrant’s Report on for 8-K filed June 29,
                    200710.22
                
                Separation
                    Payments Pledge Agreement
                
                Exhibit
                    10.22 to Registrant’s Report on for 8-K filed June 29,
                    200710.23
                
                Agreement
                    to Provide Additional Collateral
                
                Exhibit
                    10.23 to Registrant’s Report on for 8-K filed June 29,
                    200710.24
                
                Non-Compete
                    Agreement
                
                Exhibit
                    10.24 to Registrant’s Report on for 8-K filed June 29,
                    2007
  57
 Table
            of Contents
 
 Number
              
              Description
              
              Page
                  Number or Incorporated by Reference to14
              
              Code
                  of Ethics
              
              Exhibit
                  14 to Registrant’s Report on Form 10-K for the fiscal year ended March 31,
                  200421
              
              List
                  of Subsidiaries
              
              **23.1
              
              Consent
                  of Grant Thornton LLP
              
              **31.1
              
              Certification
                  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002
              
              **31.2
              
              Certification
                  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002
              
              **32.1
              
              Certification
                  of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002
              
              **32.2
              
              Certification
                  of Chief Financial Officer and Principal Financial Officer Pursuant
                  to
                  Section 906 of the Sarbanes-Oxley Act of 2002
              
              **
 
 
 *Indicates
        management contract or compensation plan or arrangements required to be filed
        as
        an exhibit to this form.
 
 **
        Filed
        with this Report.
   58