**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-K**
 x
                Annual
                    Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                    Act of
                    1934
 For
        the
        fiscal year ended March 31, 2007.
 
  ̈
              Transition
                  Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934
 For
        the
        transition period from _______________________ to
        _______________________.




**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.)*





**2950
      N.E. 84** **th** **Lane**


**Blaine,
      Minnesota 55449**


**(763)
      784-4995**


*(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:





**NONE**





Indicate
      by check mark if the registrant is a well-seasoned issuer, as defined in Rule
      405 of the Securities Act.





 ̈ YES  x NO





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or section 15(d) of the Exchange Act.





 ̈ YES  x NO





Indicate
      by check mark whether the registrant (1) has 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.





x YES   ̈ NO













Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is 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.





x YES  ̈ NO





Indicate
      by check mark whether the registrant is a large accelerated filer, and
      accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
      the
      Exchange Act).





Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerx





Indicate
      whether the registrant is a shell company (as defined in Rule 12b-2 of the
      Exchange Act).





 ̈ YES  x NO





The
      aggregate market value of the voting and non-voting equity held by
      non-affiliates of the registrant, as of the last business day of the
      registrant’s most recently completed second fiscal quarter computed by reference
      to the price at which the common equity was last sold was approximately
      $14,959,137.








The
      number of shares of common stock outstanding as of June 17, 2007 was
      11,872,331.





**Documents
      Incorporated by Reference:**





Portions
      of our proxy statement for the annual shareholders meeting to be held in August
      2007 are incorporated by reference into Part III.





2





**APAENTERPRISES,
      INC.**


**ANNUAL
      REPORT ON FORM 10-K**


**TABLE
      OF CONTENTS**








**PART
                I**
            4ITEM
                1.
            BUSINESS.
            4ITEM
                1A.
            RISK
                FACTORS.
            9ITEM
                1B.
            UNRESOLVED
                STAFF COMMENTS.
            17ITEM
                2.
            PROPERTIES
            17ITEM
                3.
            LEGAL
                PROCEEDINGS
            17ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
            18**PART
                II**
            
            18ITEM
                5.
            MARKET
                FOR REGISTRANT’S COMMON EQUITY AND RELATED
                STOCKHOLDER MATTERS
            20ITEM
                6.
            SELECTED
                FINANCIAL DATA
            20ITEM
                7.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND RESULTS OF OPERATIONS
            20ITEM
                7A.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK.
            30ITEM
                8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATA
            31ITEM
                9.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                ACCOUNTING AND FINANCIAL DISCLOSURE
            51ITEM
                9A.
            CONTROLS
                AND PROCEDURES
            52ITEM
                9B.
            OTHER
                INFORMATION
            52**PART
                III**
            
            52ITEM
                10.
            DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT
            52ITEM
                11.
            EXECUTIVE
                COMPENSATION
            52ITEM
                12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT AND RELATED STOCKHOLDER MATTERS
            52ITEM
                13.
            CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS
            53ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND
                SERVICES
            53**PART
                IV**
            
            54ITEM
                15.
            EXHIBITS
                AND FINANCIAL STATEMENT
                SCHEDULES
            54**SIGNATURES**
            55**SCHEDULE
                II - VALUATION AND QUALIFYING
                ACCOUNTS**
            56**REPORT
                OF INDEPENDENT REGISTERED CERTIFIED PUBLIC
                ACCOUNTING FIRM ON SCHEDULE**
            57**EXHIBIT
                INDEX**
            58





3
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            of Contents***





**PART
      I**





**ITEM
                1.**
            **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 2950 84 th Lane
      N.E., Blaine, MN and our corporate website is www.apaenterprises.com .
      The
      information available on our website is not part of this Report.





The
      Company reports 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”)





***Description
      of Business - Optronics Segment.***





Optronics
      focuses on leading edge research in gallium nitride (GaN), sophisticated
      optoelectronics, and optical systems, with the primary goal of developing
      advanced products for subsequent fabrication and marketing. Based on this
      research we have developed multiple products including fiber optic components
      for metro and access communications networks, a range of GaN based devices,
      and
      precision optical products.





In
      fiscal
      year 2005 we formed a wholly-owned subsidiary in India, APA Optronics (India)
      Private Limited (“APA India”), to take advantage of lower manufacturing costs
      thereby reducing the Company’s overall manufacturing and software development
      costs. In fiscal year 2006, the Company began construction of a larger facility
      in India to significantly increase its manufacturing activities. The building
      remains under construction currently. The subsidiary has been providing low
      cost
      support for both software needs related to GaN products and certain APACN
      components. However due to lower than expected demand for GaN products and
      logistics and time constraints for APACN’s fiber patch cords, the benefit has
      been less than expected. The Company is currently pursuing alternative options
      for the operation, including possible sale.





In
      fiscal
      year 2006 we sold certain equipment and intellectual property related to our
      research and development work surrounding gallium nitride based heterojunction
      field effect transistors. The sale to an unrelated third party for consideration
      including $1.9 million in cash was intended to enable us to focus our R&D
      efforts on power amplifiers built using GaN technology by using commercially
      available parts, rather than building our own transistors. This was expected
      to
      decrease our operating costs and shorten our time to market for power
      amplifiers.





In
      fiscal
      year 2006, the Company also terminated its manufacturing operations, mostly
      related to fiber optic communication components, in Aberdeen, South Dakota.
      The
      associated assets were designated as not being utilized in manufacturing. Most
      of the assets, if not utilized within the Company, will be sold the in future.
      The Company is pursuing options to lease or sell this facility.





In
      fiscal
      year 2007, the Company decided to reduce its marketing cost for its Sun UV
      related products, namely the Personal UV Monitor (PUVM) and Sun UV Station
      by
      limiting its marketing to internet sales only. The Company also reduced its
      operating expenses in the development of its UV transistor related power
      amplifier and UV Profiler product line by eliminating the research personnel
      in
      transistor development and limiting the Profiler development to mainly one
      full
      time and one part time engineer. Two other persons related to Profiler
      development are available as consultants an as needed basis. The Company is
      currently evaluating long-term options for this operation. These options include
      the possible sale of its GaN related operations, sale or lease of its Aberdeen
      facility and sale of its APA India business, including the facility under
      construction.





4
 ***Table
            of Contents***





*Products*





Our
      current products are described below.





·
            Ultraviolet
                (UV) Detector-Based ProductsWe
                currently manufacture value-added products built around UV detectors
                fabricated by Optronics and procured externally. These products
                are:





·
            SunUV®Personal UV MonitorThe SunUV®Personal UV Monitor (formerly, SunUVWatch®)
                is a personal ultraviolet (UV) radiation monitor that also incorporates
                a
                time/day/date function. It detects UV radiation that is hazardous
                to human
                health. In fiscal year 2006, we developed and introduced an attractive
                new
                PUVM plastic/metal model that offers two key advantages for the product
                line. The SunUVStation consumer product complements the Personal
                UV
                Monitor, and together they were intended to provide Optronics a product
                line in the sun protection area. The SunUVStation offers a larger
                display
                that indicates the UV Index on a colorful 7” diameter analog face for
                backyard, pool, patio, campground, or other locations where groups
                of
                people are exposed to the sun.





·
            Industrial
                Products: Profiler M UV MeterOptronics’*Profiler
                M*radiometer was created for the printing and coating industries that
                use UV
                curing. The instrument measures the intensity and distribution of
                four UV
                bands inside curing chambers. Data from the instrument can be transferred
                to a computer for analysis using proprietary*CureControl*software
                supplied as part of the purchase.





The
      Company introduced another Profiler product to the market in 2007, the Profiler
      MT, a radiometer capable of measuring surface temperature, in additional to
      all
      the spectral profile capabilities of the original Profiler M. Temperature of
      the
      surface under UV cure plays an important role in the ultimate quality of the
      cure, particularly in machines which operate at lower surface temperature.
      Whereas at present other products are capable of either surface temperature
      measurement without profile, or measuring the temperature profile at a location
      other than the curing plane, our Profiler MT accurately measures the surface
      temperature profile at the curing surface, and therefore, we believe, is a
      competitive advantage in the market.








·
            Power
                Amplifiers





·
            In
                the 4thquarter of fiscal year 2006 we completed the sale of our epitaxial
                foundry
                to an unrelated, third party for total consideration of $1.9 million
                in
                cash and a license back of the technology within a specified field
                of use.
                The transaction included sale of APA’s multi-wafer metal organic chemical
                vapor deposition system, the technical know-how associated with the
                growth
                of state-of-the-art epitaxial layers, two heterojunction field effect
                transistor patents (United States patent 5,192,987 and United States
                patent 5,296,395), an additional pending patent (now allowed, United
                States patent application claiming priority of United States provisional
                application No. 60/428,856), and associated intellectual property.
                Terms
                of the transaction allowed APA to market and sell products for
                applications greater than 1 GHz and provide revenue sharing based
                on
                future licensing agreements regarding these patents. The transaction
                allowed APA to terminate the lease of an off-site facility utilized
                by the
                epitaxial foundry and resulted in termination of three employees
                associated with the development and growth of epi-layers. The sale
                was
                intended to decrease operating costs while enabling early entry into
                power
                amplifier markets utilizing GaN power transistors procured from outside
                sources. Such transistors have demonstrated impressive performance
                while
                maintaining excellent reliability. During the later part of fiscal
                2007,
                the Company elected to suspend the development of the power amplifier
                due
                mainly to market uncertainties, and the reliability and stability
                of the
                Gallium Nitride (GaN) transistors available in the market.





5
 ***Table
            of Contents***





*Marketing
      and Distribution*





We
      do not
      maintain a large internal sales force. We have no sales person dedicated to
      the
      SunUV © Personal
      UV Monitor or SunUV Station and we market these products via internet only.
      We
      currently have one employee dedicated part time to the sale of our Profiler
      products.





***Description
      of Business - APACN Segment***





APA
      Cables and Networks, Inc. (“APACN”) is a manufacturer and seller of
      telecommunications equipment. APACN focuses on custom-engineered products for
      telecommunications customers, primarily related to cabling management
      requirements of the Fiber-to-the-Home (“FTTH”) marketplace and in designing and
      terminating custom cable assemblies for commercial and industrial original
      equipment manufacturers (“OEMs”). To date, APACN 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.





APACN
      continued to invest in the expansion of its sales and engineering programs
      in
      the broadband service provider market during fiscal year 2007 for the
      development of increased revenue in fiscal year 2008 and beyond.





APACN
      offers a broad range of telecommunications equipment and products developed
      from
      over 20 years of product expertise acquired in each of the CSP and Americable
      acquisitions. 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 FTTH, large enterprise, and OEM markets. APACN 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 APACN’s plant in Plymouth, Minnesota with support from
      a corporate network of global manufacturing partners. APACN produces these
      products on both a quick-turn and scheduled delivery basis.





*Products*




·
            Fiber
                Distribution Central Office Frame SystemsAPACN 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, APACN 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 rich solutions
                which are able to meet the needs of a broad range of network deployments.





6
 ***Table
            of Contents***





·
            Fiber
                Distribution Outside Plant CabinetsAPACN’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
                ComponentsAPACN packages optical components for signal coupling, splitting,
                termination, multiplexing, demultiplexing and attenuation to seamlessly
                integrate with the APACN FDS. 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
                AssembliesAPACN 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
                manufacturer custom solutions for both in-the-box as well as network
                connectivity assemblies specific to that customer’s product line.





Additional
      information regarding operations in the segments is set forth in Note Q in
      the
      Notes to the Consolidated Financial Statements under Item 8
      herein.





*Marketing
      and Distribution*





APACN
      markets its products in the United States through a direct sales team with
      limited support from a network of manufacturer representative organizations.
      APACN works closely with its target customers to adapt the company’s product
      platform to the client’s unique requirements. APACN offers a high level of
      customer service and principally brings new products to markets based upon
      the
      specific requests of its customers.





*Competition*





Competitors
      for the APACN FDS and FSC include but are not limited to ADC Telecommunications,
      Inc., Corning Cabling Systems, Inc., OFS (Furukawa Electric North America,
      Inc.), Telect Inc., Fiber Optic Network Solutions (FONS) Corporation (acquired
      by ADC Telecommunications during fiscal 2006), 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.





7
 ***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
      March 31, 2007, we had 12 patents issued in the United States and two pending
      patent applications inside and outside the United States. During the last fiscal
      year the following patent was sold:


US
      Patent
      5,146,465 “Aluminum gallium nitride laser”.





All
      of
      our patents relate to the business of our Optronics segment. Some of these
      patents may be sold as part of the possible sale of an Optronics product line.





We
      have
      made significant progress toward improving the active, strategic management
      of
      our intellectual property portfolio. The markets for our products are
      characterized by rapid change and continual innovation that could render our
      technology and patents obsolete before their statutory protection expires.
      Several of the companies we compete with have greater research and development
      resources than we do and could develop technologies and products that are
      similar or even superior to ours without infringing on our intellectual
      property.




**Environmental
      Compliance**





Because
      we handle a number of chemicals in our operations, we must comply with federal,
      state and local laws and regulations regarding the handling and disposal of
      such
      chemicals. To date the cost of such compliance has not been material.




**Major
      Customers**





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 or 2005.




**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. Optronics had no backlog as of March 31, 2007 or 2006 and a backlog
      of
      $7,200 as of March 31, 2005. APACN had backlogs of $1,182,576 as of
      March 31, 2007, $1,383,206 as of March 31, 2006, and $429,180 as of March 31,
      2005.





8
 ***Table
            of Contents***





**Research
      and Development**





During
      the fiscal years ended March 31, 2007, 2006, and 2005, Optronics spent
      approximately $474,000, $1,409,000, and $1,104,000, respectively, on research
      and development, mainly for the development of compound semiconductor electronic
      devices. This segment had no research activities sponsored by customers in
      fiscal years 2007, 2006 or 2005. During the third quarter of fiscal 2007, we
      suspended our research and development related to the Power Amplifier product.
      Presently, we are continuing to develop GaN industrial products on a limited
      basis as we evaluate potential alternatives for this product line. APACN has
      made no significant expenditures for research and development from its inception
      through March 31, 2007.





**Employees**





As
      of
      March 31, 2007, Optronics had 28 full-time employees in the combined locations
      of Blaine, MN, and India. As of March 31, 2007, APACN had 105 full-time
      employees, mainly in Plymouth, MN. Our future performance is dependent on our
      ability to attract, train, and retain highly qualified personnel. We have no
      employment agreements with our employees. The loss of one or more key employees
      could negatively impact the Company.




In
      January 2007, the Board of Directors approved a plan to scale-back certain
      Optronics activities in Blaine, Minnesota, to reduce investment and operating
      expenses. Specifically, the Company (i) discontinued GaN consumer marketing,
      except through the Internet, resulting in the termination of three employees,
      and (ii) reduced working hours of some GaN industrial product employees to
      half
      time. In April 2007, three additional employees in GaN industrial products
      were
      terminated.





**ITEM
                1A.**
            **RISK
                FACTORS.**





***Factors
      That May Affect Future Results***




The
      statements contained in this Report on Form 10-K 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. Business” and “Item 7. Management's Discussion and Analysis of
      Financial Condition and Results of Operations.” 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 as Form 10-K 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.





9
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            of Contents***





**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 March 31, 2007, we had an
      accumulated deficit of $39 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
      probable discontinuation of the Optronics business unit will result in a
      significant reduction in the 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 at APACN if we are to achieve profitability.





*Acquisitions
      or investments could have an adverse affect on our business.*





We
      acquired assets in India in March 2005 as part of a strategy to take advantage
      of lower manufacturing costs in India. As stated earlier, the Company is
      evaluating options for the potential disposal of this operation. We intend
      to
      continue reviewing acquisition and investment prospects. There are inherent
      risks associated with making acquisitions and investments including but not
      limited to:





·
            Challenges
                associated with integrating the operations, personnel, etc., of an
                acquired company;


·
            Potentially
                dilutive issuances of equity
                securities;


·
            Reduced
                cash balances and or increased debt and debt service
                costs;


·
            Risks
                associated with geographic or business markets different than those
                we are
                familiar with; and


·
            Diversion
                of management attention from current
                responsibilities.








**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.





*Our
      products may infringe on the intellectual property rights of
      others.*





Our
      products are sophisticated and rely on complicated manufacturing processes.
      We
      have received multiple patents on aspects of our design and manufacturing
      processes and we have applied for several more. Third parties may still assert
      claims that our products or processes infringe upon their intellectual property.
      Defending our interests against these claims, even if they lack merit, may
      be
      time consuming, result in expensive litigation and divert management attention
      from operational matters. If such a claim were successful, we could be prevented
      from manufacturing or selling our current products, be forced to redesign our
      products, or be forced to license the relevant intellectual property at a
      significant cost. Any of these actions could harm our business, financial
      condition or results of operations.





10
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            of Contents***





*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.*





In
      connection with the downturn in the communications industry we have divested
      or
      closed product lines and businesses that either were not profitable or did
      not
      match our new strategic focus. As necessary, we may make further divestitures
      or
      closures of product lines and businesses. We may also make strategic
      acquisitions.





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,
      we
      may have difficulty assimilating these businesses and their products, services,
      technologies and personnel into our operations. 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.*





Manufacturing
      of our products is a complex and precise process. We have limited experience
      in
      rapidly increasing our manufacturing capacity or in manufacturing products
      at
      high volumes. If demand for our products increases, we will 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.





11
 ***Table
            of Contents***





*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.*





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. In January 2007, the Board of Directors approved a plan
      to scale-back certain Optronics activities in Blaine, Minnesota, to reduce
      investment and operating expenses. Specifically, the Company (i) discontinued
      GaN consumer marketing, except through the Internet, resulting in the
      termination of three employees, and (ii) reduced working hours of some GaN
      industrial product employees to half time. In April 2007, three additional
      employees in GaN industrial products were terminated. These cost-cutting
      measures may prompt certain key employees to seek employment elsewhere. Loss
      of
      one or more key personnel may affect our ability to, at least in the short-term,
      respond to market demands.








**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:





12
 ***Table
            of Contents***





·
            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.





*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.*





Our
      inability to generate significant cost savings from our India facility for
      the
      manufacture of fiber optic cable assembles has resulted in the decision to
      continue sourcing products and labor from alternative off-shore sources. Our
      facility in India has in the past supported the design and production of our
      other products. We expect that our foreign operations and reliance on off shore
      sourcing will increase in the future. As such we 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.





13
 ***Table
            of Contents***





*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.*





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.





14
 ***Table
            of Contents***





*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.








**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.*





Our
      success may depend in part on our ability to obtain patents and maintain
      adequate protection of the intellectual property related to our technologies
      and
      products. The patent positions of technology companies, including our patent
      position, are generally uncertain and involve complex legal and factual
      questions. We will be able to protect our intellectual property rights from
      unauthorized use by **** third
      parties only to the extent that our technologies are covered by valid and
      enforceable patents or are effectively maintained as trade secrets. The laws
      of
      some foreign countries do not protect intellectual property rights to the same
      extent as the laws of the U.S., and many companies have encountered significant
      problems in protecting and defending such rights in foreign jurisdictions.
      We
      apply for patents covering our technologies and products as and when we deem
      appropriate. However, these applications may be challenged or may fail to result
      in issued patents. Our existing patents and any future patents we obtain may
      not
      be sufficiently broad to prevent others from practicing our technologies or
      from
      developing competing products. Furthermore, others may independently develop
      similar or alternative technologies or design around our patents. In addition,
      our patents may be challenged, invalidated or fail to provide us with any
      competitive advantages.





We
      rely
      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.




*Our
      business will suffer if we are unable to protect our patents or our proprietary
      rights.*





Our
      success may depend upon our ability to develop proprietary products. However,
      patents may not be granted upon applications which we may file in the United
      States or in other countries. In addition, the scope of any of our issued
      patents may not be sufficiently broad to offer meaningful protection.
      Furthermore, our issued patents or patents licensed to us could potentially
      be
      successfully challenged, invalidated or circumvented so that our patent rights
      would not create an effective competitive barrier.





15
 ***Table
            of Contents***





*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. Disputes could
      involve litigation or proceedings declared by the United States Patent and
      Trademark Office or the International Trade Commission. 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.





*Litigation
      or third party claims of intellectual property infringement could require us
      to
      spend substantial time and money and adversely affect our ability to develop
      and
      commercialize products.*





Our
      commercial success depends in part on our ability to avoid infringing patents
      and proprietary rights of third parties, and not breaching any licenses that
      we
      have entered into with regard to our technologies. Other parties have filed,
      and
      in the future are likely to file, patent applications covering genes and gene
      fragments, techniques and methodologies relating to model systems, and products
      and technologies that we have developed or intend to develop. If patents
      covering technologies required by our operations are issued to others, we may
      have to rely on licenses from third parties, which may not be available on
      commercially reasonable terms, or at all.





Third
      parties may accuse us of employing their proprietary technology without
      authorization. In addition, third parties may obtain patents that relate to
      our
      technologies and claim that use of such technologies infringes these patents.
      Regardless of their merit, such claims could require us to incur substantial
      costs, including the diversion of management and technical personnel, in
      defending ourselves against any such claims or enforcing our patents. In the
      event that a successful claim of infringement is brought against us, we may
      be
      required to pay damages and obtain one or more licenses from third parties.
      We
      may not be able to obtain these licenses at a reasonable cost, or at all.
      Defense of any lawsuit or failure to obtain any of these licenses could
      adversely affect our ability to develop and commercialize products.








**Executive
      Officers**




The
      following is a list of our executive officers, their ages, positions and offices
      as of March 31, 2007.





***Name***
            ***Age***
            ***Position***Dr.
                Anil K. Jain
            61
            Chief
                Executive Officer/President/Chief Financial Officer of APA Enterprises,
                Inc.Cheri
                Beranek Podzimek
            44
            President,
                APACN





***Dr.
      Anil K. Jain*** has been
      a Director, Chief Executive Officer and President since March 1979. He also
      currently serves as Chief Financial Officer. From 1973 until October 15, 1983,
      when Dr. Jain commenced full time employment with the Company, he was employed
      at the Systems and Research Center at Honeywell Inc. as a Senior Research
      Fellow, coordinating optics-related development.





16
 ***Table
            of Contents***





***Cheri
      Beranek Podzimek*** joined
      APACN in July 2003 as President. 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.





**ITEM
                1B.**
            **UNRESOLVED
                STAFF COMMENTS.**





None




**ITEM
                2.**
            **PROPERTIES**





We
      have
      corporate offices, manufacturing facilities, and laboratories located in an
      industrial building at 2950 N.E. 84 th Lane,
      Blaine, Minnesota. We currently lease 23,500 square feet of space under a lease
      from Jain-Olsen Properties, a partnership consisting of Anil K. Jain and Kenneth
      A. Olsen, the former being an officer and director of the Company. See Note
      O of
      Notes to the Consolidated Financial Statements included under Item 8 of this
      Report. We owned land directly west of the Blaine facility. In May 2007 we
      sold
      this property.





We
      own a
      24,000 square foot production facility in Aberdeen, South Dakota, which was
      used
      mainly for assembly of products for APACN customers and to a lesser extent
      for
      assembly of our DWDM components and UV detectors. During the fiscal year 2006
      the Company terminated all the manufacturing activities at this facility and
      put
      the facility for potential lease or sale. The land upon which this facility
      is
      located (approximately 12 acres) was granted to us as part of a financing
      package from the city of Aberdeen. See Note I of Notes to the Consolidated
      Financial Statements included under Item 8 in this Report for further
      information regarding the financing of this facility. This land was sub-divided
      into two parcels of approximately 10 and 2 acres, and the latter was sold to
      Aberdeen Development Corporation. The Company further sub-divided the remaining
      10 acres into two approximately 5 acres parcels with the intention of selling
      or
      leasing the building and approximately 5 acres land while retaining the other
      5
      acre parcel for future use.





APA
      India
      currently leases, on a month to month basis, a 500 square meter facility in
      a
      special export zone near New Delhi, India. While the Company evaluates potential
      options on the sale or alternative disposal of this unit, we are planning to
      relocate to our own facility, under construction at present in the same general
      location, some time in calendar year 2007.





APACN
      leases a 30,000 square foot facility in Plymouth, Minnesota consisting of
      office, manufacturing and warehouse space.





**ITEM
                3.**
            **LEGAL
                PROCEEDINGS**





None





17
 ***Table
            of Contents***





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





No
      matter
      was submitted to a vote of security holders during the fourth quarter of the
      fiscal year covered by this Report.





**PART
      II**





**ITEM
                5.**
            **MARKET
                FOR REGISTRANT’SCOMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS.**





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.








**Fiscal
                2007**
            
            **High**
            
            **Low**Quarter
                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
            
            
            1.21




**Fiscal
                2006**
            
            **High**
            
            **Low**Quarter
                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 March 31,
      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.





The
      following graph compares the cumulative 5-year total return attained by
      shareholders on APA Enterprises, Inc.'s common stock relative to the cumulative
      total returns of the NASDAQ Composite index and the NASDAQ Non-Financial index.
      The graph tracks the performance of a $100 investment in our common stock and
      in
      each of the indexes (with the reinvestment of all dividends) from 3/31/2002
      to
      3/31/2007.





18
 ***Table
            of Contents***












**3/02**
            **3/03**
            **3/04**
            **3/05**
            **3/06**
            **3/07****APA
                Enterprises, Inc.**
            
            **100.00**
            **49.08**
            **91.88**
            **52.03**
            **71.96**
            **45.02****NASDAQ
                Composite**
            
            **100.00**
            **72.11**
            **109.76**
            **111.26**
            **132.74**
            **139.65****NASDAQ
                Non-Financial**
            
            **100.00**
            **83.60**
            **92.15**
            **89.56**
            **69.13**
            **80.48**








*The
      stock price performance included in this graph is not necessarily indicative
      of
      future stock price performance.*





19
 ***Table
            of Contents***





**ITEM
                6.**
            **SELECTED
                FINANCIAL DATA**





**2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Statements
                of Operations Data:Revenues
            
            $
            18,560,178
            
            $
            15,956,203
            
            $
            14,112,605
            
            $
            11,909,465
            
            $
            436,157Net
                loss
            
            
            (2,147,310
            )
            
            (3,348,848
            )
            
            (3,420,038
            )
            
            (6,535,147
            )
            
            (5,009,434
            )Net
                loss per share, basic and diluted
            
            
            (.18
            )
            
            (.28
            )
            
            (.29
            )
            
            (.55
            )
            
            (.42
            )Weighted
                average number of shares, basic and diluted
            
            
            11,872,331
            
            
            11,872,331
            
            
            11,872,331
            
            
            11,872,331
            
            
            11,873,914Balance
                Sheet Data:Total
                assets
            
            $
            15,722,558
            
            $
            19,593,571
            
            $
            22,074,014
            
            $
            26,083,516
            
            $
            31,884,526Long-term
                obligations, including current portion
            
            
            197,599
            
            
            1,360,961
            
            
            1,578,836
            
            
            1,811,759
            
            
            2,173,682Shareholders’
                equity
            
            
            13,476,484
            
            
            15,579,442
            
            
            18,922,161
            
            
            22,363,061
            
            
            28,918,943





The
      above
      selected financial data should be read in conjunction with the financial
      statements and related notes included under Item 8 of this Report and
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” appearing in Item 7 of this Report.





**ITEM
                7.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**





***General***





The
      Company is focused primarily on the growth of the APACN business and is
      currently de-emphasizing operations associated with the design, manufacturing,
      and marketing of various optoelectronic products, ultraviolet (“UV”) detectors
      and related products. As a result, the Company is evaluating its strategic
      options for the Optronics segment including sale of its assets or
      discontinuation of its operations. For the last several years our goal had
      been
      to manufacture and market products/components based on our technology
      developments. Previously, we focused on dense wavelength division multiplexer
      (“DWDM”) components for fiber optic communications and GaN based UV detectors
      (both components and integrated detector/electronic/display packages) because
      we
      believed that these two product areas had significant potential markets and
      because we held expertise and/or patent positions related to them. In January
      2007, the Board of Directors approved a plan to scale-back certain Optronics
      activities in Blaine, Minnesota, to reduce investment and operating expenses.
      Specifically, the Company (i) discontinued GaN consumer marketing, except
      through the Internet, resulting in the termination of three employees, and
      (ii)
      reduced working hours of some GaN industrial product employees to half time.
      In
      April 2007, three additional employees in GaN industrial products were
      terminated. Optronics terminated the fiber optic communication activities at
      the
      end of fiscal year 2006.





APACN,
      which is a wholly owned subsidiary of APA Enterprises, 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:





20
 ***Table
            of Contents***





·
            Stock
                option accounting;





·
            Accounting
                for income taxes; and





·
            Valuation
                and evaluating impairment of long-lived assets and
                goodwill





Stock
      Option Accounting





In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      No.
      123—revised 2004 (“SFAS 123R”), “Share-Based Payment,” which replaces Statement
      of Financial Accounting Standards No. 123 (“SFAS 123”) and supersedes APB
      Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires
      the measurement of all share-based payments to employees, including grants
      of
      employee stock options, using a fair-value based method and the recording of
      such expense in our Consolidated Statements of Operations. In March 2005, the
      SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), “Share-Based Payment,”
which provides interpretive guidance related to the interaction between SFAS
      123R and certain SEC rules and regulations, as well as provides the SEC staff’s
      views regarding the valuation of share-based payment arrangements.





We
      adopted SFAS 123R using the modified prospective transition method, which
      requires the application of the accounting standard as of April 1, 2006, the
      first day of our fiscal year 2007. Our unaudited condensed consolidated
      financial statements as of and for the twelve months ended March 31, 2007
      reflect the impact of SFAS 123R. The compensation expense impacted both basic
      and diluted loss per share by less than $0.01 for the twelve months ended March
      31, 2007. The Company recorded $50,353 of related compensation expense for
      the
      twelve month period ended March 31, 2007. As of March 31, 2007, $86,658 of
      total
      unrecognized compensation expense related to non-vested awards is expected
      to be
      recognized over a weighted average period of approximately 3.0 years. In
      accordance with the modified prospective transition method, our unaudited
      condensed 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. If factors change
      and the Company employs different assumptions in the application of SFAS 123(R)
      may differ significantly from what was recorded in the current
      period.





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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.





Significant
      management judgment is required in determining our provision for income taxes,
      our deferred tax assets and liabilities and any valuation allowance recorded
      against our deferred tax assets. At March 31, 2007, we have recorded a full
      valuation allowance of $13,867,191 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 had U.S. federal and state net operating loss (NOL) carry
      forwards of approximately $34,626,000 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 Internal 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.





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.





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 fourth 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 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
      fourth quarter of 2007.





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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
      the three year period ended March 31, 2007.




New
      Accounting Pronouncements





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 for income 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 48 are
      effective for fiscal years beginning after April 1, 2007 with the cumulative
      effect of the change in accounting principle recorded as an adjustment to
      opening retained earnings. The adoption of this statement is not expected to
      have a material impact on the Company's consolidated financial position or
      results of operations.





In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108
      (“SAB108”), “Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements.”  SAB 108
      established an approach that requires quantification of financial statement
      misstatements based on the effects of the misstatement on each of the company’s
      financial statements and the related financial statement disclosures.  This
      approach is commonly referred to as the “dual approach” because it requires
      quantification of errors under both the roll-over and iron curtain methods.
      SAB
      108 was issued to provide consistency between how registrants quantify financial
      statement misstatements and is effective for fiscal years ending after November
      15, 2006. The initial application of SAB 108 did not have a material impact
      on
      the Company's consolidated financial position or results of operations.





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. 157 on our financial
      statements.





In
      February 2007, the FASB issued SFAS No. 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 after November 15,
      2007. We are currently evaluating the impact of SFAS No. 159 on our
      financial statements.





23
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***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)
            
            $
            221
            
            $
            82
            
            $
            139
            
            $
            0
            
            $
            0Operating
                leases
            
            
            1,932
            
            
            350
            
            
            667
            
            
            476
            
            
            439Total
                Contractual Cash Obligations
            
            $
            2,153
            
            $
            432
            
            $
            806
            
            $
            476
            
            $
            439








(1)
      Includes fixed interest ranging from 0.62 to 8.45%.





***Results
      of Operations***





**2007
      Compared to 2006**





**REVENUES**





Consolidated
      revenues for the fiscal year ended 2007 increased 16% to $18,560,000 from sales
      of $15,956,000 in 2006. Consolidated cost of sales decreased from 78% in 2006
      to
      74% in 2007 resulting in improved gross margin of $4,813,000 in 2007 as compared
      to $3,517,000 in 2006, an increase of 37%. Consolidated operating losses
      decreased to $2,755,000 in 2007 compared to $3,456,000 in 2006. Consolidated
      net
      losses decreased to $2,147,000 in 2007 or $.18 per diluted share compared to
      $3,349,000 in 2006 or $.28 per share. The losses in fiscal 2006 were impacted
      by
      significantly increased legal expenses and non-operating activities related
      to
      the sale of Metal Organic Chemical Vapor Deposition (MOCVD) operations and
      a
      non-cash deferred tax liability related to goodwill on acquisitions. Increased
      legal expenses related to the defense of a lawsuit brought by Electronic
      Instrumentation and Technology, Inc, a Virginia corporation (“EIT”), and a
      non-cash tax expense accrual related to goodwill were offset by a gain on the
      sale of MOCVD operations.





APACN’s
      revenues for the year ended 2007 were $18,364,000 versus $15,879,000 in the
      year
      ended 2006, an increase of 16%. The increase is primarily attributable to an
      increased acceptance of the Company’s products within the FTTH market resulting
      from increased sales and marketing activities during the fiscal year 2006 and
      2007. Sales to broadband service providers and commercial data networks, which
      include APACN 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. APACN’s revenue growth is 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. We expect sales at APACN in fiscal 2008 to continue to increase as
      a
      result of our investment in market development activities and the acceptance
      of
      the product line within our target customers.





Gross
      revenues at Optronics for the year ended 2007 were $196,000, compared to
      $400,000 in 2006, a decrease of 51%.  Gross revenues for fiscal year 2006
      reflect approximately $323,000 of sales to APACN for fiber optics products
      and
      subcontracted labor. Optronics did not provide any subcontract labor to APACN
      in
      fiscal year 2007. These sales are eliminated as intercompany sales in the
      consolidated financial statements. Sales of UV monitors were $21,000 versus
      $39,000 in the prior year period, and sales of foundry services were $51,000
      in
      2007 versus $60,000 in 2006.





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**COST
      OF REVENUES AND GROSS PROFIT**





APACN’s
      gross profit for the year ended in 2007 was $5,260,000 as compared to $4,195,000
      in 2006. Gross profit percent for APACN for the year ended March 31, 2007 was
      29% versus 27% in the prior year. The increase in margin percentage reflects
      on
      the results of APACN’s ongoing program to reduce the cost of its products
      through a combination of product re-design, process improvement and global
      sourcing of components and outside manufacturing. The Company expects to
      experience continued downward price pressure in fiscal year 2008, but believes
      through a combination of factors, including the growth of higher-margin product
      lines and its ongoing cost reduction program, that the gross margin percentage
      for APACN in fiscal 2008 will remain about the same as in fiscal
      2007.





Optronic’s
      net cost of revenues for the year ended 2007 were $643,000 as compared to
      $755,000 in 2006. The decrease was mostly due to decreased personnel costs
      as a
      result of Aberdeen facility shut-down and, in part, due to personnel costs
      reduction in our GaN activities in Blaine .





**RESEARCH
      AND DEVELOPMENT EXPENSES**





Research
      and development (“R&D”) expenses consist solely of the research and
      development expense at Optronics. There have been no research and development
      expenses at APACN. R&D expenses decreased by approximately $935,000, to
      $474,000 for the year ended March 31, 2007 as compared to $1,409,000 for the
      year ended March 31, 2006. This represents a decrease of 66% from 2006. The
      majority of the decrease is due mainly to the shut-down of the GaN epitaxial
      layer growth activities and the sale of the operations of the semiconductor
      machine located in a leased facility in White Bear Lake, Minnesota.





**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**





Consolidated
      selling, general and administration (“S, G & A”) expenses decreased
      approximately $88,000 or 1%, to $6,675,000 in 2007 from $6,763,000 in 2006.





S,
      G
& A expenses at APACN were $4,984,000 for the year ending March 31, 2007 as
      compared to $4,248,000 in 2006, an increase of $736,000 or 17% mainly due to
      increased sales and marketing activities as well as engineering resources.
      As a
      percentage of revenue, we expect S, G & A expenses to be comparable in
      fiscal year 2008 to fiscal year 2007.





S,
      G
& A expenses at Optronics decreased $828,000 to $1,691,000 for the year
      ending March 31, 2007, from $2,519,000 in the prior period The decrease is
      mainly due to: $508,000 decreased legal costs primarily associated with the
      defense of a law suit from Electronic Instrumentation and Technology, Inc.,
      a
      Virginia corporation; $192,000 reduction in personnel costs in Blaine and
      Aberdeen; and $119,000 reduction in non-cash transaction related to the
      elimination of amortization expenses of certain warrants. We anticipate
      significant reductions in S, G & A expenses during fiscal year 2008 with the
      possible discontinuation of our operations.





**GOODWILL
      IMPAIRMENT CHARGE**





Goodwill
      impairments charges relate solely to 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 or fiscal
      2005





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**GAIN
      ON DISPOSAL OF ASSETS (net)**





Losses
      on
      disposal of assets at APACN were $1,000 in fiscal year ending March 31, 2007
      as
      compared to gains of $4,000 in the prior year.





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. In the prior
      year, a gain of approximately $1,163,000 was recognized on the sale of the
      MOCVD
      equipment and licensing of two patents.





**OTHER
      INCOME AND EXPENSE**





Interest
      expense at APACN increased $81,000 to $467,000 for the year ending March 31,
      2007 versus $386,000 in the prior year period. The increased was due to a higher
      debt balance outstanding and increasing interest rates over the year. APACN
      had
      no other income in fiscal 2007 as compared to $122,000 in fiscal 2006. The
      difference is due mainly to significant contingent goodwill earn out of
      approximately $119,000, during fiscal year 2006, from Crescent Electric during
      the 3 rd and
      final year of agreement acquired as a direct result of CSP acquisition.





Interest
      income at Optronics increased approximately $152,000 to $856,000 in fiscal
      2007
      from $704,000 in 2006. Interest expense decreased approximately $45,000 to
      $41,000 in fiscal 2007 from $86,000 in 2006 due the bonds held by the South
      Dakota Economic Development and Finance Authority being paid off in October
      2006. Other income and expenses decreased approximately $9,000 to $21,000 from
      $30,000 in 2007.





**NET
      LOSS**





Consolidated
      net loss decreased $1,202,000 to $2,147,000, or $.18 cents per share in fiscal
      2007, as compared to a net loss of $3,349,000, or $.28 cents per share, in
      fiscal 2006.





Net
      loss
      for APACN for the year ending 2007 was $804,000 versus $588,000 in fiscal 2006.
      The increased losses during the fiscal 2007 were mainly due to a goodwill
      impairment charge of $852,000 ($520,000, after tax) offset by increased revenues
      as a result of the expansion of its sales and marketing activities.





Net
      loss
      for Optronics for the year ending 2007 was $1,343,000, a decrease of $1,417,000,
      or 51%, from $2,760,000 in 2006. The decreased losses, despite a significant
      reduction in revenues, are primarily due to significant decrease in the cost
      of
      sales and operating expenses as well as increase in net interest
      income.





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 ***Table
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**2006
      Compared to 2005**





**REVENUES**





Consolidated
      revenues for the fiscal year ended 2006 increased 13% to $15,956,000 from sales
      of $14,113,000 in 2005. Consolidated cost of sales decreased from 81% in 2005
      to
      78% in 2006 resulting in improved gross margin of $3,517,000 in 2006 as compared
      to $2,688,000 in 2005, an increase of 31%. Consolidated operating losses,
      however increased to $4,655,000 in 2006 compared to $3,795,000 in 2005.
      Consolidated net losses, however, decreased somewhat to $3,349,000 in 2006
      or
      $.28 per diluted share compared to $3,420,000 or $.29 in 2005. The losses
      in fiscal 2006 were impacted by significantly increased legal expenses and
      non-operating activities related to the sale of Metal Organic Chemical Vapor
      Deposition (MOCVD) operations and a non-cash deferred tax liability related
      to
      goodwill on acquisitions. Increased legal expenses related to the defense of
      a
      lawsuit brought by EIT, a Virginia corporation, and a non-cash tax expense
      accrual related to goodwill were offset by a gain on the sale of Metal Organic
      Chemical Vapor Deposition (MOCVD) operations.





APACN’s
      revenues for the year ended 2006 were $15,879,000 versus $14,027,000 in the
      year
      ended 2005, an increase of 13%. The increase is primarily attributable to an
      increased acceptance of the Company’s products within the FTTH market resulting
      from increased sales and marketing activities during the fiscal year 2006.
      Sales
      to broadband service providers and commercial data networks, which include
      APACN
      custom fiber distribution systems, associated cable assemblies and optical
      components, were $10,648,000 or 67% of revenue. Sales to OEMs, consisting
      primarily of fiber optic and copper cable assemblies produced to customer design
      specifications, were $5,231,000, or 33% of revenue. This compares to 69% for
      broadband and commercial data networks and 31% for OEMs in the prior year.
      APACN’s revenue growth is 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
      revenues at Optronics for the year ended 2006 were $400,000, compared to
      $489,000 in 2005, a decrease of 24%.  Gross revenues reflect approximately
      $323,000 of sales to APACN for fiber optics products and subcontracted labor
      versus $404,000 last year. These sales are eliminated as intercompany sales
      in
      the consolidated financial statements. Sales of UV monitors were $39,000 versus
      $29,000 in the prior year period, and sales of foundry services were $60,000
      in
      2006 versus $41,000 in 2005. Optronics’ revenue growth is dependent upon our
      ability to successfully establish manufacturing reliability for our GaN products
      and successful selling into our targeted market segments.





**COST
      OF REVENUES AND GROSS PROFIT**





APACN’s
      gross profit for the year ended in 2006 was $4,195,000 as compared to $3,821,000
      in 2005. Gross profit percent for APACN for the year ended March 31, 2006 was
      27% versus 28% in the prior year. The decrease in margin percentage reflects
      continued downward price pressure.





Optronic’s
      net cost of revenues for the year ended 2006 were $755,000 as compared to
      $1,218,000 in 2005. Personnel related expenses decreased approximately $250,000
      due to staff reductions in our GaN product line and the termination of our
      Aberdeen manufacturing facility.





**RESEARCH
      AND DEVELOPMENT EXPENSES**





Research
      and development (“R&D”) expenses consist solely of the research and
      development expense at Optronics. There have been no research and development
      expenses at APACN. R&D expenses increased by approximately $305,000, to
      $1,409,000 for the year ended March 31, 2006 as compared to $1,104,000 for
      the
      year ended March 31, 2005. This represents an increase of 28% from 2005. The
      majority of the increase reflects additional rental and depreciation costs
      associated with operating a semiconductor machine for the entire year fiscal
      year of 2006 as compared to only the last two quarters in fiscal 2005.





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**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**





Consolidated
      selling, general and administration (“S, G & A”) expenses increased
      approximately $1,384,000, or 26%, to $6,763,000 in 2006 from $5,379,000 in
      2005.





S,
      G
& A expenses at APACN were $4,248,000 for the year ending March 31, 2006 as
      compared to $3,487,000 in 2005, an increase of $761,000 or 22% mainly due to
      increased sales and marketing activities.





S,
      G
& A expenses at Optronics increased $626,000 to $2,519,000 for the year
      ending March 31, 2006, from $1,893,000 in the prior period. The increase is
      mainly due to $443,000 increased legal costs primarily associated with the
      defense of a law suit from Electronic Instrumentation and Technology, Inc.,
      a
      Virginia corporation.





**GAIN
      ON DISPOSAL OF ASSETS (net)**





Gains
      on
      disposal of assets at APACN were $4,000 in fiscal year ending March 31, 2006.
      There were no gains in the prior fiscal year.





Gains
      on
      disposal of assets at Optronics were $1,195,000 in fiscal year ended March
      31,
      2006 as compared to $209,000 in fiscal year ended March 31, 2005. A gain of
      approximately $1,163,000 was recognized on the sale of the MOCVD equipment
      and
      licensing of two patents during March 2006. In the prior fiscal year, the
      company realized a gain of approximately $196,000 on the sale of the optics
      product line in April 2004.





**OTHER
      INCOME AND EXPENSE**





Interest
      expense at APACN increased $83,000 to $386,000 for the year ending March 31,
      2006 versus $303,000 in the prior year period. Interest expense increased
      $83,000 due to a higher debt balance outstanding and increasing interest rates
      over the year. Other income at APACN increased approximately $114,000 to
      $122,000 in fiscal 2006 as compared to $8,000 in fiscal 2005. The difference
      is
      due mainly to significant contingent goodwill earn out of approximately
      $119,000, during fiscal year 2006, from Crescent Electric during the
      3 rd and
      final year of agreement acquired as a direct result of CSP acquisition.





Interest
      income at Optronics increased approximately $189,000 to $704,000 in fiscal
      2006
      from $515,000 in 2005. The increase is due to higher interest income earned
      on
      cash equivalents. Interest expenses decreased approximately $5,000 to $86,000
      from $91,000 in 2005. Other income and expenses decreased approximately $12,000
      due mainly to the expenses related to the EIT judgment.





**NET
      LOSS**





Consolidated
      net loss decreased $71,000 to $3,349,000, or $.28 cents per share in fiscal
      2006, as compared to a net loss of $3,420,000, or $.29 cents per share, in
      fiscal 2005.





28
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Net
      loss
      for APACN for the year ending 2006 was $588,000 versus a profit of $36,000
      in
      fiscal 2005. The increased losses during the fiscal 2006 were mainly due to
      the
      expansion of its sales and marketing activities and an accrual for taxes on
      goodwill.





Net
      loss
      for Optronics for the year ending 2006 was $2,760,000, a decrease of $696,000,
      or 20%, from $3,456,000 in 2005. The decreased losses are primarily the result
      of sale of its MOCVD operations and licensing of two patents.





***Liquidity
      and Capital Resources***





As
      of
      March 31, 2007, our principal source of liquidity was our cash, cash equivalents
      and short-term investments, which totaled $6,763,000 compared to $8,948,000
      at
      March 31, 2006.





We
      used
      $1,357,000 to fund operating activities during fiscal 2007 compared to
      $3,276,000 in fiscal 2006, and $2,247,000 in fiscal 2005. In all three years
      the
      largest use of cash in operating activities was the funding of the net losses.
      The net loss for fiscal 2007 decreased to $2,147,000 from $3,349,000 in fiscal
      2006. The primary factor contributing to the decreased loss from fiscal 2006
      to
      2007 was mainly due to decreased cost of sales and operating expenses which
      were
      a direct result of significant personnel reductions in the domestic Optronics
      operations. The net loss for fiscal 2006 decreased to $3,349,000 from $3,420,000
      in fiscal 2005. The primary factor contributing to the decreased loss from
      fiscal 2005 to 2006 was the sale of the MOCVD equipment and licensing of two
      patents which was mostly negated by increased S, G&A costs.





In
      fiscal
      2007 we netted approximately $45,000 in positive cash flow from investing
      activities. Investments in property and equipment of $582,000 including a new
      enterprise 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. In fiscal 2006 we netted
      approximately $1,509,000 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. In fiscal 2005 we used $249,000 in
      investing activities, including $49,000 used to purchase assets through APA
      Optronics (India) Private Limited. We also invested $429,000 to purchase
      property and equipment, mainly for production equipment at
      Optronics.





In
      fiscal
      2007 we used a net $873,000 in financing activities, primarily towards the
      payment of long-term debt relating to our facility in Aberdeen, South Dakota.
      In
      fiscal 2006, we used $98,000 in financing activities, primarily to pay down
      long-term debt relating to our facility in Aberdeen, South Dakota. In fiscal
      2005, we used $235,000 in financing activities, primarily to pay down 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. At
      March
      31, 2006, the total principal outstanding under bonds issued by the State of
      South Dakota was $1,320,000. Interest on the bonds ranges from 5.8% to 6.75%,
      and the bonds are due in various installments between 2005 and 2016. These
      bonds
      require compliance with certain financial covenants. We were out of compliance
      with these covenants during all of fiscal 2005 and 2006. 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 on October 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
      its
      South Dakota operations in the latter part of fiscal year 2006 as part of its
      consolidation of manufacturing operations. The Company has made timely interest
      and principal payments, and the reason for the notice was not related to the
      payments. For
      further information regarding these bonds, see Note I of Notes to the
      Consolidated Financial Statements included under Item 8 of this Report. On
      April
      14, 2004 the Company sold its optics manufacturing operations, as discussed
      in
      Note B to the Consolidated Financial Statements included under Item 8 of this
      Report, to PNE, Inc. dba IRD. The terms of the sale required the Company to
      prepay $89,000 of a loan with the Aberdeen Development Corporation (“ADC”) in
      South Dakota and to accelerate the loan payment schedule to maturity in fiscal
      2011 from 2016. In June 2005, the Company sold a portion of the land in Aberdeen
      acquired from ADC back to ADC in consideration of cancellation of the remaining
      $120,000 due on the loan. Accordingly, the loan from ADC is fully satisfied.
      See
      Note C to the Consolidated Financial Statements included under Item 8 of this
      Report.





29
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            of Contents***





Our
      capital requirements are dependent upon several factors, including market
      acceptance of our products, the timing and extent of new product introductions
      and delivery, and the costs of marketing and supporting our products on a
      worldwide basis. See “Item 1. Business.” Although we believe that our current
      cash, cash equivalents, and short-term investments will be sufficient to fund
      our operations for more than the next 12 months, we cannot assure you that
      we
      will not seek additional funds through public or private equity or debt
      financing or from other sources within this time frame, or that additional
      funding, if needed, will be available on terms acceptable to us, or at all. We
      may
      also consider the acquisition of, or evaluate investments in, products and
      businesses complementary to our business. Any acquisition or investment may
      require additional capital.





**ITEM
                7A.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK.**





Our
      exposure to market risk for changes in interest rates relates primarily to
      our
      cash equivalents. The portfolio includes only marketable securities with active
      secondary or resale markets to ensure liquidity. We have no investments
      denominated in foreign country currencies and, therefore, our investments are
      not subject to foreign exchange risk. See “Cash and Equivalents” under Note A of
      the Consolidated Financial Statements.





30
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**ITEM
                8.**
            **FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA.**





Quarterly
      Results of Operations. The following tables present our unaudited quarterly
      operating results for the eight quarters ended March 31, 2007:








Quarter
                EndedJune
                30,
              2005
            
            September
                30,2005
            
            December
                31,2005
            
            March
                31,2006(1)Statement
                of Operations DataNet
                revenue
            
            $
            3,571,598
            
            $
            4,127,140
            
            $
            4,446,087
            
            $
            3,811,378Gross
                profit
            
            
            725,110
            
            
            904,070
            
            
            1,024,333
            
            
            863,591Net
                loss
            
            
            (891,006
            )
            
            (1,063,628
            )
            
            (1,275,786
            )
            
            (118,428
            )Net
                loss per share, basic and diluted
            
            $
            (0.08
            )
            $
            (0.09
            )
            $
            (0.11
            )
            $
            (0.01
            )





Quarter
                EndedJune
                30,
              2006
            
            September
                30,2006
            
            December
                31,2006
            
            March
                31,2007(2)Statement
                of Operations DataNet
                revenue
            
            $
            5,123,029
            
            $
            4,924,161
            
            $
            4,518,591
            
            $
            3,994,397Gross
                profit
            
            
            1,329,987
            
            
            1,359,577
            
            
            1,224,613
            
            
            898,558Net
                loss
            
            
            (112,018
            )
            
            (400,433
            )
            
            (429,368
            )
            
            (1,205,491
            )Net
                loss per share, basic and diluted
            
            $
            (0.01
            )
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.10
            )








(1)
            During
                the fourth quarter of fiscal year 2006, the Company recorded a deferred
                income tax liability of $272,000 related to goodwill from
                acquisitions.





(2)
            During
                the fourth quarter of fiscal year 2007, the Company recorded a goodwill
                impairment charge of $852,000 ($519,717 after
                tax).





31
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            of Contents***





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 March 31, 2007 and 2006, and the related
      consolidated statements of operations, shareholders’ equity, and cash flows for
      each of the three years in the period ended March 31, 2007. These consolidated
      financial state-ments are the responsibility of the Com-pany’s management. Our
      responsibility is to express an opinion on these consolidated financial
      state-ments 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 assur-ance 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
      controls over financial reporting. Our audit included consideration of internal
      controls 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 of 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 pre-sent
      fairly, in all material respects, the consolidated financial position of APA
      Enterprises, Inc. and subsidiaries as of March 31, 2007 and 2006 and the
      consolidated results of their operations and their consolidated cash flows
      for
      each of the three years in the period ended March 31, 2007, in con-formity
      with
      accounting principles generally accepted in the United States of
      America.





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


June
      22,
      2007





32
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            of Contents***





**APA
      Enterprises, Inc.**





**CONSOLIDATED
      BALANCE SHEETS**





**March
      31,**








ASSETS
            
            2007
            
            2006CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            6,763,369
            
            $
            8,947,777Accounts
                receivable
            
            
            1,823,060
            
            
            1,892,483Inventories
            
            
            1,490,290
            
            
            1,836,843Prepaid
                expenses
            
            
            155,472
            
            
            173,040Bond
                reserve funds
            
            
            -
            
            
            126,385Total
                current assets
            
            
            10,232,191
            
            
            12,976,528PROPERTY,
                PLANT AND EQUIPMENT, net
            
            
            2,210,891
            
            
            2,623,412OTHER
                ASSETSBond
                reserve funds
            
            
            -
            
            
            343,241Goodwill
            
            
            2,570,511
            
            
            3,422,511Assets
                held for sale
            
            
            328,312
            
            
            -Other
            
            
            380,653
            
            
            227,8793,279,476
            
            
            3,993,631$
            15,722,558
            
            $
            19,593,571





The
      accompanying notes are an integral part of these financial
      statements.





33
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            of Contents***





**APA
      Enterprises, Inc.**





**CONSOLIDATED
      BALANCE SHEETS** ** **-
      Continued**





**March
      31,**








LIABILITIES
                AND SHAREHOLDERS’ EQUITY
            
            2007
            
            2006CURRENT
                LIABILITIESCurrent
                maturities of long-term debt
            
            $
            69,528
            
            $
            1,342,481Accounts
                payable
            
            
            952,549
            
            
            1,353,828Accrued
                compensation
            
            
            887,981
            
            
            815,046Accrued
                expenses
            
            
            100,668
            
            
            211,840Total
                current liabilities
            
            
            2,010,726
            
            
            3,723,195LONG-TERM
                DEBT, net of current maturities
            
            
            128,071
            
            
            18,480DEFERRED
                RENT
            
            
            78,116
            
            
            -DEFERRED
                INCOME TAXES
            
            
            29,161
            
            
            272,454Total
                liabilities
            
            
            2,246,074
            
            
            4,014,129COMMITMENTS
                AND CONTINGENCIES
            
            
            -
            
            
            -SHAREHOLDERS’
                EQUITYUndesignated
                shares, 4,999,500 authorized shares; no shares issued and
                outstanding
            
            
            -
            
            
            -Preferred
                stock, $.01 par value; 500 authorized shares; no shares issued and
                outstanding
            
            
            -
            
            
            -Common
                stock, $.01 par value; 50,000,000 authorized shares; 11,872,331 shares
                issued and outstanding at March 31, 2007 and 2006
            
            
            118,723
            
            
            118,723Additional
                paid-in capital
            
            
            52,018,729
            
            
            51,968,366Accumulated
                foreign currency translation
            
            
            (8,164
            )
            
            (2,153
            )Accumulated
                deficit
            
            
            (38,652,804
            )
            
            (36,505,494
            )Total
                shareholders equity
            
            
            13,476,484
            
            
            15,579,442$
            15,722,558
            
            $
            19,593,571





The
      accompanying notes are an integral part of these financial
      statements.





34
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            of Contents***





**APA
      Enterprises, Inc.**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Years
      ended March 31,**








2007
            
            2006
            
            2005Revenues
            
            $
            18,560,178
            
            $
            15,956,203
            
            $
            14,112,605Cost
                of revenues
            
            
            13,747,443
            
            
            12,439,099
            
            
            11,424,295Gross
                profit
            
            
            4,812,735
            
            
            3,517,104
            
            
            2,688,310Operating
                expensesResearch
                and development
            
            
            473,528
            
            
            1,408,778
            
            
            1,103,972Selling,
                general and administrative
            
            
            6,675,227
            
            
            6,763,068
            
            
            5,379,483Goodwill
                impairment charge
            
            
            852,000
            
            
            -
            
            
            -Gain
                on sale of assets (net)
            
            
            (433,433
            )
            
            (1,198,295
            )
            
            (208,837
            )7,567,322
            
            
            6,973,551
            
            
            6,274,618Loss
                from operations
            
            
            (2,754,587
            )
            
            (3,456,447
            )
            
            (3,586,308
            )Interest
                income
            
            
            390,249
            
            
            322,411
            
            
            225,964Interest
                expense
            
            
            (41,941
            )
            
            (90,819
            )
            
            (105,254
            )Other
                income(expense), net
            
            
            21,476
            
            
            151,578
            
            
            49,698369,784
            
            
            383,170
            
            
            170,408Loss
                before income taxes
            
            
            (2,384,803
            )
            
            (3,073,277
            )
            
            (3,415,900
            )Income
                taxes
            
            
            (237,493
            )
            
            275,571
            
            
            4,138Net
                loss
            
            $
            (2,147,310
            )
            $
            (3,348,848
            )
            $
            (3,420,038
            )Net
                loss per shareBasic
                and diluted
            
            $
            (0.18
            )
            $
            (0.28
            )
            $
            (0.29
            )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.




35
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            of Contents***





**APA
      Enterprises, Inc.**





**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**





**Years
      ended March 31, 2005, 2006, and 2007**





Undesignated
                shares
              
              Preferred
                  stock
              
              Common
                  stock
              
              Additional
                paid-in
              
              Foreign
                currency
              
              Accumulated
              
              Total
                shareholders’Shares
              
              Amount
              
              Shares
              
              Amount
              
              capital
              
              translation
              
              deficit
              
              equityBalance
                  at March 31, 2004
              
              
              -
              
              
              -
              
              $
              -
              
              
              11,872,331
              
              $
              118,723
              
              $
              51,980,946
              
              $
              -
              
              $
              (29,736,608
              )
              $
              22,363,061Options
                  issued as compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (21,244
              )
              
              -
              
              
              -
              
              
              (21,244
              )Foreign
                  currency translation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              382
              
              
              -
              
              
              382Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,420,038
              )
              
              (3,420,038
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,419,656
              )Balance
                  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
              )
              $
              13,476,484


The
        accompanying notes are an integral part of these financial
        statements.




36
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            of Contents***





**APA
      Enterprises, Inc.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Years
      ended March 31,**





2007
            
            2006
            
            2005Cash
                flows from operating activities:Net
                loss
            
            $
            (2,147,310
            )
            $
            (3,348,848
            )
            $
            (3,420,038
            )Adjustments
                to reconcile net loss to net cash provided by (used in) operating
                activities, net of acquisitions:Depreciation
                and amortization
            
            
            651,399
            
            
            1,061,199
            
            
            1,003,573Deferred
                income taxes
            
            
            (243,293
            )
            
            272,454
            
            
            -Gain
                on sale of assets
            
            
            (433,433
            )
            
            (1,198,295
            )
            
            (208,837
            )Stock
                based compensation expense
            
            
            50,363
            
            
            8,664
            
            
            (21,244
            )Goodwill
                impairment charge
            
            
            852,000
            
            
            -
            
            
            -Foreign
                currency translation
            
            
            (6,011
            )
            
            (2,535
            )
            
            382Changes
                in operating assets and liabilities, net of acquisitions:Accounts
                receivable, net
            
            
            69,423
            
            
            (446,235
            )
            
            341,293Inventories
            
            
            346,553
            
            
            (566,190
            )
            
            303,535Prepaid
                expenses and other assets
            
            
            (135,206
            )
            
            136,111
            
            
            (134,910
            )Accounts
                payable and accrued expenses
            
            
            (361,400
            )
            
            807,697
            
            
            (110,679
            )Net
                cash used in operating activities
            
            
            (1,356,915
            )
            
            (3,275,978
            )
            
            (2,246,925
            )Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (581,446
            )
            
            (427,631
            )
            
            (429,457
            )Proceeds
                from sale of assets
            
            
            626,807
            
            
            1,936,756
            
            
            229,000Cash
                paid for business acquisitions
            
            
            -
            
            
            -
            
            
            (48,772
            )Net
                cash provided by (used in) investing activities
            
            
            45,361
            
            
            1,509,125
            
            
            (249,229
            )Cash
                flows from financing activities:Payment
                of long-term debt
            
            
            (872,854
            )
            
            (97,875
            )
            
            (232,923
            )Bond
                reserve funds
            
            
            -
            
            
            (987
            )
            
            (2,341
            )Net
                cash used in financing activities
            
            
            (872,854
            )
            
            (98,862
            )
            
            (235,264
            )Decrease
                in cash and cash equivalents
            
            
            (2,184,408
            )
            
            (1,865,715
            )
            
            (2,731,418
            )Cash
                and cash equivalents at beginning of year
            
            
            8,947,777
            
            
            10,813,492
            
            
            13,544,910Cash
                and cash equivalents at end of year
            
            $
            6,763,369
            
            $
            8,947,777
            
            $
            10,813,492Supplemental
                cash flow information:Cash
                paid during the year for:Interest
            
            $
            41,841
            
            $
            90,816
            
            $
            99,337Income
                taxes
            
            
            5,800
            
            
            3,117
            
            
            4,138Noncash
                investing and financing transactions:Debt
                incurred for purchase of equipment
            
            $
            179,118
            
            $
            -
            
            $
            -Bond
                reserve funds used to pay down debt
            
            $
            469,626
            
            $
            -
            
            $
            -Debt
                relieved in exchange for land
            
            $
            -
            
            $
            120,000
            
            $
            -


The
        accompanying notes are an integral part of these financial
        statements.




37
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            of Contents***





**APA
      Enterprises, Inc.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**March
      31, 2007, 2006 and 2005**








**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 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.
                The Company also manufactures and markets a range of gallium nitride-based
                devices.





Principles
      of Consolidation





The
      consolidated financial statements include the accounts of APA Enterprises,
      Inc.
      and its wholly-owned subsidiaries. All significant inter-company accounts and
      transac-tions have been eliminated in consolidation.





Foreign
                Currency Translation





The
                Company uses the United States dollar as its functional currency
                for its
                subsidiary in India. India’s financial statements were translated into
                U.S. Dollars at the year end exchange rate, while income and expenses
                are
                translated at the average exchange rates during the year. There was
                no
                significant foreign exchange translation gain or losses during fiscal
                years ended March 31, 2007, 2006 and 2005.





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 customer as revenue and the related cost
                in
                cost of revenues.





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
                March 31, 2007 and 2006 consist entirely of short-term money market
                accounts. Cash equivalents are stated at cost, which approximates
                fair
                value.





Cash
                of approximately $47,000 and $104,000 was on deposit in foreign financial
                institutions at March 31, 2007 and 2006. 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.





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**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**








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 $78,500 and $77,831 at 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 factory overhead charges.





Property,
                Plant and Equipment





Property,
                plant and equipment are stated at cost, less accumulated depreciation
                and
                amortiza-tion. Depreciation and amortization are provided on the
                straight-line method for book and tax purposes over the follow-ing
                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
                quarters of 2005, 2006, and 2007. This test indicated that goodwill
                recorded as of March 31, 2007 for APACN was impaired, principally
                due to
                weakness in operating results of 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.





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**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**





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. Effective
      April 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) had applied the fair value method *,* to
      stock-based employee compensation for the following fiscal years:




March
                31,
            
            March
                31,2006
            
            2005Net
                loss to common shareholders - as reported
            
            $
            (3,348,848
            )
            $
            (3,420,038
            )Less:
                Total stock-based employee compensation expense determined under
                fair
                value method for all awards, net of related tax effects
            
            
            108,472
            
            
            129,914Net
                loss - pro forma
            
            $
            (3,457,320
            )
            $
            (3,549,952
            )Basic
                and diluted net loss per common share - as reported
            
            $
            (.28
            )
            $
            (.29
            )Basic
                and diluted net loss per common share - pro forma
            
            $
            (.29
            )
            $
            (.30
            )




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. The Company recorded $50,363 of
      related compensation expense for the year ended March 31, 2007 as a result
      of
      the implementation of SFAS123(R). The Company recorded compensation expense
      of
      $8,664, and compensation income of $21,244 for the years ended March 31, 2006
      and 2005 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 year ended March
      31, 2007. As of March 31, 2007, $86,658 of total unrecognized compensation
      expense related to non-vested awards is expected to be recognized over a
      weighted average period of approximately 3.0 years.





40
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**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**





The
      total
      fair value of options vested during the years ended March 31, 2007, 2006, and
      2005 was $64,545, $136,786, and $110,168. 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 vesting period
      of
      the award.





The
      Company estimates the fair value of stock option awards based on the following
      assumptions:





March
                31, 2007
            
            March
                31, 2006
            
            March
                31, 2005Expected
                volatility
            
            
            64
            %
            
            75
            %
            
            75
            %Expected
                life (in years)
            
            
            5
                years
            
            
            5
                years
            
            
            5
                yearsExpected
                dividends
            
            
            0
            %
            
            0
            %
            
            0
            %Risk-free
                interest rate
            
            
            4.78
            %
            
            3.90
            %
            
            3.40
            %








The
      weighted average fair value of options granted during the years ended March
      31,
      2007, 2006 and 2005 was $0.75, $1.39, and $1.79. 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 believes this approach results in a better
      estimate of expected volatility. 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
                net loss per share is computed by dividing net loss by the weighted
                average number of common shares outstanding. Diluted net loss per
                share is
                computed by dividing net loss by the weighted average number of common
                shares outstanding and common share equivalents related to stock
                options
                and warrants, when dilutive.





Common
      stock options and warrants to purchase 583,150, 633,780, and 683,361 shares
      of
      com-mon stock with a weighted average exercise price of $2.56, $2.96 and $4.99
      were out-standing during the years ended March 31, 2007, 2006 and 2005, but
      were excluded from the calculation of net loss per share because they were
      antidilutive. Had we not incurred net losses during the fiscal years ended
      March
      31, 2007, 2006 and 2005, we would not have assumed any conversion of stock
      options in fiscal 2007, 2006 and 2005.





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**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 assump-tions that affect the reported amounts
      of assets and liabilities, related revenues and expenses and disclo-sure 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 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 through the three year period
      ended
      March 31, 2007.





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.





Reclassifications





Certain
      reclassifications have been made to the 2006 financial statements to conform
      with the presentation used in 2007. These reclassifications had no effect on
      net
      loss or shareholders’ equity as previously reported.




Recently
      Issued Accounting Standards





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 for uncertain tax positions. FIN 48 prescribes a recognition
      threshold and measurement attribute for the financial statement 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 48 are effective for the company on April 1, 2007 with the
      cumulative effect of the change in accounting principle recorded as an
      adjustment to opening retained earnings. The adoption of this statement is
      not
      expected to have a material impact on the Company's consolidated financial
      position or results of operations.





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**NOTE
      A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**





In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108 (SAB
      108), “Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.”  SAB 108 established
      an approach that requires quantification of financial statement misstatements
      based on the effects of the misstatement on each of the company’s financial
      statements and the related financial statement disclosures.  This approach
      is commonly referred to as the “dual approach” because it requires
      quantification of errors under both the roll-over and iron curtain methods.
      SAB
      108 was issued to provide consistency between how registrants quantify financial
      statement misstatements and is effective for fiscal years ending after November
      15, 2006. The initial application of SAB 108 did not have a material impact
      on
      the Company's consolidated financial position or results of operations.





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 is currently evaluating the impact of SFAS No. 157 on our financial
      statements.





In
      February 2007, the FASB issued SFAS No. 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 after November 15,
      2007. The Company is currently evaluating the impact of SFAS No. 159 on our
      financial statements.




**NOTE
      B - SALE OF OPTICS MANUFACTURING OPERATIONS**





In
      January, 2004 the Company announced the discontinuance of optics manufacturing
      at its Blaine, Minnesota facility. The closure was the result of aggressive
      off-shore pricing and continued lower demand for this product line. This
      resulted in a charge of $171,000 taken in the 4 th quarter
      ended March 31, 2004. The Company sold its optics manufacturing operations
      on
      April 14, 2004 for $220,000. The terms of the sale required the Company to
      restructure a loan with the City of Aberdeen, South Dakota, which included
      an
      upfront loan payment of $89,305 and payment of the remaining $140,000 loan
      amount in seven annual installments of $20,000 each beginning June 30, 2004.
      The
      Company recorded a gain of approximately $208,000 on the sale in the first
      quarter of fiscal 2005.




**NOTE
      C - SALE OF LAND**





In
      June
      2005 the Company sold approximately 2 acres of its land in Aberdeen, South
      Dakota to the Aberdeen Development Corporation (ADC) in exchange for the
      retirement of its remaining $120,000 debt on its loan with ADC. The land was
      granted to APA in conjunction with building a facility in Aberdeen and is part
      of a single parcel of approximately 12 acres on which the Company has
      constructed and operates its manufacturing facility. The Company recognized
      a
      gain of approximately $109,000 on the sale of the land in the first quarter
      of
      fiscal 2006.





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**NOTE
      D - 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 in
      approximately 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 March 31, 2007. These idle assets have
      an
      approximate net book value of $1,054,000 as of March 31, 2007. The company
      plans
      to retain the 5-acre vacant land for potential future use. 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 on October 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 its South Dakota operations
      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
      E - 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. The Company does not track discrete financial information, therefore
      this
      operation was not presented as a discontinued operation.





**NOTE
      F - INVENTORIES**





Inventories
      consist of the following at March 31:





2007
            
            2006Raw
                materials
            
            $
            1,146,161
            
            $
            1,588,816Work-in-process
            
            
            33,783
            
            
            48,474Finished
                goods
            
            
            310,346
            
            
            199,553$
            1,490,290
            
            $
            1,836,843





**NOTE
      G - PROPERTY, PLANT AND EQUIPMENT**





Property,
      plant and equipment consist of the following at March 31:





2007
            
            2006Land
            
            $
            116,195
            
            $
            116,195Buildings
            
            
            1,924,407
            
            
            1,809,881Manufacturing
                equipment
            
            
            1,006,856
            
            
            4,802,514Office
                equipment
            
            
            1,138,897
            
            
            863,131Vehicles
            
            
            10,934
            
            
            10,648Leasehold
                improvements
            
            
            1,139,392
            
            
            1,135,7285,336,681
            
            
            8,738,097Less
                accumulated depreciation and amortization
            
            
            3,125,790
            
            
            6,114,685$
            2,210,891
            
            $
            2,623,412




44
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**NOTE
      H - ASSETS HELD FOR SALE**





As
      of
      March 31, 2007, the Company had $328,312 in equipment listed as held for sale
      on
      its Optronics division, which are stated at the lower of depreciated cost or
      fair market value less cost to sell. This is equipment was related to dormant
      and discontinued activities such as Power Amplifier and Fiber Optic product
      lines. The Company expects to dispose of these assets within the next twelve
      months and does not expect any material loss on these dispositions.





**NOTE
      I - LONG-TERM DEBT**





The
                following is a summary of the outstanding debt at
                March 31:





2007
            
            2006South
                Dakota Governor’s Office of Economic Development and the Aberdeen
                Development Corporation Bond, 5.8% to 6.75%,paid in full during fiscal
                2007
            
            $
            -
            
            $
            1,320,000Low
                interest economic development loans, 0%, due in various installments
                through fiscal 2011
            
            
            -
            
            
            -Other
            
            
            197,599
            
            
            40,961197,599
            
            
            1,360,961Less
                current maturities
            
            
            69,528
            
            
            1,342,481$
            128,071
            
            $
            18,480





The
      Company had no deposits with trustees in reserve funds for bond maturities
      as of
      March 31, 2007. At March 31, 2006, the Company had on deposit with trustees
      $469,626 in reserve funds for bond maturities, of which $126,385 were for
      current bond maturities. These funds are included in bond reserve funds in
      the
      accompanying balance sheets.





The
      South
      Dakota loan agreement requires the Company to maintain compliance with certain
      cove-nants. The Company was out of compliance with certain of these covenants
      in
      fiscal 2006 and the debt was classified as current due to the Company’s covenant
      violation.





All
          of
          the above debt was secured by land, buildings, and certain equipment of
          the
          Company in fiscal 2006. In fiscal 2007, certain equipment of the Company
          secures
          the other debt outstanding.








Scheduled
      maturities of the Company’s long-term debt are as follows:





Years
                ending March 31,2008
            
            $
            69,5282009
            
            
            63,2732010
            
            
            64,798$
            197,599





45
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**NOTE
      J - EMPLOYEE BENEFIT PLAN**





The
      Company maintains a contributory 401(k) profit sharing benefit plan covering
      all
      employ-ees. 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 $127,000, $114,000, and $97,000 for the years ended
      March 31, 2007, 2006 and 2005.





**NOTE
      K - 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 March 31, 2007 and 2006.





Significant
      components of deferred income tax assets and liabilities are as follows at
      March
      31:





2007
            
            2006Current
                deferred income tax assets:Inventories
            
            $
            196,966
            
            $
            160,129Accrued
                expenses
            
            
            199,945
            
            
            194,841396,911
            
            
            354,970Long-term
                deferred income tax assets:Intangibles
            
            
            32,513
            
            
            12,766Net
                operating loss carryforwards
            
            
            13,502,995
            
            
            13,173,80113,535,508
            
            
            13,186,567Total
                deferred income tax assets
            
            
            13,932,419
            
            
            13,541,537Long-term
                deferred income tax liabilities:Property
                and equipment depreciation
            
            
            36,067
            
            
            151,104Goodwill
            
            
            29,161
            
            
            272,45465,228
            
            
            423,558Total
                net deferred income taxes
            
            
            13,867,191
            
            
            13,117,979Valuation
                allowance
            
            
            (13,896,352
            )
            
            (13,390,433
            )Total
            
            $
            (29,161
            )
            $
            (272,454
            )




As
      of
      March 31, 2007, the Company has net operating loss carry forwards for federal
      and state income tax purposes of approximately $34,626,000 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.





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**NOTE
      K - INCOME TAXES - Continued**





The
      following is a reconciliation of the federal statutory income tax rate to the
      consolidated effective tax rate for March 31:





Percent
                of Pre-tax Income2007
            
            2006
            
            2005Federal
                statutory rate
            
            
            (34
            %)
            
            (34
            %)
            
            (34
            %)State
                income taxes
            
            
            (5
            %)
            
            (5
            %)
            
            (5
            %)Permanent
                differences
            
            
            9
            %
            
            7
            %
            
            1
            %Other
            
            
            (1
            %)
            
            1
            %
            
            0
            %Change
                in valuation allowance
            
            
            21
            %
            
            40
            %
            
            38
            %Tax
                rate
            
            
            (10
            %)
            
            9
            %
            
            0
            %





Components
      of the income tax expense (benefit) are as follows for the years ended March
      31:





2007
            
            2006
            
            2005Current:Federal
            
            $
            -
            
            $
            -
            
            $
            -State
            
            
            5,800
            
            
            3,117
            
            
            4,138Deferred:Federal
            
            
            228,973
            
            
            1,301,731
            
            
            869,866State
            
            
            33,673
            
            
            193,949
            
            
            127,921Valuation
                allowance
            
            
            (505,939
            )
            
            (1,223,226
            )
            
            (997,787
            )Income
                tax expense (benefit)
            
            $
            (237,493
            )
            $
            275,571
            
            $
            4,138





During
      fiscal year 2007, the Company recorded a $243,000 deferred income tax benefit
      related to the impairment of goodwill. During the fourth quarter of fiscal
      year
      2006, the Company recorded a $272,000 deferred income tax liability for the
      book
      and income tax basis difference in goodwill. Income tax expense consists
      primarily of state taxes in 2005.





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.




**NOTE
      L - 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.





47
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**NOTE
      M - SHAREHOLDER RIGHTS PLAN**





Pursuant
      to the Shareholder Rights Plan each share of com-mon 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.





**NOTE
      N - 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 716,850 shares of common stock available for issue at
      March 31, 2007.





Option
      transactions under these plans during the three years ended March 31, 2007
      are summa-rized as follows:





Number  of
                shares
            
            Weighted
                average
              exercise price
            
            Weighted
                average
              fair
                valueOutstanding
                at March 31, 2004
            
            
            385,115
            
            $
            3.74Granted
            
            
            72,000
            
            
            1.79
            
            $
            1.13Canceled
            
            
            (220,485
            )
            
            3.60Outstanding
                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
            
            $
            1.90





The
      number of shares exercisable at March 31, 2007, 2006 and 2005 was 99,950,
      113,510, and 72,255, respectively, at a weighted average exercise price of
      $2.30, $3.83, and $4.47 per share, respectively.





48
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**NOTE
      N - STOCK OPTIONS AND WARRANTS - Continued**





The
      following table summarizes information concerning currently outstanding and
      exercisable stock options at March 31, 2007:





**Options
                outstanding**Range
                of
              exercise
                prices
            
            Number
              outstanding
            
            Weighted
                average
              Remaining
              contractual
                life
            
            Weighted
              average
              exercise
                price
            
            Aggregate
              intrinsic
              value$0.00-$1.29
            
            
            15,000
            
            
            5.42
                years
            
            $
            1.28
            
            $
            19,2001.30-2.91
            
            
            213,150
            
            
            3.58
                years
            
            
            1.82
            
            
            387,0165.53-8.90
            
            
            5,000
            
            
            0.08
                years
            
            
            7.22
            
            
            36,100233,150
            
            
            3.62
                years
            
            $
            1.90
            
            $
            442,316





**Options
                exercisable**Range
                of
              exercise
                prices
            
            Number
              outstanding
            
            Weighted
                average
              remaining
              contractual
                life
            
            Weighted
              average
              exercise
                price
            
            Aggregate
              intrinsic
              value$0.00-$1.29
            
            
            -
            
            
            -
            
            $
            -
            
            $
            -1.30-2.91
            
            
            94,950
            
            
            2.91
                years
            
            
            2.04
            
            
            193,5755.53-8.90
            
            
            5,000
            
            
            0.08
                years
            
            
            7.22
            
            
            36,10099,950
            
            
            2.77
                years
            
            $
            2.30
            
            $
            229,675





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, 2004
            
            
            590,822
            
            $
            3.00
                - 17.84
            
            
            2005
                - 2008Issued
            
            
            -
            
            
            -
            
            
            -Expired
            
            
            (144,091
            )
            
            14.72
            
            
            2005Balance
                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
            
            
            2008





All
      warrants are exercisable upon date of grant.





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**NOTE
      O - COMMITMENTS**





The
      Company leases office and manufacturing facilities from a partnership consisting
      of two partners. One of the partners is a major shareholder, officer and
      director of the Company and the other partner is a significant share holder
      The
      Company has determined the partnership is not required to be consolidated with
      APA’s financial statements. The lease agreement, classified as an operating
      lease, expires November 30, 2009 and provides for periodic increases of the
      rental rate based on increases in the consumer price index. Rental expense
      was
      $459,000, $585,000 and $478,000 for the years ended March 31, 2007, 2006
      and 2005, of which $166,000, $160,000 and $155,000 was paid to the partnership,
      respectively.





The
      following is a schedule of approximate minimum payments required under the
      capital and operating leases:





Year
                ending March 31
            
            Operatingleases2008
            
            $
            349,5832009
            
            
            350,8202010
            
            
            315,5312011
            
            
            235,5902012
            
            
            240,654Thereafter
            
            
            439,275Total
                minimum lease payments
            
            $
            1,931,453





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
      P - 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.





Customers





Two
      customers comprised approximately 23% of total sales for the year ended March
      31, 2007, 11% and 12% respectively. The sales for these customers related to
      the
      APACN segment. No single customer accounted for more than 10% of the Company’s
      sales for the years ended March 31, 2006 and 2005.





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**NOTE
      Q - SEGMENTS OF BUSINESS**




The
      Company has identified two reportable segments based on its internal
      organizational structure, management of operations, and performance evaluation.
      These segments are Optronics and Cables and Networks (APACN). Optronic’s revenue
      is generated in the design, manufacture and marketing of ultraviolet (UV)
      detection and measurement devices. APACN’s revenue is derived primarily from
      standard and custom fiber optic cable assemblies, copper cable assemblies,
      value
      added fiber optics frames, panels and modules. Expenses are allocated between
      the companies based on detailed information contained in invoices. In addition,
      corporate overhead costs for management’s time and other expenses are allocated
      to each segment. Segment detail is summarized as follows (unaudited, in
      thousands):





Optronics
            
            Cables
                & Networks
            
            Eliminations
            
            Consolidated**Year
                ended March 31, 2007**External
                revenues
            
            $
            196
            
            $
            18,364
            
            $
            -
            
            $
            18,560Gross
                profit (loss)
            
            
            (447
            )
            
            5,260
            
            
            -
            
            
            4,813Operating
                loss
            
            
            (2,177
            )
            
            (578
            )
            
            -
            
            
            (2,755
            )Depreciation
                and amortization
            
            
            415
            
            
            236
            
            
            -
            
            
            651Capital
                expenditures
            
            
            326
            
            
            435
            
            
            -
            
            
            761Assets
            
            
            16,399
            
            
            7,107
            
            
            (7,783
            )
            
            15,723**Year
                ended March 31, 2006**External
                revenues
            
            $
            400
            
            $
            15,879
            
            $
            (323
            )
            $
            15,956Gross
                profit (loss)
            
            
            (674
            )
            
            4,195
            
            
            (4
            )
            
            3,517Operating
                loss
            
            
            (3,407
            )
            
            (49
            )
            
            -
            
            
            (3,456
            )Depreciation
                and amortization
            
            
            798
            
            
            263
            
            
            -
            
            
            1,061Capital
                expenditures
            
            
            289
            
            
            138
            
            
            -
            
            
            427Assets
            
            
            19,333
            
            
            7,879
            
            
            (7,618
            )
            
            19,594**Year
                ended March 31, 2005**External
                revenues
            
            $
            490
            
            $
            14,027
            
            $
            (404
            )
            $
            14,113Gross
                profit (loss)
            
            
            (1,133
            )
            
            3,821
            
            
            -
            
            
            2,688Operating
                profit (loss)
            
            
            (3,920
            )
            
            334
            
            
            -
            
            
            (3,586
            )Depreciation
                and amortization
            
            
            774
            
            
            230
            
            
            -
            
            
            1,004Capital
                expenditures
            
            
            397
            
            
            79
            
            
            -
            
            
            476Assets
            
            
            22,253
            
            
            7,188
            
            
            (7,367
            )
            
            22,074








**NOTE
      R - SUBSEQUENT EVENT**




In
      May
      2007 the Company sold approximately 1.38 acres of its land in Blaine, Minnesota
      for $325,000, realizing a gain on the sale of $265,000. The land was a separate
      vacant lot directly west of the Company’s facility. The land had originally been
      purchased for potential expansion








**ITEM
                9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE.**





None.





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**ITEM
                9A.**
            **CONTROLS
                AND PROCEDURES**





The
      Company’s chief executive officer and chief financial officer (the same person)
      has 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,
      and based on such evaluation has concluded that they are effective.





During
      the fiscal quarter ended March 31, 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
                9B.**
            **OTHER
                INFORMATION**





There
      were no events during the quarter ended **** March
      31,
      2007 required to be disclosed on Form 8-K which were not so
      disclosed.








**PART
      III**





**ITEM
                10.**
            **DIRECTORS
                AND EXECUTIVE 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 August 2007.




**ITEM
                11.**
            **EXECUTIVE
                COMPENSATION**





Information
      required by Item 11 is incorporated in this Report by reference to the proxy
      statement for our annual meeting of shareholders to be held in August
      2007.




**ITEM
                12.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER
                MATTERS**





Certain
      information required by Item 12 is incorporated in this Report by reference
      to
      the proxy statement for annual meeting of shareholders to be held in August
      2007.





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The
      following table provides information about the Company’s equity compensation
      plans (including individual compensation arrangements) as of March 31,
      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
            
            
            233,150
            
            
            $
            1.90
            
            
            
            716,850Equity
                compensation plans not approved by security holders
            
            
            350,000
            
            
            $
            3.00
            
            
            Not
                applicable*Total
            
            
            583,150
            
            
            $
            2.56
            
            
            
            716,850


*
      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.








**ITEM
                13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS**





Information
      required by Item 13 is incorporated in this Report by reference to the proxy
      statement for our annual meeting of shareholders to be held in August
      2007.





**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 August
      2007.





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**PART
      IV**







**ITEM
                15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT SCHEDULES**





(a) (1) The
      following financial statements are filed herewith under Item 8.


(i)
              Report
                  of Independent Registered Public Accounting Firm for the years
                  ended March
                  31, 2007, 2006 and 2005
 
 (ii)
              Consolidated
                  Balance Sheets as of March 31, 2007 and
                  2006
 
 (iii)
              Consolidated
                  Statements of Operations for the years ended March 31, 2007, 2006
                  and
                  2005
  (iv)
              Consolidated
                  Statement of Shareholders’ Equity for the years ended March 31, 2007, 2006
                  and 2005
  (v)
              Consolidated
                  Statements of Cash Flows for the years ended March 31, 2007, 2006
                  and
                  2005
  (vi)
              Notes
                  to the Consolidated Financial Statements for the years ended March
                  31,
                  2007, 2006 and 2005
 
 (2)
              Financial
                  Statement Schedules: See Schedule II on page following
                  signatures.
 
 (b)
              Exhibits.
                  See Exhibit Index.


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**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:
                June 22, 2007
            By
            /s/
                Anil K. JainAnil
                K. Jain*President
                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/
                Anil K. Jain
            
            President,
                Chief Executive Officer, Chief
            
            June
                22 , 2007Anil
                K. Jain
            
            Financial
                Officer and Director (principal executive officer and principal financial
                officer)/s/
                Chris M. Goettl
            
            Principal
                accounting officer
            
            June
                22 , 2007Chris
                M. Goettl/s/
                John G. Reddan
            
            Director
            
            June
                22 , 2007John
                G. Reddan/s/
                Ronald G. Roth
            
            Director
            
            June
                22, 2007Ronald
                G. Roth/s/
                Stephen L. Zuckerman MD
            
            Director
            
            June
                22, 2007Stephen
                L. Zuckerman





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**SCHEDULE
      II - VALUATION AND QUALIFYING
      ACCOUNTS**








AdditionsDescription
            
            Balance
                at Beginningof
                Period
            
            Charged
                to:
              Cost
                andExpenses
            
            Charged
                to:
              Other
              Accounts
            
            Deductions
            
            Balance
                at
              End
                of PeriodAllowance
                for doubtful accountsMarch
                31, 2007
            
            $
            77,831
            
            $
            -
            
            $
            5,550(1
            )
            $
            4,881(2
            )
            $
            78,500March
                31, 2006
            
            
            57,107
            
            
            18,000
            
            
            6,121(1
            )
            
            3,397(2
            )
            
            77,831March
                31, 2005
            
            
            49,038
            
            
            33,000
            
            
            10,692(1
            )
            
            35,623(2
            )
            
            57,107





(1)
      Represents recovery of bad debt and other adjustments


(2)
      Represents writeoffs of bad debt





56
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REPORT
      OFINDEPENDENT REGISTERED CERTIFIED


PUBLIC
      ACCOUNTING FIRM ON SCHEDULE





To
      the
      Board of Directors and Shareholders





APA
      Enterprises, 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 June 22,
      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





June
      22,
      2007





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**EXHIBIT
      INDEX**





**Number**
            
            **Description**
            
            **Page
                Number or Incorporated**
              **by
                Reference to**2.1
            
            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





58
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**Number**
            
            **Description**
            
            **Page
                Number or Incorporated**
              **by
                Reference to**4.2(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





59
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            of Contents***





**Number**
            
            **Description**
            
            **Page
                Number or Incorporated**
              **by
                Reference to**10.1(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 Cheri Podzimek, President of APACN
            
            Exhibit
                10.11 to Registrant’s Report on Form 10-K for the fiscal year ended March
                31, 2005





60
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            of Contents***





**Number**
            
            **Description**
            
            **Page
                Number or Incorporated**
              **by
                Reference to**10.12
            
            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, 200714
            
            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
            
            **32.1
            
            Certification
                of Chief Executive 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.






62