**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**










FORM
      10-K





**ANNUAL
      REPORT**


**PURSUANT
      TO SECTIONS 13 OR 15(d)**


**OF
      THE SECURITITES EXCHANGE ACT OF 1934**





(Mark
      One)


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





OR





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** **1-11056**





**ADVANCED
      PHOTONIX, INC.****®**


(Exact Name of Registrant as Specified
      in Its Charter )





**Delaware**
            **33-0325826**(State
                or Other Jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or Organization)
            Identification
                No.)





**2925
      Boardwalk** **,** **Ann
      Arbor, Michigan** **48104**


(Address
      of Principal
      Executive Offices )
      (Zip
      Code)





Registrant's
      telephone number, including area code **(734) 864-5600**





Securities
      registered pursuant to Section 12(b) of the Act: None





Securities
      registered pursuant to Section 12(g) of the Act:





**Common
      Stock, $.001 Par Value**


(Title
      of
      Class)





**Class
      A Common Stock**


(Title
      of
      Class)





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


Yes o   
No
      x.





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


Yes o   
No
x.





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


Yes x  No
o








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 any definitive proxy or
      information statements incorporated by reference in Part III of this Form
      10- K or any
      amendment to this Form 10- K.
o





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


Yes o    
No
x





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


Yes o    
No
x





The
      aggregate market value of the voting stock held by non - - affiliates
      of the registrant as of
      September 29, 2006 was
      approximately $32.3 million.


Number
      of
      shares outstanding of the registrant's Common Stock as of June
      26, 2007 : 19,226,006
      shares of Class A Common Stock and 31,691 shares of Class B Common Stock
      outstanding.





DOCUMENTS
      INCORPORATED BY REFERENCE




Portions
      of the definitive
      proxy statement to be filed pursuant to Regulation 14A promulgated under the
      Securities Exchange Act of 1934 in connection with the 2007 Annual Meeting
      of
      Stockholders of registrant have been incorporated by reference into Part
      III of this
      Form 10-K .








**TABLE
      OF CONTENTS**




**Page****Part
                I**
            
            4**Item
                1.**
            
            
            Business
            
            4**Item
                1A.**
            
            
            Risk
                Factors
            
            10**Item
                2.**
            
            
            Properties
            
            15**Item
                3.**
            
            
            Legal
                Proceedings
            
            15**Item
                4.**
            
            
            Submission
                of Matters to a Vote of Security Holders
            
            15**Part
                II**
            
            16**Item
                5.**
            
            
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            
            16**Item
                6.**
            
            
            Selected
                Financial Data
            
            18**Item
                7.**
            
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            19**Item
                7A.**
            
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            27**Item
                8.**
            
            
            Financial
                Statements and Supplementary Data
            
            28**Item
                9.**
            
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            53**Item
                9A.**
            
            
            Controls
                and Procedures
            
            53**Item
                9B.**
            
            
            Other
                Information
            
            54**Part
                III**
            
            54**Item
                10.**
            
            
            Directors,
                Executive Officers and Corporate Governance
            
            54**Item
                11.**
            
            
            Executive
                Compensation
            
            54**Item
                12.**
            
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            54**Item
                13.**
            
            
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            55**Item
                14.**
            
            
            Principal
                Accountant Fees and Services
            
            55**Part
                IV**
            
            55**Item
                15.**
            
            
            Exhibits
                and Financial Statement Schedules
            
            55**Signatures******
            
            59


**Ex-31.1**
            **Section
                302 Certification of CEO****Ex-31.2**
            **Section
                302 Certification of CFO****Ex-32.1**
            **Section
                906 Certification of CEO****Ex-32.2**
            **Section
                906 Certification of CFO**








**PART
      I**




**Item
              1**
            **Business**





**General**





Advanced
      Photonix, Inc. ® (the Company , we or API ),
      was
      incorporated under the laws of the State of Delaware in June 1988. The Company
      is engaged in the development and manufacture of optoelectronic devices and
      value-added sub-systems and systems. The Company serves a variety of global
      Original Equipment Manufacturers (OEMs), in a variety of industries. The Company
      supports the customer from the initial concept and design phase of the product,
      through testing to full-scale production. The Company has three manufacturing
      facilities ; located
      in Camarillo, CA, Dodgeville, WI and Ann Arbor, MI.





**Products
      and Technology**





**Our
      Business**





API is a
      leading supplier of custom opto-electronic solutions, high-speed optical
      receivers and Terahertz sensors and instrumentation, serving a variety of global OEM markets. Our
      optoelectronic solutions are based on our silicon Large Area Avalanche
      Photodiode (LAAPD), PIN (positive-intrinsic-negative) photodiode
      and FILTRODE® detectors. Our patented high-speed optical receivers include
      Avalanche Photodiode technology (APD) and PIN  photodiode
      technology based upon III-V materials, including InP, InAlAs, and GaAs. Our
      newly emerging Terahertz sensor product line is targeted to the industrial Non-Destructive
      Testing (NDT),
      quality control, homeland security and military markets. Using our patented
      fiber coupled technology and high speed Terahertz generation and detection
      sensors, we are engaged in transferring Terahertz technology from the
      application development laboratory to the factory floor .





We
      support the customer from the initial concept and design of the semiconductor,
      hybridization of support electronics, packaging and signal conditioning or
      processing from prototype through full-scale production and validation testing.
      The target markets served by us are Military/Aerospace, Homeland Security,
      Medical, Telecom, and Industrial Sensing/NDT.





During
      2007, Texas Optoelectronics ( TOI ),
      Silicon Detectors Inc. ( SDI )
      and
      Photonic Detectors Inc. ( PDI )
      were
      dissolved. These wholly-owned subsidiaries had no assets or liabilities at
      the
      time of dissolution.





**Technology
      & Manufacturing Capabilities**





Our
      basic
      technologies and manufacturing capabilities include the following:





·
            Optoelectronic
                semiconductor design and micro fabrication of Silicon (Si) and III-V
                compound semiconductor devices including photodetectors and terahertz
                transmitters/receiver antenna,


·
            MBE
                growth of high-speed III-V compound semiconductor material including
                GaAs,
                InAlAs and InP,


·
            Opto-electronic
                hybrid packaging of semiconductor devices combining opto-electronic
                devices with high-speed electronics and fiber
                optics,


·
            Vapor
                deposition and/or ion implantation for Silicon based PIN & APD
                photo-detectors,


·
            Terahertz
                (THz) systems, subsystems, transmitters and receivers,
                and


·
            Femtosecond
                laser pulse control and system integration.





4


**Core
      Products**




The
      core
      product technologies used in the majority of our products are opto-electronic
      semiconductor devices, including photodiodes and antennae made of Si or III-V
      compound semiconductor material. Photodiodes and antennae sense light of varying
      wavelengths and intensity and convert that light and/or Terahertz wave
      into electrical signals. We manufacture photodiodes of varying complexity,
      from
      basic PIN photodiode to the more sophisticated APD and
      antennae that transmit and receive Terahertz signals
      (Transceiver). The APD is a specialized photodiode capable of detecting very
      low
      light levels due to an internal gain phenomenon known as avalanching. All
      devices are designed by our experienced engineering staff, and fabricated in
      state-of-the-art clean rooms. Our products include the following:





·
            High
                Speed Optical Receivers (10Gb/s & 40Gb/s) which are packaged InP,
                InAlAs, or GaAs PIN and/or APD photodiodes with
                amplifiers


·
            Packaged
                PIN and APD photodiodes inSiand III-V materials (InP, InAlAs,
                GaAs)


·
            Packaged
                Si APD components, with and without thermo-electric
                coolers


·
            Packaged
                SiLAAPDcomponents


·
            Packaged
                Si photodiodes with patented FILTRODE® technology integrating optical
                filters directly on photodiode
                chips


·
            Terahertz
                Systems & subsystems utilizing III-V materials forTerahertztransmitters &/or receivers





**Terahertz
      Technology**





The
      newest technology the Company is pursuing is Terahertz (THz) or the Company’s
      T-RayTM technology. THz is a
      region of the electromagnetic (EM) Spectrum that is just beginning to be
      explored. THz lies between microwave and infrared waves on the EM spectrum.
      While microwaves and infrared waves have been explored and commercialized for
      decades, THz waves are in the early stages of being explored and commercialized
      due to the fact that they have historically been very difficult to generate
      and
      detect. Recent advances in femtosecond lasers and ultra-fast semiconductor
      and
      electro-optic devices combined with fiber-optic packaging technologies have
      enabled the development of practical T-Ray instrumentation and as a result
      application/market development of THz technology has recently accelerated.
      THz
      can be used to “look” through and beneath materials with high 2-dimensional
      (2-D) and 3- dimensional
      (3-D) spatial
      resolution roughly equivalent to the resolution of the human eye or better.
      It
      can also uniquely identify the chemical composition of many hidden or subsurface
      objects and has been determined to have non-ionizing radiation, which is not
      harmful to humans at the power levels commonly used today. THz imaging and
      spectroscopy market applications include industrial quality control through
      non-destructive testing (including aerospace and pharmaceutical markets);
      homeland security and defense screening of people, packages and bags for weapons
      and weapons of mass destruction; medical imaging and other scientific
      applications.





We
      have
      had significant Terahertz technology and product development since 1997,
      resulting in over 20 patents or patents pending to date. In 2001, we sold the
      first commercial  THz product,
      the T-RayTM 2000 as a laboratory bench top instrument for application development
      with spectroscopy and imaging capabilities targeted at the research and
      development and off-line diagnostic markets. In 2004, we sold the first T-Ray
      Manufacturing Inspection System (QA1000) for on-line, real-time inspection
      to
      NASA for the space shuttle fuel tank inspection in the Return to Flight Program.
      In March 2007, the Company announced its next generation THz imaging
      and spectroscopy system (T-RayTM 4000) which is expected to begin shipping in the
      second half of fiscal 2008. The T-Ray 4000 is significantly smaller, lighter,
      and more powerful than previous THz generations and incorporates significant technological advancements. The system
      is 55 pounds and is
      the size of a briefcase, which is a significant reduction from the
      800 pounds refrigerator size QA 1000. This system is targeted at the research and
      industrial NDT quality
      control market. The T-RayTM 4000 product will also serve as a platform for future
      homeland security and defense applications.


5





**Markets**





Our
      products serve customers in a variety of global markets, typically North
      America, Asia, Europe and Australia. The target markets and applications served
      by us are as follows:




Military:
 ·
              Space
 ·
              Defense




Industrial/ NDT :
 ·
              Manufacturing
 ·
              Instrumentation
 ·
              Display




Medical:
 ·
              Diagnostic
                  & Monitoring
 ·
              Ophthalmic
                  Equipment
 ·
              Medical
                  Imaging
  Telecommunications:
 ·
              Telecom
                  Equipment
 ·
              Test
                  and Measurement
 ·
              Wireless
                  Communications Equipment
  Homeland
        Security:
 ·
              Baggage/Cargo
                  Scanning
 ·
              Passenger
                  Screening




**Recent
      Developments**





The
      Company began consolidating semiconductor fabrication into its Ann Arbor,
      Michigan facility in June 2006. Approximately $2.2 million has been budgeted
      for
      operating expenses and capital expenditures for this consolidation. As part
      of
      the consolidation the Company relocated its corporate headquarters from
      Camarillo, California to Ann Arbor, Michigan in March
      2006. The Michigan Economic Development Corporation (MEDC) approved a state
      Single Business Tax credit valued at more than $1.1 million over 10 years to
      win
      the Company’s business. The city of Ann Arbor also approved a personal property
      tax abatement valued at approximately $103,000 over five years to support the
      project.





**Stock
      Compensation** —
      Effective April 1, 2006, the Company adopted the Statement
      of Financial Accounting Standards ( SFAS )
      No.
      123(R), “Share-Based Payment: An Amendment of FASB Statements No. 123 and 95”
using the modified prospective method. Under this method, compensation cost
      is
      recognized on or after the effective date for the portion of outstanding awards,
      for which the requisite service has not yet been rendered, based on the grant
      date fair value of those awards. Prior to April 1, 2006, the Company accounted
      for employee stock options using the intrinsic value method in accordance with
      Accounting Principles Board ( APB )
      Opinion
      No. 25 ( APB
      No.
      25 ),
      “Accounting for Stock Issued to Employees,” and adopted the disclosure only
      alternative of SFAS No. 123. For stock-based awards issued on or after April
      1,
      2006, the Company recognizes the compensation cost on a straight-line basis
      over
      the requisite service period for the entire award. Measurement
      and attribution of compensation cost for awards that are unvested as of the
      effective date of SFAS No. 123(R) are based on the same estimate of the
      grant-date or modification-date fair value and the same attribution method
      used
      previously under SFAS No. 123.





6


In
      accordance with SFAS No. 148, and as required by SFAS 123(R), the required
      pro
      forma disclosure, for periods prior to adoption of SFAS 123(R), is shown
      below:





**Year
                ended**
              **March
                31, 2006**Net
                Income (loss), as reported
            
            $
            (5,262,000
            )Net
                income (loss), proforma
            
            $
            (5,409,000
            )Basic
                income (loss) per share, as reported
            
            $
            (0.30
            )Basic
                income (loss) per share, proforma
            
            $
            (0.30
            )





**Adoption
      of SFAS 123(R)**





During
      the year ended March 31, 2007, the Company granted 90,000 stock options. The
      Company recorded stock-based compensation expense of $361,000 for all unvested
      options granted prior to and options granted after the adoption of SFAS 123(R).





As
      required by SFAS 123(R), management has made an estimate of expected forfeitures
      and is recognizing compensation costs only for those equity awards expected
      to
      vest. The cumulative effect of initially adopting SFAS 123(R) was material
      to
      the Company and represented approximately 8% of the Company’s net loss.




**Raw
      Materials**





The
      principal raw materials used by the Company in the manufacture of its
      semiconductor components and sensor assemblies are silicon and III-V material
      (InP, GaAs) wafers, chemicals, gases and metals used in processing wafers,
      gold
      wire, solders, and a variety of packages and substrates, including metal,
      printed circuit board, flex circuits, ceramic and plastic packages. All of
      these
      raw materials can be obtained from several suppliers. From time to time,
      particularly during periods of increased industry-wide demand, silicon wafers,
      III-V wafers (InP, GaAs), certain metal packages and other materials have been
      in short supply. However, the Company has not been materially affected by such
      shortages. As is typical in the industry, the Company allows for a significant
      lead-time (2 months or greater) between order and delivery of raw
      materials.





**Research
      and Development**





Since
      its
      inception in June 1988, the Company has incurred material research and
      development (R&D) expenses,
      with the intent of commercializing these investments into profitable new
      standard and custom product offerings. During the fiscal years ended in 2007,
      2006, and 2005, research and development expenses amounted to $4,015,000,
      $3,019,000, and $146,000 respectively. The increase in R&D costs is
      primarily the result of the Picometrix ,
      Inc. acquisition and other new non-Picometrix product R&D initiatives. The
      Company expects that an increase in research and development funding will be
      required for new projects/products as well as the continuing development of
      new
      derivatives of the Company’s current product line . The
      Company has in the past, and will continue to pursue customer funded, as well
      as
      internally funded, research and development projects when they are in support
      of
      the Company’s development objectives.





As
      we
      begin the new 2008 fiscal
      year, the following research and development projects are currently
      underway:





·
            The
                next generation photodiodes and high-speed optical receivers for
                both the
                10G and 40G telecommunications market,





·
            THz-
                Application development of the T-RayTM 4000 product platform for research,
                homeland security/military, aerospace, consumer, pharmaceutical and
                industrial QC markets,





7


·
            Si
                APD performance enhancements - designed specifically for certain
                military
                and medical imaging applications,
                and





·
            Si
                PIN photodiodes developments to meet unique customer requirements,
                such as
                higher speeds, lower electrical noise, and unique multi-element
                geometries.





**Environmental
      Regulations**





The
      photonics industry, as well as the semiconductor industry in general, is subject
      to governmental regulations for the protection of the environment, including
      those relating to air and water quality, solid and hazardous waste handling,
      and
      the promotion of occupational safety. Various federal, state and local laws
      and
      regulations require that the Company maintain certain environmental permits.
      The
      Company believes that it has obtained all necessary environmental permits
      required to conduct its manufacturing processes. Changes in the aforementioned
      laws and regulations or the enactment of new laws, regulations or policies
      could
      require increases in operating costs and additional capital expenditures and
      could possibly entail delays or interruptions of operations.





**Backlog
      and Customers**





The
      Company’s sales are made primarily pursuant to standard purchase orders for
      delivery of products. A substantial portion of our revenues are derived from
      sales to OEMs pursuant to individual purchase orders with short lead times.
      However, by industry practice, orders may be canceled or modified at any time.
      Accordingly, we do not believe that the backlog of undelivered product under
      these purchase orders is a meaningful indicator of our future financial
      performance. When customers cancel an order, they are responsible for all
      finished goods, all costs, direct and indirect, incurred by the Company, as
      well
      as a reasonable allowance for anticipated profits. No assurance can be given
      that the Company will receive these amounts after cancellation.





Customers
      normally purchase the Company’s products and incorporate them into products that
      they in turn sell in their own markets on an ongoing basis. As a result, the
      Company’s sales are dependent upon the success of its customers’ products and our future
      performance is dependent upon our success
      in finding new customers and receiving new orders from existing
      customers.





**Marketing**





The
      Company markets its products in the United States and Canada through its own
      technical sales engineers and through independent sales representatives.
      International sales, including Europe, the Middle East, Far East and Asia,
      are
      conducted direct and through foreign distributors. The Company’s products are
      primarily sold as components or assemblies to OEM’s .
      The
      Company markets its products and capabilities through industry specific
      channels, including the Internet, industry trade shows, and in print through
      trade journals.





**Competition**





In
      its
      target markets, the Company
      competes with different companies in each of its product platforms; custom
      optoelectronic, high-speed optical receiver and THz systems .
      The
      Company believes that its principal competitors for sales of custom
      optoelectronic products are small private companies and medium size public
      companies. In the high-speed optical receiver market the Company believes that its competitors are small private companies and medium to large size public
      companies. Because the THz product offering includes developing technology
      applications and markets, the Company believes the competition is mainly from
      small private companies and divisions of large
      public companies.





Because
      the Company specializes in devices requiring a high degree of engineering
      expertise to meet the requirements of specific applications, it generally does
      not compete with other
      large United States, European or Asian manufacturers of standard “off the shelf”
optoelectronic components or silicon photodetectors .


8


**Proprietary
      Technology**





The
      Company utilizes proprietary design rules and processing steps in the
      development and fabrication of its PIN and APD photodiodes, THz transmitters
      and
      receivers, fiber-coupled THz subsystems/systems, and THz applications. The
      Company has a significant number of patents pending and owns the following
      patents:





**Patent
                #**
            **Title**
            **Issue
                Date**142,195
            HIGHLY-DOPED
                P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED
                PHOTODIODE
            Apr-05660,471
            HIGHLY-DOPED
                P-TYPE CONTRACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED
                PHOTODIODE
            Apr-06765,715
            HIGHLY-DOPED
                P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED
                PHOTODIODE
            Jan-041,230,578
            COMPACT
                FIBER PIGTAIL TERAHERTZ IMAGING SYSTEM
            Aug-062,345,153
            HIGHLY-DOPED
                P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED
                PHOTODIODE
            Mar-044,717,946
            THIN
                LINE JUNCTION PHOTODIODE
            Jan-88
              (by
                predecessor co.)4,782,382
            HIGH
                QUANTUM EFFICIENCY PHOTODIODE DEVICES
            Nov-88
              (by
                predecessor co.)5,021,854
            SILICON
                AVALANCHE PHOTODIODE ARRAY
            Jun-915,057,892
            LIGHT
                RESPONSIVE AVALANCHE DIODE
            Oct-915,146,296
            DEVICES
                FOR DETECTING AND/OR IMAGING SINGLE PHOTOELECTRON
            Sep-925,311,044
            AVALANCHE
                PHOTOMULTIPLIER TUBE
            May-945,477,075
            SOLID
                STATE PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE
            Dec-955,757,057
            LARGE
                AREA AVALANCHE ARRAY
            May-985,801,430
            SOLID
                STATE PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE
            Sep-986,005,276
            SOLID
                STATE PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE
            Dec-996,029,988
            COMPACT
                FIBER PIGTAILED TERAHERTZ IMAGING SYSTEM
            Aug-066,111,299
            ACTIVE
                LARGE AREA AVLANCHE PHOTODIODE ARRAY
            Aug-006,262,465
            HIGHLY-DOPED
                P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED
                PHOTODIODE
            Jul-016,320,191
            A
                DISPERSIVE PRECOMPENSATOR FOR USE IN AN ELECTROMAGNETIC RADIATION
                GENERATION AND DETECTION SYSTEM
            Nov-016,816,647
            COMPACT
                FIBER PIGTAILED TERAHERTZ IMAGING SYSTEM
            Nov-046,849,852
            SYSTEM
                AND METHOD FOR MONITORING CHANGES IN STATE OF MATTER WITH TERAHERTZ
                RADIATION
            Feb-056,936,821
            AMPLIFIED
                PHOTOCONDUCTIVE GATE
            Aug-057,039,275
            FOCUSING
                FIBER OPTIC
            May-067,078,741
            HIGH-SPEED
                ENHANCED RESPONSIVITY PHOTO DETECTOR
            Jul-06





There
      can
      be no assurance that any issued patents will provide the Company with
      significant competitive advantages, or that challenges will not be instituted
      against the validity or enforceability of any patent owned by the Company,
      or,
      if instituted, that such challenges will not be successful. The cost of
      litigation to uphold the validity and to prevent the infringement of a patent
      could be substantial. Furthermore, there can be no assurance that the Company’s
      APD technology will not infringe on patents or rights owned by others, licenses
      to which might not be available to the Company. Based on limited patent
      searches, contacts with others knowledgeable in the field of APD technology,
      and
      a review of the published materials, the Company believes that its competitors
      hold no patents, licenses or other rights to the APD technology which would
      preclude the Company from pursuing its intended operations.





In
      some
      cases, the Company may rely on trade secrets to protect its innovations. There
      can be no assurance that trade secrets will be established, that secrecy
      obligations will be honored or that others will not independently develop
      similar or superior technology. To the extent that consultants, key employees
      or
      other third parties apply technological information independently developed
      by
      them or by others to Company projects, disputes might arise as to the
      proprietary rights to such information which may not be resolved in favor of
      the
      Company.





9


**Employees**





As
      of June 27,
      2007 the Company had 162 employees, comprised of 158 full time employees
      (including 3 officers) and 4 part time employees. Included are 25 engineering
      and development personnel, 10 sales and marketing personnel, 109 operations
      personnel, and 16 general and administrative personnel (including 3 officers).
      The Company may, from time to time, engage personnel to perform consulting
      services and to perform research and development under third party funding.
      In
      certain cases, the cost of such personnel may be included in the direct cost
      of
      the contract rather than in payroll expense. None of our employees are covered
      by a collective bargaining agreement. We believe our relations with our
      employees are good.





**Item
      1** **A** **Risk
      Factors**




Investing
      in our Class A Common
      Stock involves
      a high degree of risk and uncertainty. You should carefully consider the risks
      and uncertainties described below before investing in our Class A Common
      Stock .
      Our
      business, prospects, financial condition and results of operations could be
      adversely affected due to any of the following risks. In that case, the value
      of
      our Class A Common
      Stock could
      decline, and you could lose all or part of your investment.





**Risks
      Relating to Our Business**





**We
      are dependent upon several suppliers for a significant portion of raw materials
      used in the manufacturing of our products.**




The
      principal raw materials we use in the manufacture of our semiconductor
      components and sensor assemblies are silicon and III-IV wafers, chemicals and
      gases used in processing wafers, gold wire, lead frames, and a variety of
      packages and substrates, including metal, printed circuit board, flex circuits,
      ceramic and plastic packages. All of these raw materials can be obtained from
      several suppliers. From time to time, particularly during periods of increased
      industry-wide demand, silicon wafers and other materials have been in short
      supply. Any significant interruption in the supply of these raw materials could
      have a material adverse effect on the
      Company .





**Customer
      acceptance of our products is dependent on our ability to meet changing
      requirements.**





Customer
      acceptance of our products is significantly dependent on our ability to offer
      products that meet the changing requirements of our customers, including the
      military, medical institutions, industrial laboratories, government agencies
      and
      industrial corporations. Any decrease in the level of customer acceptance of
      our
      products could have a material adverse effect on the
      Company .





**We
      are subject to market risk through our sales to overseas
      markets.**





A
      growing
      amount of our sales are being derived from overseas markets. These international
      sales are primarily focused in Europe and the Middle East. These operations
      are
      subject to risks that are inherent in operating in foreign countries, including
      the following:





·
            foreign
                countries could change regulations or impose currency restrictions
                and
                other restraints;




·
            changes
                in foreign currency exchange rates and hyperinflation or deflation
                in the
                foreign countries in which we
                operate;




·
            exchange
                controls;




·
            some
                countries impose burdensome tariffs and
                quotas;




10


·
            political
                changes and economic crises may lead to changes in the business
                environment in which we operate;




·
            international
                conflict, including terrorist acts, could significantly impact our
                financial condition and results of operations;
                and




·
            economic
                downturns, political instability and war or civil disturbances may
                disrupt
                distribution logistics or limit sales in individual
                markets.





In
      addition, we utilize third-party distributors
      ( Distributors ) to act
      as our representative for the geographic region that they have been assigned.
      These Distributors are
      responsible for maintaining customer account management and in some cases
      maintaining an inventory of products for those customers within their geographic
      region. Our success is dependent on these Distributors finding
      new customers and receiving new orders from existing customers.





**Our
      future performance is dependent upon finding new customers and retaining our
      existing customers.**




Customers
      normally purchase our products and incorporate them into products that they
      in
      turn sell in their own markets on an ongoing basis. As a result, our sales
      are
      dependent upon the success of our customers' products and our future performance
      is dependent upon our success in finding new customers and receiving new orders
      from existing customers.




In
      several of our markets ,
      quality
      and/or reliability of our products are a major concern for our customers, not
      only upon the initial manufacture of the product, but for the life of the
      product. Many of our products are used in remote locations, or higher value
      assembly, making servicing of our products not feasible. Any failure of the
      quality and/or reliability of our products could have an adverse affect on
      us
      and on our ability to maintain or attract customers.





**Customer
      orders are subject to cancellation or modification at any
      time.**





Our
      sales
      are made primarily pursuant to standard purchase orders for delivery of
      products. However, by industry practice, orders may be canceled or modified
      at
      any time. When a customer cancels an order, they are responsible for all
      finished goods, all costs, direct and indirect, incurred by us, as well as
      a
      reasonable allowance for anticipated profits. No assurance can be given that
      we
      will receive these amounts after cancellation. The current backlog contains
      only
      those orders for which we have received a confirmed purchase order and also
      includes contracts which have scheduled shipping dates beyond the upcoming
      fiscal year. As such, the current backlog represents only a portion of expected
      annual revenues for fiscal
      year 2008.





**The
      markets for many of our products are characterized by changing
      technology.**





The
      markets for many of our products are characterized by changing technology,
      new
      product introductions and product enhancements, and evolving industry standards.
      The introduction or enhancement of products embodying new technology or the
      emergence of new industry standards could render existing products obsolete
      or
      result in short product life cycles. Accordingly, our ability to compete is
      in
      part dependent on our ability to continually offer enhanced and improved
      products.





**We
      are dependent on key in-house manufacturing equipment or processes to deliver
      a
      custom product (solution) with the highest performance and short time to
      market.**





We
      depend
      on key in-house manufacturing equipment and assembly processes. We believe
      that
      these key manufacturing and assembly processes give us
      the flexibility and responsiveness to meet our customer delivery schedule and
      performance specification with a custom product. This value proposition is
      an
      important component of our offering to our customers. A loss of these
      capabilities could have an adverse effect on our existing operations and new
      business growth.





11


**Changes
      in the spending priorities of the federal government can materially adversely
      affect our business.**





In fiscal
      year 2007,
      approximately 22 %
      of our
      sales were related to products purchased by military contractors. Our business
      depends upon continued federal government expenditures on defense, intelligence,
      aerospace and other programs that we support. In fiscal
      year 2007,
      our sales to military contractors declined slightly. In addition, foreign
      military sales are affected by U.S. government regulations, regulations by the purchasing foreign government and political
      uncertainties in the U.S. and abroad. There can be no assurance that the U.S.
      defense and military budget will continue to grow or that sales of defense
      related items to foreign governments will continue at present levels. In
      addition, the terms of defense contracts with the U.S. government generally permit the government to
      terminate such contracts, with or without cause, at any time. Any unexpected
      termination of a significant U.S. government contract
      with a military contractor that we sell our products to could have a material
      adverse effect on the
      Company .





**Our
      industry is highly competitive and fragmented.**





We
      compete with a range of companies for the custom optoelectronic and silicon
      photodetector requirements of customers in our target markets. We believe that
      our principal competitors for sales of custom devices are small to medium size
      companies. Because we specialize in custom devices requiring a high degree
      of
      engineering expertise to meet the requirements of specific applications, we
      generally do not compete to any significant degree with other large United
      States, European or Pacific Rim manufacturers of standard “off the shelf”
optoelectronic components or silicon photodetectors. We cannot assure you that
      we will be able to compete successfully in our markets against these or any
      future competitors.





**Our
      industry is sensitive to changing economic conditions.**





We
      believe that many factors affect our industry, including consumer confidence
      in
      the economy, interest rates, fuel prices and credit availability. The overall
      economic climate or Gross National Product growth has a direct impact on our
      customers and the demand for our products. We cannot assure you that our
      business will not be adversely affected as a result of an industry or general
      economic downturn.





**We
      are subject to environmental regulations.**





The
      photonics industry, as well as the semiconductor industry in general, is subject
      to governmental regulations for the protection of the environment, including
      those relating to air and water quality, solid and hazardous waste handling,
      and
      the promotion of occupational safety. Various federal, state and local laws
      and
      regulations require that we maintain certain environmental permits. We believe
      that we have obtained all necessary environmental permits required to conduct
      our manufacturing processes. Changes in the aforementioned laws and regulations
      or the enactment of new laws, regulations or policies could require increases
      in
      operating costs and additional capital expenditures and could possibly entail
      delays or interruptions of operations.





**If
      we are unable to protect our intellectual property rights adequately, the value
      of our products could be diminished.**





We
      utilize proprietary design rules and processing steps in the development and
      fabrication of our PIN photodiodes, APD and our THz systems
      and sensors. In addition, we have over 100 patents or patents pending utilized
      in our products. There can be no assurance that any issued patents will provide
      us with significant competitive advantages, or that challenges will not be
      instituted against the validity or enforceability of any patent utilized by
      us,
      or, if instituted, that such challenges will not be successful. The cost of
      litigation to uphold the validity and to prevent the infringement of a patent
      could be substantial and could have a material adverse effect on our operating
      results. Furthermore, there can be no assurance that our APD technology will
      not
      infringe on patents or rights owned by others, licenses to which might not
      be
      available to us. Based on limited patent searches, contacts with others
      knowledgeable in the field of APD technology, and a review of the published
      materials, we believe that our competitors hold no patents, licenses or other
      rights to the APD technology which would preclude us from pursuing our intended
      operations.




12


In
      some
      cases, we may rely on trade secrets to protect our innovations. There can be
      no
      assurance that trade secrets will be established, that secrecy obligations
      will
      be honored or that others will not independently develop similar or superior
      technology. To the extent that consultants, key employees or other third parties
      apply technological information independently developed by them or by others
      to
      our projects, disputes might arise as to the proprietary rights to such
      information which may not be resolved in our favor.





**We
      face strong competition for skilled workers.**





Our
      success depends in large part on its ability to attract and retain highly
      qualified scientific, technical, management, and marketing personnel.
      Competition for such personnel is intense and there can be no assurance that
      we
      will be able to attract and retain the personnel necessary for the development
      and operation of our business.





**We
      may not be able to successfully integrate future acquisitions, which could
      result in our not achieving the expected benefits of the acquisition, the
      disruption of our business and an increase in our costs.**





Over
      the
      past three years, we have acquired 3 businesses and we continually explore
      opportunities to acquire related businesses, some of which could be material
      to
      us. Our ability to continue to grow may depend upon identifying and successfully
      acquiring attractive companies, effectively integrating these companies,
      achieving cost efficiencies and managing these businesses as part of our
      company.





We
      may
      not be able to effectively integrate the acquired companies and successfully
      implement appropriate operational, financial and management systems and controls
      to achieve the benefits expected to result from these acquisitions. Our efforts
      to integrate these businesses could be affected by a number of factors beyond
      our control, such as regulatory developments, general economic conditions and
      increased competition. In addition, the process of integrating these businesses
      could cause the interruption of, or loss of momentum in, the activities of
      our
      existing business. The diversion of management’s attention and any delays or
      difficulties encountered in connection with the integration of these businesses
      could negatively impact our business and results of operations. Further, the
      benefits that we anticipate from these acquisitions may not develop.





**Risks
      Relating to Our Class A Common Stock**





**Our
      share** price **has been volatile in the past and may decline in the future.**


Our
      Class
      A Common
      Stock has
      experienced significant market price and volume fluctuations in the past and
      may
      experience significant market price and volume fluctuations in the future in
      response to factors such as the following, some of which are beyond our control:





·
            quarterly
                variations in our operating results;


·
            operating
                results that vary from the expectations of securities analysts and
                investors;


·
            changes
                in expectations as to our future financial performance, including
                financial estimates by securities analysts and investors;


·
            announcements
                of technological innovations or new products by us or our competitors;


·
            announcements
                by us or our competitors of significant contracts, acquisitions,
                strategic
                partnerships, joint ventures or capital commitments;


·
            changes
                in the status of our intellectual property rights;




13


·
            announcements
                by third parties of significant claims or proceedings against us;


·
            additions
                or departures of key personnel;


·
            future
                sales of our ordinary shares; and


·
            stock
                market price and volume fluctuations.





Stock
      markets often experience extreme price and volume fluctuations. Market
      fluctuations, as well as general political and economic conditions, such as
      a
      recession or interest rate or currency rate fluctuations or political events
      or
      hostilities in or surrounding the United States, could adversely affect the
      market price of our Class A Common
      Stock .





In
      the
      past, securities class action litigation has often been brought against
      companies following periods of volatility in the market price of its securities.
      We may in the future be the target of similar litigation. Securities litigation
      could result in substantial costs and divert management's attention and
      resources both of which could have a material adverse effect on our business
      and
      results of operations.





**Future
      sales of our Class A** **Common
      Stock** **in the public market could lower our stock price, and conversion of our warrants
      and any additional capital raised by us may dilute your ownership in** **the
      Company** **.**





We
      may
      sell additional shares of Class A Common
      Stock in
      subsequent offerings. In addition, holders of warrants to purchase our Class
      A Common
      Stock will,
      most likely, exercise their warrants to purchase shares of our Class A Common
      Stock after
      this registration statement is declared effective. We cannot predict the size
      of
      future issuances of our Class A Common
      Stock or the
      effect, if any, that future issuances and sales of shares of our Class A Common
      Stock will
      have on the market price of our Class A Common
      Stock .
      Sales
      of substantial amounts of our Class A Common
      Stock ,
      including shares issued in connection with the exercise of the warrants, or
      the
      perception that such sales could occur, may adversely affect prevailing market
      prices for our Class A Common
      Stock .





**The
      conversion of our outstanding convertible subordinated notes would result in
      substantial dilution to our current stockholders.**





The
      Company currently has outstanding prime plus 1% (currently 9.25%) convertible
      subordinated notes due October 2007 in the principal amount of $5.5 million.
      These notes are convertible, at the option of the holder, at any time on or
      prior to maturity into shares of our common stock at an average conversion
      price
      of $2.06 per share. An aggregate of 2,666,000 shares of common stock would
      be
      issued upon the conversion of all outstanding convertible subordinated notes
      at
      these exchange rates, which would significantly dilute the voting power and
      ownership percentage of our existing stockholders. If the stock is not converted
      into common stock, we would have to pay the repurchase price in cash and the
      aggregate 2,666,000 of common stock would not be issued. The Company may
      enter into equity, debt or a combination of equity and debt transaction in
      order
      to retire the outstanding convertible note. If the Company was to enter into
      equity transaction or a convertible debt transaction there would be dilution
      to
      the voting power and percentage ownership of our existing
      shareholders.





**Shares
      eligible for public sale in the future could decrease the price of our Class
      A** **Common
      Stock** **and reduce our future ability to raise capital.**





Sales
      of
      substantial amounts of our Class A Common
      Stock in the
      public market could decrease the prevailing market price of our Class A Common
      Stock ,
      which
      would have an adverse affect on our ability to raise equity capital in the
      future.





**We
      do not intend to pay dividends.**





We
      have
      never declared or paid any cash dividends on our Class A Common
      Stock .
      We
      currently intend to retain future earnings, if any, to finance operations and
      expand our business and, therefore, do not expect to pay any dividends in the
      foreseeable future.





14


**Item
                2**
            **Properties**





The
      Company leases all of its executive offices, research, marketing and
      manufacturing facilities. At March 31, 2007, those leases consisted of primarily
      95,000 square feet in three facilities. The facility located in Camarillo,
      California is leased through February 2009. The manufacturing facility located
      in Dodgeville, Wisconsin is leased through October , 2011.
      The corporate office and the Picometrix LLC manufacturing facility located
      in
      Ann Arbor, Michigan are leased through June 2010 with two five year renewal
      options. The Company believes that its existing facilities are adequate to
      meet
      its needs for the foreseeable future.





**Item
              3**
            **Legal
                Proceedings**





None .





**Item
              4**
            **Submission
                of Matters to a Vote of Security
                Holders**





None .




15




**PART
      II**





**Item
              5**
            **Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity
                Securities**





The
      Company's Class A Common Stock is traded on the American Stock Exchange (AMEX)
      under the symbol "API".





**Stock
      Performance Graph**







The
      graph
      below provides an indicator of our cumulative total stockholder return as
      compared with the
      AMEX Composite Index and the AMEX Technology Index. The
      graph
      assumes an initial investment of $100. The
      graph
      covers a period of time beginning in March 31, 2002, through March 30, 2007,
      which represents the last trading day of the year.











At
      June
      26, 2007, the Company had 96 holders of record for the Class A Common Stock
      (including shares held in street name), representing approximately 6,000
      beneficial owners of the Class A Common Stock. On the same date, there were
      6
      holders of record of the Class B Common Stock (none of which were held in street
      name).





16


The
      following table sets forth the high and low closing prices of the Company’s
      Class A Common Stock by quarter for fiscal years 2007 and 2006.





1stQuarter
            
            2ndQuarter
            
            3rdQuarter
            
            4thQuarter2007
            
            2006
            
            2007
            
            2006
            
            2007
            
            2006
            
            2007
            
            2006Common
                Stock1High
            
            
            2.74
            
            
            3.09
            
            
            2.35
            
            
            3.56
            
            
            2.30
            
            
            3.24
            
            
            2.30
            
            
            2.97Low
            
            
            1.57
            
            
            2.04
            
            
            1.44
            
            
            2.62
            
            
            1.68
            
            
            2.39
            
            
            1.90
            
            
            2.59


1 Price
        ranges on the  AMEX.




Quarterly
      Stock Market Data





The
      Company has never paid any cash dividends on its capital stock. The Company
      intends to retain earnings, if any, for use in its business and does not
      anticipate that any funds will be available for the payment of cash dividends
      on
      its outstanding shares in the foreseeable future. The holders of Common Stock
      will not be entitled to receive dividends in any year until the holders of
      the
      Class A Redeemable Convertible Preferred Stock receive an annual non-cumulative
      dividend preference of $.072 per share. To date, a total of 740,000 shares
      of
      Class A Redeemable Convertible Preferred Stock have been converted into 222,000
      shares of Class A Common Stock, leaving outstanding 40,000 shares of Class
      A
      Redeemable Convertible Preferred Stock. The aggregate non-cumulative annual
      dividend preference of such Class A Redeemable Convertible Preferred Stock
      is
      $2,880. There is no public market for the Company's Class A Redeemable
      Convertible Preferred Stock or Class B Common Stock; however, such stock is
      convertible into Class A Common Stock at the option of the holder and upon
      transfer by the holder of the Class A Redeemable Convertible Preferred
      Stock.





17


**Item
              6**
            **Selected
                Financial Data**





The
      selected financial data for each of the five years presented below is derived
      from our audited consolidated financial statements and should be read in
      conjunction with the consolidated financial statements, the notes to the
      consolidated financial statements, and “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations”, all of which are contained in
      this report on Form 10-K.





*(in
                thousands, except per share data)***2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Net
                Sales
            
            $
            23,588
            
            $
            23,585
            
            $
            14,803
            
            $
            12,401
            
            $
            9,147Gross
                Profit
            
            $
            10,895
            
            $
            9,183
            
            $
            4,732
            
            $
            4,297
            
            $
            2,699as
                a percentage of Sales
            
            
            46
            %
            
            39
            %
            
            32
            %
            
            35
            %
            
            30
            %Net
                Income (Loss)
            
            $
            (4,646
            )
            $
            (5,262
            )
            $
            5,078
            
            $
            794
            
            $
            (803
            )Earnings
                (Loss) per common share-Basic
            
            $
            (0.24
            )
            $
            (0.30
            )
            $
            0.38
            
            $
            0.06
            
            $
            (0.06
            )Earnings
                (Loss) per common share-Diluted
            
            $
            (0.24
            )
            $
            (0.30
            )
            $
            0.33
            
            $
            0.06
            
            $
            (0.06
            )Weighted
                average common shares outstanding
            
            
            19,065
            
            
            17,477
            
            
            13,461
            
            
            13,400
            
            
            12,356Total
                Assets
            
            $
            35,242
            
            $
            38,001
            
            $
            23,355
            
            $
            12,574
            
            $
            11,552Current
                Liabilities
            
            $
            9,253
            
            $
            5,135
            
            $
            3,185
            
            $
            2,858
            
            $
            2,640Long
                Term Liabilities
            
            $
            4,866
            
            $
            7,403
            
            $
            3,834
            
            $
            11
            
            $
            22Class
                A redeemable convertible preferred stock
            
            $
            32
            
            $
            32
            
            $
            32
            
            $
            32
            
            $
            32Shareholders'
                Equity
            
            $
            21,091
            
            $
            25,431
            
            $
            16,304
            
            $
            9,673
            
            $
            8,858Working
                Capital
            
            $
            2,424
            
            $
            9,330
            
            $
            11,261
            
            $
            5,802
            
            $
            4,811Dividends
                declared on Capital Stock
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -





18


**Item
              7**
            **Management’s
                Discussion and Analysis of Financial Condition and Results of Operation**





***Forward-Looking
      Statements***


Certain
      statements contained in this Management’s Discussion and Analysis (MD&A),
      including, without limitation, statements containing the words “may,” “will,”
“can,” “anticipate,” “believe,” “plan,” “estimate,” “continue,” and similar
      expressions constitute “forward-looking statements.” These forward-looking
      statements reflect our current views with respect to future events and are
      based
      on assumptions and subject to risks and uncertainties. You should not place
      undue reliance on these forward-looking statements. Our actual results could
      differ materially from those anticipated in these forward-looking statements
      for
      many reasons, including risks described in the Risk Factors sections and
      elsewhere in this filing. Except for our ongoing obligation to disclose material
      information as required by federal securities laws, we do not intend to update
      you concerning any future revisions to any forward-looking statements to reflect
      events or circumstances occurring after the date of this report. The following
      discussion should be read in conjunction with the Risk Factors as well as our
      financial statements and the related notes .





***Application
      of Critical Accounting Policies***


Application
      of our accounting policies requires management to make certain judgments and
      estimates about the amounts reflected in the financial statements. Management
      uses historical experience and all available information to make these estimates
      and judgments, although differing amounts could be reported if there are changes
      in the assumptions and estimates. Estimates are used for, but not limited to,
      the accounting for the allowance for doubtful accounts, inventory allowances,
      impairment costs, depreciation and amortization, warranty costs, taxes and
      contingencies. Management has identified the following accounting policies
      as
      critical to an understanding of our financial statements and/or as areas most
      dependent on management's judgments and
      estimates.





***Revenue
      Recognition***


In
      accordance with Staff Accounting Bulletin No. 104, we recognize revenue from
      the
      sale of products when the products are shipped to the customer. Revenues from
      the sale of services consist of non-recurring engineering charges, which are
      recognized when the services have been rendered. Historically, sales returns
      have amounted to less than 1% of net sales and all sales are recorded net of
      sales returns and payment discounts.





***Impairment
      of Long-Lived Assets***


The
      Company continually reviews the recoverability of the carrying value of
      long-lived assets using the methodology prescribed in Statement of Financial
      Accounting Standards (SFAS) 144, "Accounting for the Impairment and Disposal
      of
      Long-Lived Assets." The Company also reviews long-lived assets and the related
      intangible assets for impairment whenever events or changes in circumstances
      indicate that the carrying value of such assets may not be recoverable. Upon
      such an occurrence, recoverability of these assets is determined by comparing
      the forecasted undiscounted net cash flows to which the assets relate, to the
      carrying amount. If the asset is determined to be unable to recover its carrying
      value, then intangible assets, if any, are written down first, followed by
      the
      other long-lived assets to fair value. Fair value is determined based on
      discounted cash flows, appraised values or management's estimates, depending
      on
      the nature of the assets.





***Deferred
      Tax Asset Valuation Allowance***


The
      Company has incurred losses over the past years, which creates a deferred tax
      benefit. Up to 2005, we have recorded a valuation allowance that fully reserved
      the benefit because realization was doubtful. In 2005, with the addition of
      Picometrix and having had two years of profitable operations, we reduced the
      allowance to approximately half of the deferred asset. With the acquisition
      of
      Picometrix, we recorded a deferred tax liability to reflect the non-deductible
      nature of the future amortization of the intangible assets acquired. That
      deferred tax liability will be amortized over the same life as the intangible
      assets.




19


***Inventories***


The
      Company’s inventories are stated at standard cost (which approximates the
      first-in, first-out method) or market. Slow moving and obsolete inventories
      are
      reviewed throughout the year. To calculate a reserve for obsolescence, we begin
      with a review of our slow moving inventory. Any inventory, which has been slow
      moving within the past 12 months, is evaluated and reserved if deemed
      appropriate. In addition, any residual inventory, which is customer specific
      and
      remaining on hand at the time of contract completion, is reserved for at the
      standard unit cost. The complete list of slow moving and obsolete inventory
      is
      then reviewed by the production, engineering and/or purchasing departments
      to
      identify items that can be utilized in the near future. These items are then
      excluded from the analysis and the remaining amount of slow-moving and obsolete
      inventory is then reserved for. Additionally, non-cancelable open purchase
      orders for parts we are obligated to purchase where demand has been reduced
      may
      be reserved. Reserves for open purchase orders where the market price is lower
      than the purchase order price are also established. If
      a
      product that had previously been reserved for is subsequently sold, the amount
      of reserve specific to that item is then reversed.




**RESULTS
      OF OPERATIONS**





**Fiscal
      Year** **2007 compared to** **Fiscal
      Year** **2006**





***REVENUES***





The
      Company predominantly operates in one industry segment, light and radiation
      detection devices that it sells to multiple markets including
      telecommunications, industrial sensing/NDT, military/aerospace,
      medical and
      homeland security. Revenues by market consisted of the following:







Twelve
                months endedMarch
                31,2007
            
            March
                31,2006Telecommunications
            
            $
            5,850,000
            
            
            25
            %
            $
            3,129,000
            
            
            13
            %Industrial
                Sensing/NDT
            
            
            10,041,000
            
            
            43
            %
            
            10,359,000
            
            
            44
            %Military/Aerospace
            
            
            5,157,000
            
            
            22
            %
            
            5,860,000
            
            
            25
            %Medical
            
            
            2,467,000
            
            
            10
            %
            
            2,228,000
            
            
            9
            %HomelandSecurity
            
            
            73,000
            
            
            0
            %
            
            2,009,000
            
            
            9
            %Total
                Revenues
            
            $
            23,588,000
            
            
            100
            %
            $
            23,585,000
            
            
            100
            %





The
      Company's revenues for the fiscal year ended March 31, 2007 (FY 2007) were
      $23.6
      million, same as the prior fiscal year ended March 31, 2006 (FY 2006).





Although
      total revenues were the same year to year, the Company saw significant increases
      from the telecommunications market, which increased $2.7 million, or 87 %.
      The
      industrial sensing/NDT market decreased 3% or $318,000 from the prior year
      attributable to the THz product
      platform. Sales to the military/aerospace market decreased 12% over the prior
      year or approximately $703,000. This decrease from the prior year was
      attributable to a military program that reached end of life status and as a
      result the Company transitioned from full volume production to production of
      spare parts only and from reduced THz product application development contracts.
      The medical market increased $239,000 or 11% over the prior year due to
      increased customer demand of existing design wins. Homeland security decreased
      $1.9 million, also attributable to a decline in THz development contracts, primarily from the Transportation
      Security Administration.





As
      planned, the new product platform of High
      Speed Optical Receivers ( HSOR ) enabled
      the Company to take advantage of the rapidly growing telecommunication market.
      While the revenue from the Homeland Security market decreased dramatically
      primarily due to a shifting of R&D contract priorities at the TSA, we
      developed and introduced our T-RayTM 4000 product targeted at the NDT and
      Scientific markets. This T-RayTM 4000 platform provides the foundation for future
      development targeted at the Homeland Security market .





20


***COSTS
      AND EXPENSES***





Although
      revenue did not change year to year, costs of product sales decreased $1.7
      million or approximately 11.8% to $12.7 million for the FY
      2007 from
      $14.4 million for the FY
      2006. This
      improvement in cost of sales, expressed as a percent of net sales, is a 7%
      improvement from the FY 2006’s cost of goods sold percentage of 61% to FY 2007
      cost of goods sold percentage of 54%. The improvement is mainly due to a lower
      inventory write-off as a result of our focus on improving purchasing and
      inventory control procedures, coupled with lower overhead related spending.
      As a
      result gross profit increased $1.7 million to $10.9 million or 46% of revenue,
      in FY 2007, from $9.2 million, or 39% of revenue, in FY 2006, an increase of
      $1.7 million or 18%. This improvement in gross profit is attributable to sales
      product mix carrying higher gross margins in the telecommunications and medical
      markets.





**Operating
      Expenses**





R& D
      expenses increased by $1.0 million to $4.0 million during FY 2007 compared
      to
      $3.0 million in FY 2006. Approximately 22% of this increase results from having
      a
      full year (52 weeks) of R&D expenses for the
      HSOR
      and THz product platforms in FY 2007 versus 47 weeks
      in FY 2006. The remaining increase in R & D
      costs
      (approximately $ 780,000)
      is primarily the result of increased personnel related costs, the majority
      of
      which is for investment in new product development for the HSOR and next
      generation THz product platforms . We
      expect
      that R&D expenses will increase in the upcoming fiscal year, as we focus on
      new opportunities in our high growth markets.





Marketing
      and sales expenses increased $245,000 (or 13%) to $2.2 million in FY 2007
      compared to $1.9 million in FY 2006. The increase in sales and marketing
      expenses was primarily due to increases in personnel-related costs and
      commission expenses of $320,000, offset by slight reductions in other areas. Sales
      and
      marketing expenses as a percent of revenues increased to 9% in FY 2007 compared
      to 8% in FY 2006.





Total
      general and administrative expenses increased by $500,000 (12%) to $4.7 million
      in FY 2007 as compared to $4.2 million in FY 2006. Expressed as a percentage
      of
      net sales, general and administrative expenses were 19.7% in FY 2007 as compared
      to 17.6% in FY 2006. The
      increase was mainly due to the relocation of corporate headquarters and
      additional support personnel.





Amortization
      expense was $1,528,000 in FY 2007 versus $1,403,000 in FY 2006. Amortization
      of
      capital financing expenses decreased from $387,000 in FY 2006 to $148,000 in
      FY
      2007 due to the loan settlement with SBBT in FY 2007.





Stock
      option compensation of $361,000 is in connection with the expensing of stock
      options in FY 2007 which were not expensed in FY 2006. Other operating expenses
      incurred were related to the previously announced Wafer Fabrication
      consolidation to our Ann Arbor facility, which was $720,000.





Intangible
      asset impairment accounted for $349,000 in FY 2007 versus no impairment in
      FY
      2006. The company recognized goodwill impairment of $140,000 in FY 2007 compared
      to $814,000 in FY 2006.





**Financing
      and Other Income (Expense), net**





Interest
      income for FY 2007 totaled approximately $ 213,000, compared to $43,000 in
      FY
      2006, due primarily to additional debt secured in late FY 2006 which resulted
      in
      higher cash balances available for short-term investment in FY 2007. Interest
      expense for the year was $2,578,000, as compared to $2,714,000 in 2006, a
      decrease of $136,000. The decrease was the result of decreased amortization
      of
      convertible notes’ discounts by approximately $450,000 due to the conversion of
      approximately $4.475 million of debt into equity in FY 2006, offset by higher
      interest paid on the $4 million of convertible notes issued in March of 2006.





21


The Company recorded
      a favorable income tax provision of $920,000 for FY 2007 as compared to an
      income tax provision of $28,000 for FY 2006. The difference of $948,000 is
      primarily due to the projected tax savings resulting from the projected tax
      loss
      carry-forward created for FY 2007.





Net
      loss
      for FY 2007 was $4.6 million, as compared to net loss of $5.3 million in FY
      2006
      a decrease of $700,000. The decrease in net loss is attributable to increases
      in
      operating expenses of $2.3 million, including wafer fabrication consolidation
      costs of $720,000, offset by higher gross profit of $1.7 million, reduced net
      interest expense of $ 136,000, increased interest income of $170,000 and a favorable tax provision of $920,000.





Non-cash
      operating expenses for FY 2007 were $5,150,000 compared to $5,411,000 for FY
      2006, a decrease of $261,000. The decrease was the result of a reduction in
      goodwill/intangible impairment and convertible note discount interest expenses
      of $775,000 in FY 2007, offset by an increase in amortization and depreciation
      expense of $133,000, an increase in stock option expense of $361,000, as a
      result of the adoption of SFAS No. 123 ( R ) for the
      non-cash expensing of stock option grants in FY 2007, and an increase in the
      warrants provision of $20,000.





**FY
      2006 compared to** **** **(Fiscal
      Year** **2005** **)**





***REVENUES***





The
      Company predominantly operates in one industry segment, light and radiation
      detection devices that it sells to multiple markets including
      telecommunications, industrial sensing/NDT, military/aerospace, medical, and
      homeland security. Revenues by market consisted of the following:





Twelve
                months ended**March
                31,2006**
            
            **March
                27, 2005**Telecommunications
            
            $
            3,129,000
            
            
            13
            %
            $
            86,000
            
            
            1
            %Industrial
                Sensing/NDT
            
            
            10,359,000
            
            
            44
            %
            
            7,360,000
            
            
            49
            %Military/Aerospace
            
            
            5,860,000
            
            
            25
            %
            
            4,875,000
            
            
            33
            %Medical
            
            
            2,228,000
            
            
            9
            %
            
            2,482,000
            
            
            17
            %Home
                Land Security
            
            
            2,009,000
            
            
            9
            %
            
            --
            
            
            0
            %Total
                Revenues
            
            $
            23,585,000
            
            
            100
            %
            $
            14,803,000
            
            
            100
            %





The
      Company's revenues for FY 2006 were
      $23.6 million, an increase of $8.8 million, or 59% of revenues of $14.8 million
      for the FY
      2005.





Approximately
      $7.6 million of the increase was attributable to revenues from
      Picometrix,  which
      the
      Company acquired in May 2005. The
      remaining increase of $1.2 million reflects an overall increase in shipments
      of
      8% to customers in each of the Company’s remaining markets over the prior year.
      This represents approximately $1.4 million in volume increases offset by
      approximately $0.2 million in price decreases to one customer in the medical
      market as discussed in the paragraph below.





The
      acquisition of Picometrix provided the Company entry into the Homeland
      Security market
      with its THz products
      and contracts and significantly extended its reach in the telecommunication
      markets with optical receiver products. The most significant revenue increases
      are from the telecommunications market, which increased $ 3 million,
      all coming from the Picometrix acquisition. The industrial sensing/NDT market
      increased 41% or $ 3 million,
      over the prior year of which $1.7 million was attributable to Picometrix. Sales
      to the military aerospace market increased 20% over the prior year and accounted
      for approximately $985,000 of the remaining increase in revenues. Homeland Security accounted for $2.0 million of the increase all attributable to
      Picometrix , and medical dropped
      $254,000 over the prior year mainly due to price reductions for one
      customer.





As
      expected, the increased diversification and larger customer base achieved
      through the Company’s acquisitions have resulted in net revenues meeting our
      expectations for the most recent fiscal year.





22


***COSTS
      AND EXPENSES***





Cost
      of
      product sales increased to $14.4 million in 2006 from $10.1 million in 2005. Expressed
      as a percent of net sales, cost of goods sold was 61% in FY 2006 compared to
      68%
      in FY 2005. As a result, gross profit increased to $9.2 million in FY 2006
      from
      $4.7 million in FY 2005, an increase of 96%. This increase in gross profit
      is
      primarily attributable to the acquisition of Picometrix, whose products carry
      higher gross margins. This increase in Gross Profit was off-set by a $1.1
      million inventory write-off from a combination of obsolescence and excess
      inventory from prior acquisitions.





R&D costs
      increased by $2.9 million to $ 3 million
      during FY 2006 compared to $146,000 in FY 2005. The increase in R & D
      costs
      is the result of the Company’s Picometrix acquisition ($2.7 million) and other
      non-Picometrix product R&D initiatives, which amounted to $200,000. We
      expect
      that R&D expenses will increase in the upcoming fiscal year, as we focus on
      new opportunities brought to us as a result of the Picometrix acquisition.





Marketing
      and sales expenses increased by $716,000 (59%) to $1.9 million in FY 2006,
      which
      is 8% of sales, which is the same percentage as FY 2005. The acquisition of
      Picometrix accounted for $545,000 of the sales and marketing expense increase.
      Planned additions to the sales department during the year accounted for $154,000
      of increased compensation, travel and related expenses. Overall advertising
      and
      marketing expenses increased by approximately $165,000, primarily associated
      with products sold into the telecommunications market. The Company is committed
      to building our sales & marketing function in the telecommunications, Homeland
      Security ,
      military and industrial sensing markets and anticipates further increases in
      compensation, travel and related  expenses
      during FY 2007.




Total
      general and administrative expenses increased by $4.1 million (151.4%) to $6.8
      million (including amortization and goodwill impairment expense) in FY 2006
      as
      compared to $2.7 million in FY 2005. Expressed as a percentage of net sales,
      general and administrative expenses represented 29% in FY 2006 as compared
      to
      18% in FY 2005. The increase is primarily attributable to $2.6 million of
      intangible write-off and amortization, comprised of goodwill impairment of
      $814,000 for Texas Optoelectronics, intangible amortization of $1.4 million
      and
      amortization of financing expenses of $387,000 related to the acquisition of
      Picometrix. The remaining $1.5 million increased General
      and Administrative ( G&A ) costs
      was the result of added corporate expenses. The Sarbanes-Oxley Act section
      404,
      internal controls, requires the Company to be compliant by fiscal year ending
      March 2008, based on current market capitalization. External costs required
      to
      be in compliance will materially increase over the next two years.





Interest
      income for FY 2006
      totaled approximately $ 43,000,
      same as in FY 2005,
      due primarily to capital financing activities, which resulted in higher cash
      balances available for short-term investment. Interest expense for the year
      was
      $2,714,000, as compared to $330,000 in 2005. The increase was the result of
      capital financing activities and the related interest expense, including
      amortization of convertible notes’ discounts of approximately $1,978,000 and
      $206,000 of related party interest.





The
      company recorded an income tax provision of $28,000 for FY 2006 as compared
      to a
      negative income tax provision of $4.7 million for FY 2005. The difference of
      $4.7 million is due to the fact that the Company reversed 50% of its deferred
      tax valuation allowance, in the amount of $4.7 million in FY 2005.





Net
      loss
      for FY 2006 was $5.3 million, as compared to net income $5.1 million in 2005,
      which included the FY 2005 $4.7 million adjustment made to reduce the deferred
      tax valuation allowance. The decrease in net income is attributable to higher
      operating expenses, interest expense and the inventory write down at the
      California facility, offset partially by higher gross profit attributable to
      the
      Picometrix acquisition. Non-cash operating and interest expenses for FY 2006
      were $5,411,000 compared to $743,000 for FY 2005, an increase of $4,668,000
      which is the result of goodwill impairment of $814,000, increase interest
      expense of $1,802,000 related to convertible notes’ discount amortization and
      depreciation and intangible amortization of $2,052,000, associated with the
      Picometrix acquisition.





23


**Inventory**





Expense
      related to Inventory write-offs for FY 2006 compared to FY 2005 increased
      approximately $1.1 million from $36,000 in FY 2005 to $1.2 million in FY 2006.
      This is comprised of slow moving and obsolete inventory of approximately
      $821,000 of which
      $123,000 was associated with the acquisitions of Texas Optoelectronics Inc.
      (FY
      2003) and Photonic Detector Inc. ( Fiscal
      Year 2005). The
      balance of $698,000 was slow moving-excess-obsolete inventory from operations.
      The remaining $330,000 is derived from standards reductions, physical inventory
      quantity adjustments and scrap.





**Liquidity
      and Capital Resources**





**Cash
      Flows**





*Operating
      Activities*





Net
      cash
      provided by operating activities of $256,000 for the year ended March 31, 2007
      was primarily the result of a net loss of $4,646,000, of which $5,150,000 was
      non-cash expenses, a decrease in accounts receivable of $800,000, an increase
      in
      accounts payable and other liabilities of $673,000, offset by a net increase
      in
      inventory of $1,005,000, deferred tax assets of $602,000 and prepaid/other
      assets of $114,000.





Net
      cash
      used in operating activities of $783,000 for the year ended March 31, 2006
      was
      primarily the result of our net operating loss of $5,262,000, of which
      $5,411,000 was non-cash expenses, an increase in accounts receivable of $712,000
      and prepaid expenses/other assets of $197,000, a decrease in accounts payable
      and accrued expenses of $981,000, offset by a decrease in inventory of $137,000.





Net
      cash
      provided by operating activities of $228,000 for the year ended March 27, 2005
      was primarily the result of our net operating profit of $5,078,000 of which
      $3,935,000 was non-cash income ,
      an
      increase in inventory of $291,000, an increase in prepaid acquisition and
      capital finance expenses of $532,000, an increase in prepaid expenses of
      $193,000, and a decrease in customer deposits of $477,000; offset by an increase
      in accounts payable and other accrued expenses of $507,000 and a decrease in
      accounts receivable of $71,000.




*Investing
      Activities*





Net
      cash
      used in investing activities was $2.6 million for the year ended March 31,
      2007.
      The amount primarily consisted of capital expenditures of $2.4 million, of
      which
      $1.9 million was related to the previously announced Wafer Fabrication
      consolidation and corporate office move to Ann Arbor. Patent expenditures were
      $162,000 for the 2007
      fiscal year.





Net
      cash
      used in investing activities was $ 3 million
      for the year ended March 31, 2006. The amount primarily consisted of cash paid
      for the acquisition of Picometrix of $3.5 million and related expenses of
      $936,000, net of cash acquired of $678,000 and change in restricted cash of
      $1.3
      million. Capital
      expenditure activity for the year accounted for $263,000 of the cash used,
      and
      patent expenditures were $191,000 for the year.





Net
      cash
      used in investing activities was $5,048,000 for the year ended March 27, 2005.
      The amount primarily consisted of $4,228,000 loan to Picometrix, $1,254,000
      in a
      restricted cash collateral account subject to release upon satisfaction of
      certain conditions (which conditions were subsequently met), $193,000 was used
      for capital expenditures required primarily for necessary computer and
      manufacturing equipment upgrades or replacements, and $1,117,000 for purchases
      of outstanding shares of PDI common stock; offset by $1,700,000 transferred
      from
      short-term investments into cash.





24





*Financing
      Activities*





Net
      cash
      used in financing activities was $316,000 for the year ended March 31, 2007.
      This primarily reflects the $2.95 million cash paid to Santa
      Barbara Bank & Trust Company ( SBBT ) to
      retire the outstanding term loan and line of credit, note payments of $501,000
      made to related parties, offset by proceeds of a line of credit from Fifth
      Third
      Bank of $2.61 million, additional cash proceeds from a term loan by the MEDC of
      $172,000, and proceeds from employee exercised stock options of $355,000 and
      deferred tax liability on the beneficial conversion.





Net
      cash
      provided by financing activities was $8.2 million for the year ended March
      31,
      2006. This primarily reflects the $2.7 million cash proceeds from the term
      loan
      relating to the Picometrix acquisition reduced by ten months of loan repayment
      of $750,000, $5.0 million of cash proceeds from convertible notes ($1 million
      in
      September 2005 and $4
      million in March 2006 ),
      $455,000 of cash paid for warrants to purchase the Company’s Class A Common
      Stock and $600,000 of cash proceeds from a tem loan by the MEDC .
      Payments of $119,000 were made during the year to equipment vendors to adhere
      to
      unsecured financing arrangements. Employees exercised stock options for
      approximately $47,000.





Net
      cash
      provided by financing activities was $5.0 million for the year ended March
      27,
      2005. The amount primarily consisted of $5.0 million obtained through private
      placement of a convertible note, a revolving line of credit of $1,000,000;
      offset by a pay-down of $900,000 against the secured term loan and repayment
      of
      a PDI line of credit of $78,000.





The
      Company is exposed to interest rate risk for marketable securities. We
      continually monitor interest rates and will attempt to utilize the best possible
      avenues of investment as excess cash becomes available.





**Capital
      Resources**





At
      March
      31, 2007, the Company had unrestricted cash and cash equivalents of $3.3
      million, a decrease of $2.6 million, from $5.9 million as of March 31, 2006,
      primarily the result of capital expenditures of $2.4 million, of which $1.9
      million was for the clean room.





The
      Company currently has outstanding convertible subordinated notes due October
      2007 in the principal amount of $5.5 million. These
      notes are convertible, at the option of the holder, at any time on or prior
      to
      maturity into shares of our Class
      A
      Common Stock at an
      average conversion price of $2.06 per share. An
      aggregate of 2,666,000 shares of Class
      A
      Common Stock would be
      issued upon the conversion of all outstanding convertible subordinated notes
      at
      these exchange rates. If the stock is not converted into common stock, the
      Company will have to retire the convertible notes in cash. The Company may
      enter
      into equity, debt or a combination of equity and debt transaction in order
      to
      retire the outstanding convertible note.





The
      Company maintains a revolving line of credit with a regional bank that provides
      for borrowings up to $2.0 million, based on 80% of the Company’s eligible
      accounts receivable and 40% of the Company’s eligible inventory, subject to
      certain limitations as defined by the agreement. At March 31, 2007, the
      outstanding balance on the line was approximately $741,000. All business assets
      of the Company secure the line. As
      most
      recently amended, repayment is interest only monthly, with principal due at
      maturity date on March 6, 2008. Interest is computed at the prime rate as
      published in the Wall Street Journal plus 12.5 %
      with a
      floor of 8.25%. The prime interest rate was 8.25% at March 31,
      2007.





In
      March
      2007, the Company signed an equipment lease agreement with a regional bank
      to
      borrow $2.3 million. During 2007, the company borrowed $1.9 million against
      the
      line. The loan is guaranteed by all of the Company’s subsidiaries. Repayment of
      principal will begin June, 2007, plus interest, until maturity on May 30, 2012.
      Interest is computed at the prime rate as published in the Wall Street
      Journal.





The
      Company believes that current cash levels combined with our revolving line
      of
      credit and additional debt or equity financing to retire the convertible note
      will be sufficient for our 2008 fiscal year.





25


**Debt**





During
      FY
      2006 $3.475 million of the $5 million Convertible debt (Convertible Debt
      1 st Tranche)
      was converted into 1,792,000 shares of Class
      Common Stock .
      At
      March 31, 2007, the Convertible Debt 1st Tranche balance was $1.4 million (net
      of debt discount).





In
      September 2005, the Company issued $1.0 million of convertible debt with
      warrants to purchase 170,164 shares of common stock (Convertible Debt
      2 nd Tranche). The note was converted in November 2005 into 472,678 shares of Class
      A Common
      Stock .
      In
      addition, 85,082 of the warrants were converted and the Company received
      $151,446 in cash. At March 31, 2007, the
      balance of unexercised warrants was 85,082.





In
      March
      2006, the Company issued $4.0 million of convertible debt (Convertible Debt
      2 nd Tranche)
      with warrants to purchase 680,658 shares of common stock. Using the “Intrinsic
      Value” approach to valuing the beneficial conversion feature and the warrants,
      the Company recognized a $2.7 million debt discount on the $4.0 million
      principal value of the convertible note payable and is amortizing the debt
      discount to interest expense over the life of the note. At March 31, 2007 the
      balance of the Convertible Debt 2 nd Tranche
      was $2.7 million (net of the debt discount).





The MEDC entered
      into two loan agreements with Picometrix LLC, one in 2004 (MEDC-loan 1) and
      one
      in 2005 (MEDC-loan 2). Both loans are unsecured. MEDC-loan 1 is for an amount
      up
      to $1,024,000 with an interest rate of 7% and is fully amortized by the end
      of
      an eight year
      period (ending on September 15, 2012). Interest
      is accrued during the first four years, but not paid, after which time principal
      plus accrued interest is paid over the remaining four years. On September 15, 2004, the
      Company borrowed $750,000 against the $1.0 million. On February 1, 2007, the
      Company borrowed an additional $172,000 against the remaining balance of
      $274,000.





MEDC-loan
      2 is for an amount up to $1.2 million with an interest rate of 7% and is fully
      amortized by the end of a six year
      period (ending on September 15, 2011). Interest
      is accrued during the first two years and paid ratably over the third year.
      Beginning in the fourth year principal and accrued interest is paid over the
      remaining three years. On
      September 15, 2005 the Company borrowed $600,000 against the $1.2 million.


Convertible
                notes - Face value
            
            Notes
              Converted
            
            Convertible
                notes - Balance 3/31/07
            
            Conversion
              Price
            
            Outstanding
                Warrants
            
            Exercise
                PriceRound
                1 financing
            
            $
            5,000,000
            
            $
            3,475,000
            
            $
            1,525,000
            
            $
            1.9393
            
            
            680,658
            
            $
            1.78Round
                2 financing
            
            
            5,000,000
            
            
            1,000,000
            
            
            4,000,000
            
            $
            2.1156
            
            
            765,740
            
            $
            1.78Total
            
            $
            10,000,000
            
            $
            4,475,000
            
            $
            5,525,000
            
            
            
            
            
            1,446,398




26


**Summary
      of Contractual Obligations and Commitments**





The
      following table sets forth the contractual obligations of the Company at March
      31, 2007.


**Contractual
                Obligations**
            
            **Payments
                due by period****Total**
            
            **Within
                1 year**
            
            **1
                - 3 years**
            
            **3
                - 5 years**
            
            **More
                than 5 years**Long-term
                Bank loan
            
            $
            2,608,000
            
            $
            1,021,000
            
            $
            1,214,000
            
            $
            373,000
            
            
            -Long-term
                MEDC loan
            
            
            1,522,000
            
            
            -
            
            
            937,000
            
            
            585,000
            
            
            -Convertible
                notes
            
            
            5,525,000
            
            
            5,525,000
            
            
            -
            
            
            -
            
            
            -Discount
                on convertible notes
            
            
            (1,364,000
            )
            
            (1,364,000
            )
            
            -
            
            
            -
            
            
            -Debt
                to related parties
            
            
            2,401,000
            
            
            550,000
            
            
            1,851,000
            
            
            -
            
            
            -**Subtotal
                - Balance Sheet**
            
            
            **10,692,000**
            
            
            **5,732,000**
            
            
            **4,002,000**
            
            
            **958,000**
            
            
            **-**Operating
                lease obligations
            
            
            3,096,000
            
            
            1,170,000
            
            
            1,926,000
            
            
            -
            
            
            -Purchase
                obligations
            
            
            1,873,000
            
            
            1,873,000
            
            
            -
            
            
            -
            
            
            -**Total**
            
            **$**
            **15,661,000**
            
            **$**
            **8,775,000**
            
            **$**
            **5,928,000**
            
            **$**
            **958,000**
            
            
            **-**





**Item
              7A**
            **Quantitative
                and Qualitative Disclosures about Market
                Risk**





At
      March
      31, 2007, most of the Company’s interest rate exposure is linked to the prime
      rate, subject to certain limitations, offset by cash investment tied to prime
      rate. As such, we are at risk to the extent of changes in the prime rate and
      do
      not believe that moderate changes in the prime rate will materially affect
      our
      operating results or financial condition.





27





**Item
              8.**
            **Financial
                Statements and Supplementary
                Data**





The
      following consolidated financial statements of Advanced Photonix, Inc. are
      included in Item 8:





PageREPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            29FINANCIAL
                STATEMENTS:Consolidated
                Balance Sheets,As
                of March 31, 2007 and March 31, 2006
            30Consolidated
                Statements of Operationsfor
                the years ended March 31, 2007, March 31, 2006 and March 27,
                2005
            32Consolidated
                Statements of Shareholders' Equityfor
                the years ended March 31, 2007, March 31, 2006 and March 27,
                2005
            33Consolidated
                Statements of Cash Flowsfor
                the years ended March 31, 2007, March 31, 2006 and March 27,
                2005
            34Notes
                to Consolidated Financial Statements
            36




28




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Board of Directors and Shareholders


of
      Advanced Photonix, Inc.:





We
      have
      audited the accompanying consolidated balance sheets of Advanced Photonix,
      Inc.
      (the "Company") as of March 31, 2007 and 2006 and the related consolidated
      statements of operations, shareholders' equity and cash flows for each of the
      years ended March 31, 2007, March 31, 2006 and March 27, 2005. These
      consolidated financial statements are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits.





We
      conducted our audits in accordance with the Standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall presentation of the consolidated
      financial statements. We believe that our audits provide a reasonable basis
      for
      our opinion.





In
      our
      opinion, the accompanying consolidated financial statements present fairly,
      in
      all material respects, the financial position of the Company at March 31, 2007
      and 2006 and the results of its operations and its cash flows for the years
      ended March 31, 2007, March 31, 2006 and March 27, 2005 in conformity with
      accounting principles generally accepted in the United States.





/s/
      Farber Hass Hurley & McEwen LLP


Camarillo,
      California


June
      15,
      2007




29


**ADVANCED
      PHOTONIX, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


As
                of:
            
            **March
                31, 2007**
            
            **March
                31, 2006****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            3,274,000
            
            $
            5,933,000Accounts
                receivable, net of allowance for doubtful accounts of $51,000 and
                $46,000
                in 2007 and 2006, respectively
            
            
            3,587,000
            
            
            4,387,000Inventory,
                less allowance of $924,000 and $2,181,000 in 2007 and 2006,
                respectively
            
            
            4,439,000
            
            
            3,434,000Prepaid
                expenses and other current assets
            
            
            377,000
            
            
            711,000Total
                current assets:
            
            
            11,677,000
            
            
            14,465,000Equipment
                and leasehold improvements:Equipment
                and leasehold improvements
            
            
            10,301,000
            
            
            7,923,000Accumulated
                depreciation
            
            
            (5,565,000
            )
            
            (4,548,000
            )Equipment
                and leasehold improvements, net
            
            
            4,736,000
            
            
            3,375,000Other
                assets:Goodwill,
                net of accumulated amortization of $353,000 in 2007 and 2006,
                respectively
            
            
            4,579,000
            
            
            4,719,000Intangibles,
                net of accumulated amortization of $2,921,000 and $1,399,000 in 2007
                and
                2006, respectively
            
            
            12,285,000
            
            
            14,155,000Patents,
                net of accumulated amortization of $62,000 and $55,000 for 2007 and
                2006,
                respectively
            
            
            45,000
            
            
            16,000Patents
                pending
            
            
            310,000
            
            
            184,000Prepaid
                capital finance expense, net of current portion and accumulated
                amortization in 2007 and 2006 of $238,000 and $181,000,
                respectively
            
            
            --
            
            
            84,000Deferred
                income taxes
            
            
            1,225,000
            
            
            623,000Certificate
                of deposit
            
            
            285,000
            
            
            275,000Security
                deposits and other assets
            
            
            100,000
            
            
            105,000Total
                other assets
            
            
            18,829,000
            
            
            20,161,000Total
                assets:
            
            $
            35,242,000
            
            $
            38,001,000




(Continued)


30


**ADVANCED
      PHOTONIX, INC.**


**CONSOLIDATED
      BALANCE SHEETS - Continued**




**March
                31, 2007**
            
            **March
                31, 2006****Liabilities
                and shareholders' equity**Current
                liabilities:Line
                of credit
            
            $
            741,000
            
            $
            1,000,000Accounts
                payable
            
            
            1,401,000
            
            
            982,000Compensation
                and related withholdings
            
            
            1,091,000
            
            
            697,000Customer
                deposits
            
            
            --
            
            
            1,000Deferred
                income
            
            
            --
            
            
            76,000Interest
                payable
            
            
            325,000
            
            
            183,000Other
                accrued expenses
            
            
            610,000
            
            
            769,000Current
                portion of long-term debt, related party
            
            
            550,000
            
            
            500,000Current
                portion of long-term debt
            
            
            4,535,000
            
            
            927,000Total
                current liabilities
            
            
            9,253,000
            
            
            5,135,000Long-term
                debt, less current portion
            
            
            3,015,000
            
            
            5,002,000Long-term
                debt, less current portion - related party
            
            
            1,851,000
            
            
            2,401,000Total
                liabilities
            
            
            14,119,000
            
            
            12,538,000**Commitments
                and contingencies****Class
                A**redeemable convertible preferred stock, $.001 par value; 780,000
                shares
                authorized; 2007 and 2006 - 40,000 shares issued and outstanding;
                liquidation preference $32,000
            
            
            32,000
            
            
            32,000**Shareholders'
                equity****:****Preferred**stock,
                $.001 par value; 10,000,000 shares authorized; 780,000 shares designated
                Class A redeemable convertible; 2007 and 2006 - no shares issued
                and
                outstanding
            
            
            --
            
            
            --**Class
                A****Common
                Stock**,
                $.001 par value, 50,000,000 authorized; 2007 - 19,226,006 shares
                issued
                and outstanding; 2006 - 18,885,006 shares issued and
                outstanding.
            
            
            19,000
            
            
            19,000**Class
                B****Common
                Stock**,
                $.001 par value; 4,420,113 shares authorized, 2007 and 2006 - 31,691
                issued and outstanding.
            
            
            --
            
            
            --Additional
                paid-in capital
            
            
            43,887,000
            
            
            43,581,000Accumulated
                deficit
            
            
            (22,815,000
            )
            
            (18,169,000
            )Total
                shareholders' equity
            
            
            21,091,000
            
            
            25,431,000Total
                liabilities and shareholders' equity
            
            $
            35,242,000
            
            $
            38,001,000





See
      notes
      to consolidated financial statements.




31


**ADVANCED
      PHOTONIX, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




For
                the years ended March 31, 2007, March 31, 2006 and March 27,
                2005
            
            **2007**
            
            **2006**
            
            **2005**Sales,
                net
            
            $
            23,588,000
            
            $
            23,585,000
            
            $
            14,803,000Cost
                of products sold
            
            
            12,693,000
            
            
            14,402,000
            
            
            10,071,000Gross
                profit
            
            
            10,895,000
            
            
            9,183,000
            
            
            4,732,000Research
                and development expenses
            
            
            4,015,000
            
            
            3,019,000
            
            
            146,000Sales
                and marketing expenses
            
            
            2,174,000
            
            
            1,930,000
            
            
            1,214,000General
                and administrative expenses
            
            
            4,656,000
            
            
            4,157,000
            
            
            2,508,000Amortization
                expense
            
            
            1,528,000
            
            
            1,403,000
            
            
            117,000Amortization
                - capital finance expense
            
            
            148,000
            
            
            387,000
            
            
            81,000Stock
                option compensation
            
            
            361,000
            
            
            --
            
            
            --Wafer
                fabrication relocation expense
            
            
            720,000
            
            
            --
            
            
            --Loss
                on impairment of intangible asset
            
            
            349,000
            
            
            --
            
            
            --Loss
                on impairment of goodwill
            
            
            140,000
            
            
            814,000
            
            
            --Total
                operating expenses
            
            
            14,091,000
            
            
            11,710,000
            
            
            4,066,000Income
                (loss) from operations
            
            
            (3,196,000
            )
            
            (2,527,000
            )
            
            666,000Other
                income (expense):Interest
                income
            
            
            213,000
            
            
            43,000
            
            
            43,000Interest
                expense
            
            
            (322,000
            )
            
            (322,000
            )
            
            (13,000
            )Interest
                expense related to convertible notes
            
            
            (504,000
            )
            
            (208,000
            )
            
            (141,000
            )Interest
                expense, warrant discount
            
            
            (1,528,000
            )
            
            (1,978,000
            )
            
            (176,000
            )Interest
                expense, related party
            
            
            (224,000
            )
            
            (206,000
            )
            
            --Other
                income (expense)
            
            
            (5,000
            )
            
            (36,000
            )
            
            (35,000
            )Income
                (Loss) before provision (benefit) for income taxes
            
            
            (5,566,000
            )
            
            (5,234,000
            )
            
            344,000Provision
                (benefit) for income taxes:Provision
                (benefit) for income taxes - current
            
            
            62,000
            
            
            28,000
            
            
            18,000Provision
                (benefit) for income taxes - deferred
            
            
            (920,000
            )
            
            --
            
            
            (4.752,000
            )Total
                provision (benefits) for income taxes
            
            
            --
            
            
            28,000
            
            
            (4,734,000
            )Net
                income (loss)
            
            $
            (4,646,000
            )
            $
            (5,262,000
            )
            $
            5,078,000Basic
                earnings (loss) per share
            
            $
            (0.24
            )
            $
            (0.30
            )
            $
            0.38Diluted
                earnings (loss) per share
            
            $
            (0.24
            )
            $
            (0.30
            )
            $
            0.33Weighted
                average common shares outstanding
            
            
            19,065,000
            
            
            17,477,000
            
            
            13,461,000




See
        notes
        to consolidated financial statements.


32


**ADVANCED
      PHOTONIX, INC.**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


For
                  the years ended March 31, 2007, March 31, 2006 andMarch
                  27, 2005
            
            Class
                A
              Common
                Stock
            
            Class
                B
              Common
                Stock
            
            Additional
                Paid-in Capital
            
            Accumulated
                DeficitShares
            
            Amount
            
            Shares
            
            Amount
            
            Restated
            
            Restated
            
            Total**BALANCE
                AT MARCH 28, 2004**
            
            
            13,397,059
            
            $
            13,000
            
            
            31,691
            
            
            --
            
            $
            27,646,000
            
            $
            (17,986,000
            )
            $
            9,673,000Exercise
                of Options
            
            
            2,000
            
            
            --
            
            
            --
            
            
            --
            
            
            1,000
            
            
            --
            
            
            1,000Shares
                issued to acquire PDI
            
            
            113,572
            
            
            --
            
            
            --
            
            
            --
            
            
            207,000
            
            
            --
            
            
            207,000Discount
                on note payable (fair value of detachable warrants issued)
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,344,000
            
            
            --
            
            
            1,344,000Net
                Income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            5,078,000
            
            
            5,078,000**BALANCE
                AT MARCH 27, 2005**
            
            
            13,512,631
            
            $
            13,000
            
            
            31,691
            
            
            --
            
            $
            29,198,000
            
            $
            (12,907,000
            )
            $
            16,304,000Exercise
                of Options
            
            
            266,500
            
            
            --
            
            
            --
            
            
            --
            
            
            272,000
            
            
            --
            
            
            272,000Notes
                Conversions
            
            
            2,264,560
            
            
            3,000
            
            
            --
            
            
            --
            
            
            4,473,000
            
            
            --
            
            
            4,476,000Shares
                issued for interest
            
            
            11,069
            
            
            --
            
            
            --
            
            
            --
            
            
            21,000
            
            
            --
            
            
            21,000Discount
                on note payable (fair value of detachable warrants issued)
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            3,732,000
            
            
            --
            
            
            3,732,000Warrants
                exercised
            
            
            255,246
            
            
            --
            
            
            --
            
            
            --
            
            
            454,000
            
            
            --
            
            
            454,000Shares
                issued to acquire Picometrix
            
            
            2,575,000
            
            
            3,000
            
            
            --
            
            
            --
            
            
            5,431,000
            
            
            --
            
            
            5,434,000Net
                Income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (5,262,000
            )
            
            (5,262,000
            )**BALANCE
                AT MARCH 31, 2006**
            
            
            18,885,006
            
            $
            19,000
            
            
            31,691
            
            $
            -
            
            $
            43,581,000
            
            $
            (18,169,000
            )
            $
            25,431,000Exercise
                of Options
            
            
            341,000
            
            
            --
            
            
            
            
            
            
            
            
            355,000
            
            
            
            
            
            355,000Stock
                Compensation 123(R)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            361,000
            
            
            
            
            
            361,000Adjustment
                of discount on note payable (fair value of detachable warrants
                issued)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (31,000
            )
            
            
            
            
            (31,000
            )Deferred
                tax liability on beneficial conversion
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (379,000
            )
            
            
            
            
            (379,000
            )Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,646,000
            )
            
            (4,646,000
            )**BALANCE
                AT MARCH 31, 2007**
            
            
            19,226,006
            
            $
            19,000
            
            
            31,691
            
            $
            --
            
            $
            43,887,000
            
            $
            (22,815,000
            )
            $
            21,091,000





See
      notes
      to consolidated financial statements.




33





**ADVANCED
      PHOTONIX, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


For
                the years ended March 31, 2007, March 31, 2006 and March 27,
                2005
            
            **2007**
            
            **2006**
            
            **2005*****CASH
                FLOWS FROM OPERATING ACTIVITIES***Net
                income (loss):
            
            $
            (4,646,000
            )
            $
            (5,262,000
            )
            $
            5,078,000Adjustment
                to reconcile net income (loss) to net cash
              provided
                by (used in) operating activities:


Depreciation
            
            
            1,076,000
            
            
            829,000
            
            
            369,000Amortization
            
            
            1,676,000
            
            
            1,790,000
            
            
            198,000Stock
                compensation expense
            
            
            361,000
            
            
            --
            
            
            --Goodwill
                impairment charges
            
            
            140,000
            
            
            814,000
            
            
            --Loss
                on impairment of intangible asset
            
            
            349,000
            
            
            --
            
            
            --Amortization,
                convertible note discount
            
            
            1,528,000
            
            
            1,978,000
            
            
            176,000


Deferred
                income taxes
            
            
            (602,000
            )
            
            --
            
            
            --Disposal
                of fixed assets
            
            
            --
            
            
            --
            
            
            56,000Provision
                for warranty expense
            
            
            20,000
            
            
            --
            
            
            15,000Other
                provisions
            
            
            128,000
            
            
            821,000
            
            
            --Increase
                (decrease) in deferred tax valuation allowance
            
            
            --
            
            
            --
            
            
            (4,749,000
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            800,000
            
            
            (712,000
            )
            
            71,000Inventories
            
            
            (1,133,000
            )
            
            137,000
            
            
            (291,000
            )Prepaid
                expenses and other current assets
            
            
            284,000
            
            
            (355,000
            )
            
            (193,000
            )Prepaid
                acquisition costs
            
            
            --
            
            
            --
            
            
            (134,000
            )Prepaid
                capital finance expense
            
            
            --
            
            
            --
            
            
            (398,000
            )Other
                assets
            
            
            (398,000
            )
            
            158,000
            
            
            --Accounts
                payable
            
            
            419,000
            
            
            (336,000
            )
            
            428,000Customer
                deposit liability
            
            
            --
            
            
            --
            
            
            (477,000
            )Accrued
                expenses
            
            
            254,000
            
            
            (645,000
            )
            
            79,000Net
                cash provided by (used in) operating activities
            
            
            256,000
            
            
            (783,000
            )
            
            228,000***CASH
                FLOWS FROM INVESTING ACTIVITIES***Capital
                expenditures
            
            
            (2,437,000
            )
            
            (263,000
            )
            
            (193,000
            )Patent
                expenditures
            
            
            (162,000
            )
            
            (191,000
            )
            
            --Short
                term investments
            
            
            --
            
            
            --
            
            
            1,700,000Change
                in restricted cash
            
            
            --
            
            
            1,254,000
            
            
            (1,254,000
            )Cash
                acquired through acquisition of Photonic Detectors, Inc.
            
            
            --
            
            
            --
            
            
            44,000Cash
                acquired through acquisition of Picotronix, Inc.
            
            
            --
            
            
            678,000
            
            
            --Cash
                paid for Picotronix, Inc. acquisition
            
            
            --
            
            
            (3,500,000
            )
            
            --Cash
                paid for acquisition related costs
            
            
            --
            
            
            (936,000
            )
            
            --Purchase
                of outstanding shares of Photonic Detectors, Inc.
              common
                stock
            
            
            --
            
            
            --
            
            
            (1,117,000
            )Loan
                to Picometrix, Inc.
            
            
            --
            
            
            --
            
            
            (4,228,000
            )Net
                cash used in investing activities
            
            
            (2,599,000
            )
            
            (2,958,000
            )
            
            (5,048,000
            )


***CASH
                FLOWS FROM FINANCING ACTIVITIES***Repayment
                of Photonic Detectors, Inc. line of credit
            
            
            --
            
            
            --
            
            
            (78,000
            )Proceeds
                from bank term loan
            
            
            1,867,000
            
            
            2,700,000
            
            
            --Payments
                on bank term loan
            
            
            (1,950,000
            )
            
            (750,000
            )
            
            (900,000
            )Advanced
                Photonix, Inc. revolving line of credit (asset-based)
            
            
            (259,000
            )
            
            --
            
            
            1,000,000Payments
                on notes payable
            
            
            --
            
            
            119,000
            
            
            --Proceeds
                from private placement of convertible note
            
            
            --
            
            
            5,000,000
            
            
            5,000,000Proceeds
                from MEDC term loan
            
            
            172,000
            
            
            600,000
            
            
            --Proceeds
                from exercise of warrants
            
            
            --
            
            
            455,000
            
            
            --Payments
                on related party debt
            
            
            (501,000
            )
            
            --
            
            
            --Proceeds
                from exercise of stock options
            
            
            355,000
            
            
            47,000
            
            
            2,000Net
                cash provided by (used in) financing activities
            
            
            (316,000
            )
            
            8,171,000
            
            
            5,024,000***NET
                INCREASE (DECREASE) IN CASH AND CASH
                EQUIVALENTS***
            
            
            (2,659,000
            )
            
            4,430,000
            
            
            204,000***CASH
                AND CASH EQUIVALENTS AT BEGINNING OF
                YEAR***
            
            
            5,933,000
            
            
            1,503,000
            
            
            1,299,000***CASH
                AND CASH EQUIVALENTS AT END OF YEAR***
            
            $
            3,274,000
            
            $
            5,933,000
            
            $
            1,503,000





See
      notes
      to consolidated financial statements.




34


**Supplemental
      disclosure of cash flow information:**





**2007**
            
            **2006**
            
            **2005**Cash
                paid for interest
            
            $
            795,000
            
            $
            623,000
            
            $
            153,000Cash
                paid for income taxes
            
            $
            26,000
            
            $
            17,000
            
            $
            19,000





**Supplemental
      disclosure of non-cash operating, investing and financing
      activities:**





**Picometrix
      acquisition in FY 2006**


Assets
                acquired
            
            $
            19,404,000Liabilities
                assumed
            
            
            (2,406,000
            )Net
                assets acquired
            
            
            16,998,000Cash
                Paid
            
            
            (3,500,000
            )Broker
                fees and other direct costs
            
            
            (936,000
            )12,562,000Non-cash
                investing activities:Common
                stock issued
            
            
            (5,433,000
            )Note
                payable - related
            
            
            (2,901,000
            )Picometrix
                note retired
            
            
            (4,228,000
            )Net
                balance
            
            $
            --





In
      October 2004 (FY 2005), the Company issued $5.0 million in secured debt to
      be
      used for future acquisition. In conjunction with that debt, the Company issued
      warrants convertible into 850,822 shares of the Company’s common stock. The
      warrants issued were adjusted to present value. The adjustment was $141,000
      to
      additional paid-in capital. The company amortized $176,000 of the discount
      to
      interest expense in FY 2005 and $938,000 of the discount to interest expense
      in
      FY 2006. The remaining balance of $230,000 will be amortized over the remaining
      life of the convertible note which matures in Oct 2007 or sooner if the note
      is
      converted. During FY 2006 $4,475,000 of the convertible notes was converted
      into
      2,275,631 shares of the Company’s Class A Common
      Stock.





35


**ADVANCED
      PHOTONIX, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**1.**
            **Summary
                of the Company and Significant Accounting Policies******





**Summary
      of Company**





***Business
      Description*** - API is a
      leading supplier of custom opto-electronic solutions, high-speed optical
      receivers and Terahertz sensors and instrumentation, serving a variety of global OEM markets
      including telecommunications, military/aerospace, industrial sensing/NDT,
      medical and homeland security. Our optoelectronic solutions are based on our
      silicon LAAPD , PIN
      photodiode and FILTRODE® detectors. Our patented high-speed optical receivers
      include APD and
      PIN photodiode technology based upon III-V materials, including InP, InAlAs, and
      GaAs. Our newly emerging Terahertz sensor product line is targeted to the
      industrial NDT ,
      quality
      control, Homeland
      Security and
      military markets. Using our patented fiber coupled technology and high-speed
      Terahertz generation and detection sensors, we are engaged in transferring
      Terahertz technology from the application development laboratory to the factory
      floor. We have three manufacturing facilities, one in Camarillo, California ,
      one in
      Dodgeville, Wisconsin and one
      in Ann Arbor,  Michigan .





The
      Company’s wholly-owned subsidiary, Silicon Sensors, Inc. manufactures
      silicon photodiodes and optoelectronic devices in a manufacturing facility
      in
      Dodgeville, Wisconsin.





During
      2007, Texas Optoelectronics ,
      Silicon
      Detectors Inc. and
      Photonic Detectors Inc. were
      dissolved. These wholly-owned subsidiaries had no assets or liabilities at
      the
      time of dissolution.





***Principles
                of Consolidation***-
                The consolidated financial statements include the financial statements
                of
                the Company and its wholly-owned subsidiaries. All significant
                inter-company balances and transactions have been eliminated in
                consolidation.





***Reclassifications*** **-** Certain
      prior year balances have been reclassified in the consolidated financial
      statements to conform to the current year presentation.





***Fiscal
                Year-End*****-
                Effective with the FY 2006 year-end, the Company’s fiscal year ends on the
                last calendar day in March. Prior fiscal years ended on the last
                Sunday of
                March. As a result of this change, fiscal year ended March 31, 2007
                contains fifty-two weeks and fiscal year ended March 31, 2006 contains
                fifty-three weeks. The prior fiscal year ending March 27, 2005 contained
                fifty-two weeks.





***Operating
                Segment Information***-
                The Company operates as one segment in accordance with SFAS 131,
                “Disclosures about Segments of an Enterprise and Related Information.”The
                Company’s chief operating decision maker and management personnel view the
                Company’s performance and make resource allocation decisions by looking at
                the Company as a whole. Although there are different product lines
                within
                the Company, they are economically similar and are also similar in
                terms
                of the five criteria set forth in SFAS 131 that must be met to combine
                segments. The Company’s products are light and radiation detection
                devices. The nature of the production process is similar for all
                product
                lines, and manufacturing for the different product lines occurs in
                common
                facilities. Generally, the same engineers with the same qualifications
                design and manufacture products for all product lines. The types
                and class
                of customers are similar across all product lines, and products are
                distributed through common channels and distributor
                networks.




36


**Significant
      Accounting Policies**





***Pervasiveness
      of Estimates*** - The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.





***Fair
                Value of Financial Instruments***-
                The carrying value of all financial instruments potentially subject
                to
                valuation risk (principally consisting of cash equivalents, accounts
                receivable, accounts payable, notes receivable and notes payable)
                approximates fair value based upon prevailing interest rates available
                to
                the Company.





***Cash
                and Cash Equivalents***-
                The Company considers all highly liquid investments, with an original
                maturity of three months or less when purchased, to be cash
                equivalents.





***Compensating
      Cash Balance*** —  as
      a
      condition of the Master Equipment Lease Agreement with Fifth Third Bank the
      Company is required to maintain a compensating balance of not less than
      $1,500,000 as long as any indebtedness to Fifth Third is
      outstanding.





***Accounts
      Receivable*** - Receivables are stated at amounts estimated by management to be the net
      realizable value. The allowance is based on specific identification. Accounts
      receivable are charged off when it becomes apparent based upon age or customer
      circumstances that such amounts will not be collected. Collateral is not
      typically required, nor is interest charged on accounts receivable
      balances.





***Concentration
          of Credit*** **R** ***isk*** -
          Financial instruments, which potentially subject the Company to concentrations
          of credit risk, consist principally of cash equivalents and trade accounts
          receivable. The Company maintains cash balances at five financial institutions
          that are insured by the Federal Deposit Insurance Corporation (FDIC) up
          to
          $100,000. As of March 31, 2007, the Company had cash at three financial
          institutions in excess of federally insured amounts. As excess cash is
          available, the Company invests in short-term and long-term investments,
          primarily consisting of Government Securities Money Market instruments,
          and
          Repurchase agreements. As of March 31, 2007 and 2006, cash deposits held
          at
          financial institutions in excess of FDIC insured amounts were $2,926,000
          and
          $1,433,000, respectively.




Accounts
                receivable are unsecured and the Company is at risk to the extent
                such
                amount becomes uncollectible. The Company performs periodic credit
                evaluations of its customers’ financial condition and generally does not
                require collateral. As of March 31, 2007, one customer comprised
                11% of
                accounts receivable. As of March 31, 2006, one customer comprised
                14% of
                accounts receivable.





***Inventories*** -
      Inventories, which include material, labor and manufacturing overhead, are
      stated at standard cost (which approximates the first in, first out method)
      or
      market. Slow moving and obsolete inventories are reviewed throughout the year.
      To calculate a reserve for obsolescence, we begin with a review of our slow
      moving inventory. Any inventory, which has been slow moving within the past
      12
      months, is evaluated and reserved if deemed appropriate. In addition, any
      residual inventory, which is customer specific and remaining on hand at the
      time
      of contract completion, is reserved for at the standard unit cost. The complete
      list of slow moving and obsolete inventory is then reviewed by the production,
      engineering and/or purchasing departments to identify items that can be utilized
      in the near future. These items are then excluded from the analysis and the
      remaining amount of slow-moving and obsolete inventory is then reserved for.
      Additionally, non-cancelable open purchase orders for parts we are obligated
      to
      purchase where demand has been reduced may be reserved. Reserves for open
      purchase orders where the market price is lower than the purchase order price
      are also established. If a product that had previously been reserved for is
      subsequently sold, the amount of reserve specific to that item is then
      reversed.




37


***Equipment
                and Leasehold Improvements***-
                Equipment and leasehold improvements are stated at cost. Depreciation
                and
                amortization are computed using the straight-line method over the
                estimated useful lives of the assets or lease term ranging from three
                to
                nine years.





***Intangible
                Assets***


Intangible
      Assets – The
      Company records goodwill , which
      represents the excess of cost over fair value of net assets. Other intangibles
      are recorded at cost. These intangible assets are associated with the value
      of
      the acquired non-compete agreement, customer list, trademarks, R&D
      contracts, and technology/patents. These intangible assets are amortized using
      the straight-line method over their various estimated useful lives up to 15
      years.





Patents– Patents
      represent costs incurred in connection with patent applications. Such costs
      are
      amortized using the straight-line method over the useful life of the patent
      once
      issued, or expensed immediately if any specific application is unsuccessful.





***Impairment
      of Long-Lived Assets and Goodwill*** — The
      Company reviews the recoverability of the carrying value of long-lived assets
      using the methodology prescribed in SFAS 144. The Company reviews long-lived
      assets for impairment whenever events or changes in circumstances indicate
      that
      the carrying value of such assets may not be recoverable. Upon such an
      occurrence, recoverability of these assets is determined by comparing the
      forecasted undiscounted net cash flows to which the assets relate, to the
      carrying amount. If the asset is determined to be unable to recover its carrying
      value, it is written down to fair value. Fair value is determined based on
      discounted cash flows, appraised values or other information available in the
      market, depending on the nature of the assets.





The
      Company reviews the carrying value of goodwill and non-amortizable intangible
      assets using the methodology prescribed in SFAS 142, “Goodwill and Other
      Intangible Assets.” SFAS 142 requires that the Company not amortize goodwill and
      intangible assets with indefinite lives, but instead subject them to impairment
      tests on at least an annual basis and whenever circumstances suggest that
      goodwill may be impaired. Company
      recognizes impairment losses on long-lived assets used in operations when the
      undiscounted cash flows estimated to be generated by those assets are less
      than
      the assets' carrying amounts. In such circumstances, those assets are written
      down to estimated fair value. Long-lived assets consist primarily of goodwill
      and fixed assets.





***Revenue
      Recognition*** —
      The Company recognizes revenues upon shipment. Provision for estimated losses,
      if any, is made in the period in which such losses are determined.





Revenues
                from research and development cost reimbursement-type contracts are
                recorded as costs are incurred based upon the relationship between
                actual
                incurred costs, total estimated costs and the amount of the contract
                or
                grant award. Estimation of cost is reviewed periodically and any
                anticipated losses are recognized in the period in which they first
                become
                determinable.





***Significant
      Customers***— During
      fiscal years ended March 31, 2007 and 2006, no single customer accounted for
      more than 10% of the Company’s net sales. During FY 2005, two customers
      represented 12% and 12% of the Company’s net sales.




38


***Product
      Warranty*** —
      The Company generally sells products with a limited warranty of product quality.
      The Company accrues for known warranty issues if a loss is probable and can
      be
      reasonably estimated, and accrues for estimated incurred but unidentified issues
      based on historical activity. The accruals, and the related expenses, for known
      issues and for estimated incurred but unidentified issues were not significant
      during the periods presented.




***Shipping
      and Handling Costs*** ****— The
      Company’s policy is to classify shipping and handling costs as a component of
      Costs of Goods Sold in the Statement of Operations.





***Research
      and Development Costs*** - The
      Company charges all research and development costs, including costs associated
      with development contract revenues, to expense when incurred. Manufacturing
      costs associated with the development of a new fabrication process or a new
      product are expensed until such times as these processes or products are proven
      through final testing and initial acceptance by the customer. Costs related
      to
      revenues on non-recurring engineering services billed to customers are generally
      classified as cost of product sales. The company generally retains intellectual
      property rights related to paid research and development contracts.




***Advertising
      Costs*** ******— Advertising costs are expensed as incurred. Advertising expense was
      approximately $91,000, $133,000 and $84,000 in FY 2007, 2006 and 2005,
      respectively.





***Accounting
      for Stock Option Based Compensation*** —  Effective
      April 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment: An
      Amendment of FASB Statements No. 123 and 95” using the modified prospective
      method. Under this method, compensation cost is recognized on or after the
      effective date for the portion of outstanding awards, for which the requisite
      service has not yet been rendered, based on the grant date fair value of those
      awards. Prior to April 1, 2006, the Company accounted for employee stock options
      using the intrinsic value method in accordance with Accounting Principles Board
      ( APB )
      Opinion
      No. 25 ( APB
      No.
      25 ),
      “Accounting for Stock Issued to Employees,” and adopted the disclosure only
      alternative of SFAS No. 123. For stock-based awards issued on or after April
      1,
      2006, the Company recognizes the compensation cost on a straight-line basis
      over
      the requisite service period for the entire award. Measurement and attribution
      of compensation cost for awards that are unvested as of the effective date
      of
      SFAS No. 123(R) are based on the same estimate of the grant-date or
      modification-date fair value and the same attribution method used under SFAS
      No.
      123.




On
      November 10, 2005, the Financial Accounting Standards Board ( FASB )
      issued
      FASB Staff Position No. FAS 123(R)-3 “Transition Election Related to Accounting
      for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt
      the alternative transition method provided in the FASB Staff Position for
      calculating the tax effects of stock-based compensation pursuant to SFAS 123(R).
      The alternative transition method includes simplified methods to establish
      the
      beginning balance of the additional paid-in capital pool ( APIC
      pool )
      related
      to the tax effects of employee stock-based compensation, and to determine the
      subsequent impact on the APIC pool and Consolidated Statements of Cash Flows
      of
      the tax effects of employee stock-based compensation awards that are outstanding
      upon adoption of SFAS 123(R). As the Company is currently in a net operating
      loss position and has placed valuation allowances on its net deferred tax
      assets, there is no net impact on the Company’s APIC pool related to stock-based
      compensation for the year ended March 31, 2007.In accordance with SFAS No.
      148,
      and as required by SFAS 123(R), the required pro forma disclosure, for periods
      prior to adoption of SFAS 123(R), is shown below (in millions, except per share
      data).





**2006**
            
            **2005**Net
                Income (loss) , as reported
            
            $
            (5,262,000
            )
            $
            5,078,000Net
                income (loss), Proforma
            
            $
            (5,409,000
            )
            $
            5,032,000Basic
                income (loss) per share, as reported
            
            $
            (0.30
            )
            $
            0.38Basic
                income (loss) per share, Proforma
            
            $
            (0.30
            )
            $
            0.38





39





***Accounting
      for Income Taxes*** —
Income
      taxes are provided for taxes currently payable or refundable, and for deferred
      income taxes arising from future tax consequences of events that were recognized
      in the Company’s financial statements or tax returns. The effects of income
      taxes are measured based on enacted tax laws and rates applicable to periods
      in
      which the differences are expected to reverse. If necessary, a valuation
      allowance is established to reduce deferred income tax assets to an amount
      that
      will more likely than not be realized in accordance with SFAS No. 109
“Accounting for Income Taxes.




The
      Company follows the guidance established in EITF Issues No. 05-8, “Income Tax
      Consequences of issuing Convertible Debt with a Beneficial Conversion Feature”
( EITF
      05-8 )
      which
      concludes that the issuance of convertible debt with a beneficial conversion
      feature results in a basis difference that should be accounted for as a
      temporary difference and the establishment of a deferred tax liability for
      the
      basis difference should result in an adjustment to additional paid in
      capital.




***Earnings
      per Share*** —
The
      Company presents both basic and diluted earnings (loss) per share ( EPS )
      amounts. Basic EPS is calculated by dividing net income (loss) by the weighted
      average number of common shares outstanding during the period. Diluted
      EPS amounts are based upon the weighted average number of common and common
      equivalent shares outstanding during the period. The Company uses the treasury
      stock method to calculate the impact of stock compensation. Common equivalent
      shares are excluded from the computation in periods in which they have an
      anti-dilutive effect. The total shares excluded from the computation of earnings
      per share for the year ended March 31, 2007 total 3.5 million shares,
      representing outstanding stock options, warrants and debt convertible into
      shares of common stock.




***Recent
      Pronouncements and Accounting Changes*** —
In
      February 2007, the FASB issued SFAS No. 159, which permits entities to choose
      to
      measure many financial instruments and certain other items at fair value. SFAS
      No. 159 also includes an amendment to SFAS No. 115, “Accounting for Certain
      Investments in Debt and Equity Securities” which applies to all entities with
      available-for-sale and trading securities. This Statement is effective as of
      the
      beginning of an entity’s first fiscal year that begins after November 15, 2007.
      The Company is assessing the impact of SFAS No. 159 and has not determined
      whether it will have a material impact on the Company’s results of operations or
      financial position.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” The
      Statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles and expands disclosures about fair
      value measurements, and does not require any new fair value measurements. This
      Statement applies under other accounting pronouncements that require or permit
      fair value measurements. The Statement is effective for the fiscal years
      beginning after November 15, 2007. The Company is assessing SFAS No. 157 and
      has
      not determined the impact the adoption of SFAS No. 157 will have its results
      of
      operations or financial position.




In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48). The
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in a company’s financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes.” Specifically, the pronouncement prescribes a
      recognition threshold and a 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 also provides guidance on the related
      de-recognition, classification, interest and penalties, accounting for interim
      periods, disclosure and transition of uncertain tax positions. The
      interpretation is effective for fiscal years beginning after December 15, 2006.
      The Company is assessing FIN 48 and has not determined the impact that the
      adoption of FIN 48 will have on its consolidated financial
      statements.





40


**2.**
            **Inventories**




Inventories
                consist of the following at March
                31:





**2007**
            
            **2006**Raw
                material
            
            $
            3,348,000
            
            $
            4,288,000Work-in-process
            
            
            1,503,000
            
            
            937,000Finished
                products
            
            
            512,000
            
            
            390,000Total
                inventories
            
            
            5,363,000
            
            
            5,615,000Less
                reserve
            
            
            (924,000
            )
            
            (2,181,000
            )Inventories,
                net
            
            $
            4,439,000
            
            $
            3,434,000





**3.**
            **Equipment
                and Leasehold Improvements**




Equipment
                and leasehold improvements consist of the following at March
                31:




**2007**
            
            **2006**Machinery
                and equipment
            
            $
            6,449,000
            
            $
            6,133,000Furniture
                and fixtures
            
            
            521,000
            
            
            516,000Leasehold
                improvements
            
            
            554,000
            
            
            394,000Data
                processing equipment
            
            
            555,000
            
            
            439,000Vehicles
            
            
            26,000
            
            
            26,000Capitalized
                software
            
            
            442,000
            
            
            401,000Total
                assets
            
            
            8,547,000
            
            
            7,909,000Accumulated
                depreciation
            
            
            (5,565,000
            )
            
            (4,548,000
            )2,982,000
            
            
            3,361,000Construction-in-process
            
            
            1,754,000
            
            
            14,000Net
                equipment and leasehold improvements
            
            $
            4,736,000
            
            $
            3,375,000




Included
      in the table of Equipment and Leasehold improvements above, are assets totaling
      $1,867,000 at March 31, 2007, representing assets leased under a capital lease
      (see note 6 for a description of lease terms). A significant portion of these
      assets are included in construction in process.





Depreciation
      expense was $1,076,000 for fiscal year ended March 31, 2007, $829,000 for fiscal
      year ended March 31, 2006 and $369,000 for fiscal year ended March 27,
      2005.




**4.**
            **Intangible
                Assets and Goodwill**





***Intangible
      Assets*** **-** In
      October 2004 the Company entered into a definitive agreement for $5,000,000
      of
      senior convertible notes, (see note 6). In connection with the agreement, costs
      of approximately $646,000 were incurred which are being amortized over the
      36-month term of the agreement or expensed when the notes are converted. In
      March 2006, the amortization of prepaid capital finance expense was accelerated
      to reflect the portion of the convertible notes that were converted during
      the
      year. The remaining balance of $69,000 will be amortized at approximately $9,900
      per month over the remaining life of the notes. In March 2007, the Company
      paid
      off the SBBT Term Loan and Line of Credit. The portion of the capital finance
      expense related to the SBBT loan agreement was accelerated and written off
      in
      March 2007.





In
      December 2004 the Company acquired Photonic Detectors, Inc. The Company recorded
      an intangible asset of $635,000, which represents the excess of cost over fair
      value of net assets. This intangible asset is associated with the value of
      the
      acquired customer list. The intangible asset is being amortized over a period
      of
      60 months beginning January 2005. Monthly amortization is approximately $10,600
      per month. Each year the Company evaluates the present value of future cash
      flows associated with the list. Any impairment would be recognized when the
      expected future operating cash flows from such intangible assets is less than
      their carrying value. The annual intangible impairment evaluation resulted
      in
      the write-off of the PDI Customer List asset in the amount of
      $349,000.





41


In
      May
      2005 the Company completed the acquisition of Picotronix, Inc., dba Picometrix,
      Inc. The Company recorded intangible assets of $14,920,000, which represents
      the
      excess of cost over fair value of net assets. These intangible assets are
      associated with the value of the acquired non-compete agreement, customer list,
      trademarks, R&D contacts, and technology/patents. These intangible assets
      are being amortized over their various estimated useful lives up to 15 years.
      Amortization is approximately $116,200 per month.





Intangible
      assets that have definite lives consist of the following (in
      thousands):





**March
                31, 2007**
            
            **March
                31, 2006****Weighted
                Average Lives**
            
            **Carrying
                Value**
            
            **Accumulated
                Amortization**
            
            **Intangibles
                Net**
            
            **Carrying
                Value**
            
            **Accumulated
                Amortization**
            
            **Intangibles
                Net**Non-Compete
                agreement
            
            
            3
            
            $
            130
            
            $
            82
            
            $
            48
            
            $
            130
            
            $
            38
            
            $
            92Customer
                list
            
            
            15
            
            
            475
            
            
            309
            
            
            166
            
            
            825
            
            
            170
            
            
            655Trademarks
            
            
            15
            
            
            2,270
            
            
            286
            
            
            1,984
            
            
            2,270
            
            
            135
            
            
            2,135R&D
                contracts
            
            
            15
            
            
            1,380
            
            
            174
            
            
            1,206
            
            
            1,380
            
            
            82
            
            
            1,298Patents
            
            
            
            
            
            107
            
            
            62
            
            
            45
            
            
            70
            
            
            54
            
            
            16Patents
                pending
            
            
            
            
            
            310
            
            
            --
            
            
            310
            
            
            184
            
            
            --
            
            
            184Technology
            
            
            10
            
            
            10,950
            
            
            2,069
            
            
            8,881
            
            
            10,950
            
            
            975
            
            
            9,975**Total
                Intangibles**
            
            
            **11.4**
            
            **$**
            **15,622**
            
            **$**
            **2,982**
            
            **$**
            **12,640**
            
            **$**
            **15,809**
            
            **$**
            **1,454**
            
            **$**
            **14,355**





Amortization
      expense for the fiscal year ended March 31, 2007 was approximately $1,528,000
      compared to $1,403,000 for the year ended March 31, 2006. Patent amortization
      expense was approximately $7,000, $3,000 and $3,000 in FY 2007, 2006 and 2005,
      respectively. The current patents held by the Company have remaining useful
      lives ranging from 2 years to 20 years, with a weighted average remaining useful
      life of 3.5 years.




Assuming
      no impairment to the intangible value, future amortization expense for
      intangible assets and patents are as follows:





**Intangible
                Assets**
            
            **Patents**2008
            
            $
            1,394,000
            
            
            2008
            
            $
            7,0002009
            
            
            1,356,000
            
            
            2009
            
            
            6,0002010
            
            
            1,351,000
            
            
            2010
            
            
            5,5002011
            
            
            1,351,000
            
            
            2011
            
            
            5,5002012
            
            
            1,351,000
            
            
            2012
            
            
            5,0002013
                & after
            
            
            5,482,000
            
            
            2013
                & after
            
            
            16,000**Total**
            
            **$**
            **12,285,000**
            
            
            **Total**
            
            **$**
            **45,000**




Patent
      pending costs will be amortized beginning the month the patents are granted.





***Impairment
                of Goodwill***-As a result of the Company’s annual goodwill impairment evaluation,
                goodwill recorded from the 2003 Texas Optoelectronics Inc. acquisition
                of
                approximately $1.4 million was reduced $140,000 in FY 2007 and $814,000
                in
                FY 2006, based on the net present value of the estimated future cash
                flow
                as a result of the acquisition.




42


**5.**
            **Line
                of Credit/Short Term Debt**




On
      March
      6, 2007, the Company and Fifth Third  entered
      into a Revolving Line of Credit (the Loan
      Agreement )
      providing for borrowings of up to a maximum of $2,000,000. The availability
      under the facility will be determined by the calculation of a borrowing base
      that includes a percentage of eligible accounts receivable and inventory.





The
      Loan
      Agreement contains customary representations, warranties and financial
      covenants. The interest rate is variable and is adjusted quarterly. The maximum
      interest rate will equal the prime rate. The principal loan amounts are due
      on
      March 6, 2008.





The
      Loan
      Agreement is guaranteed by each of API’s wholly-owned subsidiaries and the loan
      is secured by a Security Agreement among API, its Subsidiaries and Fifth Third,
      pursuant to which API and its subsidiaries granted to Fifth Third a
      first-priority security interest in certain described assets. On
      March
      8, 2007, API drew down $741,000 under the Loan Agreement to pay off prior
      indebtedness.





**6.**
            **Long-Term
                Debt and Notes Payable**




In
      October 2004, the Company entered into a definitive agreement for the private
      placement to four institutional investors of $5 million aggregate principal
      amount of its senior convertible notes. The original Securities Purchase
      Agreement was filed with the Securities and Exchange Commission on October
      12,
      2004. The notes are convertible at the option of the holder under certain
      circumstances into shares of the Company’s Class A Common Stock at an initial
      conversion price of $1.9393 per share, subject to adjustment. The notes pay
      interest at an annual rate of prime plus 1% and will mature on October 12,
      2007.





In
      connection with the transaction, the Company had issued to the investors
      five-year warrants to purchase 850,822 shares of the Company’s Class A Common
      Stock at an exercise price of $2.1156 per share, subject to adjustment. The
      Company has agreed to register the shares of common stock issuable upon
      conversion of the notes and upon exercise of the warrants for resale under
      the
      Securities Act of 1933. The investors have the option for a period of one year
      following effectiveness of the registration statement to acquire an additional
      $5 million aggregate principal amount of the notes with an initial conversion
      price of $2.1156 per share and five-year warrants purchasing an additional
      850,822 shares of common stock. The original terms of the warrants issued and,
      the additional warrants to be issued, in the private placement to the investors
      were also modified on March 9, 2005 to reduce the exercise price from $2.1156
      per share of Class A Common Stock of API to $1.78 per share. Similarly, on
      March
      9, 2005, the terms of the notes issued in connection with the private placement
      (the Notes )
      were
      modified to (i) provide that the interest rate shall not be less than 6.5%
      at
      any time , (ii)
      increase the amount of “Permitted Indebtedness” (as such term is defined in the
      Notes) from $3 million to $6 million and (iii) decrease the amount of “Permitted
      Acquisition Indebtedness” (as such term is defined in the Notes) from $6 million
      to $3 million. In addition, the investors in the private placement agreed to
      subordinate, pursuant to a form of subordination agreement in form and substance
      reasonable satisfactory to them, (i) the principal and interest payments on
      the
      Notes to the “Permitted Bank Debt” (as such term is defined in the letters of
      agreement) and (ii) their liens on the Company’s assets to any lien granted by
      the Company as security for the “Permitted Bank Debt”.





In
      accordance with APB 14, the Company has recorded a discount to the note of
      $1,344,000 to account for the fair value associated with the note’s detachable
      warrants. Upon any exercise of the conversion feature, the notes will then
      be
      converted from debt to equity. A copy of the original agreement and all related
      documents were filed with the Securities and Exchange Commission on October
      12,
      2004 on Form 8-K, and the foregoing summary is qualified in its entirety by
      reference thereto.





43


During
      FY 2006, $3.475
      million of the $5 million Convertible debt (Convertible Debt 1st Tranche) was
      converted into 1,792,000 shares leaving a Convertible Debt 1st Tranche balance
      of $1,439,000 (net of discount) at March 31, 2007. In addition, 170,164 of
      the
      warrants were converted and the Company received $299,490 in cash. At March
      31, 2007, the
      balance of unexercised warrants was 680,658.





In
      September 2005, the Company issued $1.0 million of convertible debt with
      warrants to purchase 170,164 shares of common stock (Convertible Debt
      2 nd Tranche). The Company originally valued the warrants and recorded an increase
      to
      additional paid-in-capital amounting to $27,000. Subsequently, the Company
      determined that the beneficial conversion option and the warrants should have
      been valued using the “Intrinsic Value” approach. Accordingly, the Company
      recognized a $1.0 million debt discount on the $1.0 million principal value
      of
      the convertible note payable and the debt discount is amortized over
      the
      life of the note. The note was converted in November 2005 into 472,678 shares
      of
      Class A Common
      Stock .
      In
      addition, 85,082 of the warrants were converted and the Company received
      $151,446 in cash. At March 31, 2007, the
      balance of unexercised warrants was 85,082.





In
      March
      2006, the Company issued $4.0 million of convertible debt (Convertible Debt
      2 nd Tranche)
      with warrants to purchase 680,658 shares of common stock. The Company originally
      valued the warrants and recorded an increase to additional-paid-in- capital
      mounting to $1.8 million. Subsequently, the Company determined that the
      beneficial conversion options and warrants should have been valued using the
      “Intrinsic Value” approach. Accordingly, the Company recognized a $2.7 million
      debt discount on the $4.0 million principal value of the convertible note
      payable and is amortizing the debt discount to interest expense over the life
      of
      the note. At March 31, 2007, the
      Convertible Debt 2 nd Tranche
      was $2,722,000 (net of the debt discount).





In
      May
      2005, the Company borrowed $2.7 million from a regional bank. Scheduled
      repayments were principal of $75,000 per month, plus interest, until maturity
      on
      May 2, 2008. This loan was paid in full in March 2007.





The MEDC entered
      into two loan agreements with Picometrix LLC, one in fiscal 2004 (MEDC-loan
      1)
      and one in fiscal 2005 (MEDC-loan 2). Both loans are unsecured.





MEDC-loan
      1 is for an amount up to $1.024 million with an interest rate of 7% and is
      fully
      amortized by the end of an eight year
      period (ending on September 15, 2012). Interest accrued, but unpaid in the
      1 st four
      years of this agreement will be added to the then outstanding principal of
      this
      Note. In October 2008, interest will begin to accrue on the restated principal.
      Commencing in October 2008, the Company will pay MEDC the restated principal
      and
      accrued interest on any unpaid balance over the remaining four years. In
      September 2004, the
      Company borrowed $750,000 against the $1.0  million.
      On February 1, 2007, the Company borrowed an additional $ 172,000.





MEDC-loan
      2 is for an amount up to $1.2 million with an interest rate of 7% and is fully
      amortized by the end of a six year
      period (ending on September 15, 2011). Interest
      accrued, but unpaid in the 1 st two
      years of this agreement will be added to the then outstanding principal of
      this
      Note. During the third year of this agreement, the Company will pay interest
      on
      the restated principal of the Note. Commencing in October 2008, the Company
      will
      pay MEDC the restated principal and accrued interest on any unpaid balance
      over
      the remaining three years. In September 2005 the Company borrowed $600,000
      against the $1.2 million.




As
      a
      result of the acquisition of Picotronix, Inc. (dba Picometrix ,
      Inc. ),
      the
      Company issued promissory notes to the stockholders of Picometrix, ( Debt
      to
      Related Parties ).
      The
      notes are payable in annual installments of varying amounts through May 2009.
      The notes bear interest at a rate of prime plus 1.0% and are secured by all
      of
      the intellectual property of Picometrix. API
      has
      the option of prepaying the notes without penalty.





44


In
      March,
      2007, API, as Lessee, entered into a Master Equipment Lease Agreement with
      Fifth
      Third Leasing Company, as Lessor, to finance the purchase of new manufacturing
      equipment up to an aggregate of $2,300,000 ( Lease ). API
      may
      purchase equipment under the Lease until June 30, 2007. The Lease will have
      a
      term expiring 60-months following the completion of all permitted purchases
      or
      June 30, 2007 whichever is earlier (the Lease
      Date ).
      The
      interest rate for the interim period prior to the Lease Date is a variable
      rate
      based on the prime rate plus 12.5 %.
      On the
      Lease Date, the Lessee has the option to fix the interest rate based on the
      interest swap rate then in effect plus 300 basis points, or to elect to continue
      to use the variable interest rate of prime plus 12.5 %. API’s
      obligations under the Lease are secured by a first priority security interest
      in
      the purchased equipment and are guaranteed by API’s subsidiaries.




The
      Lease
      contains standard contract provisions regarding the Lessee's obligations to
      make
      payment, to maintain the equipment and to keep it insured and events
      constituting a default under the Lease. The Lease further provides that if
      no
      event of default exists at the end of the Lease term, the Company has the option
      to purchase the Equipment for $1.00. This lease has been accounted for as a
      capital lease in accordance with SFAS No. 13. The balance on this loan at March
      31, 2007 was $1,867,000.





**Debt
      Maturity Table (in 000’s)**





**Balance
                3/31/07**
            **FY2008**
            **FY2009**
            **FY2010**
            **FY2011**
            **FY2012**
            **FY2013
                & Beyond**Bank
                Term Loan -Fifth Third Bank
            $1,867
            $280
            $373
            $373
            $373
            $373
            $95Credit
                Line - Fifth Third Bank
            741
            741MEDC---loan 1
            750
            --
            93
            188
            188
            188
            93MEDC
                - loan 2
            600
            75
            150
            150
            150
            75
            --MEDC
                - loan 3
            172
            --
            21
            43
            43
            43
            22Convertible
                Debt 1stTranche
            1,525
            1,525Discount
                on convertible note 1st
            (86)
            (86)Convertible
                Debt 2ndTranche
            4,000
            4,000Discount
                on convertible notes 2nd
            (1,278)
            (1,278)Debt
                to Related Parties
            2,401
            550
            900
            951**TOTAL**
            **$10,692**
            **$5,807**
            **$1,537**
            **$1,705**
            **$754**
            **$679**
            **$210**





**7.**
            **Capitalization**




The
      Company’s Certificate of Incorporation provides for two classes of common stock,
      a Class A for which 50,000,000 shares are authorized for issuance and a Class
      B
      for which 4,420,113 shares are authorized for issuance. The par value of each
      class is $.001. Subject to certain limited exceptions, shares of Class B Common
      Stock are automatically converted into an equivalent number of Class A shares
      upon the sale or transfer of the Class B Common Stock by the original holder.
      The holder of each share of Class A and Class B Common Stock is entitled to
      one
      vote per share.





The
      Company has authorized 10,000,000 shares of Preferred Stock, of which 780,000
      shares have been designated Class A Redeemable Convertible Preferred Stock
      with
      a par value of $.001 per share. 40,000 shares of Class A Redeemable Convertible
      Preferred Stock ( Class
      A
      Preferred )
      were
      issued and outstanding at March 31, 2007 and 2006. The Class A Preferred Stock
      has a liquidation preference equal to its issue price ($.80 per share) and
      is
      convertible at any time, at the option of the holder, into .3 shares of Class
      B
      Common Stock for each share of Class A Preferred Stock converted. The Class
      A
      Preferred Stock is subject to redemption at the Company’s option for $.80 per
      share at any time. The Company would be required to pay approximately $32,000
      to
      redeem these shares. The holders of the Class A Preferred Stock are entitled
      to
      an annual non-cumulative dividend preference of $.072 per share when the
      Company’s net earnings per share of Class A Preferred Stock equal or exceed
      $.072. The Class A Preferred stockholders do not have voting rights except
      as
      required by applicable law.





45


**8.**
            **Stock
                Options and Warrants**




The
      Company has four stock option plans: The 1990 Incentive Stock Option and
      Non-Qualified Stock Option Plan, the 1991 Directors’ Stock Option Plan
      ( The
      Directors’ Plan ),
      the
      1997 Employee Stock Option Plan and the 2000 Stock Option Plan. Compensation
      expense related to the grant of options in FY 2007 was $361,000.





The
      Company’s various stock option plans provide for the granting of non-qualified
      and incentive stock options to purchase up to 3,700,000 shares of common stock
      for periods not to exceed 10 years. Options typically vest at the rate of 25%
      per year over four years, except for options granted under The Directors’ Plan,
      which typically vest at the rate of 50% per year over two years. Under these
      plans, the option exercise price equals the stock’s market price on the date of
      grant. Options may be granted to employees, officers, directors and consultants.
      The Company has also granted options, under similar terms as above, under no
      specific shareholder approved plan.





Compensation
      expense related to the grant of options in FY 2007 was $361,000. The total
      unrecognized compensation expense for unvested share-based compensation awards
      outstanding at March 31, 2007 amounted to $339,000, which is expected to be
      recognized over the subsequent fiscal three years.





Stock
      option transactions for fiscal years 2005, 2006 and 2007 are summarized as
      follows:





**Shares
                (000)**
            
            **Weight
                Average Exercise Price**Outstanding,
                March 28, 2004
            
            
            1,961
            
            $
            1.39Granted
            
            
            401
            
            $
            1.88Exercised
            
            
            (2
            )
            $
            0.65Expired
            
            
            (5
            )
            $
            1.86Outstanding,
                March 27, 2005
            
            
            2,355
            
            $
            1.47Exercisable,
                March 27, 2005
            
            
            1,776
            
            $
            1.48Outstanding,
                March 27, 2005
            
            
            2,355
            
            $
            1.47Granted
            
            
            926
            
            $
            2.23Exercised
            
            
            (267
            )
            $
            1.08Expired
            
            
            --
            
            
            --Outstanding,
                March 31, 2006
            
            
            3,014
            
            $
            1.74Exercisable,
                March 31, 2006
            
            
            2,025
            
            $
            1.64Outstanding,
                March 31, 2006
            
            
            3,014
            
            $
            1.74Granted
            
            
            90
            
            $
            2.81Exercised
            
            
            (341
            )
            $
            1.04Expired
            
            
            (223
            )
            $
            1.74Outstanding,
                March 31, 2007
            
            
            2,540
            
            $
            1.90Exercisable,
                March 31, 2007
            
            
            1,978
            
            $
            1.81





46





Information
      regarding stock options outstanding as of March 31, 2007 is as follows:





**Options
                Outstanding**(in
                000s)
            
            Weighted
                Average
            
            Weighted
                AveragePrice
                Range
            
            Shares
            
            Exercise
                Price
            
            Remaining
                Life$0.50
                - $1.25
            
            
            911
            
            $
            0.77
            
            
            1.96$1.50
                - $2.50
            
            
            913
            
            $
            2.01
            
            
            7.71$2.87
                - $5.34
            
            
            716
            
            $
            3.18
            
            
            6.88








**Options
                Exercisable**(in
                000s)
            
            Weighted
                Average
            
            Weighted
                AveragePrice
                Range
            
            Shares
            
            Exercise
                Price
            
            Remaining
                Life$0.50
                - $1.25
            
            
            881
            
            $
            0.76
            
            
            1.93$1.50
                - $2.50
            
            
            538
            
            $
            1.99
            
            
            7.54$2.87
                - $5.34
            
            
            559
            
            $
            3.27
            
            
            5.77





**Warrants
      Outstanding & Exercisable**





(in
                000s)
              Shares
            Exercise
                Price
            Remaining
                Life (in yrs)681
            $1.78
            3.7766
            $1.78
            4.5





The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option pricing model with the following weighted-average
      assumptions used for grants in 2007: risk-free interest rate of 4.6% - 5.0%,
      expected volatility of 52.9% - 58.0% and expected lives of 10 years in all
      periods. No dividends were assumed in the calculations.





**9.**
            **Foreign
                Sales**




In
                FY 2007, 2006 and 2005, the Company had export sales of approximately
                $4.4
                million, $2.1 million and $2.5 million, respectively, made primarily
                to
                customers in North America, Asia and Europe*.*All foreign sales are denominated in U.S. dollars. Sales to specific
                countries, stated as a percentage of total sales, consist of the
                following:




2007
            
            2006
            
            2005Australia
            
            
            --
            
            
            1
            %
            
            --Canada
            
            
            1
            %
            
            --
            
            
            2
            %Germany
            
            
            10
            %
            
            --
            
            
            --Hong
                Kong
            
            
            1
            %
            
            --
            
            
            --Israel
            
            
            1
            %
            
            --
            
            
            --Japan
            
            
            1
            %
            
            --
            
            
            2
            %Spain
            
            
            --
            
            
            --
            
            
            5
            %United
                Kingdom
            
            
            4
            %
            
            4
            %
            
            2
            %All
                other countries
            
            
            1
            %
            
            4
            %
            
            6
            %Total
                export sales
            
            
            19
            %
            
            9
            %
            
            17
            %





**10.**
            **Employees’
                Retirement Plan**




The
      Company maintains a 401(k) Plan which is qualified under the Internal Revenue
      Code. All full-time employees are eligible to participate in the Plan. Employees
      may make voluntary contributions to the Plan, which is matched by the Company
      at
      the rate of $1.00 for every $1.00 of employee contribution up to 3% of wages,
      and $.50 for every $1.00 of employee contributions on the next 2% of wages,
      subject to certain limitations. Employer contributions are fully vested when
      earned. The Company contributions and administration costs recognized as expense
      were approximately $255,000, $181,000 and $62,000 in FY 2007, 2006 and 2005,
      respectively.





47


**11.**
            **Income
                Taxes**





At
      March
      31, 2007, the Company had net operating loss carry forwards (NOL’s) of
      approximately $22.5 million for Federal income tax purposes and $2.5 million
      for
      state income tax purposes that expire at various dates through fiscal year
      2027.
      The tax laws related to the utilization of loss carry forwards are complex
      and
      the amount of the Company’s loss carry forward that will ultimately be available
      to offset future taxable income may be subject to annual limitations under
      IRC
      Section 382 resulting from changes in the ownership of the Company’s common
      stock.





The
      tax
      effects of temporary differences that gave rise to significant portions of
      the
      deferred tax assets at March 31, 200 were substantially composed of the
      Company's net operating loss carry forwards for which the Company had made
      a
      deferred tax asset valuation allowance of $5.7 million based upon the
      acquisition of Picometrix, Inc. in May 2005. Based upon the FY 2007 results,
      the
      Company management has projected that the Company will generate sufficient
      future taxable income to utilize some of the carry-forwards that expire by
      2027.





Realization
      of the deferred tax asset is dependent upon generating sufficient taxable income
      prior to expiration of any NOL’s. Although realization is not assured,
      management believes it is more likely than not that the recorded deferred asset
      will be realized. Accordingly the Company has decreased the deferred tax asset
      valuation allowance to $4.5 million at March 31, 2007. In addition, the Company
      has reduced the deferred tax asset by the deferred tax liability of $ 3.1
      million from the Picometrix acquisition, the deferred tax liability of $379,000
      relating to the beneficial conversion feature of the convertible debt for the
      year ending March 31, 2007, and the tax loss carry forward that expired in
      FY
      2007.




The
      ultimate realization of deferred tax assets is dependent upon the generation
      of
      future taxable income during the periods in which those temporary differences
      become deductible. Management considers the scheduled reversal of deferred
      tax
      liabilities, projected future taxable income and tax planning strategies in
      making this assessment.





The
      tax
      provision for the year ended March 31, 2007 is composed of the Wisconsin state
      income tax. The tax provision for the year ended March 31, 2006 was composed
      of
      Wisconsin state income tax. The tax provision for the year ended March 27,
      2005
      was composed of Wisconsin state income tax and the minimum California franchise
      tax.




Below
      are
      reconciliations between the provisions for income taxes compared with the
      amounts at the United States federal statutory rate:




**Years
                Ended**
            
            **March
                31, 2007**
            
            **March
                31, 2006**
            
            **March
                27, 2005**Federal
                income tax at statutory rates
            
            
            (1,898,000
            )
            
            (1,173,000
            )
            
            177,000State
                income taxes, net of federal benefit
            
            
            (93,000
            )
            
            (193,000
            )
            
            39,000Expiration
                of NOL carry-forwards
            
            
            1,189,000
            
            
            302,000
            
            
            (211,000
            )Change
                in valuation allowance
            
            
            (1,189,000
            )
            
            972,000
            
            
            (4,749,000
            )Change
                in R&E credit carry-forwards
            
            
            (13,000
            )Other
            
            
            (22,000
            )
            
            66,000
            
            
            10,000Permanent
                items
            
            
            1,108,000
            
            
            55,000Effective
                federal income tax
            
            
            (920,000
            )
            
            28,000
            
            
            (4,734,000
            )





48





Deferred
      Tax Assets at March 31, 2007 are as follows, at a projected tax rate of 34%
      for
      federal income tax purposes and 5.61% for state income tax
      purposes:





**Federal**
            
            **State**Current
            
            
            --
            
            
            --Long
                Term
            
            
            1,225,000
            
            
            --1,225,000
            
            
            --





The
      Company’s net deferred tax assets consist of the following components, for
      fiscal years 2007 and 2006:




**2007**
            
            **2006**Sec.
                263A adjustment
            
            
            45,000
            
            
            36,000Accrued
                bonus
            
            
            103,000
            
            
            --Inventory
                reserve
            
            
            270,000
            
            
            719,000Utility
                accruals
            
            
            --
            
            
            7,000Warranty
                reserve
            
            
            33,000
            
            
            25,000Accounts
                receivable allowance
            
            
            20,000
            
            
            16,000Accrued
                vacation
            
            
            51,000
            
            
            90,000Charitable
                contributions
            
            
            8,000
            
            
            4,000NOL
                Carryforwards
            
            
            7,524,000
            
            
            7,870,000Accumulated
                amortization
            
            
            305,000
            
            
            163,000Accumulated
                depreciation
            
            
            (57,000
            )
            
            (50,000
            )R&D
                credits
            
            
            563,000
            
            
            675,000Goodwill
                amortization
            
            
            322,000
            
            
            322,000California
                Mfg. credit
            
            
            39,000
            
            
            39,000Other
            
            
            --
            
            
            2,000Total
            
            
            9,226,000
            
            
            9,918,000Valuation
                allowance
            
            
            (4,533,000
            )
            
            (5,722,000
            )Deferred
                tax liability - Picometrix acquisition
            
            
            (3,089,000
            )
            
            (3,573,000
            )Deferred
                tax-beneficial conversion
            
            
            (379,000
            )
            
            --Net
                deferred tax asset
            
            
            1,225,000
            
            
            623,000





At
      March
      31, 2007 the Company’s net operating loss carry forwards will expire on the
      following dates:




**Federal**
            
            **California****Amount**
            
            **Expiration**
            
            **Amount**
            
            **Expiration**2,226,072
            
            
            March
                31, 2008
            
            
            82,141
            
            
            March
                31, 20133,816,200
            
            
            March
                31, 2009
            
            
            973,927
            
            
            March
                31, 20141,947,320
            
            
            March
                31, 2010
            
            
            471,220
            
            
            March
                31, 201430,267
            
            
            March
                31, 2011
            
            
            945,813
            
            
            March
                31, 20171,548,581
            
            
            March
                31, 2012599,421
            
            
            March
                31, 2013250,133
            
            
            March
                31, 20196,096,005
            
            
            March
                31, 202082,471
            
            
            March
                31, 20211,868,504
            
            
            March
                31, 202250
            
            
            March
                31, 2022846,957
            
            
            March
                31, 2023753,118
            
            
            March
                31, 20231,500
            
            
            March
                31, 20241,500
            
            
            March
                31, 20252,407,874
            
            
            March
                31,2027$
            22,475,973
            
            
            
            
            $
            2,473,101





49


At
      March
      31, 2007 the Company’s Federal R&D tax credit carry forwards will expire on
      the following dates:




**Amount**
            
            **Expiration**40,963
            
            
            March
                31, 200780,385
            
            
            March
                31, 200866,489
            
            
            March
                31, 200917,847
            
            
            March
                31, 201063,832
            
            
            March
                31, 201134,245
            
            
            March
                31, 201216,737
            
            
            March
                31, 2018168,399
            
            
            March
                31, 20199,217
            
            
            March
                31, 2020100,338
            
            
            March
                31, 202187,020
            
            
            March
                31, 202299,925
            
            
            March
                31, 202382,575
            
            
            March
                31, 2024143,990
            
            
            March
                31, 2025124,030
            
            
            March
                31, 2026125,000
            
            
            March
                31, 2027$
            1,260,992





**12.**
            **Net
                Income (Loss) Per Share**




Calculations
      of Net income (loss) per share are in accordance with SFAS No. 128, “Earnings
      per Share”. Accordingly, basic earnings (loss) per share are computed by
      dividing net income (loss) by the weighted average number of shares outstanding
      for each year. The
      impact of Statement 128 on the calculation of earnings per share is as
      follows:





**2007**
            
            **2006**
              **Restated**
            
            **2005
                Restated****BASIC**Average
                Shares Outstanding
            
            
            19,065,000
            
            
            17,477,000
            
            
            13,461,000Net
                Income (Loss)
            
            $
            (4,646,000
            )
            $
            (5,262,000
            )
            $
            5,078,000Basic
                Income (Loss) Per Share
            
            $
            (0.24
            )
            $
            (0.30
            )
            $
            0.38**DILUTED**Average
                Shares Outstanding
            
            
            19,065,000
            
            
            17,477,000
            
            
            13.461,000Net
                Effect of Shares Issuable pursuant to terms of convertible note,
                based on
                a weighted average
            
            
            783,000
            
            
            1,476,000
            
            
            1,176,000Net
                Effect of Dilutive Stock Options and Warrants based on the treasury
                stock
                method using average market price
            
            
            2,677,000
            
            
            2,666,000
            
            
            962,000Total
                Shares
            
            
            22,525,000
            
            
            21,619,000
            
            
            15,599,000Net
                Income (Loss), adjusted for interest expense on convertible note
                (net of
                tax)
            
            $
            (4,257,000
            )
            $
            (4,873,000
            )
            $
            5,128,000Diluted
                Earnings Per Share
            
            
            anti
                dilutive
            
            
            anti-dilutive
            
            $
            0.33Average
                Market Price of Common Stock
            
            $
            2.06
            
            $
            2.82
            
            $
            2.18Ending
                Market Price of Common Stock
            
            $
            1.96
            
            $
            2.71
            
            $
            2.11





50





The
      following stock options granted to Company employees, directors, and former
      owners were excluded from the calculation of earnings per share in the financial
      statements because they were anti-dilutive for the periods
      reported:




**2007**
            
            **2006**
            
            **2005**Exercise
                Price per Share($)
            
            No.
                Shares Underlying Options
            
            Exercise
                Price per Share($)
            
            No.
                Shares Underlying Options
            
            Exercise
                Price per Share($)
            
            No.
                Shares Underlying Options2.1100
            
            
            239,5002.1600
            
            
            6,0002.2500
            
            
            16,8002.3200
            
            
            58,4002.6800
            
            
            50,0002.8700
            
            
            87,500
            
            
            2.8700
            
            
            3,750
            
            
            2.2500
            
            
            35,4002.8900
            
            
            20,000
            
            
            2.8900
            
            
            10,000
            
            
            2.5000
            
            
            27,7003.0940
            
            
            1,000
            
            
            3.0940
            
            
            1,000
            
            
            3.0940
            
            
            1,0003.1875
            
            
            350,000
            
            
            3.1875
            
            
            350,000
            
            
            3.1875
            
            
            350,0005.3440
            
            
            50,000
            
            
            5.3440
            
            
            50,000
            
            
            5.3440
            
            
            50,000Total
            
            
            879,200
            
            
            Total
            
            
            414,750
            
            
            Total
            
            
            464,100





**13.**
            **Related
                Party Transactions**




The
      Company’s only significant related party transactions relate to the payment of
      principal and interest on Debt to Related Parties (see Note 15). On March 31,
      2007 the remaining balance on the notes was $2.4 million. The Company paid
      $500,000 of principal and $224,000 in interest to the note holders in FY 2007.
      Robin Risser and Steve Williamson, the Company’s CFO and CTO, respectively, are
      the note holders .





**14.**
            **Commitments
                & contingencies**




***Leases
      -*** The
      Company leases all of its executive offices, research, marketing and
      manufacturing facilities under non-cancellable operating leases. At March 31,
      2007, those leases consisted of approximately 95,000 square feet in three
      facilities. The facility located in Camarillo, California is leased through
      February 2009. The manufacturing facility located in Dodgeville, Wisconsin
      is
      leased through October 2011, subject to early termination by the Company upon
      six month’s written notice served after October 31, 2007. The facility located
      in Ann Arbor, Michigan is comprised of the Corporate office and the Picometrix
      LLC manufacturing plant and is leased through June 2010, with two five year
      options to renew at the current lease rate with a CPI adjuster. In addition,
      the
      Company has the right of first refusal to purchase the facility. The Company
      believes that its existing facilities are adequate to meet its needs for the
      foreseeable future. Minimum future lease payments under all non-cancellable
      operating leases are as follows:





2008
            
            $
            1,170,0002009
            
            
            1,045,0002010
            
            
            705,0002011
            
            
            176,000Total
            
            $
            3,096,000





Rent
                expense was approximately $1,264,000, $1,183,000 and $482,000 in
                FY 2007,
                2006 and 2005, respectively.





***Legal*** -
      The
      Company is, from time to time, subject to legal and other matters in the normal
      course of its business. While the results of such matters cannot be predicted
      with certainty, management does not believe that the final outcome of any
      pending matters will have a material effect on the financial position and
      results of operations of the Company.





51


**15.**
            **Subsequent
                Events**




In
      accordance with the terms of the Lease agreement with Fifth Third Bank (note
      6),
      the Company made an additional draw in the amount of $421,000 on April 30,
      2007.
      The balance on this loan at April 30, 2007 was $2,288,000.





On
      June
      12, 2007,
      API received
      a notice of a complaint for a patent infringement on a product that was part
      of
      the PDI acquisition from Opto Diode Corporation. The Company sold less than
      $30,000 of product since the acquisition and feels the complaint is without
      merit and is seeking to resolve this matter as quickly as possible.





**16.**
            **Quarterly
                Financial Data**




The
      table
      below lists financial information (unaudited) by quarter for each of the three
      fiscal years ending March 31, 2007, March 31, 2006, and March 27,
      2005.




**First**
            
            **Second**
            
            **Third**
            
            **Fourth**
            
            **Total
                Year****2007**Net
                Sales
            
            $
            5,668,000
            
            $
            5,878,000
            
            $
            5,881,000
            
            $
            6,161,000
            
            $
            23,588,000Cost
                of Sales
            
            
            3,191,000
            
            
            2,997,000
            
            
            2,997,000
            
            
            3,508,000
            
            
            12,693,000Gross
                Profit
            
            
            2,477,000
            
            
            2,881,000
            
            
            2,884,000
            
            
            2,653,000
            
            
            10,895,000Research
                & Development Expenses
            
            
            969,000
            
            
            1,019,000
            
            
            1,005,000
            
            
            1,022,000
            
            
            4,015,000Selling,
                General & Administrative Expenses
            
            
            2,243,000
            
            
            2,441,000
            
            
            2,214,000
            
            
            3,178,000
            
            
            10,076,000Net
                Income (Loss)
            
            $
            (1,234,000
            )
            $
            (1,124,000
            )
            $
            (964,000
            )
            $
            (1,324,000
            )
            $
            (4,646,000
            )Basic
                Income (Loss) per Common Share
            
            $
            (0.07
            )
            $
            (0.06
            )
            $
            (0.05
            )
            $
            (0.07
            )
            $
            (0.24
            )Diluted
                Income (Loss) per Common Share
            
            
            anti-dilutive
            
            
            anti-dilutive
            
            
            anti-dilutive
            
            
            anti-dilutive
            
            
            anti-dilutiveWeighted
                Average Common Shares Outstanding
            
            
            18,980,000
            
            
            19,026,000
            
            
            19,089,000
            
            
            19,165,000
            
            
            19,065,000**2006**Net
                Sales
            
            $
            5,077,000
            
            $
            5,194,000
            
            $
            6,511,000
            
            $
            6,803,000
            
            $
            23,585,000Cost
                of Sales
            
            
            2,929,000
            
            
            3,070,000
            
            
            3,513,000
            
            
            4,890,000
            
            
            14,402,000Gross
                Profit
            
            
            2,148,000
            
            
            2,124,000
            
            
            2,998,000
            
            
            1,913,000
            
            
            9,183,000Research
                & Development Expenses
            
            
            452,000
            
            
            795,000
            
            
            836,000
            
            
            936,000
            
            
            3,019,000Selling,
                General & Administrative Expenses
            
            
            1,669,000
            
            
            1,969,000
            
            
            1,902,000
            
            
            3,151,000
            
            
            8,691,000Net
                Income (Loss)
            
            $
            (235,000
            )
            $
            (1,613,000
            )
            $
            (870,000
            )
            $
            (2,544,000
            )
            $
            (5,262,000
            )Basic
                Income (Loss) per Common Share
            
            $
            (0.02
            )
            $
            (0.09
            )
            $
            (0.05
            )
            $
            (0.13
            )
            $
            (0.30
            )Diluted
                Income (Loss) per Common Share
            
            
            anti-dilutive
            
            
            anti-dilutive
            
            
            anti-dilutive
            
            
            anti-dilutive
            
            
            anti-dilutiveWeighted
                Average Common Shares Outstanding
            
            
            15,133,000
            
            
            17,252,000
            
            
            18,563,000
            
            
            18,882,000
            
            
            17,477,000**2005**Net
                Sales
            
            $
            3,253,000
            
            $
            3,709,000
            
            $
            3,852,000
            
            $
            3,989,000
            
            $
            14,803,000Cost
                of Sales
            
            
            1,956,000
            
            
            2,451,000
            
            
            2,832,000
            
            
            2,832,000
            
            
            10,071,000Gross
                Profit
            
            
            1,297,000
            
            
            1,258,000
            
            
            1,020,000
            
            
            1,157,000
            
            
            4,732,000Research
                & Development Expenses
            
            
            42,000
            
            
            37,000
            
            
            33,000
            
            
            34,000
            
            
            146,000Selling,
                General & Administrative Expenses
            
            
            902,000
            
            
            982,000
            
            
            870,000
            
            
            1,166,000
            
            
            3,920,000Net
                Income (Loss)
            
            $
            347,000
            
            $
            260,000
            
            $
            (43,000
            )
            $
            4,514,000
            
            $
            5,078,000Basic
                Income (Loss) per Common Share
            
            $
            0.03
            
            $
            0.02
            
            $
            0.00
            
            $
            0.33
            
            $
            0.38Diluted
                Income (Loss) per Common Share
            
            $
            0.02
            
            $
            0.02
            
            $
            0.00
            
            $
            0.30
            
            $
            0.33Weighted
                Average Common Shares Outstanding
            
            
            13,431,000
            
            
            13,431,000
            
            
            13,437,000
            
            
            13,544,000
            
            
            13,461,000





52


**17.**
            **Fourth
                Quarter Adjustments**




The
      Company recorded certain adjustments in the fourth quarter that related to
      events or transactions in earlier fiscal quarters in 2007. The following
      schedule summarizes the adjustments and the revised results of operations in
      the
      applicable quarters:





**June
                30,**
              **2006**
            
            **September
                29, 2006**
            
            **December
                29, 2006**Net
                Loss, as previously reported
            
            $
            (1,234,000
            )
            $
            (1,124,000
            )
            $
            (964,000
            )Fourth
                quarter adjustmentsAdjust
                Stock Option Comp 123R
            
            
            (18,000
            )
            
            (20,000
            )
            
            (20,000
            )WIP
                Inventory adjustment
            
            
            (38,000
            )
            
            (53,000
            )
            
            (136,000
            )Total
                fourth quarter adjustments
            
            
            (56,000
            )
            
            (73,000
            )
            
            (156,000
            )Net
                Loss, as adjusted
            
            $
            (1,290,000
            )
            $
            (1,197,000
            )
            $
            (1,120,000
            )Net
                Loss per share, as previously reported
            
            $
            (0.07
            )
            $
            (0.06
            )
            $
            (0.05
            )Effect
                of adjustments
            
            $
            0.00
            
            $
            0.00
            
            $
            (0.01
            )Net
                Loss per share, as adjusted
            
            $
            (0.07
            )
            $
            (0.06
            )
            $
            (0.06
            )





**Item
              9**
            **Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure**




None .





**Item
              9A**
            **Controls
                and Procedures**





Our
      Chief
      Executive Officer and Chief Financial Officer (the Certifying
      Officers )
      are
      responsible for establishing and maintaining disclosure controls and procedures
      for the Company. The Certifying Officers have designed such disclosure controls
      and procedures to ensure that material information is made known to them,
      particularly during the period in which this report was prepared. The Certifying
      Officers have evaluated the effectiveness of the Company's disclosure controls
      and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as
      of
      the end of the period covered by this annual report and believe that the
      Company's disclosure controls and procedures are effective based on the required
      evaluation. During the past twelve months, the Company transferred certain
      accounting functions to our Ann Arbor office. We will continue to review and
      assess future needs and responsibilities in all locations and may make future
      changes. We believe that these changes may have a material affect on our
      internal controls and procedures.





**Disclosure
      Controls**





As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our principal executive officer
      and principal financial officer, of the effectiveness of the design and
      operation of our disclosure controls and procedures (as such term is defined
      in
      Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (or
      Exchange Act)). Based on this evaluation, our principal executive officer and
      principal financial officer concluded that our disclosure controls and
      procedures are effective in alerting them in a timely manner to material
      information required to be disclosed in our periodic reports filed with the Securities
      Exchange Commission .





53


**Changes
      in Internal Controls**





During
      our most recent fiscal quarter, there has not occurred any change in our
      internal control over financial reporting (as such term is defined in Rules
      13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected,
      or
      is reasonably likely to materially affect, our internal control over financial
      reporting.





**Item
              9B**
            **Other
                Information**





None .





**PART
      III**





In
      accordance with General Instruction G (3),
      and
      except for certain of the information called for by Items 10 and 12 which is
      set
      forth below, the information called for by Items 10 through 13 of Part III
      is
      incorporated by reference from the Company’s definitive proxy statement
      ( Proxy
      Statement )
      to be
      filed pursuant to Regulation 14A promulgated under the Securities Exchange
      Act
      of 1934 in connection with the Company’s 2007 Annual
      Meeting of Stockholders.





**Item
              10**
            **Directors
                and Executive Officers**





**Code
      of Ethics**




The
      Company has adopted a Code of Ethics for Senior Financial Officers, pursuant
      to
      the Sarbanes-Oxley Act of 2002. The Code of Ethics is published on the Company's
      web site, www.advancedphotonix.com on the Investor Relations page. The
      Company will also provide a copy of the Code of Ethics to any person without
      charge upon his or her request. Any such request should be directed to our
      Secretary at 2925 Boardwalk, Ann Arbor, Michigan 48104. The Company intends
      to
      make all required disclosures concerning any amendments to or waivers from
      the
      Code of Ethics on its website.





**Item
              11**
            **Executive
                Compensation**





The
      response to this item is incorporated by reference from the Company’s Proxy
      Statement.





**Item
              12**
            **Security
                Ownership of Certain Beneficial Owners and
                Management**




The
      following table sets forth, as of March 31, 2007, the aggregated information
      pertaining to all securities authorized for issuance under the Company’s equity
      compensation plans:





54


Plan
                Category
            
            Number
                of Securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            Weighted-average
                exercise price of outstanding options, warrants and rights
            
            Number
                of securities remaining available for future issuanceEquity
                compensation plans approved by shareholders
            
            
            1,977,500
            
            $
            1.81
            
            
            150,000Equity
                compensation plans not approved by shareholders
            
            
            -
            
            
            -
            
            
            -Total
            
            
            1,977,500
            
            $
            1.81
            
            
            150,000




**Item
              13**
            **Certain
                Relationships and Related
                Transactions**





The
      response to this item is incorporated by reference from the Company’s Proxy
      Statement.





**Item
              14**
            **Principal
                Accounting Fees and
                Services**





The
      response to this item is incorporated by reference from the Company’s Proxy
      Statement.





**PART
      IV**





**Item
              15**
            **Exhibits,
                Financial Statement
                Schedules**





The
      following is a list of the financial statements, schedules and exhibits filed
      herewith.





(1)
      Financial Statements: No financial statements have been filed with this Form
      10-K other than those listed in Item 8.





(2)
      Financial Statement Schedules: Schedules for which provisions are made in the
      applicable accounting regulations
      of the Securities and Exchange Commission are not required under the related
      instructions, or are disclosed in the accompanying consolidated financial
      statements, or are inapplicable and, therefore, have been omitted.





(3)
      Exhibits:





**Exhibit**


**No.**
            Description




2.1
            Stock
                Purchase Agreement dated December 21, 2004 between Advanced Photonix,
                Inc.
                and Photonic Detectors, Inc. - incorporated by reference to Exhibit
                2.1 to
                the Registrant’s Form 8-K, as filed with the Securities and Exchange
                Commission on December 23, 2004





2.2
            Agreement
                and Plan of Merger between Advanced Photonix, Inc. and Michigan
                Acquisition Sub, LLC, Picotronix, Inc., Robin Risser and Steven
                Williamson, dated March 8, 2005 - incorporated by reference to Exhibit
                2.1
                to the Registrant’s Form 8-K, as filed with the Securities and Exchange
                Commission on March 14, 2005





55


3.1
            Certificate
                of Incorporation of the Registrant, as amended - incorporated by
                reference
                to Exhibit 3.1 to the Registrant's Registration Statement on Form
                S-1,
                filed with the Securities and Exchange Commission on November 23,
                1990





3.1.1
            Amendment
                to Certificate of Incorporation of the Registrant, dated October
                29,
                1992-incorporated by reference to the Registrant's March 31, 1996
                Annual
                Report on Form 10-K





3.1.2
            Amendment
                to Certificate of Incorporation of the Registrant, dated September
                9,
                1992-incorporated by reference to the Registrant's March 31, 1996
                Annual
                Report on Form 10-K





3.2
            By-laws
                of the Registrant, as amended - incorporated by reference to Exhibit
                3.(ii) to the Registrant’s Form 8-K as filed with the Securities and
                Exchange Commission on June 8, 2005





4.1
            Rights
                Agreement, by and between the Company and Continental Stock Transfer
                and
                Trust Company, as amended - incorporated by reference to Exhibit
                4.1 to
                the Registrant’s Form 8-K filed with the Securities and Exchange
                Commission on February 9, 2005





10.1
            Advanced
                Photonix, Inc. 1991 Special Directors Stock Option Plan - incorporated
                by
                reference to Exhibit 10.9 to the Registrant's March 31, 1991 Annual
                Report
                on Form 10-K





10.2
            Advanced
                Photonix, Inc. 1990 Incentive Stock Option and Non-Qualified Stock
                Option
                Plan - incorporated by reference to Exhibit No. 10.11 to the Registrant's
                Registration Statement on Form S-1, filed with the Securities and
                Exchange
                Commission on November 23, 1990





10.3
            Advanced
                Photonix, Inc. 1997 Employee Stock Option Plan - incorporated by
                reference
                to Exhibit 10.13 to the Registrant’s March 30, 1997 Annual Report on Form
                10-K





10.4
            Amendment
                No. 1 to 1997 Employee Stock Option Plan of Advanced Photonix, Inc.
                -
                incorporated by reference to Exhibit 10.14 to the Registrant’s December
                28, 1997 Quarterly report on Form
                10-Q





10.5
            Advanced
                Photonix, Inc. 2000 Stock Option Plan, as amended - incorporated
                by
                reference to Exhibit 99.1 to the Registrant's Form 8-K, as filed
                with the
                Securities and Exchange Commission on November 19,
                2004





10.9
            Lease
                Agreement dated February 23, 1998 between Advanced Photonix, Inc.
                and High
                Tech No. 1, Ltd. - incorporated by reference to Exhibit 10.9 to the
                Registrant's March 29, 1998 Annual Report on Form
                10-K





10.10
            Form
                of Indemnification Agreement provided to Directors and Principal
                Officers
                of Advanced Photonix, Inc. - incorporated by reference to Exhibit
                10.15 to
                the Registrant’s December 28, 1997 Quarterly report on Form
                10-Q





10.11
            Employment
                Agreement dated August 21, 2002 between Advanced Photonix, Inc. and
                Paul
                D. Ludwig - incorporated by reference to Exhibit 10.1 to the Registrant’s
                Form 8-K as filed with the Securities and Exchange Commission on
                September
                5, 2002





10.12
            Employment
                Agreement dated February 10, 2003 between Advanced Photonix, Inc.
                and
                Richard D. Kurtz - incorporated by reference to Exhibit 10.12 to
                the
                Registrant’s March 30, 2003 Annual Report on Form
                10-KSB





56


10.20
            Securities
                Purchase Agreement, Registration Rights Agreement, Senior Subordinated
                Convertible Note, Warrant to Purchase Class A Common Stock, and Additional
                Investment Right dated October 12, 2004 between Advanced Photonix,
                Inc.
                and private investors - incorporated by reference to Exhibits 10.13
                through 10.13.4 to the Registrant’s Form 8-K, as filed with the Securities
                and Exchange Commission on October 12,
                2004





10.20.1
            Letters
                of Agreement amending the Securities Purchase Agreement and Warrant
                to
                Purchase Class A Common Stock, dated March 9, 2005, between Advanced
                Photonix, Inc. and private investors - incorporated by reference
                to
                Exhibits 10.2 through 10.5 to the Registrant’s Form 8-K, as filed with the
                Securities and Exchange Commission on March 14, 2005





10.26.1
            Promissory
                Note between Picotronix, Inc. and Advanced Photonix, Inc., dated
                March 10,
                2005 - incorporated by reference to Exhibit 10.1 to the Registrant’s Form
                8-K, as filed with the Securities and Exchange Commission on March
                14,
                2005





10.26.2
            Secured
                Promissory Note between Advanced Photonix, Inc. and Robin Risser,
                dated
                May 2, 2005 - incorporated by reference to Exhibit 10.1 to the
                Registrant’s Form 8-K, as filed with the Securities and Exchange
                Commission on May 6, 2005





10.26.3
            Secured
                Promissory Note between Advanced Photonix, Inc. and Steven Williamson,
                dated May 2, 2005 - incorporated by reference to Exhibit 10.2 to
                the
                Registrant’s Form 8-K, as filed with the Securities and Exchange
                Commission on May 6, 2005





10.26.4
            Employment
                Agreement between Advanced Photonix, Inc. and Robin Risser, dated
                May 2,
                2005 - incorporated by reference to Exhibit 10.3 to the Registrant’s Form
                8-K, as filed with the Securities and Exchange Commission on May
                6,
                2005





10.26.5
            
            Employment
                Agreement between Advanced Photonix, Inc. and Steven Williamson,
                dated May
                2, 2005 - incorporated by reference to Exhibit 10.4 to the Registrant’s
                Form 8-K, as filed with the Securities and Exchange Commission on
                May 6,
                2005





10.27
            Loan
                Agreement between Advanced Photonix, Inc. and Fifth Third Bank, dated
                March 6, 2007 - incorporated by reference to Exhibit 10.1 to the
                Registrant’s Form 8-K, as filed with the Securities and Exchange
                Commission on March 9, 2007.





10.27.1
            Promissory
                Note by Advanced Photonix, Inc. in favor of Fifth Third Bank, for
                $2,000,000 dated March 6, 2007 - incorporated by reference to Exhibit
                10.2
                to the Registrant’s Form 8-K, as filed with the Securities and Exchange
                Commission on March 9, 2007





10.27.2
            Security
                Agreement among Advanced Photonix, Inc., Silicon Sensors, Inc.,
                Picometrix, LLC, and Fifth Third Bank - incorporated by reference
                to
                Exhibit 10.3 to the Registrant’s Form 8-K, as filed with the Securities
                and Exchange Commission on March 9,
                2007





10.27.3
            Master
                Equipment Lease Agreement between Advanced Photonix, Inc. and Fifth
                Third
                Leasing Company dated March 6, 2007 - incorporated by reference to
                Exhibit
                10.4 to the Registrant’s Form 8-K, as filed with the Securities and
                Exchange Commission on March 9,
                2007





10.27.4
            Interim
                Funding Schedule between Advanced Photonix and Fifth Third Leasing
                Company
                - incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K,
                as filed with the Securities and Exchange Commission on March 9,
                2007





57


21.1
            List
                of Subsidiaries of Registrant - incorporated by reference to Exhibit
                21.1
                to the Registrant’s March 30, 2003 Annual Report on Form
                10-KSB





31.1
            Certification
                of the Registrant’s Chairman, Chief Executive Officer and Director
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002





31.2
            Certification
                of the Registrant’s Chairman, Chief Financial Officer and Director
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002





32.1
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002





32.2
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002




58





**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.




ADVANCED
              PHOTONIX, INC.
            ****By:
            /s/
              Richard
              KurtzChief Executive Officer&
              President


Date:
      June 29, 2007





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 in the
      capacities and on the dates indicated.





Signature
            
            Title
            
            Date/s/
                Richard D. Kurtz
            
            Chairman
                of the Board, President, and
            
            June
                29, 2007Richard
                D. Kurtz
            
            Chief
                Executive Officers/
                Robin Risser
            
            Chief
                Financial Office and Director
            
            June
                29, 2007Robin
                Risser/s/
                M. Scott Farese
            
            Director
            
            June
                29, 2007M.
                Scott Farese/s/
                Lance Brewer
            
            Director
            
            June
                29, 2007Lance
                Brewer/s/
                Donald Pastor
            
            Director
            
            June
                29, 2007Donald
                Pastor/s/
                Stephen P. Soltwedel
            
            Director
            
            June
                29, 2007Stephen
                P. Soltwedel





59