**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, 2008
 
 OR
 
 o
        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 oNo 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 oNo 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 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.
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        definitions of “large accelerated filer,” “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act. (Check
        one):
 Large
                  accelerated filer o
              Accelerated
                  filer oNon-accelerated
                  filer o
              Smaller
                  reporting company x
 (Do
        not
        check if a smaller reporting company)
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes oNo x
 
 The
        aggregate market value of the voting stock held by non– affiliates
        of the registrant as of
        September 28, 200 7 was
        approximately $40.3 million.
  Number
        of
        shares outstanding of the registrant's Common Stock as of June
        26, 200 8 : 23,977,978
        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 2008 Annual Meeting
        of
        Stockholders of registrant have been incorporated by reference into Part
        III of this
        Form 10-K .
 
 2
 **ADVANCED
        PHOTONIX, INC.**
 **FISCAL
        YEAR ENDED MARCH 31, 2008**
 
 **INDEX
        TO FORM 10-K**
  **Page****Part
                  I****Item 1.**
              Business
              4**Item 1A.**
              Risk
                  Factors
              10**Item 2.******
              Properties
              14**Item 3.******
              Legal
                  Proceedings
              14**Item 4.******
              Submission
                  of Matters to a Vote of Security Holders
              14**Part
                  II****Item 5.******
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              15**Item 6.******
              Selected
                  Financial Data
              16**Item 7.******
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              16**Item 7A.******
              Quantitative
                  and Qualitative Disclosures about Market Risk
              24**Item 8.******
              Financial
                  Statements and Supplementary Data
              24**Item 9.******
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              51**Item 9A.******
              Controls
                  and Procedures
              51**Item 9B.******
              Other
                  Information
              51**Part
                  III****Item 10.******
              Directors,
                  Executive Officers and Corporate Governance
              52**Item 11.******
              Executive
                  Compensation
              52**Item 12.******
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              52**Item 13.******
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              52**Item 14.******
              Principal
                  Accountant Fees and Services
              52**Part
                  IV****Item 15.******
              Exhibits
                  and Financial Statement Schedules
              53**Signatures**
              
              58
 **Ex-18.1**
              **Preferability
                  Letter – BDO Seidman, LLP****Ex-23.1**
              **Consent
                  of BDO Seidman, LLP****Ex-23.2**
              **Consent
                  of Farber Hass Hurley LLP****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**





3





**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 two manufacturing
      facilities located
      in Camarillo, California and Ann Arbor, Michigan.





**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 2008, the Company shipped its next generation THz imaging
      and spectroscopy system (T-RayTM 4000). 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  pound 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
              ·DefenseIndustrial/NDT:
              ·Manufacturing
              ·Instrumentation
              ·DisplayMedical:
              ·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 $2.0 million has been spent to
      date for operating expenses and $1.9 million for capital expenditures for this
      consolidation. The Company anticipates spending approximately $400,000 in
      additional operating expense in FY 2009 to complete the closure and transfer
      of
      wafer fabrication operations from Camarillo, California to Ann Arbor, Michigan.
      As a result, the Company estimates, the total consolidation operating expenses
      will be $2.4 million upon completion of the project.





During
      the second quarter of FY 2008 the Company undertook a review of its
      Optosolutions product operations as part of its ongoing efforts to integrate
      acquisitions and rationalize our over all cost structure. The review resulted
      in
      plans to achieve approximately $750,000 in pre-tax annual cost savings beginning
      in FY 2009 including a reduction of 10% of the total workforce and the
      consolidation of facilities, with the closure of our Silicon Sensor facility
      in
      Dodgeville, Wisconsin. The savings will come from the consolidation of the
      Wisconsin assembly operations into our Camarillo, CA facility. Actual spending
      related to the closure of the Wisconsin facility was $534,000 in Q3 2008. The
      WI
      facility was closed December 31, 2007, all expenses for the closure were
      incurred and paid in FY 2008 and no additional exit costs are
      anticipated.





6





**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 2008
      and
      2007, research and development expenses amounted to $4.2 million and $4.0
      million, respectively. The increase in R&D costs is primarily the result of 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 2009 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,


o
            40G
                Long haul market


o
            100G
                Metro market


o
            Cost
                Reduction through vertical integration of strategic 40G and 100G
                components





·
            THz–


o
            Application
                development of the T-RayTM 4000 product platform for industrial QC
                including pharmaceutical, aerospace and consumer
                markets


o
            T-RayTM
                4000 product platform research and development for homeland
                security/militarymarkets


o
            T-RayTM
                4000 cost reduction initiatives for high volume industrial QC
                markets





·
            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.




7




**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-04766,174
            
            ENHANCED
                PHOTODETECTOR
            
            Oct-07809,655
            
            METHOD
                AND APPARATUS TO MONITOR PHASE CHANGES IN MATTER WITH TERAHERTZ
                RADIATION
            
            Feb-08934,665
            
            TRADEMARK
                APPLICATION FOR T-RAY
            
            Aug-071,116,280
            
            HIGHLY-DOPED
                P-TYPE CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED
                PHOTODIODE
            
            Oct-071,230,578
            
            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-067,263,266
            
            PRECISION
                FIBER ATTACHMENT
            
            Aug-077,348,607
            
            PLANAR
                AVALANCHE PHOTODIODE
            
            Mar-087,348,608
            
            PLANAR
                AVALANCHE PHOTODIODE
            
            Mar-08





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.




9




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.





**Employees**





As
      of June 23,
      2008 the Company had 140 full time employees (including 3 officers). Included
      are 34 engineering and development personnel, 11 sales and marketing personnel,
      77 operations personnel, and 18 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, specialized
      semiconductor amplifiers, 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, specialized semiconductor amplifiers 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
      telecommunication, military, medical and industrial corporations, as well as
      government agencies. 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 Asia, Europe and the Middle East. These
      operations are subject to risks that are inherent in operating in foreign
      countries, including the following:




10





·
            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;




·
            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, the Company utilizes third-party distributors
      ( Distributors ) to act
      as our representative for the geographic region that they have been assigned. Sales
      through distributors represent approximately 5% of total revenue. Significant
      terms and conditions of distributor agreements include FOB source, net 30 days
      payment terms, with no return or exchange rights, and no price protection.
      Since
      the product transfers title to the distributor at the time of shipment by the
      Company, the products are not considered inventory on consignment. 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 2009.





**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 2008,
      approximately 19 %
      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 2008,
      our sales to military contractors declined 14%. 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 requirements
      of
      customers in our target markets. We believe that our principal competitors
      for
      sales of our products are small to medium size companies. Because we specialize
      in custom high performance 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 high volume manufacturers of standard “off the shelf” optoelectronic
      components. 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 photodiodes 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 PIN photodiodes, APD photodiodes and THz 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 PIN photodiodes, APD photodiodes and our THz technology, and a review of the published materials, we believe that our
      competitors hold no patents, licenses or other rights to the PIN photodiodes, APD photodiodes and our THz 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 1 business 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;


·
            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.





13




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 the
      future. 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 .
      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 .





**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.




**Item 2.**
            **PROPERTIES**





The
      Company leases all of its executive offices, research, marketing and
      manufacturing facilities. At March 31, 2008, those leases consisted of primarily
      80,300 square feet in two facilities. The facility located in Camarillo,
      California is leased through February 2009. 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**





On
      October 12, 2007 API was served with a summons and complaint filed by Opto
      Diode
      Corporation in the Central District of California for patent infringement.
      The
      infringement is in reference to a product that the Company purchased from
      InfraTech, which was part of the PDI acquisition. The Company sold less than
      $30,000 of the named product since the acquisition. The Company settled on
      June
      10, 2008 with Opto Diode Corporation without prejudice and without any financial
      payment and agreed to stop selling products which were in question. The
      Company is pursuing a claim for indemnity against InfraTech to recover legal
      fees and costs incurred in defending the patent claims brought by Opto Diode
      Corporation.





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





No
      matters were submitted to a vote of our stockholders during the fourth quarter
      ended March 31, 2008.





14




**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, 2003, through March 31, 2008,
      which represents the last trading day of the year.









At
      June
      26, 2008, the Company had 105 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





The
      following table sets forth the high and low closing prices of the Company’s
      Class A Common Stock by quarter for fiscal years 2008 and 2007.




15





**Common
      Stock Price**





**1****st****Quarter**
            
            **2****nd****Quarter**
            
            **3****rd****Quarter**
            
            **4****th****Quarter****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008**
            
            **2007**Common
                Stock1**High**
            
            $
            1.99
            
            $
            2.74
            
            $
            2.20
            
            $
            2.35
            
            $
            2.84
            
            $
            2.30
            
            $
            1.87
            
            $
            2.30**Low**
            
            
            1.55
            
            
            1.57
            
            
            1.43
            
            
            1.44
            
            
            1.70
            
            
            1.68
            
            
            1.30
            
            
            1.90





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.




**Item
      6. SELECTED FINANCIAL DATA**





Advanced
      Photonix, Inc. is a smaller reporting company as defined by Rule 12b-2 of the
      Exchange Act and is not required to provide the information required under
      this
      item.




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





***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***


Revenue
      is derived principally from the sales of the Company’s products. The Company
      recognizes revenue when the basic criteria of Staff Accounting Bulletin
      No. 104 are met. Specifically, the Company recognizes revenue when
      persuasive evidence of an arrangement exists, usually in the form of a purchase
      order, when shipment has occurred since its terms are FOB source, or when
      services have been rendered, title and risk of loss have passed to the customer,
      the price is fixed or determinable and collection is reasonably assured in
      terms
      of both credit worthiness of the customer and there are no post shipment
      obligations or uncertainties with respect to customer acceptance.




16




The
      Company sells certain of its products to customers with a product warranty
      that
      provides warranty repairs at no cost. The length of the warranty term is one
      year from date of shipment. The Company accrues the estimated exposure to
      warranty claims based upon historical claim costs. The Company’s management
      reviews these estimates on a regular basis and adjusts the warranty provisions
      as actual experience differs from historical estimates or as other information
      becomes available.





The
      Company does not provide price protection or general right of return. The
      Company’s return policy only permits product returns for warranty and
      non-warranty repair or replacement and requires pre-authorization by the Company
      prior to the return. Credit or discounts, which have been historically
      insignificant, may be given at the discretion of the Company and are recorded
      when and if determined.





The
      Company predominantly sells directly to original equipment manufactures with
      a
      direct sales force. The Company sells in limited circumstances through
      distributors. Sales through distributors represent approximately 5% of total
      revenue. Significant terms and conditions of distributor agreements include
      FOB
      source, net 30 days payment terms, with no return or exchange rights, and no
      price protection. Since the product transfers title to the distributor at the
      time of shipment by the Company, the products are not considered inventory
      on
      consignment.





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


In
      accordance with SFAS No. 142, *“Goodwill
      and Other Intangible Assets”,* goodwill
      and ** intangible
      assets that are not subject to amortization shall be tested for impairment
      annually, or more frequently if events or changes in circumstances indicate
      that
      the asset might be impaired. The impairment test shall consist of a comparison
      of the fair value of the asset with its carrying amount, as defined. If the
      carrying amount of the asset exceeds its fair value, an impairment loss shall
      be
      recognized in an amount equal to that excess. The Company’s evaluation for the
      fiscal year ended March 31, 2008, indicated there were no impairments.





In
      accordance with SFAS No. 144, *“Accounting
      for the Impairment or Disposal of Long-lived Assets”,* the
      carrying value of long-lived assets, including amortizable intangibles and
      property and equipment, are evaluated whenever events or changes in
      circumstances indicate that a potential impairment has occurred relative to
      a
      given asset or assets. Impairment is deemed to have occurred if projected
      undiscounted cash flows associated with an asset are less than the carrying
      value of the asset. The estimated cash flows include management’s assumptions of
      cash inflows and outflows directly resulting from the use of that asset in
      operations. The amount of the impairment loss recognized is equal to the excess
      of the carrying value of the asset over its then estimated fair value. The
      Company’s evaluation for the fiscal year ended March 31, 2008, indicated
      there were no impairments.




***Accounting
      for Income Taxes*** —
Income
      tax provisions 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”* .





As
      part
      our assessment of the need for a valuation allowance, we consider all available
      evidence, both positive and negative, including our recent operating results
      and
      our forecasting process. The Company forecasts taxable income through its
      budgeting and planning process each year. The process takes into account
      existing contracts, firm sales backlog, and projected sales based upon customer
      supplied forecasts of product purchases its design wins, Company resources
      needed to fulfill these customers’ requirements, and extraordinary expenses that
      may be part of long-term initiatives to increase shareholder value through
      revenue growth and efficiency improvements leading to profit improvement. The
      Company has substantial history, more than 10 years in most cases, with its
      customers and its market on which its forecasts are based.




17




At
      March
      31, 2007, our net deferred tax asset before consideration of a valuation
      allowance mainly consisted of net operating loss carry-forwards which expire
      at
      various amounts over an approximate 20 year period. In evaluating this asset,
      we
      considered the positive evidence that the Company had realized taxable income
      in
      2 of the past 3 years and our projections of future income. We also considered
      negative evidence such as the cumulative taxable losses the Company experienced
      over the 2005-2007 period and that the Company historically had not fully
      achieved its projected taxable income. As a result of this analysis, it was
      the
      Company’s judgment that a valuation allowance of $4,533,000 was necessary at
      March 31, 2007. Management estimated that the remaining deferred tax asset
      of
      $1,225,000 would more likely than not be realized.





For
      the
      year ended March 31, 2008, we incurred additional taxable losses that have
      increased our net operating loss carry-forwards. In evaluating our net deferred
      tax assets at March 31, 2008, we considered the additional negative evidence
      that we have taxable losses in each of the past two years and cumulative losses
      over the past three years. Because evidence such as our operating results during
      the most recent historical periods is afforded more weight than forecasted
      results for future periods, our recent losses and cumulative loss position
      during our most recent three-year period represents sufficient negative evidence
      of the need for a full valuation allowance at March 31, 2008.





***Inventories*** — The
      Company’s inventories are stated at the lower of standard cost (which
      approximates actual cost under 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 Ended March 31, 2008 Compared to*** ****** ***F*** ***iscal
      Year Ended March 31,*** ***200*** ***7***


**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:






**Year
                ended****March 31,2008**
            
            **March 31, 2007**Telecommunications
            
            $
            5,349,000
            
            
            23
            %
            $
            5,850,000
            
            
            25
            %Industrial
                Sensing/NDT
            
            
            9,993,000
            
            
            43
            %
            
            10,041,000
            
            
            43
            %Military/Aerospace
            
            
            4,412,000
            
            
            19
            %
            
            5,157,000
            
            
            22
            %Medical
            
            
            3,132,000
            
            
            14
            %
            
            2,467,000
            
            
            10
            %Homeland
                Security
            
            
            329,000
            
            
            1
            %
            
            73,000
            
            
            —Total
                Revenues
            
            $
            23,215,000
            
            
            100
            %
            $
            23,588,000
            
            
            100
            %





The
      Company's revenues for FY 200 8
      were
      $23.2 million, a decrease of $373,000, or 1.6% from revenues of $23.6 million
      for the FY
      2007.





Telecommunications
      sales were $5.3 million, a decrease of $501,000 or 8.6% from FY 2007. This
      decrease was the result of suspension of shipments for our 10G receiver products
      for a product redesign driven by new market requirements or specifications,
      combined with a delay in the production ramp-up of our 40G products due to
      our
      customer supply chain delivery issues. During the 4 th quarter
      our customers started releasing their product into the market and therefore
      started releasing production orders for our 40G product offering.





Industrial
      Sensing/NDT market revenues were flat at $10.0 million in FY 2008, a slight
      decrease of less than 1% (or $48,000) from FY 2007 revenues of $10.0 million.
      Revenues would have increased by approximately $1 million if the Company had
      not
      made the decision to stop supplying a low value added opto-electronic contract
      manufacturing part representing approximately $600,000 in revenue and
      manufacturing shipment delays valued at $400,000 in revenue due to the transfer
      of production from our Wisconsin facility to our California facility. These
      decreases were offset by increases of approximately $1.0 million from sales
      to
      an existing industrial sensing customer and increases in THz/NDT revenues with
      the introduction of the T-Ray 4000TM.





18




Military/Aerospace
      market revenues were $4.4 million, a decrease of 14% (or $745,000) from the
      comparable prior year revenues of $5.2 million, which primarily resulted from
      delays in receiving military orders for our Optosolutions products.





Medical
      market revenues increased $665,000 or 27% over the prior year of $2.5 million,
      due to the continuation of customer demand of existing design wins, which the
      customer planned to obsolete in FY 2008.





Homeland
      security increased $256,000, to $329,000, attributable to an increase in THz development contracts for the nuclear gauge replacement from the Department
      of
      Homeland Security.




**Gross
      Profit**


Gross
      Profit was $8.9 million (or 38% of revenue), compared to the prior year of
      $10.9
      million (or 46% of revenue), a reduction of 18%, due primarily to the product
      mix of lower margin products shipped into the industrial sensing market combined
      with lower military market sales in the Optosolutions product platform. The
      Company also experienced higher scrap expenses associated with the redesign
      of
      our 10G APD and 40G PIN products, and lower sales in the telecommunication
      market, combined with planned production capacity expansion in anticipation
      of
      production volume ramping for the telecommunication product.





The
      Company believes that this is not a trend and gross margins should be improved
      as a result of our facilities consolidation that has been largely completed
      in
      FY2008, the selective elimination of low margin products in the industrial
      sensing market, and increasing revenues from the telecommunication market driven
      by our 40G products and the ramp up of our T-Ray 4000 sales.





**Operating
      Expenses**


*Research
      and Development expenses (R&D) —* The
      Company’s R&D costs increased by $206,000 to $4.2 million during FY 2008
      compared to $4.0 million in FY 2007. The increase was attributable to the
      Company’s planned increase R&D spending as we continued to focus on new
      opportunities in our high growth High Speed Optical Receiver and NDT/THz
      markets. The Company expects to continue to increase investment in the next
      generation 40G/100G receivers and NDT/THz applications in FY 2009, however
      R&D expenses as a percentage of sales is expected to decrease.





*Sales
      and Marketing expenses (S&M) –* The
      Company’s S&M expenses increased $138,000 (or 6.3%) to $2.3 million in FY
      2008 compared to $2.2 million in FY 2007. The
      increase was primarily attributable to having a full year of the personnel
      hired
      last year and additional sales and marketing support personnel added in FY
      2008
      to support the projected increased in sales activity in the Company’s high
      growth opportunities.





*General
      and administrative expenses (G&A) —* G&A
      expenses decreased by $427,000 (or 8.5%) to approximately $4.6 million (20%
      of
      sales) for FY 2008 as compared to $5.0 million (21% of sales) for FY 2007.
      This
      decrease was the result of $561,000 in reduced G&A expenses comprised of
      $215,000 of reduced expenditures, reduced stock compensation expense of $218,000
      and lower depreciation expense of $128,000.





Amortization
      expense was $2.0 million in FY 2008 compared to $1.5 million in FY 2007, an
      increase of $435,000. This
      increase was primarily the result of the
      Company’s reassessment of its amortization methodology from straight line to
      cash flows for its intangible assets.





Other
      operating expenses incurred were related to the previously announced Wafer
      Fabrication consolidation to our Ann Arbor facility, which was $1.3 million
      in
      FY 2008 compared to $720,000 in FY 2007, and the closure of the Dodgeville,
      WI
      facility in FY 2008 at a cost of $534,000. The Dodgeville,
      WI facility
      was closed December 31, 2007. All expenses for WI facility closure were incurred
      and paid in FY 2008 and no additional exit costs are anticipated.




19




The
      Company’s evaluations of Intangible assets and Goodwill for the year ended
      March 31, 2008 resulted in no impairment adjustments. In FY 2007, Intangible
      asset impairment accounted for $349,000 and goodwill impairment of $140,000.





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


Interest
      income for FY 2008 decreased to approximately $ 96,000, compared to $213,000
      in
      FY 2007, due primarily to lower cash balances available for short-term
      investment in FY 2008.





Interest
      expense for FY 2008 was $2.5 million as compared to $2.6 million in FY 2007,
      a
      decrease of $57,000. This
      decrease was primarily attributable to reduced interest expense of $271,000
      comprised of $166,000 lower interest expense on the convertible notes and lower
      interest expense on other notes, including related parties of $105,000, offset
      by increases in non-cash interest expense of $214,000 comprised of $144,000
      in
      the amortization of the discount related to the convertible notes and a $70,000
      in non-cash interest expense from the reclassification of capital financing
      costs. In FY 2008 total interest expense related to the convertible notes was
      approximately $2.0 million. These convertible notes were retired in Q3 of FY
      2008 and as a result no additional interest on these notes will be incurred
      in
      future periods.





Net
      loss
      for FY 2008 was $9.6 million, as compared to net loss of $4.6 million in FY
      2007, an increased loss of $5.0 million. The
      increase in net loss is attributable to reduced gross profit of approximately
      $2.0 million, increased non-recurring expenses for wafer fabrication
      consolidation and the Dodgeville facility closure of approximately $1.0 million
      and a change in the provision for income taxes of approximately $2.1 million.
      Despite a loss of $8.4 million before tax, the Company recorded
      a provision for income taxes of $1.2 million in FY 2008 as compared to an income
      tax benefit of $920,000 in FY 2007. The Company recorded a tax provision in
      FY
      2008 based upon its decision to fully reserve the Deferred Tax Asset based
      upon
      the results of reporting tax losses for the past two years.





Non-cash
      expenses for FY 2008 were $6.3 million compared to $4.5 million for FY 2007,
      an
      increase of $1.8 million. The increase was primarily the result of an increase
      in convertible note discount interest expenses of $144,000, an increase in
      amortization and depreciation expense of $411,000, and an increase in the income
      tax provision of $1.8 million offset by a reduction in goodwill/intangible
      impairment of $489,000, and a decrease in stock based compensation expense
      of
      $131,000.




The
      Company’s net loss for FY 2008, excluding $1.8 million of non-recurring expenses
      due to the wafer fabrication consolidation and Dodgeville facility closure
      and
      $6.3 million of non-cash expenses, including $1.2 million of income tax
      provision, would be $1.5 million.




**Liquidity
      and Capital Resources**


*Operating
      Activities —* Net
      cash
      used in operating activities of $3.4 million for the year ended March 31, 2008
      was primarily the result of a cash net loss of $3.3 million comprised of a net
      loss of $9.6 million, of which $6.3 million was non-cash expenses. This net
      cash
      loss was increased by $30,000 changes in operating assets and liabilities
      comprised of a decrease in accounts receivable of $385,000, inventories of
      $308,000 and prepaids/other assets of $111,000, offset by an decrease in
      accounts payable and accrued expenses of $834,000.





Of
      the
      approximate $3.3 million cash loss, approximately $2.1 million was from
      non-recurring expenses due to the wafer fabrication consolidation, the Wisconsin
      facility closure and interest expense on the convertible notes.





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 $4.6 million, of which $4.6 million
      was non-cash expenses, a decrease in accounts receivable of $800,000, an
      increase in accounts payable and accrued expenses of $673,000, offset by a
      net
      increase in inventories of $1.1 million, and prepaid/other assets of $114,000.




*Investing
      Activities —* Net
      cash
      used in investing activities was approximately $1.3 million for the year ended
      March 31, 2008. The amount consisted of capital expenditures of approximately
      $1.2 million and patent expenditures were $195,000 for the 2008
      fiscal year.





Net
      cash
      used in investing activities was $4.1 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. Restricted cash required
      as collateral against the bank loan was $1.5 million. Patent expenditures
      were $162,000 for the 2007
      fiscal year.




20


*Financing
      Activities —* The
      Company generated net cash from financing activities of $3.0 million including
      increases in cash from financing activities of $6.3 million offset by decreases
      in financing activities of $3.3 million. The increase of cash resulted from
      the
      private placement of Company Class A common stock of $4.3 million, $227,000
      from
      the exercise of warrants and stock options for Company common stock, net
      increase in the bank line of credit of $559,000, and the net increase in term
      loans of $790,000, offset by the retirement of convertible notes of $2.4
      million, and the reduction in related parties notes payable of $550,000.





The
      Company maintains a revolving line of credit with a regional bank that provides
      for borrowings up to $3.0 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, 2008, the
      outstanding balance on the line was $1.3 million. All business assets of the
      Company secure the line other than the intellectual property of the Company’s
      Picometrix subsidiary. The
      Loan
      Agreement contains customary representations, warranties and financial
      covenants. The interest rate is variable between prime rate and prime less
      0.25%
      based on the bank Index Rate determined by the Debt Service Coverage Ratio,
      as
      defined in the loan agreement. This interest is reviewed and adjusted quarterly.
      The maximum interest rate will equal the prime rate. Interest is
      payable monthly,
      with principal due at maturity date on July 1, 2008. The prime interest rate
      was
      5.25% at March 31, 2008.





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 $740,000, the bank capital lease financing of $1.9 million after
      principle payments, additional cash proceeds from a term loan by the MEDC of
      $172,000, and proceeds from employee exercised stock options of $355,000.




At
      March
      31, 2008, the Company had cash and cash equivalents of $0.1 million, a decrease
      of $1.7 million, from $1.8 million as of March 31, 2007, primarily attributable
      to a cash loss of $3.3 million from operations, including approximately $1.8
      million in wafer fabrication consolidation and Dodgeville plant closure
      expenses.





**Debt**





The
      Company maintains a revolving line of credit with a regional bank that provides
      for borrowings up to $3.0 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, 2008, the
      outstanding balance on the line was $1.3 million. All business assets of the
      Company secure the line other than intellectual property of the Company’s
      Picometrix subsidiary. The
      Loan
      Agreement contains customary representations, warranties and financial
      covenants. The interest rate is variable between prime rate and prime less
      0.25%
      based on the bank Index Rate determined by the Debt Service Coverage Ratio,
      as
      defined in the loan agreement. This interest is reviewed and adjusted quarterly.
      The maximum interest rate will equal the prime rate. Interest is
      payable monthly,
      with principal due at maturity date on July 1, 2008. The prime interest rate
      was
      5.25% at March 31, 2008.




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 $2.3 million ( Lease ). API
      purchased equipment under the Lease until June 30, 2007. The Lease is amortized
      over 60-months from its start date of June 30, 2007. The
      interest rate for the Lease is variable and is based on the prime rate plus 0.125%. The
      interest rate at March 31, 2008 was 5.375%. 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, “ *Accounting
      for Leases* ”.
      The
      balance on this loan at March 31, 2008 was approximately $1.9 million, which
      reflects a principal pay-down of $383,000 made during fiscal year
      2008.


21


The
      Company believes that current cash levels combined with our revolving line
      of
      credit and additional debt or equity financing will be sufficient for our 2009
      fiscal year.




MEDC-loan
      1 is for an amount up to $1.0 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
      first
      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 amount. 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 Note. In the fourth quarter of FY 2007,
      the Company borrowed an additional $ 172,000.
      In the first quarter of FY 2008, the Company borrowed the final $103,000 against
      this initial MEDC loan.


MEDC-loan
        2 is for an amount up to $1.3 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 first 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.
        In May, 2007, the Company borrowed an additional $168,000. On September 15,
        2007, principal was restated to include $87,000 of accrued interest. During
        the
        3rd quarter of FY 2008, the Company borrowed final $431,000 against MEDC-loan
        2.


**Summary
      of Contractual Obligations and Commitments**





The
      following table sets forth the contractual obligations of the Company at March
      31, 2008.





**Contractual****Obligations**
            
            **Payments****due by period****Total**
            
            **Within 1**
              **year**
            
            **1 – 3 years**
            
            **3 – 5 years**
            
            **More than**
              **5 years**Bank
                line of credit
            
            $
            1,300,000
            
            $
            1,300,000
            
            $
            -
            
            $
            -
            
            $
            -Capital
                lease obligations
            
            
            1,917,000
            
            
            460,000
            
            
            1,380,000
            
            
            77,000Long-term
                MEDC loans
            
            
            2,311,000
            
            
            62,000
            
            
            1,733,000
            
            
            516,000
            
            
            -Debt
                to related parties
            
            
            1,851,000
            
            
            900,000
            
            
            951,000
            
            
            -
            
            
            -**Subtotal –
                Balance Sheet**
            
            
            **7,379,000**
            
            
            **2,722,000**
            
            
            **4,064,000**
            
            
            **593,000**
            
            
            **-**Expected
                interest expense on current debt obligations
            
            
            838,000
            
            
            416,000
            
            
            418,000
            
            
            4,000
            
            
            -Operating
                lease obligations
            
            
            2,133,000
            
            
            1,227,000
            
            
            902,000
            
            
            4,000
            
            
            -Purchase
                obligations
            
            
            2,373,000
            
            
            2,284,000
            
            
            89,000
            
            
            -
            
            
            -**Total**
            
            **$**
            **12,723,000**
            
            **$**
            **6,649,000**
            
            **$**
            **5,473,000**
            
            **$**
            **601,000**
            
            **$**
            **-**




***Recent
      Accounting Pronouncements***




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. In February
      2008, the FASB issued FASB Statement of Position (FSP) FAS No.
      157-2 *,
      “Effective Date of FASB Statement No. 157”.* This FSP
      delays the effective date of SFAS No. 157 for all nonfinancial assets
      and nonfinancial liabilities, except those that are recognized or disclosed
      at
      fair value in the financial statements on a recurring basis (at least annually).
      The effective date for nonfinancial assets and nonfinancial liabilities has
      been
      delayed by one year to fiscal years beginning after November 15, 2008 and
      interim periods within those fiscal years.  The
      adoption of SFAS No. 157 will not have a significant impact on our
      consolidated financial statements except for the required disclosures related
      to
      fair value.


22





In
      February 2008, the FASB issued FSP FAS No. 157-1, *“Application
      of FASB Statement No. 157 to FASB Statement No. 13 and Other
      Accounting Pronouncements That Address Fair Value Measurements for Purposes
      of
      Lease Classification or Measurement under Statement 13”.* This FSP
      excludes certain leasing transactions accounted for under FASB Statement
      No. 13, *“Accounting
      for Leases”* from the
      scope of SFAS No. 157. The exclusion does not apply to fair value
      measurements of assets and liabilities recorded as a result of a lease
      transaction but measured pursuant to other pronouncements within the scope
      of
      SFAS No. 157. FSP FAS No. 157-1 is effective upon the Company’s
      initial adoption of SFAS No. 157. The Company anticipates that this
      FSP will not have a material impact on its consolidated financial statements.




In
      February 2007, the FASB issued SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities”* (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 has not elected the early adoption provisions of this standard. Because
      application of the standard is optional, any impacts are limited to those
      financial assets and liabilities to which SFAS No. 159 would be applied,
      which has yet to be determined, as is any decision concerning the adoption
      of
      the standard.





In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007 *),”
      Business Combinations* ”
(SFAS
      No. 141(R)). The objective of SFAS No. 141(R) is to improve reporting by
      creating greater consistency in the accounting and financial reporting of
      business combinations, resulting in more complete, comparable and relevant
      information for investors and other users of financial statements. SFAS No.
      141(R) requires the acquiring entity in a business combination to recognize
      all (and only) the assets acquired and liabilities assumed in the transaction;
      establishes the acquisition-date fair value as the measurement objective for
      all
      assets acquired and liabilities assumed; and requires the acquirer to disclose
      to investors and other users all of the information they need to evaluate and
      understand the nature and financial effect of the business combination. SFAS
      No.
      141(R) includes both core principles and pertinent application guidance,
      eliminating the need for numerous EITF issues and other interpretative guidance,
      thereby reducing the complexity of existing GAAP. SFAS No. 141(R) is
      effective as of the start of fiscal years beginning after December 15,
      2008. Early adoption is not allowed. The adoption of SFAS No. 141(R) will
      change our accounting treatment for business combinations on a prospective
      basis
      beginning April 1, 2009.




In
      December 2007, the FASB issued SFAS No. 160 *,”
      Non-controlling Interests in Consolidated Financial Statements”* (SFAS
      No. 160). SFAS No. 160 improves the relevance, comparability, and transparency
      of financial information provided to investors by requiring all entities to
      report non-controlling (minority) interests in subsidiaries in the same
      way—as equity in the consolidated financial statements. Moreover, SFAS No. 160
      eliminates the diversity that currently exists in accounting for transactions
      between an entity and non-controlling interests by requiring they be treated
      as
      equity transactions. SFAS No. 160 is effective as of the start of fiscal years
      beginning after December 15, 2008. Early adoption is not allowed. Since the
      Company currently has no minority interest, this standard will have no impact
      on
      our financial position, results of operations or cash flows.





In
      December 2007, the SEC issued Staff Accounting Bulletin No. 110 *(“SAB No.
      110”)* to amend
      the SEC’s views discussed in Staff Accounting Bulletin No. 107 *(“SAB No.
      107”)* regarding the use of the simplified method in developing an estimate of expected
      life of share options in accordance with SFAS No. 123(R). SAB No. 110
      is effective for us beginning April 1, 2007. The company currently uses
      reasonable estimate of expected life in accordance with SAB No. 107, as
      amended by SAB No. 110.


23





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





At
      March
      31, 2008, 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.





**Item
              8.**
            **FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATA**





The
      following consolidated financial statements of Advanced Photonix, Inc., prepared
      in accordance with Regulation S-X and the Reports of the Independent Registered
      Accounting Firm are included in Item 8:




**Page****REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
            
            25**FINANCIAL
                STATEMENTS:**Consolidated
                Balance Sheets, as of March 31, 2008 and March 31, 2007
            
            27Consolidated
                Statements of Operationsfor
                the years ended March 31, 2008 and March 31, 2007
            
            28Consolidated
                Statements of Shareholders' Equityfor
                the years ended March 31, 2008 and March 31, 2007
            
            29Consolidated
                Statements of Cash Flowsfor
                the years ended March 31, 2008 and March 31, 2007
            
            30Notes
                to Consolidated Financial Statements
            
            32


24


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 sheet of Advanced Photonix, Inc.
      as of March 31, 2008 and the related consolidated statements of operations,
      shareholders’ equity and cash flows for the year then ended. In connection with
      our audits of the financial statements, we have also audited the financial
      statement schedule for the year ended March 31, 2008 included at Item 15. These
      financial statements and schedule are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements and schedule based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States).  Those standards require
      that we plan and perform the audit to obtain reasonable assurance about whether
      the financial statements are free of material misstatement.  The
      Company is not required to have, nor were we engaged to perform, an audit of
      its
      internal control over financial reporting. Our audit included consideration
      of internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion.  An
      audit also includes examining, on a test basis, evidence supporting the amounts
      and disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall presentation of the financial statements and schedule.  We
      believe that our audit provides a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Advanced Photonix, Inc.
      at
      March 31, 2008, and the results of its operations and its cash flows for
      the year then ended **,** in
      conformity with accounting principles generally accepted in the United States
      of
      America.





Also,
      in
      our opinion, the financial statement schedule for the year ended March 31,
      2008,
      when considered in relation to the basic consolidated financial statements
      taken
      as a whole, present fairly, in all material respects, the information set forth
      therein.








/s/
      BDO
      Seidman LLP


Troy,
      Michigan


June
      30,
      2008


25


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 sheet of Advanced Photonix,
        Inc.
        (the "Company") as of March 31, 2007 and the related consolidated statements
        of
        operations, shareholders' equity and cash flows for the year then ended.
        These
        consolidated financial statements and schedule are the responsibility of
        the
        Company's management. Our responsibility is to express an opinion on these
        consolidated financial statements and schedule based on our audit.
 
 We
        conducted our audit in accordance with the Standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. The
        Company
        determined that it was not required to have, nor were we engaged to perform,
        an
        audit of its internal control over financial reporting. Our audits included
        consideration of internal control as a basis for designing audit procedures
        that
        are appropriate in the circumstances, but not for the purpose of expressing
        an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly we express no such opinion. An audit 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,
        and schedule. We believe that our audit provides 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 the results of its operations and its cash flows for the year then ended
        in
        conformity with accounting principles generally accepted in the United
        States.
 
 Also,
        in
        our opinion, the financial statement schedule for the year ended March 31,
        2007,
        when considered in relation to the basic consolidated financial statements
        taken
        as a whole, present fairly, in all material respects, the information set
        forth
        therein.





/s/
      Farber Hass Hurley LLP


(formerly
      Farber Hass Hurley & McEwen LLP)


Camarillo,
      California


June
      15,
      2007


26


**ADVANCED
      PHOTONIX, INC.**


**CONSOLIDATED
      BALANCE SHEETS**








**March 31, 2008**
            
            **March 31, 2007****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            82,000
            
            $
            1,774,000Restricted
                cash
            
            
            1,500,000
            
            
            1,500,000Accounts
                receivable, net of allowance for doubtful accounts of $14,000 and
                $51,000
                in 2008 and 2007, respectively
            
            
            3,202,000
            
            
            3,587,000Inventories
            
            
            4,131,000
            
            
            4,439,000Prepaid
                expenses and other current assets
            
            
            195,000
            
            
            377,000Total
                current assets
            
            
            9,110,000
            
            
            11,677,000Equipment
                and leasehold improvements, net
            
            
            4,757,000
            
            
            4,736,000Goodwill
            
            
            4,579,000
            
            
            4,579,000Intangibles,
                net
            
            
            10,871,000
            
            
            12,640,000Deferred
                income taxes
            
            
            —
            
            
            1,225,000Certificate
                of deposit
            
            
            276,000
            
            
            285,000Security
                deposits and other assets
            
            
            110,000
            
            
            100,000Total
                other assets
            
            
            15,836,000
            
            
            18,829,000**TOTAL
                ASSETS**
            
            $
            29,703,000
            
            $
            35,242,000**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Current
                liabilities:Line
                of credit
            
            $
            1,300,000
            
            $
            741,000Accounts
                payable
            
            
            1,339,000
            
            
            1,401,000Other
                accrued expenses
            
            
            1,254000
            
            
            2,026,000Current
                portion of long-term debt, related parties
            
            
            900,000
            
            
            550,000Current
                portion of long-term debt
            
            
            62,000
            
            
            4,255,000Current
                portion of long term debt, capital lease obligations
            
            
            460,000
            
            
            280,000Total
                current liabilities
            
            
            5,315,000
            
            
            9,253,000Long-term
                debt, less current portion
            
            
            2,249,000
            
            
            1,428,000Long-term
                debt-capital lease obligations, less current portion
            
            
            1,457,000
            
            
            1,587,000Long-term
                debt, less current portion - related parties
            
            
            951,000
            
            
            1,851,000Total
                liabilities
            
            
            9,972,000
            
            
            14,119,000**Commitments
                and contingencies****Class
                A redeemable convertible preferred stock,**$.001
                par value; 780,000 shares authorized; 2008 and 2007 - 40,000 shares
                issued
                and outstanding; liquidation preference $32,000
            
            
            **—**
            
            
            32,000**Shareholders'
                equity:****Class
                A****Common
                Stock****,**$.001 par value, 50,000,000 authorized; 2008 – 23,977,678 shares
                issued and outstanding; 2007 – 19,226,006 shares issued and
                outstanding
            
            
            24,000
            
            
            19,000**Class
                B****Common
                Stock****,**$.001 par value; 4,420,113 shares authorized, 2008 and 2007 - 31,691
                issued and outstanding
            
            
            —
            
            
            —Additional
                paid-in capital
            
            
            52,150,000
            
            
            43,887,000Accumulated
                deficit
            
            
            (32,443,000
            )
            
            (22,815,000
            )Total
                shareholders' equity
            
            
            19,731,000
            
            
            21,091,000**TOTAL
                LIABILITIES AND SHAREHOLDERS’ EQUITY**
            
            $
            29,703,000
            
            $
            35,242,000




See
      notes
      to consolidated financial statements.




27


**ADVANCED
      PHOTONIX, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the Fiscal Years Ended March 31, 2008 and 2007**





**2008**
            
            **2007**Sales,
                net
            
            $
            23,215,000
            
            $
            23,588,000Cost
                of products sold
            
            
            14,340,000
            
            
            12,693,000Gross
                profit
            
            
            8,875,000
            
            
            10,895,000Research
                and development expenses
            
            
            4,218,000
            
            
            4,012,000Sales
                and marketing expenses
            
            
            2,312,000
            
            
            2,174,000General
                and administrative expenses
            
            
            4,593,000
            
            
            5,020,000Amortization
                expense – intangible assets
            
            
            1,963,000
            
            
            1,528,000Amortization –
                capital finance expense
            
            
            —
            
            
            148,000Dodgeville
                consolidation expenses
            
            
            534,000
            
            
            —Wafer
                fabrication relocation expenses
            
            
            1,256,000
            
            
            720,000Loss
                on impairment of intangible assets
            
            
            —
            
            
            349,000Loss
                on impairment of goodwill
            
            
            —
            
            
            140,000Total
                operating expenses
            
            
            14,876,000
            
            
            14,091,000Income
                (loss) from operations
            
            
            (6,001,000
            )
            
            (3,196,000
            )Other
                income (expense):Interest
                income
            
            
            96,000
            
            
            213,000Interest
                expense on bank & MEDC loans
            
            
            (419,000
            )
            
            (322,000
            )Interest
                expense related to convertible notes
            
            
            (268,000
            )
            
            (504,000
            )Interest
                expense, warrant discount
            
            
            (1,672,000
            )
            
            (1,528,000
            )Interest
                expense, related parties
            
            
            (162,000
            )
            
            (224,000
            )Other
                income (expense)
            
            
            23,000
            
            
            (5,000
            )Income
                (Loss) before provision (benefit) for income taxes
            
            
            (8,403,000
            )
            
            (5,566,000
            )Provision
                (benefit) for income taxes:Provision
                (benefit) for income taxes - current
            
            
            —
            
            
            62,000Provision
                (benefit) for income taxes - deferred
            
            
            1,225,000
            
            
            (982,000
            )Total
                provision (benefit) for income taxes
            
            
            1,225,000
            
            
            (920,000
            )Net
                income (loss)
            
            $
            (9,628,000
            )
            $
            (4,646,000
            )Basic
                earnings (loss) per share
            
            $
            (0.44
            )
            $
            (0.24
            )Diluted
                earnings (loss) per share
            
            $
            (0.44
            )
            $
            (0.24
            )Weighted
                average common shares outstanding
            
            
            21,770,000
            
            
            19,065,000





See
      notes
      to consolidated financial statements.


28


**ADVANCED
      PHOTONIX, INC.**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


**For
      the Fiscal Years Ended March 31, 2008 and 2007**


(Dollars
                    in thousands, except share
                    data)


Class A
                Common
                Shares
              
              Class A
                Common
                Amount
              
              Class A
                Preferred
                Shares
              
              Class A
                Preferred
                Amount
              
              Class B
                Common
                Shares
              
              Class B
                Common
                Amount
              
              Additional
                Paid-in
                Capital
              
              Accumulated
                Deficit
              
              Total**BALANCE,
                  APRIL 1, 2006**
              
              
              18,885,006
              
              $
              19
              
              
              —
              
              $
              —
              
              
              31,691
              
              $
              —
              
              $
              43,581
              
              $
              (18,169
              )
              $
              25,431Exercise
                  of Stock Options
              
              
              341,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              355
              
              
              —
              
              
              355Stock
                  based compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              361
              
              
              —
              
              
              361Adjustment
                  of discount on convertible notes payable (fair value of detachable
                  warrants issued)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (31
              )
              
              —
              
              
              (31
              )Deferred
                  tax liability on beneficial conversion
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (379
              )
              
              —
              
              
              (379
              )Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (4,646
              )
              
              (4,646
              )**BALANCE,
                  MARCH 31, 2007**
              
              
              19,226,006
              
              $
              19
              
              
              —
              
              $
              —
              
              
              31,691
              
              $
              —
              
              $
              43,887
              
              $
              (22,815
              )
              $
              21,091Exercise
                  of Stock Options
              
              
              98,200
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              76
              
              
              —
              
              
              76Reclassification
                  of Class A Redeemable Preferred Stock to Equity
              
              
              —
              
              
              —
              
              
              40,000
              
              
              -
              
              
              —
              
              
              -
              
              
              32
              
              
              —
              
              
              32Stock
                  based compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              230
              
              
              —
              
              
              230Shares
                  issued upon conversion of notes payable
              
              
              1,601,323
              
              
              2
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              3,150
              
              
              —
              
              
              3,152Warrants
                  exercised
              
              
              86,817
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              151
              
              
              —
              
              
              151Issuance
                  of common stock
              
              
              2,965,332
              
              
              3
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              4,318
              
              
              —
              
              
              4,321Adjustment
                  of discount on convertible notes (anti-dilution
                  adjustment)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              306
              
              
              —
              
              
              306Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (9,628
              )
              
              (9,628
              )**BALANCE
                  MARCH 31, 2008**
              
              
              23,977,678
              
              $
              24
              
              
              40,000
              
              $
              —
              
              
              31,691
              
              $
              —
              
              $
              52,150
              
              $
              (32,443
              )
              $
              19,731


See
      notes
      to consolidated financial statements.


29


**ADVANCED
      PHOTONIX, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**For
      the fiscal years ended March 31, 2008 and 2007**


**2008**
                  
                  **2007****Cash
                      flows from operating activities:**Net
                      loss
                  
                  $
                  (9,628,000
                  )
                  $
                  (4,646,000
                  )Adjustment
                      to reconcile net loss to net cashprovided
                      by (used in) operating activities:Depreciation
                  
                  
                  1,130,000
                  
                  
                  1,076,000Amortization
                  
                  
                  2,033,000
                  
                  
                  1,676,000Stock
                      based compensation expense
                  
                  
                  230,000
                  
                  
                  361,000Goodwill
                      impairment charges
                  
                  
                  —
                  
                  
                  140,000Loss
                      on impairment of intangible asset
                  
                  
                  —
                  
                  
                  349,000Amortization,
                      convertible note discount
                  
                  
                  1,672,000
                  
                  
                  1,528,000Deferred
                      income taxes
                  
                  
                  1,225,000
                  
                  
                  (602,000
                  )Provision
                      for warranty expense
                  
                  
                  —
                  
                  
                  20,000Other
                  
                  
                  —
                  
                  
                  128,000Changes
                      in operating assets and liabilities:Accounts
                      receivable
                  
                  
                  385,000
                  
                  
                  800,000Inventories
                  
                  
                  308,000
                  
                  
                  (1,133,000
                  )Prepaid
                      expenses and other current assets
                  
                  
                  70,000
                  
                  
                  284,000Other
                      assets
                  
                  
                  41,000
                  
                  
                  (398,000
                  )Accounts
                      payable
                  
                  
                  (62,000
                  )
                  
                  419,000Accrued
                      expenses
                  
                  
                  (772,000
                  )
                  
                  254,000Net
                      cash provided by (used in) operating activities
                  
                  
                  (3,368,000
                  )
                  
                  256,000**Cash
                      flows from investing activities:**Capital
                      expenditures
                  
                  
                  (1.151,000
                  )
                  
                  (2,437,000
                  )Change
                      in restricted cash
                  
                  
                  —
                  
                  
                  (1,500,000
                  )Patent
                      expenditures
                  
                  
                  (195,000
                  )
                  
                  (162,000
                  )Net
                      cash used in investing activities
                  
                  
                  (1,346,000
                  )
                  
                  (4,099,000
                  )**Cash
                      flows from financing activities:**Payments
                      on bank loans
                  
                  
                  —
                  
                  
                  (1,950,000
                  )Proceeds
                      from capital lease financing
                  
                  
                  433,000
                  
                  
                  1,867,000Payments
                      on capital lease financing
                  
                  
                  (383,000
                  )
                  
                  —Net
                      borrowings(repayments) on revolving line of credit
                  
                  
                  559,000
                  
                  
                  (259,000
                  )Payments
                      of convertible note
                  
                  
                  (2,375,000
                  )
                  
                  —Proceeds
                      from MEDC term loan
                  
                  
                  790,000
                  
                  
                  172,000Net
                      proceeds from issuance of common stock
                  
                  
                  4,321,000
                  
                  
                  —Proceeds
                      from exercise of warrants
                  
                  
                  151,000
                  
                  
                  —Payments
                      on related party debt
                  
                  
                  (550,000
                  )
                  
                  (501,000
                  )Proceeds
                      from exercise of stock options
                  
                  
                  76,000
                  
                  
                  355,000Net
                      cash provided by (used in) financing activities
                  
                  
                  3,022,000
                  
                  
                  (316,000
                  )Net
                      increase (decrease) in cash and cash equivalents
                  
                  
                  (1,692,000
                  )
                  
                  (4,159,000
                  )Cash
                      and cash equivalents, beginning of period
                  
                  
                  1,774,000
                  
                  
                  5,933,000Cash
                      and cash equivalents, end of period
                  
                  $
                  82,000
                  
                  $
                  1,774,000**Supplemental
                      cash flow information:**
                  
                  
                  **2008**
                  
                  
                  **2007**Cash
                      paid for interest
                  
                  $
                  745,000
                  
                  $
                  795,000Cash
                      paid for income taxes
                  
                  $
                  81,000
                  
                  $
                  26,000**Supplemental
                      disclosure of non-cash operating, investing and financing
                      activities**Adjustment
                      of discount on convertible notes (anti-dilution
                      adjustment)
                  
                  
                  (306,
                      000
                  )
                  
                  —


See
      notes
      to consolidated financial statements.


30





**ADVANCED
      PHOTONIX, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**March
      31, 2008 and 2007**





**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 two manufacturing facilities located in Camarillo,  California  and
      Ann
      Arbor,  Michigan .





The
      Company’s wholly-owned subsidiary, Silicon Sensors, Inc., which
      manufactured silicon photodiodes and optoelectronic devices in a manufacturing
      facility in Dodgeville, Wisconsin, was closed December 27, 2007.





During
      FY
      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.





**Significant
      Accounting Policies**





***Principles
                of Consolidation***-
                The consolidated financial statements include the financial statements
                of
                the Company and its wholly-owned subsidiaries (Silicon Sensors Inc.
&
                Picometrix LLC). 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.




***Operating
                Segment Information***–
                The Company operates as one segment in accordance with SFAS No. 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 No. 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.




***Pervasiveness
      of Estimates*** - The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities 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.




31




***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 Line of Credit Agreement with Fifth Third Bank, the Company
      is
      required to maintain a compensating quarterly cash balance of not less than
      $1,500,000 as long as any indebtedness to Fifth Third is outstanding. This
      amount has been separately disclosed on the accompanying balance sheets as
      restricted cash. During fiscal year 2008, the Company reclassified the March
      31,
      2007 compensating balance from cash to restricted cash. In addition, the Company
      reclassified its fiscal year 2007 statement of cash flows to reflect the
      compensating balance as an out flow from investing activities.





***Accounts
      Receivable*** – Receivables are stated at amounts estimated by management to be the net
      realizable value. The allowance for doubtful accounts 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.


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. Any
          unanticipated change in the customers’ credit worthiness or other matters
          affecting the collectability of amounts due from such customers could have
          a
          material affect on the results of operations in the period in which such
          changes
          or events occur. As of March 31, 2008, no customer comprised 10% or more
          of
          accounts receivable. As of March 31, 2007, one customer comprised 11% of
          accounts receivable.


***Concentration
          of Credit Risk*** –
          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, 2008, the Company had cash at one financial
          institution 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, 2008 and March 31, 2007, cash deposits held
          at
          financial institutions in excess of FDIC insured amounts were $1.4 million
          and
          $2.9 million, respectively.




***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.


32




***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, as follows:
 
 Leasehold
                  Improvements
              
              term
                  of lease or useful life,
                whichever
                  is lessMachinery
                  and Equipment
              
              5 –
                  7 yearsOffice
                  Furniture
              
              3 –
                  7 yearsComputer
                  Hardware
              
              3 –
                  7 yearsComputer
                  Software
              
              3 –
                  5 yearsAutomobiles
              
              5
                  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***
 In
        accordance with SFAS No. 142, *“Goodwill
        and Other Intangible Assets”,* goodwill
        and ** intangible
        assets that are not subject to amortization shall be tested for impairment
        annually, or more frequently if events or changes in circumstances indicate
        that
        the asset might be impaired. The impairment test shall consist of a comparison
        of the fair value of an intangible asset with its carrying amount, as defined.
        If the carrying amount of goodwill or an intangible asset exceeds its fair
        value, an impairment loss shall be recognized in an amount equal to that
        excess.
 
 In
        accordance with SFAS No. 144, *“Accounting
        for the Impairment or Disposal of Long-lived Assets”,* the
        carrying value of long-lived assets, including amortizable intangibles and
        property and equipment, are evaluated whenever events or changes in
        circumstances indicate that a potential impairment has occurred relative
        to a
        given asset or assets. Impairment is deemed to have occurred if projected
        undiscounted cash flows associated with an asset are less than the carrying
        value of the asset. The estimated cash flows include management’s assumptions of
        cash inflows and outflows directly resulting from the use of that asset in
        operations. The amount of the impairment loss recognized is equal to the
        excess
        of the carrying value of the asset over its then estimated fair
        value.
 
 ***Revenue
        Recognition*** – Revenue
        is derived principally from the sales of the Company’s products. The Company
        recognizes revenue when the basic criteria of Staff Accounting Bulletin
        No. 104 are met. Specifically, the Company recognizes revenue when
        persuasive evidence of an arrangement exists, usually in the form of a purchase
        order, when shipment has occurred since its terms are FOB source, or when
        services have been rendered, title and risk of loss have passed to the customer,
        the price is fixed or determinable and collection is reasonably assured in
        terms
        of both credit worthiness of the customer and there are no post shipment
        obligations or uncertainties with respect to customer acceptance.
  The
        Company sells certain of its products to customers with a product warranty
        that
        provides warranty repairs at no cost. The length of the warranty term is
        one
        year from date of shipment. The Company accrues the estimated exposure to
        warranty claims based upon historical claim costs. The Company’s management
        reviews these estimates on a regular basis and adjusts the warranty provisions
        as actual experience differs from historical estimates or as other information
        becomes available.
 
 The
        Company does not provide price protection or general right of return. The
        Company’s return policy only permits product returns for warranty and
        non-warranty repair or replacement and requires pre-authorization by the
        Company
        prior to the return. Credit or discounts, which have been historically
        insignificant, may be given at the discretion of the Company and are recorded
        when and if determined.
 
 The
        Company predominantly sells directly to original equipment manufactures with
        a
        direct sales force. The Company sells in limited circumstances through
        distributors. Sales through distributors represent approximately 5% of total
        revenue. Significant terms and conditions of distributor agreements include
        FOB
        source, net 30 days payment terms, with no return or exchange rights, and
        no
        price protection. Since the product transfers title to the distributor at
        the
        time of shipment by the Company, the products are not considered inventory
        on
        consignment.
  33
  ***Significant
        Customers***– During
        fiscal years ended March 31, 2008 and 2007, no single customer accounted
        for
        more than 10% of the Company’s net sales.
  ***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 Products 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.
  *AdvertisingCosts* ******– Advertising costs are expensed as incurred. Advertising expense was
        approximately $106,000 and $91,000 in FY 2008 and 2007,
        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 No. 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 No. 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, 2008.
  ***Accounting
        for Income Taxes*** —
Income
        tax provisions 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”* .
  34
  The
        Company follows the guidance established in EITF Issue 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.
  The
        calculation of federal income taxes involves dealing with uncertainties in
        the
        application of complex tax regulations. On January 1, 2007, the Company
        adopted FASB Interpretation No. 48 *“Accounting
        for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109”* (“FIN 48”).
        As a result of the implementation of FIN 48, we recognize liabilities for
        uncertain tax positions based on the two-step process prescribed in the
        interpretation. The first step is to evaluate the tax position for recognition
        by determining if the weight of available evidence indicates that it is more
        likely than not that the position will be sustained on audit, including
        resolution of related appeals or litigation processes, if any. The second
        step
        requires us to estimate and measure the tax benefit as the largest amount
        that
        is more than 50% likely to be realized upon ultimate settlement. It is
        inherently difficult and subjective to estimate such amounts, as we have
        to
        determine the probability of various possible outcomes. We reevaluate these
        uncertain tax positions on an annual basis. This evaluation is based on factors
        including, but not limited to, changes in facts or circumstances, changes
        in tax
        law, effectively settled issues under audit, and new audit activity. Such
        a
        change in recognition or measurement would result in the recognition of a
        tax
        benefit or an additional charge to the tax provision.
  ***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, 2008 total 426,000 shares, representing
        outstanding stock options and warrants convertible into shares of common
        stock.
  ***Recent
        Pronouncements and Accounting Changes***
  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. In February
        2008, the FASB issued FSP FAS No. 157-2 *,
        “Effective Date of FASB Statement No. 157”.* This
        FSP
        delays the effective date of SFAS No. 157 for all nonfinancial assets
        and nonfinancial liabilities, except those that are recognized or disclosed
        at
        fair value in the financial statements on a recurring basis (at least annually).
        The effective date for nonfinancial assets and nonfinancial liabilities has
        been
        delayed by one year to fiscal years beginning after November 15, 2008 and
        interim periods within those fiscal years.  The
        adoption of SFAS 157 will not have a significant impact on our consolidated
        financial statements except for the required disclosures related to fair
        value.
  In
        February 2008, the FASB issued FSP FAS No. 157-1, *“Application
        of FASB Statement No. 157 to FASB Statement No. 13 and Other
        Accounting Pronouncements That Address Fair Value Measurements for Purposes
        of
        Lease Classification or Measurement under Statement 13”.* This FSP
        excludes certain leasing transactions accounted for under FASB Statement
        No. 13, *“Accounting
        for Leases”* from the
        scope of SFAS No. 157. The exclusion does not apply to fair value
        measurements of assets and liabilities recorded as a result of a lease
        transaction but measured pursuant to other pronouncements within the scope
        of
        SFAS No. 157. FSP FAS No. 157-1 is effective upon the Company’s
        initial adoption of SFAS No. 157. The Company anticipates that this
        FSP will not have a material impact on its consolidated financial statements.
  35
  In
        February 2007, the FASB issued SFAS No. 159, *“The
        Fair Value Option for Financial Assets and Financial Liabilities”* (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 has not elected the early adoption provisions of this standard. Because
        application of the standard is optional, any impacts are limited to those
        financial assets and liabilities to which SFAS No. 159 would be applied,
        which has yet to be determined, as is any decision concerning the adoption
        of
        the standard.
 
 In
        December 2007, the FASB issued SFAS No. 141 (Revised 2007 *),”
        Business Combinations* ”
(SFAS
        No. 141(R)). The objective of SFAS No. 141(R) is to improve reporting by
        creating greater consistency in the accounting and financial reporting of
        business combinations, resulting in more complete, comparable and relevant
        information for investors and other users of financial statements. SFAS No.
        141(R) requires the acquiring entity in a business combination to recognize
        all (and only) the assets acquired and liabilities assumed in the transaction;
        establishes the acquisition-date fair value as the measurement objective
        for all
        assets acquired and liabilities assumed; and requires the acquirer to disclose
        to investors and other users all of the information they need to evaluate
        and
        understand the nature and financial effect of the business combination. SFAS
        No.
        141(R) includes both core principles and pertinent application guidance,
        eliminating the need for numerous EITF issues and other interpretative guidance,
        thereby reducing the complexity of existing GAAP. SFAS No. 141(R) is
        effective as of the start of fiscal years beginning after December 15,
        2008. Early adoption is not allowed. The adoption of SFAS No. 141(R) will
        change our accounting treatment for business combinations on a prospective
        basis
        beginning April 1, 2009.
  In
        December 2007, the FASB issued SFAS No. 160 *,”
        Non-controlling Interests in Consolidated Financial Statements”* (SFAS
        No. 160). SFAS No. 160 improves the relevance, comparability, and transparency
        of financial information provided to investors by requiring all entities
        to
        report non-controlling (minority) interests in subsidiaries in the same
        way—as equity in the consolidated financial statements. Moreover, SFAS No. 160
        eliminates the diversity that currently exists in accounting for transactions
        between an entity and non-controlling interests by requiring they be treated
        as
        equity transactions. SFAS No. 160 is effective as of the start of fiscal
        years
        beginning after December 15, 2008. Early adoption is not allowed. Since the
        Company currently has no minority interest, this standard will have no impact
        on
        our financial position, results of operations or cash flows.
  In
        December 2007, the SEC issued Staff Accounting Bulletin *No.* 110 *(“SAB No.
        110”)* to amend
        the SEC’s views discussed in Staff Accounting Bulletin *No.* 107 *(“SAB No.
        107”)* regarding the use of the simplified method in developing an estimate of expected
        life of share options in accordance with SFAS *No.* 123(R).
        SAB *No.* 110
        is
        effective for us beginning April 1, 2007. The company currently uses the
        simplified method in accordance with SAB *No.* 107,
        as
        amended by SAB *No.* 110.
 
 **2.**
              **Inventories**
  Inventories
        consisted of the following at March 31:
 **2008**
                
                **2007**Raw
                    material
                
                $
                3,260,000
                
                $
                3,348,000Work-in-process
                
                
                1,626,000
                
                
                1,503,000Finished
                    products
                
                
                229,000
                
                
                512,000Total
                    inventories
                
                
                5,115,000
                
                
                5,363,000Less
                    reserve
                
                
                (984,000
                )
                
                (924,000
                )Inventories,
                    net
                
                $
                4,131,000
                
                $
                4,439,000
 
 **3.**
              **Equipment
                  and Leasehold Improvements**
  Equipment
        and leasehold improvements consisted of the following at March 31:
  **2008**
              
              **2007**Machinery
                  and equipment
              
              $
              7,912,000
              
              $
              6,449,000Furniture
                  and fixtures
              
              
              715,000
              
              
              521,000Leasehold
                  improvements
              
              
              952,000
              
              
              554,000Computer
                  hardware equipment
              
              
              564,000
              
              
              555,000Vehicles
              
              
              26,000
              
              
              26,000Capitalized
                  software
              
              
              419,000
              
              
              442,000Total
                  assets
              
              
              10,588,000
              
              
              8,547,000Accumulated
                  depreciation
              
              
              (6,090,000
              )
              
              (5,565,000
              )4,498,000
              
              
              2,982,000Construction-in-process
              
              
              259,000
              
              
              1,754,000Net
                  equipment and leasehold improvements
              
              $
              4,757,000
              
              $
              4,736,000
  36
  Included
        in the table of Equipment and Leasehold improvements above, are assets totaling
        $2.3 million at March 31, 2008 and 2007, representing assets leased under
        a
        capital lease (see note 6 for a description of lease terms). Accumulated
        amortization related to the lease assets totaled $234,000 and $0 at March
        31,
        2008 and 2007, respectively.
 
 Depreciation
        expense was $1.1 million for fiscal year ended March 31, 2008 and $1.1 million
        for fiscal year ended March 31, 2007.
  **4.**
              **Intangible
                  Assets and Goodwill**
 
 Intangible
        assets that have definite lives consist of the following (in
        thousands):
 
 **March 31, 2008**
              
              **March 31, 2007****Weighted**
                **Average**
                **Lives**
              
              **Amortization**
                **Method**
              
              **Carrying**
                **Value**
              
              **Accumulated**
                **Amortization**
              
              **Intangibles**
                **Net**
              
              **Carrying**
                **Value**
              
              **Accumulated**
                **Amortization**
              
              **Intangibles**
                **Net**Non-Compete
                  agreement
              
              
              3
              
              
              Cash
                  Flow
              
              $
              130
              
              $
              117
              
              $
              13
              
              $
              130
              
              $
              82
              
              $
              48Customer
                  list
              
              
              15
              
              
              Straight
                  Line
              
              
              475
              
              
              322
              
              
              153
              
              
              475
              
              
              309
              
              
              166Trademarks
              
              
              15
              
              
              Cash
                  Flow
              
              
              2,270
              
              
              391
              
              
              1,879
              
              
              2,270
              
              
              286
              
              
              1,984Customer
                  relationships
              
              
              5
              
              
              Cash
                  Flow
              
              
              1,380
              
              
              450
              
              
              930
              
              
              1,380
              
              
              174
              
              
              1,206Technology
              
              
              10
              
              
              Cash
                  Flow
              
              
              10,950
              
              
              3,592
              
              
              7,358
              
              
              10,950
              
              
              2,069
              
              
              8,881Patents
                  pending
              
              
              
              
              
              
              
              
              424
              
              
              —
              
              
              424
              
              
              310
              
              
              —
              
              
              310Patents
              
              
              
              
              
              Straight
                  Line
              
              
              187
              
              
              73
              
              
              114
              
              
              107
              
              
              62
              
              
              45**Total
                  Intangibles**
              
              
              
              
              
              
              
              **$**
              **15,816**
              
              **$**
              **4,945**
              
              **$**
              **10,871**
              
              **$**
              **15,622**
              
              **$**
              **2,982**
              
              **$**
              **12,640**
 
 Through
        March 31, 2007, these intangible assets were being amortized using the
        straight-line method, which, at the time of the acquisition, in the Company’s
        judgment, best reflected the pattern in which the economic benefits of the
        intangible asset would be consumed.
 
 Throughout
        the amortization period, the Company continuously reviews its amortization
        method and useful lives to ensure they continue to reflect the pattern in
        which
        the assets will be consumed. As part of that analysis, specifically for the
        Technology intangible asset, the estimated future cash flows, derived from
        the
        Company’s initial discounted cash flow valuation model used to determine the
        estimated fair value of intangible assets in connection with the Picometrix
        acquisition, were projected to be substantially greater in fiscal years
        2008-2011 than they were in fiscal years 2006-2007. As a result, the Company
        felt that the use of the straight-line method of amortization beyond fiscal
        2007
        no longer would have materially reflected the pattern of future asset
        consumption. During fiscal years 2006 and 2007, the amount of straight-line
        amortization taken was greater than the amortization that would have been
        expensed had the estimated cash flow methodology been used in these years.
        The
        Company believed it was appropriate to have accelerated the amortization
        in the
        first two years for this technology-based asset. Thus, based on its judgment,
        the Company felt that a straight-line methodology in the early years of the
        asset was more appropriate, and a change to the cash flow methodology beginning
        in 2008 was more appropriate given the estimated future cash flows. The only
        impact of this change was to modify future amortization expense.
  37
  Concurrent
        with the Company’s change in amortization methodology from straight-line to cash
        flows for the Technology asset, the Company also changed its amortization
        method
        from straight-line to cash flows for the Trademarks, Customer List and
        Non-Compete Agreement intangibles. The change related to these other intangible
        assets had an insignificant impact to the Company’s amortization on a cumulative
        and prospective basis.
 
 The
        Company believes that the change from straight-line amortization to cash
        flow
        amortization is consistent with the definition in SFAS No. 154 of a
“ *Change
        in Accounting Estimate Effected by a Change in Accounting
        Principle”* .
        In
        accordance with paragraph 20 of SFAS No. 154, “like other changes in accounting
        principle, a change in accounting estimate that is effected by a change in
        accounting principle may be made only if the new accounting principle is
        justifiable on the basis that it is preferable. For example, an entity that
        concludes that the pattern of consumption of the expected benefits of an
        asset
        has changed, and determines that a new depreciation method better reflects
        that
        pattern, may be justified in making a change in accounting estimate effected
        by
        a change in accounting principle.” The Company believes that the new accounting
        principle (cash flow amortization) is preferable beginning in fiscal 2008
        because it better reflected the pattern of consumption of the expected benefits
        of the asset. Preferability is consistent with paragraph 12 of SFAS No. 142,
        “ *Goodwill
        and Other Intangible Assets”* ,
        which
        states, “The method of amortization shall reflect the pattern in which the
        economic benefits of the intangible asset are consumed or otherwise used
        up.”
Furthermore, paragraph 20 of SFAS No. 154 states that “changes of that type
        often are related to the continuing process of obtaining additional information
        and revising estimates and, therefore, are considered changes in estimates
        for
        purposes of applying this Statement.” The Company feels this was also applicable
        to its situation, and thus it treated the change as a change in accounting
        estimate, rather than a change in accounting principle.
 
 As
        a part
        of its analysis, the Company did not change its amortization method, but
        did
        reduce the estimated useful life of its Customer Relationships (formerly
        referred to as R&D Contracts) from 15 years to 5 years. This was done;
 1)
              because
                  this asset is technology related (generated based on customer
                  relationships obtained from various customers) and technology-based
                  assets
                  would tend to have shorter useful lives
                  and
 2)
              to
                  reflect the attrition inherent in customer related intangibles.
 
 In
        assessing this asset, the Company reviewed the cash flows from its original
        valuation and determined that such cash flows, while providing a reasonable
        overall asset value, provided significant variability over its original useful
        life. Accordingly, the Company adjusted to a shorter estimated remaining
        life to
        ensure recognition of cost that better corresponds with the distribution
        of
        revenues. The only impact of this change was to modify future amortization
        expense.
 
 The
        table
        below reflects the revised future amortization expense for the Company’s
        intangible assets based on the changes discussed above.
 
 **Fiscal
                  Year**
              
              **Future Amortization**
                **As previously**
                **Reported**
              
              **Future Amortization**
                **As Adjusted**
              
              **Difference**2008
              
              $
              1,394,000
              
              $
              1,952,000
              
              $
              558,0002009
              
              
              1,356,000
              
              
              2,090,000
              
              
              734,0002010
              
              
              1,351,000
              
              
              2,035,000
              
              
              684,0002011
              
              
              1,351,000
              
              
              1,584,000
              
              
              233,0002012
              
              
              1,351,000
              
              
              1,305,000
              
              
              (46,000
              )2013
                  & after
              
              
              5,482,000
              
              
              3,319,000
              
              
              (2,163,000
              )**Total
                  Amortization**
              
              **$**
              **12,285,000**
              
              **$**
              **12,285,000**
              
              **$**
              **-**
 
 Amortization
        expense for the fiscal year ended March 31, 2008 was approximately $2.0 million
        compared to $1.5 million for the year ended March 31, 2007. Patent amortization
        expense, included above, was approximately $12,000 and $7,000 in FY 2008
        and
        2007, respectively. The current patents held by the Company have remaining
        useful lives ranging from 2 years to 20 years.
  38
  Assuming
        no impairment to the intangible value, future amortization expense for
        intangible assets and patents are as follows:
  **Intangible
                  Assets (a)**
              
              **Patents
                  (b)**2009
              
              $
              2,090,000
              
              
              2009
              
              $
              14,0002010
              
              
              2,035,000
              
              
              2010
              
              
              12,0002011
              
              
              1,584,000
              
              
              2011
              
              
              12,0002012
              
              
              1,305,000
              
              
              2012
              
              
              12,0002013
              
              
              1,088,000
              
              
              2013
              
              
              12,0002014
                  & after
              
              
              2,231,000
              
              
              2014
                  & after
              
              
              52,000**Total**
              
              **$**
              **10,333,000**
              
              
              **Total**
              
              **$**
              **114,000**
  a.
              The
                  table reflects the revised future amortization expense as of March
                  31,
                  2008 for the Company’s intangible assets based on the changes discussed
                  above.
 
 b.
              Patent
                  pending costs of $424,000 are not included in the chart above.
                  These costs
                  will be amortized beginning the month the patents are granted.
 
 ***Intangible
        Impairment*** —
        The Company acquired Photonic Detectors Inc. (PDI) in December of 2004 and
        recorded an intangible asset related to the customer list. In fiscal year
        ended
        March 31, 2007 the Company dissolved PDI. As a result of this dissolution
        and a
        review of the future cash flows from the customer list, management determined
        that the intangible customer list asset no longer had value and was written
        off.
  ***Impairment
                  of Goodwill***–
                  The
                  Company’s evaluation of Goodwill for the year ended March 31, 2008
                  indicated that there was no impairment.As
                  a result of the Company’s annual goodwill impairment evaluation in prior
                  years, goodwill recorded from the 2003 Texas Optoelectronics Inc.
                  acquisition of approximately $1.4 million was reduced $140,000
                  in FY 2007,
                  based on the net present value of the estimated future cash flow
                  as a
                  result of the acquisition.
  **5.**
              **Line
                  of Credit**
 On
        March
        6, 2007, the Company and Fifth Third Bank entered
        into a Revolving Line of Credit (the Loan
        Agreement )
        providing for borrowings of up to a maximum of $2.0 million. 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.
  On
        November 13, 2007, the Company and Fifth Third Bank signed an amendment to
        the
        Loan Agreement increasing the principal amount available to $3.0
        million.
 
 The
        Loan
        Agreement contains customary representations, warranties and financial covenants
        including a maximum debt service coverage ratio (as defined in the agreement).
        The interest rate is variable based on the prime rate and is adjusted quarterly.
        The maximum interest rate will equal the prime rate. Prime rate at March
        31,
        2008 was 5.25%. The loan maturity date is now July 1, 2008. The Company did
        not
        meet the debt service coverage ratio at March 31, 2008 and the Loan Agreement
        was subsequently amended as described in footnote 17.
 
 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
 
 **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 $5.0 million aggregate principal
        amount of its senior convertible notes (Convertible Debt 1 st Tranche). The original Securities Purchase Agreement was filed with the
        Securities and Exchange Commission on October 12, 2004. The notes were
        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 paid interest at an annual rate
        of
        prime plus 1% and had a majority date of October 12, 2007.
 
 39





In
      connection with the agreement, costs of approximately $646,000 were incurred
      which were 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. In March 2007, the Company paid off the
      SBBT Term Loan and Line of Credit. The remaining portion of the capital finance
      expense related to the SBBT loan agreement was accelerated and written off
      in
      March 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 had 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 had the option for a period of one year
      following effectiveness of the registration statement to acquire an additional
      $5.0 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 $3.0 million to $6.0 million and (iii) decrease the amount of
“Permitted Acquisition Indebtedness” (as such term is defined in the Notes) from
      $6.0 million to $3.0 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, “ *Accounting
      for Convertible Debt and Debt Issued with Stock Purchase
      Warrants* ”,
      the
      Company recorded a discount to the note of $1.3 million to account for the
      fair
      value associated with the detachable warrants. Upon any exercise of the
      conversion feature, the notes would 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.





During
      FY 2006, $3.5
      million of the $5 million Convertible debt was converted into approximately
      1,792,000 shares of Class A Common Stock leaving a Convertible Debt 1st Tranche
      balance of $1.5 million (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 an
      interest rate of prime plus 1%, a maturity date of October 12, 2007 and 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 was 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 an interest rate of prime plus 1%, a maturity date of October
      12,
      2007 and warrants to purchase 680,658 shares of common stock. The Company
      originally valued the warrants and recorded an increase to additional-paid-in-
      capital amounting 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 was amortizing the debt discount to interest expense over the life
      of the note. At March 31, 2007, the
      Convertible Debt 2 nd Tranche
      was $2.7 million (net of the debt discount).




40




In
      connection with the placement of the Convertible Notes in October 2004,
      September 2005 and March 2006, the Company issued detachable warrants granting
      the holders the right to acquire 1,446,398 shares of the Company’s common stock
      at $1.78 per share. The warrants were to expire five years from the date of
      registration. In accordance with Emerging Issues Task Force Issue 00-27,
“ *Application
      of Issue No. 98-5 to Certain Convertible Instruments* ”
(“EITF
      00-27”), the Company allocated the value attributable to the warrants ($1.9
      million) to additional paid-in capital and recorded a corresponding discount
      against the Convertible Notes. The Company valued the warrants in accordance
      with EITF 00-27 using the Black-Scholes pricing model and the following
      assumptions: contractual terms of 5 years, an average risk free interest rate
      of
      4.9%, a dividend yield of 0%, and volatility of 72%, 52% and 52%,
      respectively.




As
      a
      result of the common stock private placement, completed on September 14,
      2007(see note 10), the anti-dilution clause of the Convertible Notes was
      triggered; increasing the number of shares issuable, if converted, by 104,047
      and decreasing the weighted average conversion price to $1.99 from $2.06. In
      addition the number of warrants increased by 29,500 and the exercise price
      of
      the warrants decreased to $1.7444 from $1.78. The Company recorded the intrinsic
      value attributable to the additional shares and warrants issued of $306,000
      as
      additional debt discount with an offset to Additional Paid in Capital. In
      accordance with EITF 00-27, the $306,000 was amortized to interest expense
      over
      the remaining life of the convertible notes, $134,000 of which was during the
      quarter ended September 28, 2007, and the remaining $172,000 was amortized
      in
      the third quarter ending December 28, 2007.




In
      October 2007, the Company retired the outstanding convertible notes of $5.5
      million. The convertible note holders converted a total of $3.1 million into
      1,601,323 shares of the Company’s common stock and the Company retired the
      balance of $2.4 million, plus interest, in cash.





During
      the third quarter of FY 2008, warrant holder Bluegrass LTD, exercised their
      right to purchase 86,817 shares of the Company’s common stock at $1.7444 per
      share for $ 151,444 in two stages. In October, 2007, this holder of warrants
      exercised their right to purchase 50,000 shares of the Company’s common stock
      for $87,220 at $1.7444 per share. On November 8, 2007, this same holder of
      warrants exercised their right to purchase their final 36,817 shares of the
      Company’s common stock for $64,224 at $1.7444 per share.





For
      the
      twelve month period ended March 31, 2008 and March 31, 2007, the Company
      recorded non-cash interest expense in the amount of $1.7 million and $1.5
      million, respectively, in connection with the Convertible Notes
      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.





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 $2.3 million (Lease). API purchased equipment
      under the Lease until June 30, 2007. The Lease expires May 2012. The interest
      rate is a variable rate based on the prime rate plus 0.125%. 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, “ *Accounting
      for Leases* ”.
      The
      balance on this loan at March 31, 2008 was $1.9 million.




41





Year Ended March 31,
            
            Future minimum capital
              lease payments2009
            
            $
            552,0002010
            
            
            527,0002011
            
            
            502,0002012
            
            
            477,0002013
            
            
            78,0002014
                & after
            
            
            —Total
            
            $
            2,136,000Less:
                amounts representing interest
            
            
            (219,000
            )Total
            
            $
            1,917,000Current
                portion
            
            
            460,000Long-term
                portion
            
            
            1,457,000





The Michigan
      Economic Development Corporation ( 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 $1.0 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 first 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 amount. 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 Note. In the fourth quarter of FY 2007, the
      Company borrowed an additional $ 172,000. In the first quarter of FY 2008,
      the
      Company borrowed the final $103,000 against this initial MEDC loan.





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  first
      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. In May, 2007, the Company borrowed an additional
      $168,000. On September 15, 2007, principal was restated to include $87,000
      of
      accrued interest. During the 3 rd quarter
      of FY 2008, the Company borrowed the final $431,000 against MEDC-loan
      2.





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 )
      (see
      note 15). 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.





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




**Balance**
              **3/31/07**
            
            **Balance**
              **3/31/08**
            
            **FY2009**
            
            **FY2010**
            
            **FY2011**
            
            **FY2012**
            
            **FY2013**
            
            **FY2014 &**
              **Beyond**Credit
                Line – Fifth Third Bank
            
            $
            741
            
            $
            1,300
            
            $
            1,300
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Debt
                to Related Parties
            
            
            2,401
            
            
            1,851
            
            
            900
            
            
            951
            
            
            —
            
            
            —
            
            
            —
            
            
            —MEDCloans
            
            
            1,522
            
            
            2,311
            
            
            62
            
            
            538
            
            
            577
            
            
            619
            
            
            448
            
            
            67Convertible
                Debt 1stTranche
            
            
            1,439
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Convertible
                Debt 2ndTranche
            
            
            2,722
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Capital
                Lease Obligation
            
            
            1,867
            
            
            1,917
            
            
            460
            
            
            460
            
            
            460
            
            
            460
            
            
            77
            
            
            —**TOTAL**
            
            **$**
            **10,692**
            
            **$**
            **7,379**
            
            **$**
            **2,722**
            
            **$**
            **1,949**
            
            **$**
            **1,037**
            
            **$**
            **1,079**
            
            **$**
            **525**
            
            **$**
            **67**




42




**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. At March 31, 2007, 40,000 shares of Class A
      Redeemable Convertible Preferred Stock ( Class
      A
      Preferred )
      were
      issued and outstanding. The Class A redeemable convertible preferred stock
      is
      recorded at its issuance price of $.80 per share, which is also the liquidation
      preference price per share, or a total of $32,000 with respect to all such
      shares outstanding. The Class A Preferred Stock is redeemable 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. This clause has since lapsed and
      consistent with the Company’s disclosure, the preferred stock is now redeemable
      at the Company’s option for $.80 per share at any time. . Accordingly, the
      Company, in accordance with SAB Topic 3C and EITF Topic D-98 reclassified the
      Class A redeemable convertible preferred stock as equity, at par value ($.001
      per share) with the balance recorded as Additional Paid in Capital. The Class
      A
      Preferred stockholders do not have voting rights except as required by
      applicable law.





**8.**
            **Stock
                Based Compensation**




The
      Company has five stock equity 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, the 2000 Stock Option Plan and the 2007 Equity
      Incentive Plan. As of March 31, 2008, there were 84,500 shares available for
      issuance under the 1991 Directors’ Plan, 100,000 shares available for issuance
      under the 1997 Plan, 12,500 shares available for issuance under the 2000 Plan
      and 2,484,000 shares available for issuance under the 2007 Plan.





As
      of
      March 31, 2008, the Company’s various equity plans provide for the granting of
      non-qualified and incentive stock options and restricted stock awards to
      purchase up to 2,681,000 shares of common stock. Options typically vest at
      the
      rate of 25% per year over four years and are exercisable up to ten years from
      the date of issuance. The Directors’ Plan typically vests 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 and restricted stock awards
      may be granted to employees, officers, directors and consultants.




Stock
      option transactions for fiscal years 2007 and 2008 are summarized as
      follows:





**Shares (000)**
            
            **Weight Average Exercise**
              **Price****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
            )
            $
            1.74**Outstanding,
                March 31, 2007**
            
            
            2,540
            
            $
            1.90Exercisable,
                March 31, 2007
            
            
            1,978
            
            $
            1.81Outstanding,
                March 31, 2007
            
            
            2,540
            
            $
            1.90Granted
            
            
            161
            
            $
            1.87Exercised
            
            
            (98
            )
            $
            0.78Expired
            
            
            16
            
            $
            (0.08
            )**Outstanding,
                March 31, 2008**
            
            
            2,619
            
            $
            1.92Exercisable,
                March 31, 2008
            
            
            2,198
            
            $
            1.87




43




The
      intrinsic value of options exercised in fiscal years 2008 and 2007 was
      approximately $116,000 and $375,000, respectively.





Information
      regarding stock options outstanding as of March 31, 2008 is as follows:





**Options
                Outstanding**(in 000s)
            
            Weighted Average
            
            Weighted AveragePriceRange
            
            Shares
            
            Exercise Price
            
            Remaining Life$0.50
                - $1.25
            
            
            854
            
            $
            0.78
            
            
            0.87$1.50
                - $2.50
            
            
            1,049
            
            $
            2.00
            
            
            6.98$2.87
                - $5.34
            
            
            716
            
            $
            3.18
            
            
            5.74





**Options Exercisable**(in 000s)
            
            Weighted Average
            
            Weighted AveragePrice Range Shares
            
            Shares
            
            Exercise Price
            
            Remaining Life$0.50
                - $1.25
            
            
            853
            
            $
            0.77
            
            
            0.87$1.50
                - $2.50
            
            
            730
            
            $
            2.00
            
            
            6.77$2.87
                - $5.34
            
            
            615
            
            $
            3.24
            
            
            5.37





The
      Company accounts for stock-based incentives plans, in accordance with Statement
      of Financial Accounting Standards No. 123(R), “ *Share-Based
      Payment”* (SFAS
      No.
      123(R)). Accordingly, the Company estimates the fair value of stock-based awards
      utilizing the Black-Scholes pricing model. The fair value of the awards is
      amortized as compensation expense on a straight-line basis over the requisite
      service period of the award, which is generally the vesting period. The fair
      value calculations involve significant judgments, assumptions, estimates and
      complexities that impact the amount of compensation expense to be recorded
      in
      current and future periods. The factors include:





·  The
      time
      period that stock-based awards are expected to remain outstanding has been
      determined based on the average of the original award period and the remaining
      vesting period in accordance with the SEC’s short-cut approach pursuant to
      SAB No. 107, “ *Disclosure
      about Fair Value of Financial Statements”* .
      As
      additional evidence develops from the Company’s stock trading history, the
      expected term assumption will be refined to capture the relevant trends.


·  The
      future volatility of the Company’s stock has been estimated based on the weekly
      stock price from the acquisition date of Picometrix LLC (May 2, 2005) to the
      date of the latest stock grant. As additional evidence develops, the future
      volatility estimate will be refined to capture the relevant trends.


·  A
      dividend yield of zero has been assumed for awards issued for the years ended
      March 31, 2008 and March 31, 2007, based on the Company’s actual past experience
      and the fact that Company does not anticipate paying a dividend on its shares
      in
      the near future.


·  The
      Company has based its risk-free interest rate assumption for awards issued
      during the years ended March 31, 2008 and March 31, 2007 on the implied yield
      available on U.S. Treasury issues with an equivalent expected
      term.


·  The
      forfeiture rate for awards issued during the years ended March 31, 2008 and
      March 31, 2007 were approximately 18.7% and was based on the Company’s actual
      historical forfeiture trend.




44


**Year
                  Ended****March 31, 2008**
              
              **March 31, 2007****Option
                  Plan Shares:**Expected
                  term (in years)
              
              
              6.3
              
              
              6.5Volatility
              
              
              49.
                  8
              %
              
              47.8
              %Expected
                  dividend
              
              
              0
              %
              
              0
              %Risk-free
                  interest rate
              
              
              4.4
              %
              
              5.0
              %Weighted-average
                  grant date fair value
              
              $
              1.09
              
              $
              1.35




Under
      the
      provisions of SFAS No. 123(R), the Company recorded $230,000 and $361,000 of
      stock compensation expense in our consolidated statements of operations for
      the
      years ended March 31, 2008 and March 31, 2007, respectively.




The
      table
      below lists the classification of the Stock Based Compensation Expense for
      the
      years ended March 31, 2008 and March 31, 2007.




**2008**
            
            **2007**Cost
                of Products Sold
            
            $
            15,000
            
            
            —Research
                and development expense
            
            
            58,000
            
            
            —General
                and Administrative expense
            
            
            143,000
            
            
            361,000Sales
                and Marketing expense
            
            
            14,000
            
            
            —**Total
                Stock Based Compensation**
            
            **$**
            **230,000**
            
            **$**
            **361,000**




At
      March
      31, 2008, the total stock-based compensation expense related to unvested stock
      options granted to employees under the Company’s stock option plans but not yet
      recognized was approximately $144,000. This expense will be amortized on a
      straight-line basis over a weighted-average period of approximately 3.1 years
      and will be adjusted for subsequent changes in estimated
      forfeitures.





**9.**
            **Wafer
                Fabrication consolidation and Dodgeville
                closure**




**Wafer
      Fabrication consolidation** - The
      Company is in the process of consolidating and modernizing its wafer fabrication
      facilities. Prior to this consolidation the Company had excess wafer fabrication
      capacity at its three locations (including Dodgeville, WI), with the Ann Arbor,
      MI facility having the most modern infrastructure. The wafer fabrication
      facilities and equipment in its Wisconsin and California facilities had similar
      capabilities and both required substantial upgrade and improvement in order
      to
      maintain production capabilities. Since the Ann Arbor facility, when equipped,
      would have the physical capacity to produce all of the Company’s current and
      foreseeable wafer requirements and would not significantly impact current
      production requirements during any upgrade process, management decided to
      consolidate all optoelectronic wafer fabrication into the Ann Arbor facility.
      Even though the Company had excess capacity in its Wisconsin and California
      production facilities, no abnormally low production levels were experienced.
      Unallocated overheads were recognized as an expense in the period in which
      they
      were incurred in accordance with SFAS No. 151 *,
      “Inventory Costs* ”,
      during
      the normal course of business.




The
      Company estimates its wafer fabrication consolidation expense will be
      approximately $2.4 million to complete its consolidation of this business.
      Projected costs consist of labor and associated expense of $1.1 million, travel
      and relocation costs of $169,000, accelerated depreciation expense on
      de-commissioned assets of $150,000 and supplies, consulting and other related
      costs of $854,000. To date the Company has incurred approximately $2.0 million
      of such expense the balance expected to be incurred through the remainder of
      the
      project is projected to be approximately $400,000. In accordance with SFAS
      No.
      146, *“Accounting
      for Cost Activities Associated with Exit or Disposal Activities”,* all
      costs
      associated with the consolidation are recorded as expenses when incurred. Upon
      fiscal year 2009 completion of the wafer fabrication consolidation, the Company
      expects cost reduction through elimination of duplicate expenditures and yield
      improvements as well as an increase in new product development
      capability.




45




**Dodgeville
      closure - During** the
      3 rd quarter
      of fiscal year 2008, the Company recorded $534,000 in restructuring charges
      related to the consolidation of the Dodgeville, WI facility into the Camarillo,
      CA facility. These charges included $243,000 for severance and benefits,
      $266,000 for manufacturing transfer cost, and $25,000 for lease costs. This
      consolidation accounted for the termination of 30 employees. Of these reductions
      to headcount, 26 were in manufacturing, 1 in research and development and 3
      in
      sales, general and administration functions. As of the end of the 3 rd quarter
      of fiscal year 2008, all of these employees were terminated. All closure
      restructuring charges were paid in the 3rd quarter of fiscal year 2008. The
      Camarillo, CA and Dodgeville, WI facilities both had the same hybrid
      manufacturing and assembly capabilities, but combined represented excess
      capacity. As a result, management decided to reduce this excess capacity and
      consolidate into the California facility.





**10.**
            **Equity**





**Shareholders’
      Equity Transactions**


On
      September 14, 2007, The Company completed a private placement (the “Offering”)
      described in the Company’s form 8-K filed on September 7, 2007. Each unit sold
      by the Company in the Offering consisted of four (4) shares of the Company’s
      Class A Common Stock, par value $0.001 per share (the “Offering Shares”) and one
      (1) five year warrant exercisable for one share of Common Stock at an exercise
      price of $1.85 (each a “Warrant”). The Company sold a total of 741,332 units
      (consisting of 2,965,332 Offering Shares and 741,332 Warrants), of which 33,000
      units (consisting of 132,000 Offering Shares and 33,000 Warrants) were to
      Related Parties at the prevailing closing stock price of $1.83 per share, for
      an
      aggregate purchase price of $4.5 million. The offer and sale of the Offering
      Shares and Warrants were made pursuant to Rule 506 promulgated pursuant to
      the
      Securities Act and each of the investors is an “accredited investor” as defined
      by Rule 501 promulgated pursuant to the Securities Act.





The
      schedule below shows the outstanding warrants at March 31, 2008, more fully
      described in Note 6 and the paragraph above:




**Warrants
      Outstanding & Exercisable**





(in 000s)
              Shares
            
            Exercise Price
            
            Remaining Life (in yrs)Convertible
                Note – 1stTranche
            
            
            695
            
            $
            1.7444
            
            
            2.1Convertible
                Note – 2ndTranche
            
            
            781
            
            $
            1.7444
            
            
            3.5Private
                Placement
            
            
            741
            
            $
            1.85
            
            
            4.5Total
            
            
            2,217





**11.**
            **Foreign
                Sales**




In
                FY 2008 and 2007, the Company had export sales of approximately $3.5
                million and $4.4 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:





**2008**
            
            ******2007**Australia
            
            
            —
            
            
            —Canada
            
            
            1
            %
            
            1
            %Germany
            
            
            3
            %
            
            10
            %Hong
                Kong
            
            
            —
            
            
            1
            %Israel
            
            
            —
            
            
            1
            %Japan
            
            
            1
            %
            
            1
            %United
                Kingdom
            
            
            7
            %
            
            4
            %All
                other countries
            
            
            3
            %
            
            1
            %Total
                export sales
            
            
            15
            %
            
            19
            %




46




**12.**
            **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 $272,000 and $255,000 in FY 2008 and 2007,
      respectively.





**13.**
            **Income
                Taxes**




At
      March
      31, 2008, the Company had net operating loss carry forwards (NOL’s) of
      approximately $25.7 million for Federal income tax purposes and $4.7 million
      for
      state income tax purposes that expire at various dates through fiscal year
      2028.
      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
      Company performed an analysis to determine whether an ownership change under
      Section 382 of the Internal Revenue Code had occurred. The effect of an
      ownership change would be the imposition of an annual limitation on the use
      of
      the net operating loss carry forwards attributable to periods before the
      change.  As of March 31, 2008, the Company believes there are no
      limitations on the use of these federal NOLs.




At
      March
      31, 2008, our net deferred tax asset before consideration of a valuation
      allowance was approximately $7.9 million, mainly consisting of net operating
      loss carryforwards which expire at various amounts over an approximate 20 year
      period. In
      assessing the realizability of deferred tax assets, the Company has determined
      that at this time it is “more likely than not” that deferred
      tax assets will not
      be realized , primarily
      due to uncertainties related to its ability to utilize the net operating loss
      carryforwards before they expire based on the negative evidence of its recent
      years history of losses, including tax
      losses in two of the last three years and cumulative taxable losses over the
      past three years, outweighing the positive evidence of taxable income
      projections in future years. The ultimate realization of these deferred tax
      assets is dependent upon the generation of future taxable income during those
      periods in which those temporary differences become deductible or within the
      periods before NOL carry forwards expire. During the year ended March 31, 2008,
      the company recorded a full valuation allowance on its net deferred tax assets
      and recognized an income tax provision of approximately $1.2
      million.





The
      current tax provisions for the year ended March 31, 2007 was composed of
      Wisconsin state income 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, 2008**
            
            **March 31, 2007**Federal
                income tax at statutory rates
            
            $
            (2,857,000
            )
            $
            (1,899,000
            )State
                income taxes, net of federal benefit
            
            
            (110,000
            )
            
            (93,000
            )Change
                in NOL carry-forwards
            
            
            757,000
            
            
            1,189,000Change
                in valuation allowance
            
            
            3,331,000
            
            
            (1,189,000
            )Change
                in R&E credit carry-forwards
            
            
            (29,000
            )
            
            (13,000
            )Other
            
            
            (165,000
            )
            
            (22,000
            )Permanent
                items
            
            
            298,000
            
            
            1,107,000Effective
                federal income tax
            
            $
            1,225,000
            
            $
            (920,000
            )




47




The
      Company’s net deferred tax assets consist of the following components, for
      fiscal years 2008 and 2007:




**2008**
            
            **2007**Sec.
                263A adjustment
            
            $
            55,000
            
            $
            45,000Accrued
                bonus
            
            
            —
            
            
            103,000Inventory
                reserve
            
            
            267,000
            
            
            270,000Utility
                accruals
            
            
            4,000
            
            
            —Warranty
                reserve
            
            
            34,000
            
            
            33,000Accounts
                receivable allowance
            
            
            6,000
            
            
            20,000Accrued
                vacation
            
            
            43,000
            
            
            51,000Charitable
                contributions
            
            
            10,000
            
            
            8,000NOL
                Carryforwards
            
            
            8,760,000
            
            
            7,524,000Accumulated
                amortization
            
            
            365,000
            
            
            305,000Accumulated
                depreciation
            
            
            (163,000
            )
            
            (57,000
            )R&D
                credits
            
            
            442,000
            
            
            563,000Goodwill
                amortization
            
            
            322,000
            
            
            322,000California
                Mfg. credit
            
            
            39,000
            
            
            39,000Other
            
            
            —
            
            
            —Total
            
            $
            10,184,000
            
            $
            9,226,000Valuation
                allowance
            
            
            (7,864,000
            )
            
            (4,533,000
            )Deferred
                tax liability – Intangibles related to Picometrix
                acquisition
            
            
            (2,320,000
            )
            
            (3,089,000
            )Deferred
                tax-beneficial conversion
            
            
            —
            
            
            (379,000
            )Net
                deferred tax asset
            
            $
            0
            
            $
            1,225,000




At
      March
      31, 2008 the Company had net operating loss carry forwards for federal tax
      of
      approximately $25,743,000 that expires between 2009 and 2028, and approximately
      $4,711,000 for California state tax that expires between 2013 and 2018.





At
      March
      31, 2008 the Company’s Federal R&D tax credit carry forwards totaled
      approximately $1,325,000. These will expire annually at March 31 over the next
      twenty (20) years.




**14.**
            **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
      diluted loss per share for FY 2008 and FY 2007 were the equivalent of basic
      loss
      per share because of the net loss in each period.  Stock
      options granted to Company employees, directors, and former owners, warrants
      granted to convertible note holders, warrants granted in association with the
      private placement (note 10), and other potentially dilutive instruments that
      were excluded from the calculation of earnings per share in the financial
      statements because they were anti-dilutive for the periods reported were
      approximately 4,416,000 shares in FY 2008 and 3,424,000 in FY 2007.





**15.**
            **Related
                Party Transactions**




The
      Company’s only significant related party transactions relate to the payment of
      principal and interest on Debt to Related Parties. On March 31, 2008 the
      remaining balance on the notes was $1.9 million. The Company paid $550,000
      of
      principal and $129,000 in interest to the note holders in FY 2008. Robin Risser
      and Steve Williamson, the Company’s CFO and CTO, respectively, are the note
      holders .





**16.**
            **Commitments
                & contingencies**




***Leases
      -*** The
      Company leases all of its executive offices, research, marketing and
      manufacturing facilities under non-cancellable operating leases. At March 31,
      2008, those leases consisted of approximately 80,300 square feet in two
      facilities. The facility located in Camarillo, California is leased through
      February 2009. 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:




48




2008
            
            $
            1,190,0002009
            
            
            1,190,0002010
            
            
            705,0002011
            
            
            176,000Total
            
            $
            3,261,000




Rent
          expense was approximately $1.3 million and $1.3 million in FY 2008 and
          2007,
          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.





**17.**
            **Subsequent
                Events**




As
      disclosed in the Form 8-K filed with the SEC on May 1, 2008, the Company and
      Messrs. Risser and Williamson entered into amendments to the Notes (see Note
      15)
      to extend the due date for the third installment under each of the Notes (in
      the
      aggregate amount of $900,000) to December 1, 2008 from the original agreement
      payment date of May 1, 2008. Prior to entering into the Amendments, the
      transaction was reviewed and approved by the Company’s Audit Committee pursuant
      to the Company’s policies relating the review and approval of related party
      transactions since Mr. Risser currently serves as the Company’s Chief Financial
      Officer and Mr. Williamson currently serves as the Company’s Chief Technology
      Officer.





On
      October 12, 2007 API was served with a summons and complaint filed by Opto
      Diode
      Corporation in the Central District of California for patent infringement.
      The
      infringement is in reference to a product that the Company purchased from
      InfraTech, which was part of the PDI acquisition. The Company sold less than
      $30,000 of the named product since the acquisition. The Company settled on
      June
      10, 2008 with Opto Diode Corporation without prejudice and without any financial
      payment and agreed to stop selling products which were in question. The
      Company is pursuing a claim for indemnity against InfraTech to recover legal
      fees and costs incurred in defending the patent claims brought by Opto Diode
      Corporation.





On
      June
      30, 2008 the Company entered into an amendment to the business loan agreement
      with Fifth Third Bank with the following terms: The Loan Agreement contains
      customary representations, warranties and financial covenants including minimum
      debt service coverage ratio (as defined in the agreement).The Company expects
      to
      be in compliance with these terms. The interest rate is variable based on the
      prime rate plus 2% and is adjusted quarterly. The Prime rate at June 30, 2008
      was 5.0%. The new loan maturity date is now October 1, 2008. The new revolving
      line of credit is $2.5
      million (formerly $3.0 million) with a minimum compensating balance requirement
      of $500,000 (formerly $1.5 million).




49




**18.**
            **Quarterly
                Financial Data**





The
      table
      below lists financial information (unaudited) by quarter for each of the two
      fiscal years ending March 31, 2008 and 2007.


**First**
              
              **Second**
              
              **Third**
              
              **Fourth**
              
              **Total Year****2008**Net Sales
              
              $
              6,145,000
              
              $
              6,529,000
              
              $
              5,306,000
              
              $
              5,235,000
              
              $
              23,215,000Cost of Sales
              
              
              3,675,000
              
              
              3,784,000
              
              
              3,431,000
              
              
              3,450,000
              
              
              14,340,000Gross Profit
              
              
              2,470,000
              
              
              2,745,000
              
              
              1,875,000
              
              
              1,785,000
              
              
              8,875,000Research & Development Expenses
              
              
              896,000
              
              
              1,016,000
              
              
              1,034,000
              
              
              1,272,000
              
              
              4,218,000Selling, General & Administrative Expenses
              
              
              2,650,000
              
              
              2,497,000
              
              
              3,117,000
              
              
              2,397,000
              
              
              10,658,000Net Income (Loss)
              
              $
              (1,906,000
              )
              $
              (1,857,000
              )
              $
              (2,726,000
              )
              $
              (3,139,000
              )
              $
              (9,628,000
              )Basic Income (Loss) per Common Share
              
              $
              (0.10
              )
              $
              (0.09
              )
              $
              (0.11
              )
              $
              (0.13
              )
              $
              (0.44
              )Diluted Income (Loss) per Common Share
              
              $
              (0.10
              )
              $
              (0.09
              )
              $
              (0.11
              )
              $
              (0.13
              )
              $
              (0.44
              )Weighted Average Common Shares Outstanding
              
              
              19,258,000
              
              
              19,906,000
              
              
              23,804,000
              
              
              23,926,000
              
              
              21,770,000**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
              
              
              1,019,000
              
              
              4,012,000Selling, General & Administrative Expenses
              
              
              2,243,000
              
              
              2,441,000
              
              
              2,214,000
              
              
              3,181,000
              
              
              10,079,000Net 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
              
              $
              (0.07
              )
              $
              (0.06
              )
              $
              (0.05
              )
              $
              (0.07
              )
              $
              (0.24
              )Weighted Average Common Shares Outstanding
              
              
              18,980,000
              
              
              19,026,000
              
              
              19,089,000
              
              
              19,165,000
              
              
              19,065,000




During the fourth quarter of fiscal year 2008, the Company recorded a tax provision of $1,225,000 to fully reserve its net deferred tax asset.




50




**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.
 
 **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
        management’s evaluation (with the participation of the chief executive officer
        and chief financial officer), as of the end of the period covered by this
        report, our chief executive officer and chief financial officer have concluded
        that our disclosure controls and procedures (as defined in Rules 13a-15(e)
        and
        15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange
        Act”)) are effective.
 
 **Management’s
        Report on Internal Control Over Financial Reporting –** Our
        management is responsible for establishing and maintaining adequate internal
        control over financial reporting, as such term is defined in Exchange Act
        Rule
        13a-15(f). Under the supervision and with the participation of our management,
        including our chief executive officer and chief financial officer, we conducted
        an evaluation of the effectiveness of our internal control over financial
        reporting as of March 31, 2008 based on the criteria set forth in *Internal
        Control – Integrated Framework* issued
        by
        the Committee of Sponsoring Organization of the Treadway Commission. Based
        on
        our evaluation under the criteria set forth in *Internal
        Control – Integrated Framework* ,
        our
        management concluded that our internal control over financial reporting was
        effective as of March 31, 2008.


This
      Annual Report does not include an attestation report of our independent
      registered public accounting firm regarding internal control over financial
      reporting. We were not required to have, nor have we engaged our independent
      registered public accounting firm to perform, an audit on our internal control
      over financial reporting pursuant to the rules of the Securities and Exchange
      Commission that permit us to provide only managements’ report in this Annual
      Report.





**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 .





51





**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 OFFICERS AND CORPORATE
                GOVERNANCE**




**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 AND RELATED
                STOCKHOLDER MATTERS**




The
      following table sets forth, as of March 31, 2008, the aggregated information
      pertaining to all securities authorized for issuance under the Company’s equity
      compensation plans:


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
              
              
              2,198,400
              
              $
              1.87
              
              
              2,681,000
              (1)Equity
                  compensation plans not approved by shareholders
              
              
              -
              
              
              -
              
              
              -Total
              
              
              2,198,400
              
              $
              1.87
              
              
              2,681,000
              (1)




(1)
      Represents shares issuable upon the grant of restricted stock and stock
      options.




**Item
              13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE**




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.





52




**PART
      IV**





**Item
              15.**
            **EXHIBITS
                AND 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: The following additional financial statement
      schedule is furnished herewith pursuant to the requirements of Form
      10-K.





**SCHEDULE
      II**


**ADVANCED
      PHOTONIX, INC.**





**Valuation
      and Qualifying Accounts**





**Additions****March 31,**
              **2007**
            
            Charged to
              Expense
            
            Charged to
              Other Accounts
            
            Deductions
            
            **March 31,**
              **2008**Allowance
                for doubtful accounts
            
            $
            51,000
            
            $
            9,000
            
            $
            —
            
            $
            46,000
            
            $
            14,000Inventory
                reserves
            
            $
            924,000
            
            $
            363,000
            
            $
            —
            
            $
            303,000
            
            $
            984,000Warranty
                reserves
            
            $
            83,000
            
            $
            2,000
            
            $
            —
            
            $
            —
            
            $
            85,000Deferred
                tax valuation allowance
            
            $
            4,533,000
            
            $
            1,225,000
            
            $
            2,106,000
            
            $
            —
            
            $
            7,864,000




**Additions****March 31,**
              **2006**
            
            Charged to
              Expense
            
            Charged to
              Other Accounts
            
            Deductions
            
            **March 31,**
              **2007**Allowance
                for doubtful accounts
            
            $
            46,000
            
            $
            42,000
            
            $
            —
            
            $
            37,000
            
            $
            51,000Inventory
                reserves
            
            $
            2,181,000
            
            $
            147,000
            
            $
            —
            
            $
            1,404,000
            
            $
            924,000Warranty
                reserves
            
            $
            63,000
            
            $
            20,000
            
            $
            —
            
            $
            —
            
            $
            83,000Deferred
                tax valuation allowance
            
            $
            5,722,000
            
            $
            —
            
            $
            —
            
            $
            1,189,000
            
            $
            4,533,000





All
      other
      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: The following is a list of the exhibits filed as part of this Form
      10-K.





**Exhibit****Number**
            
            **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, 20042.2
            
            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




53




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,
                19903.1.1
            
            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-K3.1.2
            
            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-K3.2
            
            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, 20054.1
            
            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, 200510.1
            
            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-K10.2
            
            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, 199010.3
            
            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-K10.4
            
            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-Q10.5
            
            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, 200410.6
            
            Advanced
                Photonix, Inc. 2007 Equity Incentive Plan – incorporated by reference to
                the Registrant’s Exhibit A to the Proxy Statement relating to its 2007
                Annual Meeting of Stockholders, as filed July 16, 2007 on Form
                14A10.7
            
            Form
                of Director Restricted Stock Agreement under the 2007 Equity Incentive
                Plan — incorporated by reference to Exhibit 4.4 to the Registrant's Form
                S-8 on Registration Statement No.333-147012,
                as filed with the Securities and Exchange Commission on October 30,
                200710.8
            
            Form
                of Employee Restricted Stock Agreement under the 2007 Equity Incentive
                Plan — incorporated by reference to Exhibit 4. to the Registrant's Form
                S-8 on Registration Statement No.333-147012,
                as filed with the Securities and Exchange Commission on October 30,
                200710.9
            
            Form
                of Employee Stock Option Agreement under the 2007 Equity Incentive
                Plan —
                incorporated by reference to Exhibit 4.6 to the Registrant's Form
                S-8 on
                Registration Statement No.333-147012,
                as filed with the Securities and Exchange Commission on October 30,
                200710.10
            
            Advanced
                Photonix, Inc. Executive Incentive Compensation Plan — incorporated by
                reference to Exhibit 10.1 to the Registrant’s December 28, 2007 Quarterly
                report on Form 10-Q




54




10.11
            
            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-K10.12
            
            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-Q10.20
            
            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, 200410.20.1
            
            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, 200510.26.1
            
            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,
                200510.26.2
            
            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, 200510.26.3
            
            Amendment
                dated May 1, 2008 to Secured Promissory Note dated May 2, 2005 by
                and
                between Advanced Photonix, Inc. and Robin Risser — incorporated by
                reference to Exhibit 10.1 to the Registrant’s Form 8-K, as filed with the
                Securities and Exchange Commission on March 2, 200810.26.4
            
            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, 200510.26.5
            
            Amendment
                dated May 1, 2008 to Secured Promissory Note dated May 2, 2005 by
                and
                between Advanced Photonix, Inc. and Steven Williamson — incorporated by
                reference to Exhibit 10.2 to the Registrant’s Form 8-K, as filed with the
                Securities and Exchange Commission on March 2, 200810.26.6
            
            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,
                200510.26.7
            
            Amendment
                Number 1 to Employment Agreement dated May 2, 2005 by and between
                Advanced
                Photonix, Inc. and Robin Risser — incorporated by reference to Exhibit
                10.2 to the Registrant’s December 28, 2007 Quarterly report on Form
                10-Q10.26.8
            
            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




55




10.26.9
            
            Amendment
                Number 1 to Employment Agreement dated May 2, 2005 by and between
                Advanced
                Photonix, Inc. and Steven Williamson — incorporated by reference to
                Exhibit 10.3 to the Registrant’s December 28, 2007 Quarterly report on
                Form 10-Q10.27
            
            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, 200710.27.1
            
            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, 200710.27.2
            
            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, 200710.27.3
            
            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, 200710.27.4
            
            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,
                200710.27.5
            
            First
                Amendment dated November 13, 2007 between Advanced Photonix, Inc.
                and
                Fifth Third Bank to that certain Business Loan Agreement dated as
                of March
                6, 2007 – incorporated by reference to Exhibit 10.4 to the Registrant’s
                Form 10-Q/A, as filed with the Securities and Exchange Commission
                on June
                17, 200810.28
            
            Form
                of Third Party Subscription Agreement, dated August 31, 2007 –
                incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, as
                filed with the Securities and Exchange Commission on September 7,
                200710.29
            
            Form
                of Insiders Subscription Agreement, dated August 31, 2007 – incorporated
                by reference to Exhibit 10.2 to the Registrant’s Form 8-K, as filed with
                the Securities and Exchange Commission on September 7,
                200710.30
            
            Form
                of 2007 Series Warrant to Purchase Class A Common Stock, dated August
                31,
                2007 – incorporated by reference to Exhibit 10.3 to the Registrant’s Form
                8-K, as filed with the Securities and Exchange Commission on September
                7,
                200710.31
            
            Form
                of Registration Rights Agreement, dated August 31, 2007 – incorporated by
                reference to Exhibit 10.4 to the Registrant’s Form 8-K, as filed with the
                Securities and Exchange Commission on September 7, 200710.32
            
            Insider
                Side Letter regarding the Warrant Exercise Price, dated August 31,
                2007 –
                incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K, as
                filed with the Securities and Exchange Commission on September 7,
                200710.33
            
            Insider
                Side Letter regarding the Registration Rights Agreement, dated August
                31,
                2007 – incorporated by reference to Exhibit 10.6 to the Registrant’s Form
                8-K, as filed with the Securities and Exchange Commission on September
                7,
                2007




56




10.34
            
            Form
                of Third Party Subscription Agreement, dated September 14, 2007 –
                incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, as
                filed with the Securities and Exchange Commission on September 19,
                200718.1
            
            Preferability
                Letter of Independent Auditors, dated June 30, 200821.1
            
            List
                of Subsidiaries of Registrant – incorporated by reference to Exhibit 21.1
                to the Registrant’s March 30, 2003 Annual Report on Form
                10-KSB23.1
            
            Consent
                  of BDO Seidman, LLP23.2
            
            Consent
                ofFarber
                Hass Hurley LLP31.1
            
            Certification
                of the Registrant’s Chairman, Chief Executive Officer and Director
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                200231.2
            
            Certification
                of the Registrant’s Chairman, Chief Financial Officer and Director
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                200232.1
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 200232.2
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002





57




**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 PresidentDate:
                June 30, 2008





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
                30, 2008Richard
                D. Kurtz
            
            
            Chief
                Executive Officers/
                Robin Risser
            
            
            Chief
                Financial Office and Director
            
            June
                30, 2008Robin
                Risser/s/
                M. Scott Farese
            
            
            Director
            
            June
                30, 2008M.
                Scott Farese/s/
                Lance Brewer
            
            
            Director
            
            June
                30, 2008Lance
                Brewer/s/
                Donald Pastor
            
            
            Director
            
            June
                30, 2008Donald
                Pastor/s/
                Stephen P. Soltwedel
            
            
            Director
            
            June
                30, 2008Stephen
                P. Soltwedel




58