As filed with the Securities and Exchange Commission on November 28, 2005

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 20-F



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(Mark One)



| ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended May 31, 2005



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to



| ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | --------------------------------------------------------------------------------------------



Date of event requiring Shell Company report



Commission file number: 0-29142



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API ELECTRONICS GROUP CORP.

(formerly API Electronics Group Inc. and
previously, InvestorLinks.com Inc.)

(Exact name of Registrant as specified in its charter)



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Province of Ontario, Canada

(Jurisdiction of incorporation or organization)



|                                                         
|---------------------------------------------------------
|505 University Ave., Suite 1400, Toronto, Ontario M5G 1X3
|(Address of principal executive offices)                 



Securities
registered or to be registered pursuant to Section 12(b) of the Act:



None



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



|                           
|---------------------------
|Common Shares, no par value
|(Title of Class)           



Securities for
which there is a reporting obligation pursuant to Section 15(d) of the Act:



None



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Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period
covered by the Annual Report:



|                                          
|------------------------------------------
|2,684,396 Common Shares as of May 31, 2005



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



|       |  |     |  |              
|------ |  | --- |  | -------------
|Yes  x |  | No ̈ |  | Inapplicable ̈



Indicate by check mark which
financial statement item the registrant has elected to follow:



|           |  |         
|---------- |  | --------
|Item 17  x |  | Item 18 ̈



If this is an annual report, indicate
by check mark whether the registrant is a Shell Company (as defined in Rule 12 b-2 of the Exchange Act).



|     |  |      
|---- |  | -----
|Yes ̈ |  | No  x



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PART I



ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS



Not Applicable



ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE



Not Applicable



ITEM 3. KEY INFORMATION



A.
SELECTED FINANCIAL DATA



General



The selected consolidated statement of operations data set forth below for the two year
period ended May 31, 2005, and the selected consolidated balance sheet data set forth below at May 31, 2005 and May 31, 2004 are derived from the consolidated financial statements of the Company included in Part III, Item 17 of
this Annual Report, which consolidated financial statements have been audited by BDO Dunwoody LLP.



The Company acquired API Electronics, Inc. (API) in August 2001. API is deemed to be the acquirer for Canadian generally accepted accounting principles (Cdn. GAAP). For US generally accepted
accounting principles (US GAAP), API is also deemed to be the acquirer. Accordingly, comparative figures for the fiscal years ended May 31, 2001 for Cdn. GAAP and US GAAP included in the selected financial data are those of API
and are derived from the financial statements of API which have been audited by Perry Colletti, CPA. API has conducted operations for approximately twenty-seven (27) years.



The note to the consolidated financial statements entitled Business Acquisitions included in Part III, Item 17 of this
Annual Report describes the Companys acquisition (the Filtran Acquisition) of the outstanding shares of Filtran, Inc., Filtran Limited, Canadian Dataplex Limited and Tactron Communications (Canada) Limited, collectively referred to
as the Filtran Group of companies as of May 31, 2002. For Cdn. GAAP and US GAAP the Filtran Group acquisition has been accounted for using the purchase method.



The note to the consolidated financial statements entitled Business Acquisitions included in Part III, Item 17 of this
Annual Report describes the Companys purchase, through its wholly-owned subsidiary, TM Systems II, Inc. (TM Systems) of the assets of TM Systems, Inc. (the TM Systems Acquisition), as of February 6, 2003. For Cdn.
GAAP and US GAAP, the TM Systems Acquisition has been accounted for using the purchase method.



Because of the reverse take-over of the Company by API, the Selected Financial Data for Cdn. GAAP and US GAAP does not include any financial data for InvestorLinks.com Inc. (InvestorLinks), the
Companys former name prior to API Electronics Group Inc. Prior to the acquisition of the Company by API on August 31, 2001, the Company closed its Internet website, then its primary business, and wrote down all related assets to their
estimated net recoverable amounts.



2



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The selected financial data should be read in conjunction with the consolidated financial statements of the Company and
the notes thereto included in Part III, Item 17 of this Annual Report, and Item 5  Operating and Financial Review and Prospects herein.



The information set forth in this Annual Report is current as of November 18, 2005, unless an earlier or later date is indicated, and references to the date
of this Annual Report shall be deemed to refer to such date.



3



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The Companys accounts are presented in US dollars. In this Annual Report, all dollar amounts are expressed in US
dollars except where otherwise indicated.



Selected
Consolidated Financial Data

API Electronics Group Corp.

(formerly known as API Electronics Group Inc. and previously, InvestorLinks.com Inc.)

Prepared Pursuant to

United States Generally Accepted Accounting Principles

(In thousands of US $, except per share data)



|                                                                   |  |                                     |        |      |   |        |      |  |   |        |   |  |      |       |   |  |   |      
|------------------------------------------------------------------ |  | ----------------------------------- | ------ | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ----- | - |  | - | -----
|                                                                   |  | Fiscal Years Ended May 31Audited(1)
|                                                                   |  | 2005                                |        | 2004 |   |        | 2003 |  |   | 2002   |   |  | 2001
|Income Statement Data:                                             |  |                                     |        |      |   |        |      |  |   |        |   |  |      |       |   |  |   |      
|                                                                   |  |                                     |        |      |  
|Net sales                                                          |  | $                                   | 12,548 |      | $ | 11,278 |      |  | $ | 8,254  |   |  | $    | 2,903 |   |  | $ | 2,653
|Income (loss) from operations                                      |  |                                     | 250    |      |   | (624   | )    |  |   | (1,891 | ) |  |      | (933  | ) |  |   | 175  
|Net income (loss)                                                  |  |                                     | 301    |      |   | (593   | )    |  |   | (1,869 | ) |  |      | (911  | ) |  |   | 102  
|Net income (loss) per common share                                 |  |                                     | 0.12   |      |   | (0.25  | )    |  |   | (1.05  | ) |  |      | (0.85 | ) |  |   | 0.16 
|                                                                   |  |                                     |        |      |  
|Balance Sheet Data:                                                |  |                                     |        |      |   |        |      |  |   |        |   |  |      |       |   |  |   |      
|                                                                   |  |                                     |        |      |  
|Current assets.                                                    |  |                                     | 6,710  |      |   | 5,029  |      |  |   | 6,981  |   |  |      | 4,383 |   |  |   | 1,672
|Capital assets                                                     |  |                                     | 3,080  |      |   | 3,000  |      |  |   | 3,289  |   |  |      | 2,867 |   |  |   | 882  
|Goodwill and intangible assets                                     |  |                                     | 2,568  |      |   | 2,863  |      |  |   | 3,241  |   |  |      | 1,288 |   |  |   | 10   
|Future income tax asset                                            |  |                                     | 295    |      |   | 293    |      |  |   |       |   |  |      |      |   |  |   |     
|Total assets                                                       |  |                                     | 12,653 |      |   | 11,185 |      |  |   | 13,547 |   |  |      | 8,538 |   |  |   | 2,564
|Current liabilities                                                |  |                                     | 2,600  |      |   | 1,947  |      |  |   | 4,734  |   |  |      | 2,231 |   |  |   | 742  
|Long-term debt                                                     |  |                                     | 42     |      |   | 106    |      |  |   | 232    |   |  |      | 1,299 |   |  |   | 1,495
|Future income tax liability                                        |  |                                     | 501    |      |   | 502    |      |  |   | 248    |   |  |      | 530   |   |  |   |     
|Shareholders equity                                               |  |                                     | 9,510  |      |   | 8,630  |      |  |   | 8,333  |   |  |      | 4,478 |   |  |   | 327  
|Shares used in the computation of basic and diluted loss per share |  |                                     | 2,684  |      |   | 2,339  |      |  |   | 1,778  |   |  |      | 1,074 |   |  |   | 650  

---

|(1) | On September 15, 2004, the Company effected a ten (10) for one (1) common share consolidation. For comparative purposes, all share and per share figures prior to that
date have been presented to reflect this change as if it occurred before that date.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4



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Selected Consolidated Financial Data

API Electronics Group Corp.

(formerly known as API Electronics Group Inc. and
previously, InvestorLinks.com Inc.)

Prepared Pursuant to

Canadian Generally Accepted Accounting Principles

(In thousands of US $,
except per share data)



|                                                                   |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |      
|------------------------------------------------------------------ |  | -------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ----- | - |  | - | -----
|                                                                   |  | Fiscal Years Ended May 31Audited(1)(2)
|                                                                   |  | 2005                                   |        |   | 2004 |   |        | 2003 |  |   | 2002   |   |  | 2001
|Statement of Operations:                                           |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |      
|                                                                   |  |                                        |        |   |     
|Net sales                                                          |  | $                                      | 12,548 |   |      | $ | 11,278 |      |  | $ | 8,254  |   |  | $    | 2,903 |   |  | $ | 2,653
|Income (loss) from operations                                      |  |                                        | (655   | ) |      |   | (422   | )    |  |   | (620   | ) |  |      | (879  | ) |  |   | 175  
|Net income (loss)                                                  |  |                                        | (604   | ) |      |   | (342   | )    |  |   | (598   | ) |  |      | (858  | ) |  |   | 102  
|Earnings (loss) per common share                                   |  |                                        | (0.24  | ) |      |   | (0.15  | )    |  |   | (0.34  | ) |  |      | (0.80 | ) |  |   | 0.16 
|                                                                   |  |                                        |        |   |     
|Balance Sheet Data:                                                |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |      
|                                                                   |  |                                        |        |   |     
|Current assets.                                                    |  |                                        | 6,703  |   |      |   | 5,021  |      |  |   | 6,930  |   |  |      | 4,380 |   |  |   | 1,672
|Capital assets                                                     |  |                                        | 3,080  |   |      |   | 3,000  |      |  |   | 3,276  |   |  |      | 2,867 |   |  |   | 882  
|Goodwill and intangible assets                                     |  |                                        | 2,568  |   |      |   | 2,863  |      |  |   | 3,241  |   |  |      | 1,288 |   |  |   | 10   
|Total assets                                                       |  |                                        | 12,646 |   |      |   | 10,884 |      |  |   | 13,447 |   |  |      | 8,535 |   |  |   | 2,564
|Current liabilities                                                |  |                                        | 2,600  |   |      |   | 1,947  |      |  |   | 4,734  |   |  |      | 2,231 |   |  |   | 742  
|Long-term debt                                                     |  |                                        | 41     |   |      |   | 106    |      |  |   | 232    |   |  |      | 1,299 |   |  |   | 1,132
|Future income tax liability                                        |  |                                        | 501    |   |      |   | 209    |      |  |   | 248    |   |  |      | 530   |   |  |   |     
|Shareholders equity                                               |  |                                        | 9,504  |   |      |   | 8,622  |      |  |   | 8,233  |   |  |      | 4,475 |   |  |   | 690  
|Shares used in the computation of basic and diluted loss per share |  |                                        | 2,535  |   |      |   | 2,339  |      |  |   | 1,778  |   |  |      | 1,074 |   |  |   | 650  

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|(1) | On September 15, 2004, the Company effected a ten (10) for one (1) common share consolidation. For comparative purposes all share and per share figures prior to that
date have been presented to reflect this change as if it occurred that date.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | During 2004, the Company changed its accounting policy for the amortization of customer contracts from the straight line basis to a basis which more closely matches the revenue
earned from these contracts to the amortization for the year. The effect of this change was a reduction of amortization for 2004 of $135,881. The change has been accounted for on a retroactive basis with restatement of the 2003 year figures. The
effect of the change is to increase amortization in 2003 by $48,531, the deficit of 2003 year by $48,531 and reduce the 2004 year deficit by $87,350.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Effective June 1, 2004, the Company adopted the revised CICA Handbook Section 3870, Stock-Based Compensation and Other Stock-based Payments which requires the
application of a fair value method of accounting to all stock-based compensation payments to employees. The stock-based compensation expense represents the fair value of stock options granted and vested during the period. Prior to June 1, 2004,
the Company had been using the settlement based method of accounting for stock options and disclosed the pro-forma costs only with no expense recorded. Accordingly, an adjustment to retained earnings was made on June 1, 2004 in the amount of
$1,876,956. This adjustment represents for total compensation expense which would have been recorded had the fair value method been used for stock options granted and warrants modified after June 1, 2002.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



5



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Reconciliation to United States Generally Accepted Accounting Principles



The consolidated financial statements of the Company have been prepared in accordance with
Cdn. GAAP, which differ materially in certain respects from US GAAP. For a description of these differences see Note 19 to the consolidated financial statements of the Company for its fiscal year ended May 31, 2005 included in Item 19 of
this Annual Report.



Dividend Policy



The Company has not paid any dividends, in cash or in kind, during the financial years ended
May 31, 2001 through 2005 and does not intend to pay dividends in cash or in kind in the future. The Company expects to retain its earnings to finance the further growth of the Company. The directors of the Company will determine if and when
dividends should be declared and paid in the future based upon the earnings and financial conditions of the Company at the relevant time and such other factors as the directors may deem relevant. All of the Common Shares of the Company are entitled
to an equal share in any dividends declared and paid.



B. CAPITALIZATION AND
INDEBTEDNESS



Not Applicable



C. REASONS FOR THE OFFER AND USE OF PROCEEDS



Not Applicable



D. RISK FACTORS



In the discussion below, unless the context requires otherwise, references to the Company shall include its subsidiaries, API, Filtran Group and TM Systems.



Uncertainties and Risk Factors



The Company is subject to a number of significant uncertainties and risks including, but not
limited to, those described below and those described elsewhere in this Annual Report, which may ultimately affect the Company in a manner and to a degree that cannot be foreseen at this time. On August 31, 2001, the Company completed an
acquisition through which the primary business of the Company became the manufacture and supply of semiconductors and microelectronic circuits for military, aerospace, and commercial applications through its newly-acquired, wholly-owned subsidiary
API. As of May 31, 2002, the Company acquired Filtran Group, an affiliated group of companies that are suppliers of electronic components for customers in the communications, computer, instrumentation and process control industries, with
manufacturing facilities in the United States and Canada. Effective February 6, 2003, the Company acquired the assets of TM Systems, Inc. TM Systems is a manufacturer of naval landing and launching equipment, flight control and signaling
systems, radar systems alteration, data communication and test equipment, and aircraft ground control equipment, which are sold to military contractors with multi-national operations.



6



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General Risks and Risks Relating to an Investment in the Securities of the Company



Stock Market Price and Volume Volatility



The market for the common stock of the Company has been volatile. The stock price is
volatile for reasons both related to the performance of the Company or events pertaining to the industry, as well as factors unrelated to the Company or its industry. Shares of the Companys Common Stock can be expected to be subject to
volatility in both price and volume arising from market expectations, announcements and press releases regarding the Companys business, and changes in estimates and evaluations by securities analysts or other events or factors. Over the years,
the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies, particularly small-capitalization companies such as the Company, have experienced wide
fluctuations which have not necessarily been related to the operations, performances, underlying asset values, or prospects of such companies. For these reasons, the shares of the Companys Common Stock also can be expected to continue to be
subject to significant volatility resulting from purely market forces over which the Company will have no control. Further, despite the existence of a market for trading the Companys Common Stock in the United States, the market has limited
liquidity and the stockholders of the Company may be unable to sell significant quantities of Common Stock in the public trading markets without a significant reduction in the price of the stock.



Stock Market Issues



The Companys Common Stock currently trades on the OTC Bulletin Board (OTCBB) in the United States. The OTCBB is operated
by NASDAQ. The Company may file an application to be quoted on the NASDAQ small cap market. Unlike the OTCBB, the NASDAQ small cap market has corporate governance and other public interest standards, which the Company will have to meet. Such
standards and regulations may restrict the Companys capital raising or other activities by requiring stockholder approval for certain issuances of stock, for certain acquisitions, and for the adoption of stock option or stock purchase plans.
The Company also will have to provide proxy statements to shareholders for all shareholders meetings. To meet NASDAQs requirements, a majority of the members of the Companys Board of Directors will have to be independent directors as
defined by NASDAQ. The independent directors must have regularly scheduled meetings at which only independent directors are present. Compensation of the chief executive officer of the Company must be determined, or recommended to the Board of
Directors for determination, either by (i) a majority of the independent directors, or (ii) a compensation committee comprised solely of independent directors, and the chief executive officer cannot be present during voting or
deliberations. Compensation of all other executive officers must be determined, or recommended to the Board of Directors either by (i) a majority of the independent directors, or (ii) a compensation committee comprised solely of
independent directors. Director nominees must either be selected, or recommended for selection by the Board of Directors either by (i) a majority of the independent directors, or (ii) a nominations committee comprised solely of independent
directors. The nominations process must be set forth in a formal written charter or a Board of Directors resolution. The Company will have to adopt a written audit committee charter. In addition, the audit committee will have to be composed of
at least three (3) members, all of whom are independent as defined by NASDAQ, and under SEC Rule 10A-3(c), and who have not participated in the preparation of the financial statements of the Company or any subsidiary of the Company during the
past three (3) years. One member of the audit committee must have specified employment experience in finance or accounting. Accordingly, the Company would have to appoint three independent directors to serve on its audit committee and one of
those audit committees members would need the required experience in finance and accounting. The Company does not currently meet NASDAQs corporate governance requirements. In order to attract independent directors, the Company anticipates that
it will need to purchase directors and officers insurance, which is costly.



7



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We May Have Increasing Difficulty to Attract and Hold Outside Board Members.



The directors and management of publicly traded corporations are increasingly
concerned with the extent of their personal exposure to lawsuits and shareholder claims, as well as governmental and creditor claims which may be made against them in connection with their positions with publicly-held companies. Outside directors
are becoming increasingly concerned with the availability of directors and officers liability insurance to pay on a timely basis the costs incurred in defending shareholder claims. Directors and officers liability insurance has become much
more expensive and difficult to obtain than it had been in the past. It has become increasingly more difficult for small companies like the Company to attract and retain qualified outside directors to serve on its Board.



Reverse Stock Split or Common Share Consolidation



The Company effected a one (1) for ten (10) common share consolidation on
September 15, 2004. The common share consolidation was approved by the Companys shareholders at the Companys annual meeting in October 2003. The Companys management proposed the common share consolidation as a means to
increase the price of the Companys stock sufficiently to enable the Company to qualify for listing on the NASDAQ small cap market, should management determine to do so. Although the common share consolidation is intended to increase the
Companys stock price, the stock price may not increase proportionately to the common share consolidation and the Companys aggregate market value may decline.



Change of Domicile to Delaware



The Companys shareholders approved the Companys change of domicile to Delaware at the Companys annual meeting in October 2003. Before the Company can
change its domicile to Delaware, it will have to file a registration statement with the United States (US) Securities and Exchange Commission registering its stock under the Securities Act of 1933. If the Company changes its domicile
(reincorporates) to Delaware, then the Company will become subject to US federal securities laws and Delaware state corporate law. The Company will no longer be a foreign private issuer under the US securities laws and will become subject to the
more extensive reporting requirements applicable to domestic US entities. The Companys financial statements will be prepared in accordance with US GAAP. The Company would be likely to incur additional expenses and legal requirements as a
result of becoming a Delaware corporation. Management of the Company will change the Companys domicile only if it believes such action is in the long term best interests of the Company.



Dilution Through Employee, Director and Consultant Options and Warrants



Because the success of the Company is highly dependent upon its employees, directors and
consultants, the Company has and intends in the future to grant to some or all of its key employees, directors and consultants options or warrants to purchase shares of its Common Stock as non-cash incentives. The Company has adopted a stock option
plan expressly for this purpose. Subject to certain limitations, those options may be granted at exercise prices below those for the Common Stock prevailing in the public trading market at the time, or may be granted at exercise prices equal to
market prices at times when the public market is depressed. To the extent that significant numbers of such options may be granted and exercised, the interests of the other stockholders of the Company may be diluted. As of the date of this Annual
Report, the Company has granted outstanding options to purchase 400,000 Common Shares to employees, directors, and consultants. There have been proposals from lawmakers in the United States to require that options be expensed when issued. Under
Canadian Generally Accepted Accounting Principals, the Company must expense options issued beginning June 1, 2004.



8



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Rights Plan



The Company has adopted a stockholder rights plan that is designed to make any person that is interested in acquiring more than twenty percent (20%) of the common
shares of the Company to do so by way of a type of bid that the Company has determined is fair to stockholders (Permitted Bids). Other types of bids will activate certain stockholders rights to purchase shares at fifty percent
(50%) below the market price, which are intended to make those types of bids other than Permitted Bids, prohibitively expensive. The existence of the stockholder rights plan may discourage potential bidders and make the Company less likely to
become a takeover candidate. Although the Company adopted the stockholder rights plan to protect the stockholders and the value of their stock, the adoption of this plan may not be in the stockholders best interest in all cases.



Dividends



The Company intends to invest all available funds to finance the growth of the Companys business and therefore investors cannot expect
to receive any dividends on the Common Stock of the Company in the foreseeable future. Even if the Company were to determine that a dividend could be declared, the Company could be precluded from paying dividends by restrictive provisions of loans,
leases or other financing documents or by legal prohibitions under applicable corporate law.



Directors and Assets Outside United States



Since certain of the Companys past directors and two of its current directors are domiciled outside of the United States, it may not be possible to effect service of process upon such directors, and since all or a substantial portion
of the assets of such directors are located outside the United States, there may be difficulties in enforcing against such directors judgments obtained in United States courts. Also, because a significant portion of the Companys assets are
located outside the United States, there may be difficulties in enforcing against the Company judgments obtained in United States courts. If the Company does not change its domicile to the United States, the same risks exist with respect to
directors and assets outside of Canada.



Adjustments and Changes Resulting
from Acquisitions



We have recently expanded our operations through
strategic acquisitions, specifically, the Filtran Acquisition and the TM Systems Acquisition, and may continue to expand and diversify our operations with additional acquisitions. While we believe we have adequately integrated these companies into
our operations, there are risks involved with this process. Some of the risks that may continue to affect our ability to integrate acquired companies include those associated with:



| |  |  | unexpected losses of key employees or customers of the acquired companies;
| | - |  | --------------------------------------------------------------------------



| |  |  | conforming the acquired companys standards, processes, procedures and controls with our operations;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | coordinating our new product and process development;
| | - |  | -----------------------------------------------------



| |  |  | integrating administrative processes, accounting practices and technologies;
| | - |  | ----------------------------------------------------------------------------



| |  |  | retaining management from the acquired companies, hiring additional management and other critical personnel;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | increasing the scope, geographic diversity and complexity of our operations; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | the need to implement controls and procedures and policies appropriate for a public company and a company that prior to their acquisition lacked these controls, procedures and
policies.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9



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We have raised the capital required to make such acquisitions from the sale of stock and options, which is dilutive to
our stockholders.



Additionally, in the period following an acquisition, we
will be required to evaluate goodwill and acquisition-related intangible assets for impairment. When such assets are found to be impaired, they will be written down to estimated fair value, with a charge against earnings.



Integrating acquired organizations and their products and services may be difficult,
expensive, time-consuming and a strain on our resources and our relationships with employees and customers and ultimately may not yield the expected results.



Possibility of Good-Will Impairments



All public companies have been required to adopt Statement of Financial Accounting Standard No. 142 (SFAS 142), which changes the accounting for goodwill
from an amortization method to an impairment-only approach. We early adopted this standard at the beginning of fiscal year 2003. Consequently, goodwill and other intangible assets with indefinite lives are no longer be amortized, while those
intangible assets with known useful lives will continue to be amortized over their respective useful lives. At least annually, we are required to reassess whether there has been an impairment of goodwill in any one or more business units, which
would, if we determine that impairment exists, result in a charge to earnings and a reduction in goodwill on our balance sheet. Whenever we determine that there has been an impairment of goodwill or other intangible assets with indefinite lives, we
will record an impairment loss equal to the excess of the carrying value of goodwill over its then fair value. The identification of intangible assets and the determination of the fair value and useful lives of goodwill and other intangible assets
are subjective in nature and often involve the use of significant estimates and assumptions. The judgments made in determining the estimated useful lives assigned to each class of assets can significantly affect net income. The rules of SFAS 142 are
complex and very restrictive. SFAS 142 is more restrictive than the previously followed SFAS 121. SFAS 142 uses a more restrictive approach than the prior method of determining impairment under GAAP.



Goodwill was acquired through the common share purchase of the Filtran Group (Filtran
Limited, Filtran Inc., Canadian Dataplex Limited, and Tactron Communications (Canada) Limited) on May 31, 2002. It consists of proprietary designs, customer lists, distribution channels, and intellectual property. As of May 31, 2005,
management has determined that there has been no impairment in the valuation of goodwill.



The value of intangible assets, including goodwill, is exposed to future adverse changes if we experience any declines in operating results or if any negative industry or economic trends or other factors in future
performance are below projections that we currently use in making estimates. The estimates that are used in the evaluation of goodwill and other intangible assets are consistent with the plans and estimates that we use to manage our business. If new
products fail to gain market acceptance or if market projections are otherwise too big, revenue and other forecasts will not be achieved, and additional impairment charges to goodwill may be recorded as a result.



To the extent of the non-impaired goodwill and to the extent of any goodwill of any business
that we acquire in the future, a future impairment could also affect our future results and balances in a similar way.



Certain Forward-looking Statements



This Annual Report (including the documents incorporated or deemed to be incorporated by reference herein) contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that are based on the beliefs of



10



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the management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this Annual
Report, the words anticipate, believe, estimate, expect, intend, plan and similar expressions, as they relate to the Company or the management of the Company, identify
forward-looking statements. Such statements reflect the current views of the Company with respect to future events, the outcome of which is subject to certain risks, including among others general economic and market conditions, the state of the
international, federal, state and local regulatory environment, lack of demand for the Companys products and services, and other risks described in this Item 3D of this Annual Report and elsewhere. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected, intended or planned.



Future Capital Needs



The Company may require additional funds for future capital expenditures. Adequate funds for these purposes, whether from additional
financings, collaborative arrangements with other companies, or other sources, may not be available when needed or on favorable terms.



In addition, any strategic investments and acquisitions that we may make to help us grow our business may require additional capital resources. We cannot assure you that
the capital required to fund these investments and acquisitions will be available in the future.



11



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Conflicts of Interest



Certain of the directors and officers of the Company are also directors and/or officers and/or shareholders of other companies. Such associations may give rise to
conflicts of interest from time to time. The directors of the Company are required by law to act honestly and in good faith with a view to the best interests of the Company and to disclose any interest, which they may have in any project or
opportunity of the Company. If a conflict of interest arises at a meeting of the board of directors, any director in a conflict must disclose his interest and abstain from voting on such matter. The NASDAQ rules require that such matters be referred
to the audit committee. In determining whether or not the Company will participate in any project or opportunity, the directors will primarily consider the degree of risk to which the Company may be exposed and its financial position at the time.



Control by Principal Stockholders, Officers and Directors Could Adversely
Affect the Companys Stockholders



The Companys officers,
directors and greater-than-five-percent stockholders (and their affiliates), acting together, hold substantial amounts of the outstanding stock of the Company and as a result will have a controlling influence on (i) matters submitted to the
Companys stockholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of the Companys assets) and (ii) the Companys management and affairs.
However, these persons, acting alone, do not have sufficient numbers of votes to approve matters submitted to stockholders. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company,
impeding a merger, consolidation, takeover or other business combination involving the Company or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could materially
adversely affect the market price of the Companys stock. If the Company becomes listed on the NASDAQ small cap market, then the Company will become subject to NASDAQs corporate governance rules which require, among other things,
shareholder approval of (i) a number of related party transactions, (ii) certain stock issuances, and (iii) other corporate reorganizations. Accordingly, the Company will need to prepare a proxy statement that will be reviewed by the
SEC disclosing material aspects of any such transaction and seek shareholder approval of the proposed transactions. Under the NASDAQ rules, related party transactions must be approved by the audit committee.



Accounting for Issuance of Stock Options



Under US GAAP (FAS 123), stock options granted to non-employees are recognized as an
expense based on their fair value at the date of grant.



The Company follows
APB 25 for options granted to employees. For employees, compensation expense is recognized under the intrinsic value method, compensation cost is the excess, if any, of the quoted market price at grant date over the exercise price. Such expense is
reflected over the service period; if for prior services, expensed at date of grant; if for future services, expensed over the vesting period. During fiscal 2005, 400,000 options were issued at an exercise price that was equal to the quoted market
price; therefore no compensation expense was recognized in 2005 for options granted to employees. During 2004, 440,000 options were issued at an exercise price that was equal to the quoted market price; therefore no compensation expense was
recognized in 2004 for options granted to employees. No options were granted in 2003.



If the Company issues a substantial number of options in any year, such issuance could have a negative affect on the Companys statement of operations and net income.



12



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Risks Related to the Companys Primary Businesses - the Operation of API, Filtran Group and TM Systems



Downturns in the Highly Cyclical Semiconductor Industry and/or the
Electronic Component Industry Would Adversely Affect the Companys Operating Results and the Value of the Company



The semiconductor and electronic component industries are highly cyclical, and the value of the Companys business may decline during the down portion of
these cycles. The markets for APIs products depend on continued demand in the aerospace, military defense systems, and commercial end-markets, and these end-markets may experience changes in demand that could adversely affect our operating
results and financial condition. The markets for Filtran Groups products depend upon continued demand in the military defense, telecommunications, computer, instrumentation and process control end-markets, and these end-markets may experience
changes in demand that could adversely affect our operating results and financial condition. The markets for TM Systems products depend primarily upon continued demand within the military defense industry for its products, which include naval
landing and launching equipment, flight control and signaling systems, radar systems alteration, data communication and test equipment, and aircraft ground control equipment.



The Semiconductor and Electronic Components Businesses Are Highly Competitive and Increased Competition Could Reduce the Value of an
Investment in the Company



The semiconductor and electronic component
industries, including the areas in which API, Filtran Group and TM Systems do business, are highly competitive. The Company expects intensified competition from existing competitors and new entrants. Competition is based on price, product
performance, product availability, quality, reliability and customer service. Even in strong markets, pricing pressures may emerge. For instance, competitors may attempt to gain a greater market share by lowering prices. The market for commercial
products is characterized by declining selling prices. API and Filtran Group anticipate that their average selling prices will continue to decrease in future periods, although the timing and amount of these decreases cannot be predicted with any
certainty. The Company competes in various markets with companies of various sizes, many of which are larger and have greater financial and other resources than the Company has, and thus may be better able to pursue acquisition candidates and to
withstand adverse economic or market conditions. In addition, companies not currently in direct competition with the Company may introduce competing products in the future. API, Filtran Group and TM Systems each have numerous competitors. Some of
APIs current major competitors include Microsemi Corporation (NASDAQ National Market Symbol MSCC), Semtech Corp. (NASDAQ: SMTC), International Rectifier Corp. (NYSE: IRF), Knox Semiconductor, National
Hybrid, Aeroflex Incorporated, and Skyworks Solutions. Filtran Group has numerous competitors. Some of Filtran Groups current major competitors include Pulse Engineering, a division of Technitrol (NYSE:TNL), Midcom Inc., Bel Fuse, Inc.
(NASDAQ:BELFA and NASDAQ:BELFB), ATC Frost Magnetics, Inc. and Halo Electronics. TM Systems also has various competitors, including EMW, Leatherwood, S&W. The Company or any one of its subsidiaries may not be able to compete successfully in the
future and competitive pressures may harm the financial condition and/or operating results of the Company.



Reliance on Defense Spending



The
Company is dependent upon the US defense industry and its military subcontractors for the sale of many of its products. While the US government currently plans increases in defense spending, the actual timing and amount of such increases has been
occurring at a rate that has been slower than expected. In addition, changes in appropriations and in the national defense policy and decreases in ongoing defense programs could adversely affect the Companys performance. Such occurrences are
beyond the Companys control. The effects of defense spending increases are difficult to estimate and subject to many sources of delay.



13



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The Companys contracts with prime US Government contractors contain customary provisions permitting termination at
any time, at the convenience of the US Government or the prime contractors upon payment to the Company for costs incurred plus a reasonable profit. If the Company experiences significant reductions or delays in procurements of its products by the US
Government, or terminations of government contracts or subcontracts, its operating results could be materially and adversely affected. Certain contracts are also subject to price re-negotiation in accordance with US Government sole source
procurement provisions.



New Technologies Could Result in the Development of
Competing Products and a Decrease in Demand for the Companys Products



The failure of either the Company or any of its subsidiaries to develop new technologies or to react to changes in existing technologies could materially delay their development of new products (which for API are typically adaptations of
existing products formerly manufactured by others), which could result in decreased revenues and/or a loss of the Companys market share to competitors. Rapidly changing technologies and industry standards, along with frequent new product
introductions, characterize much of the semiconductor and electronic component industries. The financial performance of the Company depends on its ability to design, develop, manufacture, assemble, test, market and support new products (which for
API are typically adaptations of existing products formerly manufactured by others), and enhancements on a timely and cost-effective basis. A fundamental shift in technologies in the Companys product markets could have a material adverse
effect on the Company and subsidiaries competitive position.



Growth-Related Risks



The Company may be subject to
growth-related risks, including capacity constraints and pressure on its internal systems and controls. The ability of the Company to manage its growth effectively will require it to continue to implement and improve its operational and financial
systems and to expand, train and manage its employee base. Growth and expansion activities are subject to a number of risks, including:



| |  |  | Unavailability or late delivery of the advanced, and often customized, equipment used in the production of our products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | Difficulties in hiring and retaining appropriate personnel;
| | - |  | -----------------------------------------------------------



| |  |  | Delays in bringing new product equipment on-line;
| | - |  | -------------------------------------------------



| |  |  | Delays in supplying products to our existing customers; and
| | - |  | -----------------------------------------------------------



| |  |  | Unforeseen environmental or engineering problems relating to existing or new facilities.
| | - |  | ----------------------------------------------------------------------------------------



These and other risks may affect the ultimate cost and timing of our present or future expansion of our capacity.



The inability of the Company to manage its growth could have a material adverse impact on its
business, operations, financial condition and prospects.



Risks Related to
Complexity of Manufacturing Processes



The Companys manufacturing
processes are highly complex, require advanced and costly equipment and are continuously being modified in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields. The
Companys operations could be materially adversely affected if production at any of its facilities (or the facilities of third parties from whom it purchases products) is interrupted for any reason. The Company may experience manufacturing
difficulties in the future.



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The Company May Not be Able to Develop New Products to Satisfy Changes in Demand



The industries in which the Company operates are dynamic and constantly evolving. The
Company cannot assure investors that it will successfully identify new product opportunities and develop and bring products to market in a timely and cost-effective manner, or those products or technologies developed by others will not render the
Companys products or technologies obsolete or noncompetitive. In addition, to remain competitive the Company must continue to improve manufacturing yields and expand sales. The Company may not be able to accomplish these goals.



The introduction of new products presents significant business challenges because product
development commitments and expenditures must be made well in advance of product sales. The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specific
implementation factors, including:



| |  |  | timely and efficient completion of process design and development;
| | - |  | ------------------------------------------------------------------



| |  |  | timely and efficient implementation of manufacturing and assembly processes;
| | - |  | ----------------------------------------------------------------------------



| |  |  | product performance;
| | - |  | --------------------



| |  |  | the quality and reliability of the product;
| | - |  | -------------------------------------------



| |  |  | effective marketing, sales and service; and
| | - |  | -------------------------------------------



| |  |  | sufficient demand for the product.
| | - |  | ----------------------------------



The failure of our products to achieve market acceptance due to these or other factors could harm our business.



Our Products May be Found to be Defective, Product Liability Claims May Be Asserted
Against Us and We May Not Have Sufficient Liability.



One or more of our
products may be found to be defective after shipment, requiring a product replacement, recall or repair which would cure the defect but impede performance of the product. We may also be subject to product returns which could impose substantial costs
and harm our business.



Product liability claims may be asserted with respect
to our technology or products. Although we currently have insurance, there can be no assurance that we have obtained a sufficient amount of insurance coverage, that asserted claims will be within the scope of coverage of the insurance, or that we
will have sufficient resources to satisfy any asserted claims.



Failure to
Protect the Companys Proprietary Technologies or Maintain the Right to Use Certain Technologies May Negatively Affect the Companys Ability to Compete



The Company relies heavily on its proprietary technologies, which consist primarily of drawings, specifications, and processes purchased
from others. The Companys future success and competitive position may depend in part upon its ability to obtain or maintain protection of certain proprietary technologies used in principal products. The Company generally does not have, nor
does it generally intend to apply for, patent protection on any aspect of its technology or its business processes or methods. The Companys reliance upon protection of some of its technology as trade secrets will not necessarily
protect it from the use by other persons of its technology, or the use by others of technology that is similar



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or superior to that which is embodied in the Companys trade secrets. Others may be able independently to duplicate
or improve upon the Companys technology in whole or in part. The Company cannot assure investors that it will be able to maintain the confidentiality of its technology, dissemination of which could have a material adverse effect on its
business. In addition, litigation may be necessary to determine the scope and validity of the Companys proprietary rights. Obtaining or protecting the Company s proprietary rights may require the Company to defend claims of intellectual
property infringement by its competitors. While the Company currently is not engaged as a defendant in intellectual property litigation that it believes will have a material adverse effect on its business, the Company could become subject to
lawsuits in which it is alleged that the Company has infringed upon the intellectual property rights of others.



If any such infringement claims exist, arise or are claimed in the future, the Company may be exposed to substantial liability for damages and may need to obtain licenses
from patent owners, discontinue or change its processes or products or expend significant resources to develop or acquire non-infringing technologies. The Company cannot assure investors that it would be successful in such efforts or that such
licenses would be available under reasonable terms. The Companys failure to develop or acquire non-infringing technologies or to obtain licenses on acceptable terms or the occurrence of related litigation itself could have a material adverse
effect on the Companys operating results and financial condition.



The
Company Must Commit Resources to Product Production Prior to Receipt of Purchase Commitments and Could Lose Some or All of the Associated Investment



The Company sells many of its products pursuant to purchase orders for current delivery, rather than pursuant to long-term supply contracts. This makes long-term planning
difficult. Further, many of these purchase orders may be revised or canceled prior to shipment without penalty. As a result, the Company must commit resources to the production of products without any advance purchase commitments from customers. The
cancellation or deferral of product orders, the return of previously sold products, or overproduction due to the failure of anticipated orders to materialize, could result in the Company holding excess or obsolete inventory, which could result in
inventory write-downs. The Companys inability to sell products after it has devoted significant resources to them could have a material adverse effect on the Companys business, financial condition and results of operations.



Variability of the Companys Manufacturing Yields May Affect the Companys
Gross Margins



The Companys manufacturing yields vary significantly
among products, depending on the complexity of a particular integrated circuits design and the Companys experience in manufacturing that type of integrated circuit. From time to time, the Company has experienced difficulties in achieving
planned yields, which have adversely affected the Companys gross margins.



The fabrication of integrated circuits is a highly complex and precise process. Problems in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous integrated circuits on each wafer to be
nonfunctional, thereby reducing yields. These difficulties include:



| |  |  | defects in masks, which are used to transfer circuit patterns onto the Companys wafers;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | impurities in the materials used;
| | - |  | ---------------------------------



| |  |  | contamination of the manufacturing environment; and
| | - |  | ---------------------------------------------------



| |  |  | equipment failure.
| | - |  | ------------------



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The manufacture of filters and transformers is a multi-level process. Each component has dependency on the other. Each
raw material must yield consistent results or productivity is adversely affected. The difficulties that may be experienced in this process include:



| |  |  | impurities in the materials used;
| | - |  | ---------------------------------



| |  |  | equipment failure; and
| | - |  | ----------------------



| |  |  | bottlenecks (product cannot move to the next stage until the previous stage is completed).
| | - |  | ------------------------------------------------------------------------------------------



The manufacturing process for the stabilized Glide Slope Indicator (SGSI) is a unique process in that it is highly reliant on
subcontractors. These units are comprised of four major units, three of which are manufactured by separate manufacturing companies.



The difficulties that may be experienced in this process include:



| |  |  | defects in subcontractors components;
| | - |  | -------------------------------------



| |  |  | impurities in the materials used;
| | - |  | ---------------------------------



| |  |  | equipment failure; and
| | - |  | ----------------------



| |  |  | reliability of subcontractor.
| | - |  | -----------------------------



Because a large portion of the Companys costs of manufacturing these products are relatively fixed, it is critical for the Company to improve the number of
shippable integrated circuits per wafer and increase the production volume of wafers in order to maintain and improve the Companys results of operations. Yield decreases can result in substantially higher unit costs, which could materially and
adversely affect the Companys operating results and have done so in the past. Moreover, the Company cannot assure investors that it will be able to continue to improve yields in the future or that it will not suffer periodic yield problems,
particularly during the early production of new products or introduction of new process technologies. In either case, the Companys results of operations could be materially and adversely affected.



Risks Related to Supply of Materials and Services



The Company purchases most of its raw materials, including silicon wafers, bobbins, cores,
diodes, hydraulic pumps, gyroscopes, stabilized platforms, and electronic transformers on a purchase order basis from a number of vendors. Although the Company tries to have alternative supply sources for all necessary materials, some materials and
services have a single source supplier. If any subcontractors or vendors are unable to provide these materials in the future, the relationships with the Companys customers could be seriously affected and its revenues, financial condition and
cash flows could be severely damaged. Although the Company seeks to reduce its dependence on sole and limited source suppliers both for services and for materials, disruption or financial, operational, production or quality assurance difficulties at
any of these sources could occur and cause the Company to have problems with the delivery of necessary supplies.



Inventories May Become Obsolete



The life cycles of some of the Companys products depend heavily upon the life cycles of the end products into which these products are designed. Products with short
life cycles require the Company to manage closely its production and inventory levels. Inventory may also become obsolete because of adverse changes in end-market demand. The life cycles for electronic components have been shortening over time at an
accelerated pace. The Company may be adversely affected in the future by obsolete or excess inventories which may result from unanticipated changes in the estimated total demand for the Companys products or the estimated life cycles of the end
products into which the Companys products are designed.



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The Companys International Operations and Sales Expose the Company to Material Risks



The Company expects revenues from foreign markets to continue to represent a portion of
total revenues. The Company maintains contracts with entities in the United States, Canada, Europe, China and certain other countries. There are risks inherent in doing business internationally, including:



| |  |  | changes in, or impositions of, legislative or regulatory requirements, including environmental regulations and tax laws in the countries in which the Company sells its products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | trade restrictions;
| | - |  | -------------------



| |  |  | differences in customs that affect commercial activities;
| | - |  | ---------------------------------------------------------



| |  |  | local economic conditions;
| | - |  | --------------------------



| |  |  | transportation delays;
| | - |  | ----------------------



| |  |  | work stoppages;
| | - |  | ---------------



| |  |  | economic and political instability;
| | - |  | -----------------------------------



| |  |  | changes in import/export regulations, tariffs and freight rates;
| | - |  | ----------------------------------------------------------------



| |  |  | difficulties in collecting receivables and enforcing contracts generally;
| | - |  | -------------------------------------------------------------------------



| |  |  | currency exchange rate fluctuations;
| | - |  | ------------------------------------



| |  |  | possibility of involvement in legal proceedings in a foreign country; and
| | - |  | -------------------------------------------------------------------------



| |  |  | terrorism or insurgencies of some sort.
| | - |  | ---------------------------------------



In addition, the laws of certain foreign countries may not protect the Companys products or intellectual property rights to the same extent as do US and Canadian
laws. Therefore, the risk of piracy of the Companys technology and products may be greater in these foreign countries. Although the Company has not experienced any material adverse effect on its operating results as a result of these and other
factors, the Company cannot assure investors that such factors will not have a material adverse effect on the Companys financial condition and operating results in the future.



Delays in Production, Implementing New Production Techniques or Resolving Problems Associated with Technical Equipment Malfunctions Could
Adversely Affect the Companys Manufacturing Efficiencies



The
Companys manufacturing efficiencies will be an important factor in its future profitability, and the Company cannot assure investors that it will be able to maintain or increase its manufacturing efficiencies. The Companys manufacturing
processes are highly complex, require advanced and costly equipment, and are continually being modified in an effort to improve yields and product performance. The Company may experience manufacturing problems in achieving acceptable yields or
experience product delivery delays in the future as a result of, among other things, capacity constraints, construction delays, upgrading or expanding existing facilities, or changing process technologies, any of which could result in a loss of
future revenues. The Companys operating results also could be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenues do not increase proportionately.



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Interruptions, Delays or Cost Increases Affecting the Companys Materials, Parts, Equipment or Subcontractors May
Impair the Companys Competitive Position.



Some of the
Companys products are assembled and tested by third-party subcontractors. The Company does not have any long-term agreements with these subcontractors. As a result, the Company may not have assured control over its product delivery schedules
or product quality. Due to the amount of time typically required to qualify assemblers and testers, the Company could experience delays in the shipment of its products if it is forced to find alternative third parties to assemble or test them. Any
product delivery delays in the future could have a material adverse effect on the Companys operating results and financial condition. The Companys operations and ability to satisfy customer obligations could be adversely affected if its
relationships with these subcontractors were disrupted or terminated.



Although
the Company seeks to reduce its dependence on its sole and limited source suppliers, disruption or termination of any of these sources could occur, and such disruptions or terminations could harm the Companys business and operating results. In
the event that any of the Companys subcontractors were to experience financial, operational, production or quality assurance difficulties resulting in a reduction or interruption in supply, its operating results would suffer until alternate
subcontractors, if any, became available.



Risks Related to Markets in Which
Filtran Group Sells its Products - Telecommunications Industry



Historically, one of Filtran Groups major markets is the telecommunications industry. The telecommunications industry, which has experienced a downturn from 2000 through 2005, made up 17% of Filtran Groups sales in fiscal 2005.
Over those years, demand for Filtran Groups products from its customers in that industry has decreased. Decreased demand has had an adverse affect on Filtrans operating results and profitability. Filtrans primary risk at the
present time is the unpredictability of the electronic component market across all industries. However, unlike the recent past, Filtran Group is no longer solely dependent on the telecommunications industry as they have increased their product
presence in the Military and Aerospace industries, which now make up over 63% of sales.



Environmental Liabilities Could Adversely Impact the Companys Financial Position



United States federal, state and local laws and regulations and federal, provincial and local laws, rules and regulations in Canada, impose various restrictions and controls on the discharge of materials, chemicals
and gases used in the Companys manufacturing processes. In addition, under some laws and regulations, the Company could be held financially responsible for remedial measures if its properties are contaminated or if it sends waste to a landfill
or recycling facility that becomes contaminated, even if the Company did not cause the contamination. Also, the Company may be subject to common law claims if it releases substances that damage or harm third parties. Further, future changes in
environmental laws or regulations may require additional investments in capital equipment or the implementation of additional compliance programs in the future. Any failure to comply with environmental laws or regulations could subject the Company
to serious liabilities, and could have a material adverse effect on its operating results and financial condition.



In the conduct of the Companys manufacturing operations, it has handled and continues to handle materials that are considered hazardous, toxic or volatile under US
federal, state and local laws and Canadian, federal, provincial and local laws, rules and regulations. The risk of accidental release of such materials cannot be completely eliminated. In addition, contaminants may migrate from or within, or through
real property. These risks may give rise to claims. Where third parties are responsible for contamination, the third parties may not have funds, or make funds available when needed, to pay remediation costs imposed under environmental laws and
regulations.



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Fixed Costs May Reduce Operating Results If Our Sales Fall Below Expectations.



Our expense levels are based, in part, on our expectations as to future sales. Many of our
expenses, particularly those relating to capital equipment and manufacturing overhead, are relatively fixed. Decreases in lead times between orders and shipments and customers ordering practices could adversely affect our ability to project
future sales. We might be unable to reduce spending quickly enough to compensate for reductions in sales. Accordingly, shortfalls in sales could materially and adversely affect our operating results.



Potential Effects of System Outages



Risks are presented by electrical or telecommunications outages, computer hacking, viruses,
or other general system failure. To try to manage our operations efficiently and effectively, we rely heavily on our internal information and communications systems and on systems or support services from third parties. Any of these are subject to
failure. System-wide or local failures that affect our information processing could have material adverse effects on our business, financial condition, results of operations and cash flows. In addition, insurance coverage for the risks described
above may be unavailable or inadequate.



Dependence on Key Personnel



The Company is dependent upon a small number of key personnel. For
example, Thomas W. Mills, President and Chief Operating Officer of API, has held these positions since 1991, has been employed by API since 1981, is extremely familiar with all aspects of APIs business, and has a proven track record of capable
leadership. The loss of the services of such personnel could have a material adverse effectover business. Our success will depend in large part on the efforts of these individuals. It is not currently proposed that there will be any long-term
employment agreements or key-man insurance in respect of such key personnel. We will face intense competition for qualified personnel, and there can be no assurance that we will be able to attract and retain such personnel.



Dependence on Recruiting and Retention of Sales and Customer Support and Technical
Personnel



Our future revenue growth will depend in large part on our
ability to expand our sales force and our customer support capability. We may not be able successfully to manage the expansion of such functions or to recruit and train additional sales, consulting and client/customer support personnel. If we are
unable to hire and retain additional sales personnel, we may not be able to increase our revenues to the extent necessary to ensure ongoing profitability. If we are unable to hire and retain trained consulting and client/customer support personnel,
we may be unable to meet client or customer demands. We are unlikely to be able to increase our revenues in the event we fail to maintain or expand our sales force or our consulting and client/customer support staff. We also need to be able to
retain and attract highly qualified technical personnel, and will be subject to similar risks if we fail to do so. Even if we are successful in expanding our sales force and client/customer support capabilities and our technical staff, such
expansion may not result in revenue growth.



Fluctuations and Changes in
Earnings



While API has been in business for approximately 27 years, it
has experienced losses in some of its recent financial years, including the fiscal years ended May 31, 2002, 2003 and 2004. API may experience significant fluctuations in future quarterly results that may be caused by many factors, including
(i) the pace of development of its business; (ii) changes in the level of marketing and other operating expenses to support future growth; (iii) competitive factors; (iv) product obsolescence; (v) availability of adequate
supplies; (vi) changes in manufacturing yields; (vii) changes in demand for its products; and (viii) general economic conditions.



20



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While Filtran Group has been operating for over 30 years, it has experienced losses in some of its recent financial
years, including the nine months ended May 31, 2002, and the year ended May 31, 2003 and May 31, 2005. Filtran Groups losses in 2002 and 2003 were the direct result of the downturn in the telecommunications industry, which has
caused a decrease in demand for Filtran Groups products. In 2004 and 2005 Filtran Group increased their presence in the Defense and Aerospace Industries. Sales revenue to this sector during the years ended May 31, 2004 and 2005 were
approximately 50% and 63%, respectively, of its total sales revenue. Filtran Group also is concentrating on developing sales from manufacturers of high-end equipment manufacturers; however, there can be no assurance that Filtran Group will be
successful in such efforts. Filtran Group may continue to experience fluctuations in earnings and/or depressed earnings until demand for telecommunications products increases, or until its sales efforts generate sufficient demand from customers in
other industries. Filtran Group may also experience fluctuations in quarterly results as a result of other factors, including (i) the pace of development in its business; (ii) changes in the level of marketing and other operating expenses
to support future growth; (iii) competitive factors; and (iv) general economic conditions.



TM Systems has been in business for over 30 years and posted a net profit for the financial years ended May 31, 2004 and from the February 6, 2003 acquisition date to May 31, 2003 and a loss for the
year ended May 31, 2005. In addition, TM posted net profits in each of its fiscal periods ending December 31, 2002 and 2001. However, TM may experience fluctuations in earnings or experience losses if demand for the products, which is
derived primarily from the defense industry, decreases. Other factors which may cause fluctuations in future quarterly results are (i) pace of development of its business, (ii) competition, (iii) retirement of key personnel, and
(iv) general economic conditions.



Dependence on Additional Financing



The Company may require additional financing in order to support
expansion, develop new or enhanced services or products, respond to competitive pressures, acquire complementary businesses or technologies, or take advantage of unanticipated opportunities. The ability of the Company to arrange such financing in
the future will depend in part upon the prevailing capital market conditions, as well as the business performance of the Company. There can be no assurance that the Company will be successful in its efforts to arrange additional financing under
satisfactory terms. If additional financing is raised by the issuance of shares of the Companys Common Stock, the Companys shareholders may suffer dilution. If adequate funds are not available, or are not available on acceptable terms,
the Company may not be able to take advantage of opportunities, or otherwise respond to competitive pressures and remain in business.



Terrorist Attacks, War and Other Acts of Violence May Negatively Affect Our Operations and Your Investment.



Terrorist attacks, such as the attacks that took place on September 11, 2001, wars,
such as the current war in Iraq, and other acts of violence such as those that may result from the increasing tension in the Middle East, Asia, and the Korean Peninsula, or any other national or international crisis, calamity or emergency, may
result in interruption to the business activities of many activities, business losses and overall disruption of the U.S. economy at many levels. These events or armed conflicts may directly impact our physical facilities or those of our customers
and suppliers. Additionally, these events or armed conflicts may cause some of our customers or potential customers to reduce the level of expenditures on their services and products that ultimately may reduce our revenue. The consequences of these
reductions are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business.



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For example, as a result of these events, insurance premiums for businesses may increase and the scope of coverage may be
decreased. Consequently, we may not be able to obtain adequate insurance coverage for our business and properties. A high or Orange or severe or Red threat condition announced by the Homeland Security
Advisory System or similar agency and any consequent effect on the transportation industry may adversely affect our ability to timely import materials from our suppliers located outside the United States or impact our ability to deliver our products
to our customers without incurring significant delays. To the extent that these disruptions result in delays or cancellations of customer orders, a general decrease in corporate spending, or our inability to effectively market our services and
products, our business and results of operations could be harmed.



Risks
Related to Fire, Natural Disaster, Other Disasters, and Equipment Problems



If a fire, natural disaster or any other catastrophic event prevents the Company or any of its subsidiaries from operating their factories for more than a few days, the Companys revenues and financial condition could be severely
impacted. The Company has four manufacturing facilities located in different locations and although it is unlikely that a fire, natural disaster or similar occurrence would affect all such facilities, the loss of the use of one of these facilities
would negatively impact the Company. There are a number of foundries which, given appropriate lead times, could meet some of the Companys fabrication needs. However, in the event the Company has to use such foundries, it cannot guarantee that
it will be able to meet its customers required delivery schedules. Because of the unique nature of the Companys manufacturing processes, it would be difficult for the Company to arrange for independent suppliers to produce
semiconductors, microelectronic circuits, bobbins, cores, diodes or other electronic components in a short period of time. While the Company believes that it has sufficient manufacturing capacity to meet its near term plans, prolonged problems with
the equipment at any of the facilities could cause the Company to miss its production goals.



ITEM 4. INFORMATION ON THE COMPANY



INTRODUCTION



API Electronics Group Corp. (formerly API
Electronics Group Inc. and previously, InvestorLinks.com Inc.), incorporated in the Province of Ontario, Canada (the Company), completed an acquisition on August 31, 2001, by which the primary business of the Company became the
manufacture and supply of semiconductors and microelectronic circuits for military, aerospace and commercial applications through its newly acquired, wholly-owned subsidiary API Electronics, Inc. API Electronics, Inc. has been in business for
approximately 27 years. As of May 31, 2002, the Company purchased the Filtran Group of companies, which companies are manufacturers of inductors, filters and transformers, primarily for the telecommunications industry, with manufacturing
facilities in both Canada and the United States. The Filtran Group has been in business for over 30 years. As of February 6, 2003, the Company, through its wholly-owned subsidiary TM Systems, purchased the assets of TM Systems, Inc., which is a
manufacturer of naval landing and launching equipment, flight control and signaling systems, radar systems alteration, data communication and test equipment, and aircraft ground control equipment for military use. TM Systems, Inc. had been in
business for over 30 years. Effective March 23, 2004, the Company acquired the assets of Islip Transformer & Metal co., Inc., a supplier of critical systems and components to the U.S. Department of Defense. The Company changed its name
from API Electronics Group Inc. to API Electronics Group Corp. on September 15, 2004 in connection with the one (1) for ten (10) common share consolidation. During 2005, the Company has continued to integrate its recent acquisitions.



Prior to August 31, 2001, and since June 6, 2000 the Company had
been primarily engaged in the business of a financial resource and directory portal provider on the Internet, through the operation of the Internet investment site www.InvestorLinks.com. That business was effectively closed down prior to the end of
the



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fiscal year ending April 30, 2001 and the assets of that business were sold during the fiscal year ending
May 31, 2002. Prior to September 7, 2001, and during the fiscal year ending April 30, 2001, the Companys name was InvestorLinks.com Inc. Prior to June 6, 2000, and during the fiscal year ended April 30, 2000, the
Companys name was Opus Minerals Inc., and the Company was in the business of locating, acquiring, exploring, and, if warranted, developing and exploiting mineral properties.



The Company is a publicly traded company whose Common Shares (the Common Stock or the Common Shares) trade in the
United States on the National Association of Securities Dealers OTC Bulletin Board (OTCBB) under the symbol AEGCF. Prior to the one (1) for ten (10) common share consolidation, the Companys symbol was
APIEF. Previously, the Companys Common Stock traded on the Canadian Venture Exchange under the symbol YIK, and on the OTCBB under the symbol IVLKF. The Company voluntarily delisted from the TSX Venture
Exchange, formerly known as the Canadian Venture Exchange, as of August 31, 2001. The Company may apply for listing on the NASDAQ small cap market.



A. HISTORY AND DEVELOPMENT OF THE COMPANY



The Companys legal name and commercial name is API Electronics Group Corp. The Company changed its name from API Electronics Group Inc. to API Electronics Group
Corp. on September 15, 2004 in connection with the one (1) for ten (10) common share consolidation. The legal and commercial name of its primary businesses and wholly-owned subsidiaries are API Electronics, Inc., the Filtran Group of
companies consisting of Filtran Inc., Filtran Limited and TM Systems II, Inc. The Company was incorporated on May 14, 1985, in the Province of Ontario, Canada under the name Shediac Bay Resources Inc. The Company is a corporation domiciled in
the Province of Ontario, Canada, and operates under the Ontario Business Corporations Act. At the Companys annual shareholders meeting held on October 8, 2003, the Companys shareholders approved a change of the Companys
domicile from Ontario to the State of Delaware. The Board of Directors will determine if and when the Company changes its domicile to Delaware.



Both the registered office and principle place of business of the Company are located at 505 University Avenue, Suite 1400, Toronto, Ontario, Canada M5G 1X3. The
telephone numbers of the Companys registered office and principle place of business in Ontario, Canada are (416) 593-6543 and 1(800) 606-2326. The Company is not required to have an agent in its home country, Canada, or in the host
country, the United States.



From the time of the Companys incorporation
on May 14, 1985 until June 6, 2000, the Company was in the business of locating, acquiring, exploring, and, if warranted, developing and exploiting, mineral properties. From June 6, 2001 through August 31, 2001, the
Companys primary business was that of a financial resource and directory portal provider on the Internet through its website www.InvestorLinks.com. On July 25, 2000, the Company changed its name from Opus Minerals Inc. to
InvestorLinks.com Inc. In 2000, the Companys Common Stock began trading on the OTCBB under the symbol IVLKF. The Company no longer operates this website.



On August 30, 2001, the Companys shareholders approved the acquisition of all of the issued and outstanding shares of API
Electronics, Inc., a Delaware corporation by the issuance of 650,000 post-consolidation units at $4.00 per unit. Each unit consists of one common share and 1/2of one Series A common share purchase warrant exercisable at $4.50 per share for a period of 18 months from the date of issuance, and 1/2of one Series B common share purchase warrant exercisable at $7.50 per share for a period of two years from date of issuance. The expiration date of these
warrants was extended until February 28, 2005 and August 30, 2005, respectively, and the unit number, the number of shares and warrants and the exercise price of the warrants were adjusted to reflect the one (1) for ten
(10) common share consolidation, effective September 15, 2004. These warrants are no longer outstanding. This transaction constituted a reverse take-over of the Company by API, the deemed acquiring company. Also



23



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on August 30, 2001, the Companys shareholders approved a change of the Companys name from
InvestorLinks.com Inc. to API Electronics Group Inc., and the consolidation of the authorized common shares on the basis that every three pre-consolidation Common Shares were converted into one post-consolidation Common Share. The name change and
share consolidation became effective on September 10, 2001. On September 10, 2001, shares of the Companys Common Stock began trading on the OTCBB under the symbol APIEF. The Companys trading symbol on the OTCBB was
changed to AEGCF in connection with the September 15, 2004 one (1) for ten (10) common share consolidation. As of August 31, 2001, the Companys primary business became the manufacture and distribution of semiconductors and
microelectronic circuits for military, aerospace, and commercial applications through its newly acquired, wholly-owned subsidiary API. Additional details regarding the transactions summarized in this paragraph can be found below in Item 17 of this
Annual Report.



Effective May 31, 2002, the Company acquired the 100% of
the shares of the Filtran Group of companies for $2,670,835. The purchase price was paid as follows: $716,565 in cash and a promissory note for $1,954,270. As part of the acquisition of the Filtran Group, the Company paid $325,712 in cash to Philip
Walter White, the former principal of the Filtran Group of companies, for entering into a Non-Competition and Confidentiality Agreement with the Company. The Filtran Group of companies included Filtran Limited, Filtran Inc., Canadian Dataplex Ltd.
and Tactron Communications (Canada) Limited. Canadian Dataplex Ltd., Filtran Limited and Tactron Communications (Canada) Limited were amalgamated under the name Filtran Limited under the Business Corporations Act of Ontario as of June 1, 2003.
The Filtran Group of companies are manufacturers of electronic components, particularly inductors, filters and transformers. Additional details regarding the Filtran Acquisition can be found in Item 17 of this Annual Report.



In early June 2002, the Company raised $1,175,000 through the sale of 50,000 units at $23.50
per unit. Each unit consisted of one share of common stock of the Company and one warrant to purchase one share of common stock exercisable at $30.00 per share. The Filtran Acquisition was the primary use of the proceeds of this offering. These
numbers (unit number, unit price and warrant exercise price) have been adjusted to reflect the one (1) for ten (10) common share consolidation effective September 15, 2004.



Effective February 6, 2003, the Company through its wholly-owned subsidiary TM Systems, acquired the assets of TM Systems, Inc. for a
purchase price consisting of (i) $1,500,000 paid in cash at closing, (ii) a promissory note in the principal amount of $1,475,652 bearing interest at the annual rate of 1.65% (the applicable federal rate at the closing date), due and
payable one year from the date of the closing, and subject to adjustment if orders fall below a specified level, and (iii) certain earn-out payments equal to ten percent (10%) of the gross proceeds of future deliveries for the two-year
period following the closing. As of February 6, 2005, which is the end of the two-year earn-out period, the Company had made earn-out payments to TM Systems, Inc. of $$80,425. The assets purchased by TM Systems include inventory, equipment,
work-in-progress, contracts, orders, files, ledgers and furniture. Additional details regarding the TM System Acquisition can be found in Item 17 of this Annual Report.



TM Systems also assumed lease obligations for two separate premises which are manufacturing facilities located in Albertson, New York and
Bridgeport, Connecticut from TM Systems, Inc. As of February 6, 2003, TM Systems also entered into one-year employment arrangements with Walter Weiner and Irwin Shuldman, who were executive officers of TM Systems, Inc., to serve as executive
officers of TM Systems for annual salaries of $100,000 each. Those contracts expired on February 6, 2004, and Messrs. Weiner and Shuldman are no longer with TM Systems. TM Systems is a manufacturer of naval landing and launching equipment,
flight control and signaling systems, alteration data communication and test equipment, and aircraft ground control equipment.



24



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Contemporaneous with the TM Systems Acquisition, the Company raised $2,770,000 in capital through the sale of 692,500
units at $4.00 per unit. Each unit consisted of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock exercisable at $6.00 per share. These numbers (unit number, unit price and warrant exercise
price) have been adjusted to reflect the one (1) for ten (10) common share consolidation effective September 15, 2004. The Company used the proceeds of the financing for the TM Acquisition.



On September 15, 2004, the Company effected a one (1) for ten (10) common
share consolidation. In connection with the common share consolidation, the Company changed its name from API Electronics Group Inc. to API Electronics Group Corp. (a name change is required under Canadian law) and changed its OTCBB trading symbol
to AEGCF.



Effective March 23, 2004, the Company acquired the
assets of Islip Transformer & Metal Co., Inc., a supplier of critical systems and components to the U.S. Department of Defense. The assets acquired included certain Department of Defense contracts, the sellers CAGE code, the right to
use the sellers name, all test fixtures, test equipment, plans, specifications and files relating to previous contracts performed, inventory and equipment. The consideration for the assets was $50,000 plus 10% of the amount of confirmed orders
received pursuant to the terms of the contract.



The Company has adopted a
stockholder rights plan that is designed to make any person that is interested in acquiring more than twenty percent (20%) of the common shares of the Company to do so by way of a type of bid that the Company has determined is fair to
stockholders (Permitted Bids). Other types of bids will activate certain stockholders rights to purchase shares at 50% below the market price, which are intended to make those types of bids other than Permitted Bids, prohibitively
expensive. Any offer other than a permitted bid or a competing permitted bid will, as a result of the dilutive effects of the Rights (defined below), be prohibitively expensive for the acquiring person. The existence of the stockholder rights plan
may discourage potential bidders and make the Company less likely to become a takeover candidate. Although the Company adopted the stockholder rights plan to protect the stockholders and the value of their stock, the adoption of this plan may not be
in the stockholders best interest in all cases.



The following is a summary of
the terms of the Rights Plan:



Under the Rights Plan, share purchase rights
(the Rights) will be created at the rate of one Right for each common share outstanding as at a certain time in February 2004 (the Record Time) and at a rate of one Right for each common share issued.



The dilutive effects of the Rights are triggered by a person becoming an acquiring person
upon the acquisition of beneficial ownership of twenty percent (20%) or more of the outstanding common shares. Notwithstanding the foregoing, there are certain circumstances where a person will not trigger the separation and exercisability of
the Rights if he becomes the beneficial owner of twenty percent (20%) of the Companys common shares.



Investment advisors (for fully managed accounts) and trust companies acquiring greater than twenty percent (20%) of the Companys common shares will not be
considered to be the beneficial owner of such shares, and so will be exempted from triggering the dilutive effects of the Rights, provided that they are not, either alone or as part of a group, making a take-over bid.



The Rights will separate from the common shares and become exercisable ten (10) business
days after a person has become an acquiring person, or commences or announces a take-over bid for the outstanding common shares. The acquisition by an acquiring person of twenty percent (20%) or more of the Companys common shares is
referred to as a Flip-in Event.



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When a Flip-in Event occurs, each Right (except for Rights beneficially owned by an acquiring person or certain
transferees of an acquiring person, which Rights shall be void) becomes a right to purchase from the Company that number of common shares having an aggregate market price on the date of consummation or occurrence of such Flip-in Event equal to twice
the exercise price for an amount in cash equal to the exercise price. For example, if at the time of the stock acquisition date the exercise price is $50.00 and the market price of the common shares is $20.00, the holder of each Right would be
entitled to purchase common shares having an aggregate market price of $100.00 (that is, five (5) common shares) for $50.00 (that is, a fifty percent (50%) discount from the market price).



Prior to the Rights being triggered by a Flip-in Event, the Rights will have no value and
will have no dilutive effect on the common shares of capital stock of the Company.



A permitted bid will not trigger the dilutive effects of the Rights Plan. Permitted bids include:



|(a) | the offer must be made for all common shares and must be made by way of a take-over bid circular to all holders of the Companys common shares;
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------



|(b) | the offeror must not beneficially own more than ten percent (10%) of the outstanding common shares (this restriction does not apply to offerors who beneficially own ten percent
(10%) or more of the outstanding common shares as at the Record Time, provided that they do not increase their beneficial ownership by more than two percent (2%) of the outstanding shares after the Record Time);
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | the offer must be outstanding for a minimum of ninety (90) days (and up to one hundred twenty (120) days in the event that a competing permitted bid emerges) to permit
shareholders of the Company to properly assess the bid and to allow competing bids to emerge. This also gives the Board of Directors sufficient time to review the offer, seek or formulate alternatives and communicate its recommendation to
shareholders of the Company. Should more than fifty percent (50%) of common shares held by shareholders other than the offeror be tendered to the offer, shareholders of the Company are to be provided with an additional ten (10) clear
business days during which to tender any common shares not already tendered to the offer;
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) | the offer must provide that common shares may only be taken up and paid for if more than fifty percent (50%) of the common shares held by shareholders of the Company other than
the offeror have been deposited or tendered and not withdrawn;
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) | when the offer has been made, no further common shares may be acquired by the offeror except pursuant to the permitted bid; and
|--- | -------------------------------------------------------------------------------------------------------------------------------



|(f) | if the consideration offered is not payable entirely in cash, a fairness opinion must be provided to the shareholders of the Company in connection with the offer.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



A competing permitted bid will not have to be outstanding for a
minimum of ninety (90) days but will instead have to be outstanding for at least as long as the initial permitted bid.



If at any time the Board of Directors determines that conditions exist which would eliminate or materially diminish, in any respect, the benefits intended to be afforded
to the holders of Rights under the Rights Plan, it may, at its option, at any time after a person has become an acquiring person, authorize the



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Company to issue or deliver, in exchange for each Right (excluding Rights held by an acquiring person), debt or equity
securities or assets (or a combination thereof) of the Company and, in that event, the right to exercise the Rights will terminate.



The Board of Directors may, at its option, elect to redeem all but not less than all of the Rights at a redemption price of one one-hundredth of one cent ($0.0001 per
Right) and, in that event, the right of holders of Rights to exercise the Rights will terminate. The Rights Plan also gives the Board of Directors the right, at its option, to waive the application of the Rights Plan to any particular Flip-in Event,
provided that it also waives the application of the Rights Plan to any other Flip-in Event then in existence.



The Rights Plan will have a term of ten (10) years.



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Principal Capital Expenditures and Divestitures Since June 1, 2002



The following chart contains a description, including the amount invested, of the
Companys principal capital expenditures and divestitures (including interests in other companies), since June 1, 2002, the beginning of the Companys last three fiscal years.



|                            |  |                                                                      |  |                              |  |                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--------------------------- |  | -------------------------------------------------------------------- |  | ---------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date                        |  | Parties                                                              |  | Type                         |  | Description of Capital Expenditure or Divestiture                                                                |  | Amount Invested or Divested                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|February 6, 2003            |  | TM Systems, Inc., TM Systems II, Inc. and API Electronics Group Inc. |  | Asset Purchase Agreement     |  | The Company, through its wholly-owned subsidiary, TM Systems II, Inc. acquired the assets of TM Systems, Inc.    |  | TM Systems purchased the assets of TM Systems, Inc. for a purchase price consisting of (i) a $1,500,000 cash payment, (ii) a promissory note in the principal amount of $1,475,651, bearing
interest at the annual rate of 1.65% and due and payable one year from the closing date of the purchase, subject to adjustment if orders fall below a specified level and (iii) earn out payments equal to 10% of the gross proceeds of future deliveries
for the two year period following the closing date of the purchase.
|                            |  |                                                                      |  |                             
|February 6, 2003            |  | TM Systems, Inc., TM Systems II, Inc. and API Electronics Group Inc. |  | Asset Purchase Agreement     |  | The Company, through its wholly-owned subsidiary, TM Systems II, Inc. acquired the assets of TM Systems, Inc.    |  | TM Systems purchased the assets of TM Systems, Inc. for a purchase price consisting of (i) a $1,500,000 cash payment, (ii) a promissory note in the principal amount of $1,475,651, bearing
interest at the annual rate of 1.65% and due and payable one year from the closing date of the purchase, subject to adjustment if orders fall below a specified level and (iii) earn out payments equal to 10% of the gross proceeds of future deliveries
for the two year period following the closing date of the purchase.
|                            |  |                                                                      |  |                             
|February 6, 2003            |  | Walter Weiner, TM Systems II, Inc. and API Electronics Group Inc.    |  | Employment Letter            |  | TM Systems II, Inc. confirmed its employment of Walter Weiner as an executive officer for a period of one year.  |  | Annual Salary of $100,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                            |  |                                                                      |  |                             
|February 6, 2003            |  | Irwin Shuldman, TM Systems II, Inc. and API Electronics Group Inc.   |  | Employment Letter            |  | TM Systems II, Inc. confirmed its employment of Irwin Shuldman as an executive officer for a period of one year. |  | Annual Salary of $100,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                            |  |                                                                      |  |                             
|Fiscal Year 2003            |  | API Electronics, Inc. and various contractors                        |  | Facility Improvements        |  | API upgraded its manufacturing facilities (machinery and equipment and building).                                |  | Cost of $411,436                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                            |  |                                                                      |  |                             
|June 2003                   |  | Canadian Dataplex Ltd. and Buyer                                     |  | Sale of land and building    |  | Canadian Dataplex Ltd. sold its land and building                                                                |  | Net Proceeds of $108,186                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                            |  |                                                                      |  |                             
|March 2004                  |  | API Electronics, Inc. and Islip Transformer & Metal Co., Inc.        |  | Asset Purchase Agreement     |  | The Company acquired the machinery, equipment and inventory of Islip Transformer & Metal Co., Inc.               |  | $50,000 cash, plus 10% of confirmed orders                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                            |  |                                                                      |  |                             
|February 2005 to March 2005 |  | API and Various Shareholders                                         |  | Common Share Buyback Program |  | The Company acquired 139,735 common shares in the open market under the Buyback program.                         |  | Cost of $723,289 Cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                            |  |                                                                      |  |                             
|June 2005                   |  | API and Various Shareholders                                         |  | Common Share Buyback Program |  | The Company acquired 112,675 common shares in the open market under the Buyback program                          |  | Cost of $712,106 Cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                            |  |                                                                      |  |                             
|August 2005                 |  | API and Various Shareholders                                         |  | Common Share Buyback Program |  | The Company acquired 25,000 common shares in the open market under the Buyback program                           |  | Cash of $131,500 Cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                            |  |                                                                      |  |                             
|September 2005              |  | API and Various Shareholders                                         |  | Common Share Buyback Program |  | The Company acquired 63,398 common shares in the open market under the Buyback program                           |  | Cash of $322,062 Cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                            |  |                                                                      |  |                             
|October 2005                |  | API and Various Shareholders                                         |  | Common Share Buyback Program |  | The Company acquired 138,950 common shares in the open market under the Buyback program                          |  | Cash of $707,256 Cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



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As of the date of this Annual Report, other than a stock buyback program for an additional 118,000 common shares, there
are no material capital expenditures or divestitures in progress.



Public
Takeover Offers



There have been no public takeover offers by third
parties in respect of the Companys shares or by the Company in respect of other companies shares since June 1, 2003.



B. BUSINESS OVERVIEW



Business Overview  API Electronics, Inc., the Filtran Group of Companies and TM Systems



API Electronics, Inc.  Operations, Activities and Products



Effective on August 31, 2001, subsequent to the end of the Companys fiscal year ending April 30, 2001, the Company completed its acquisition of API
Electronics, Inc., a Delaware corporation, which then became a wholly-owned subsidiary of the Company. This transaction constituted a reverse take-over of the Company by API, the deemed acquiring company. From the time of the reverse take-over until
the acquisition of the Filtran Group, the primary business of the Company became the manufacture and supply of semiconductors and microelectronic circuits for military, aerospace, and commercial applications through its newly-acquired, wholly-owned
subsidiary API.



API manufactures niche specialty products that major
semiconductor manufacturers no longer produce or do not plan on producing in the future. API has focused on the discontinued parts niche of the electronic component industry since its formation approximately 27 years ago. In support of APIs
goals and objectives, API has focused on maximizing the potential of the various products for which it has become the sole source supplier. Through the implementation of engineering process controls and total quality management principles, API has
achieved manufacturing efficiencies and effectiveness via specialization and concentration on these niche products.



APIs reputation is that of a preferred supplier of custom replacement parts for critical, fixed-design systems. Such niche products include Varactor tuning diodes,
specialty suppressor diodes for the relay market, and custom microelectronic hybrid circuits designed, built and tested to customer specifications. API also manufactures power and small-signal transistors, silicon rectifiers, zener diodes,
high-voltage diodes, and resistor/capacitor networks. All microelectronic products are manufactured using semiconductor, hybrid, and surface-mount technologies or a combination. All methods and processes are controlled and monitored by APIs
Quality Assurance programs.



Applications for APIs semiconductor products
include: Telecommunications, Aerospace, Military Defense Systems, Automated Test Equipment, Computing Equipment, Medical Equipment, Robotics, Instrumentation and Automotive Systems. API currently serves a broad group of customers with products



29



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and services falling into four main categories: Hybrid Circuit, Power and Small-Signal Transistor, Varactor Tuning Diode
and Value-Added Distribution. APIs products facilitate the power supply in end products such as missiles, the space shuttle, F-15 and F-16 fighter planes and B-1 bombers.



APIs principal markets consist of the government and military markets (approximately 70% of revenues), laboratory and commercial
equipment, and other replacement parts (approximately 30% of revenues) during the fiscal year ended May 31, 2005. The Companys customers include government agencies, Departments of Defense, and large military contractors such as
Honeywell/Allied Signal, BAE Systems Controls, Deutch Relays, Litton Systems and Lockheed-Martin. Other customers include Raytheon, Northrop Grumman Litton, Alcatel, Tektroniz, Racal, Ball Aerospace and the Defense Electronic Supply Center.



The main thrust of APIs strategy has been to increase its market
penetration through the addition of the following competitors product lines:



| | 1. | Ampower  Power Transistors
| | -- | ---------------------------

| | 2. | Unitrode  Power and Darlington Transistors
| | -- | -------------------------------------------

| | 3. | Solid Power Corp.  Homotaxial Power Transistors
| | -- | ------------------------------------------------

| | 4. | MSI Electronics  Varactor Tuning, Abrupt, and Hyperabrupt Diodes
| | -- | -----------------------------------------------------------------

| | 5. | ASI Microsystems  Custom Hybrid Circuits
| | -- | -----------------------------------------

| | 6. | REL Labs  Standard Hybrid Amplifiers, Oscillators, and Networks
| | -- | ----------------------------------------------------------------



API has obtained the original designs of these companies to manufacture brand new spare parts for aircraft, military, medical and commercial systems that were built over
the past three decades and are still providing essential services.



API
continues to invest in engineering and research and development to become more active in the power control industries. Having already manufactured and delivered components for this industry, API is presently developing systems that use these
components. API is now listed on the U.S. Department of Defense Qualified Products List (QPL) and was awarded Laboratory Suitability Certification for Military Semiconductors. These U.S. Government Certifications allow API to produce and test
approved U.S. Military devices. API is still in the process of pursuing Qualified Manufacturers List (QML) certification, which should be completed in 2006. The QPL and QML consist of a supplier base that has successfully demonstrated their
products meet the specified performance, quality, and reliability levels via the U.S. Department of Defense (DoD) product qualification program. API will join the select suppliers meeting the exacting criteria (design, fabrication, assembly and test
processes) required to be QPL/QML listed.



API has instituted a cost-effective
sales and marketing program. Catalogs, brochures, line cards, and product lists are augmented by its website describing API and its capabilities. API seeks to improve its product sales in overseas markets through an increased emphasis on that part
of its domestic direct sales force and improved communication with overseas sales representatives and distributors.



Principal Markets in which API Competes



APIs customers are located primarily in the United States. The United States, United Kingdom and Canada are the markets in which API competes.



The geographical breakdown of revenue for API (where its customers are located) for the year
ended May 31, 2005 is as follows (000s):



|               |  |   |       |  |     |  
|-------------- |  | - | ----- |  | --- | -
|United States  |  | $ | 3,146 |  | 85  | %
|               |  |   |       |  |     |  
|Canada         |  |   | 132   |  | 3   | %
|United Kingdom |  |   | 435   |  | 12  | %
|               |  |   |       |  |     |  
|Total          |  | $ | 3,713 |  | 100 | %
|               |  |   |       |  |     |  



30



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New Products



APIs Islip Transformer Division has introduced a redesigned model of an Aircraft Radar Indication System using Liquid Crystal Display (LCD) technology. API has not
introduced any other significant new products or services in the year prior to the date of this Annual Report.



Seasonality



APIs revenues and business are not, in general, seasonal.



Raw Materials



Raw materials required by APIs business
consist primarily of silicon wafers. A broad market for silicon wafers exists worldwide, and the prices of silicon wafers have not historically been volatile.



Marketing Channels



APIs marketing channels consist primarily of the use of an in-house sales manager with a sales staff of two persons, and regional agents who act as independent contractors to API. API does not use any special
sales methods such as installment sales.



Dependence on Patents, Licenses,
Contracts and Processes



API is not dependent on patents, licenses,
industrial contracts, commercial contracts, financial contracts, or new manufacturing processes in such a manner that such dependence would be material to APIs business or profitability.



Material Effects of Government Regulations



Except as noted below, government regulations of the United States and the State of New York
related to environmental compliance, labor conditions, and government contracting are typical in APIs industry and do not have a material effect on the Companys business. During the fiscal year ended May 31, 2003, API received
certification that it is ISO 9001:2000. API believes it is also complaint under 9100:2001 but has not yet received certification. API has obtained certification under MIL-PRF-19500 (QML-19500) and is the process of obtaining MIL-PRF-38534
(QML-38534) certification. API is listed as a Qualified Source of Supply to the United States Defense Electronics Supply Centers (DESCs). The United States Department of Defense regulates certification and qualification
requirements of the DESCs, while ISO certifications are granted by independent organizations. ISO certifications are recognized on a worldwide basis.



Filtran Group of Companies - Operations, Activities and Products



The Company acquired 100% of the stock of the Filtran Group of companies as of May 31, 2002. The companies included in the group were Filtran, Inc., Canadian
Dataplex Ltd., Tactron Communications (Canada) Inc. and Filtran Limited. Canadian Dataplex Ltd., Factran Communications (Canada ) Inc. and Filtran Limited were amalgamated under the name Filtran Limited as of June 1, 2003.



31



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Filtran Limited was incorporated in 1969 to manufacture filters and transformers. Filters are frequency selective
networks, usually consisting of a combination of capacitors and inductors or transformers. Widely used in telegraphy and telex networks that worked on the principle of frequency division multiplexing, these analog techniques devices have been
superseded by digital transmission methods.



Approximately 26 years ago Filtran
Inc. established itself in the US, initially in eastern Florida but relocated in Ogdensburg, N.Y., which is a one-hour drive from Ottawa. Filtran Limited. located in Ottawa does the engineering, purchasing, and marketing and provides the overall
administration for Filtran Inc. as well as manufacturing of all products for Canadian and European customers. Filtran Inc. is strictly a manufacturing facility for US customers.



Manufacturers of telecommunications equipment, computers and computer peripherals, process control equipment, power supplies, test
equipment, medical devices and similar products use these products. The power rating of these specialty transformers ranges from microwatts in signal transformers to 2,000W - 3,000W for laminated power transformers. Filtran Group does not make the
larger transformers of the type used in power distribution networks to cities, businesses or private homes.



Many changes have been made to Filtran Groups product lines over the years. As linear power supplies have been superseded, in most instances, by switched mode designs, Filtran Group has developed a range of
ferrite based transformers and inductors for high frequency applications and all the commonly used topologies. Similarly, signal transformers have become smaller and the pulse rate for most digital telecommunications systems has increased
dramatically. Many newer products use a number of toroidal transformers or inductors in a miniature flat pack case. The Filtran Groups products facilitate the power supply in end products such as army field radios and various types of
telecommunications equipment.



Filtran was the first transformer manufacturer
in Canada to produce surface mount devices (SMDs). Millions of these are in use all over the world. Because of the coplanarity requirements of SMDs the company has invested in automatic equipment to solder these under a blanket of dry
nitrogen.



The main demand today for the Filtran Groups products comes
from military, aerospace, telecom, audio, video, voice / data, and transportation oems. Filtran produces a wide variety of magnetic components over 85% of which are custom designed (build to print) for specific customer applications. Filtran
has invested heavily in upgrading its engineering, quality control/test and manufacturing processes to support these markets and is now poised to grow significantly in the coming years.



Filtran Limited and Filtran Inc. have always been custom manufacturers, both building the product to the customers print or designing
and then building to its specifications. The products include transformers of all kinds from small signal types to large laminated units weighing 50 lb. or more.



About 4 years ago, as part of its long-term growth plan, Filtran Limited acquired a local company called Canadian Dataplex Ltd., which
company was established 26 years ago. Canadian Dataplex Ltd. had engineering skills in the design and manufacturing of custom power supplies, which have now been integrated into the Filtran Group.



Filtran Group is ISO 9001-2000 certified, which enables it to design, manufacture and sell
electronic components with the ISO 9001-2000 designation. This certification recognizes the product under one of the highest measure of quality standards for electronic components. This certification is an international measure and applies to
products world-wide.



32



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Filtran Group builds a wide variety of inductors (chokes) from small signal units up to heavy laminated devices. Filtran
also designs and manufactures filters for use by others. Some of these operate at frequencies into the GHz region while others block the ripple from diesel generators delivering several hundred amps at frequencies of a few hundred Hz. Most filters
are passive; i.e. they are formed by arrays of inductors and capacitors.



Principal Markets in which the Filtran Group Competes



Filtrans customers are located primarily in the US, the United Kingdom and Canada; however, it sells a limited amount of products to customers in a number of other countries.



The geographical breakdown of revenues for the Filtran Group for the year ended May 31,
2005 is as follows (000s):



|               |  |   |       |  |     |  
|-------------- |  | - | ----- |  | --- | -
|United States  |  | $ | 3,661 |  | 61  | %
|Canada         |  |   | 704   |  | 12  | %
|United Kingdom |  |   | 1,225 |  | 20  | %
|South America  |  |   | 168   |  | 3   | %
|All Other      |  |   | 262   |  | 4   | %
|               |  |  
|Total          |  | $ | 6,012 |  | 100 | %
|               |  |   |       |  |     |  



There are three major markets for
Filtrans products  military and defense, telecommunications companies and high-end equipment manufacturers.



The breakdown of revenues for the Filtran Group for the year ended May 31, 2005 by industry of end users is as follows (000s):



|                                 |  |   |       |  |     |  
|-------------------------------- |  | - | ----- |  | --- | -
|High-end Equipment Manufacturers |  | $ | 1,202 |  | 20  | %
|Telecommunications Companies     |  |   | 1,023 |  | 17  | %
|Military and Defense             |  |   | 3,787 |  | 63  | %
|                                 |  |  
|Total                            |  | $ | 6,012 |  | 100 | %
|                                 |  |   |       |  |     |  



1. Telecommunications Companies



All Canadian and US telecommunications equipment manufacturers are
potential customers for the Filtran Group companies. Filtran also does business with telecommunications companies in Europe and Asia. In the past years, the high labor costs in Canada and the US excluded the Filtran Group from the high volume
product sales. Since 2003, the Filtran Group has established the relationships to outsource the manufacturing of certain products to companies in Asia, particularly China, labor costs are no longer a barrier for Filtran Group to compete for these
orders.



2. High End Equipment Manufacturers



Filtrans target customers for non-telecommunications products are high-end equipment
manufacturers. There are an enormous variety of these high-end product equipment manufacturers in every major city in Canada and the US, which constitutes a large untapped market for Filtran Group who has always built products to Best
Commercial Standards.



33



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3. Military and Defense



The Filtran Group has aggressively pursued growth opportunities in the Military and Aerospace industry since 2002. In an effort to support these strategies, Filtran
has invested in training, enhanced engineering and manufacturing process controls, added resources in the Quality Department and successfully obtained their ISO 9001:2000 certification at the Ogdensburg, NY manufacturing facility (Filtran Limited in
Ottawa, Ontario has been ISO certified since 1999). To further support the Military and Aerospace industries, Filtran successfully applied for a Controlled Goods Certificate in the spring of 2005 from the Canadian Government, enabling Filtran to
produce goods that carry a level of security. These investments and achievements have resulted in efficient, quality products that meet the high standards of the Military and Aerospace industry.



4. Major Customers



|                                                 |  |            
|------------------------------------------------ |  | -----------
|Harris Corporation, R.F. Communications Division |  | US         
|TT EMS                                           |  | US & UK    
|ADC Telecommunications                           |  | US         
|Star Headlight                                   |  | US         
|Alstom Signalling                                |  | US & Brazil
|Electronics 2000                                 |  | UK & Europe
|General Dynamics                                 |  | UK & Canada
|Sterne Medical                                   |  | Canada     
|Wescan                                           |  | Canada     
|Ross Video                                       |  | Canada     



The volume of business provided to the
Filtran Group by these customers equals about 80% of total sales. No single customer represents more than 40% of total sales



New Products



Due to the custom and proprietary nature of Filtran Groups products, Filtran Group has not introduced any significant new products or services in the year prior to the date of the Annual Report, however, in
fiscal year 2005, Filtran Group has designed, developed and produced over 150 new parts for both new and existing customers.



Seasonality



The revenues and business of the Filtran Group are not, in general, seasonal.



Raw Materials



The primary raw materials required by Filtran Groups business consist of cores, bobbins, wire, lamination, tapes (polyamide, polyfilm,
masking, copper, glasscloth, antistatic), epoxy, solder tips, varnish, metal plates, PVC insulation, diodes, and circuit boards. Filtran Groups purchasing policies require the companies to find alternate sources for materials; however, some
materials have a single source supplier due to customer specifications or unique construction requirements. Most of Filtran Groups raw material suppliers are located in the US. These materials are readily available. The lead time for ordering
manufactured materials has decreased to 4 to 6 weeks from up to 24 months during the technology boom. The prices for these materials are relatively stable.



34



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Marketing Channels



Filtrans principal markets are the US, United Kingdom and Canada. Filtran also sells products in a large number (over 30) of European and Asian countries. Filtran
primarily sells directly to customers but also uses independent sales representatives and distributors and uses its website as a sales channel. Filtran has introduced a performance based compensation system for its direct sales force and independent
representatives focusing on increasing sales and market share to targeted accounts. Filtran has two internal sales representatives. Filtran does not use any special sales methods such as installment sales.



Dependence on Patents, Licenses, Contracts and Processes



Filtran Group is not dependent on patents, licenses, industrial contracts, commercial
contracts financial contracts, or new manufacturing processes in such a manner that such dependence would be material to Filtran Groups business or profitability.



Material Effects of Government Regulations



Government regulations of the US, the State of New York, the Province of Ontario and Canada related to environmental compliance and labor conditions are typical in
Filtran Groups industry and do not have a material effect on Filtran Groups business.



TM Systems - Operations, Activities and Products



TM Systems manufactures highly engineered products and systems for defense and aerospace applications. The Companys advanced electronic, electromechanical systems and engineered materials are mission-critical,
standard equipment on a wide range of military platforms. TM Systems provides equipment and services that are purchased by military contractors for use by many countries, military forces and governments.



TM Systems supplies the defense sector with naval aircraft landing and launching equipment
 including Visual Landing Aids (VLA) and the Stabilized Glide Slope Indicator (SGSI)  flight control and signaling systems, radar systems alteration, data communication and test equipment as well as aircraft ground support equipment.



New Products



TM Systems has not introduced any significant new products or services in the year prior to
the date of this Annual Report.



Principal Markets in which TM Systems
Competes



TM Systems principal market is the military/defense
industry. TM Systems acts as a Prime Contractor or Subcontractor to this market and realizes 100% of its sales revenue from this market. Its customers are all US companies, most of which have foreign subsidiaries and divisions. TM Systems sells
products to these companies and their foreign subsidiaries and divisions for use in products sold to many countries.



TMs customers are located primarily in the US.



35



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The geographical breakdown of revenues for TM Systems (where the customers are located) for the year ended May 31,
2005 is as follows (000s):



|              |  |   |       |  |     |  
|------------- |  | - | ----- |  | --- | -
|United States |  | $ | 2,823 |  | 100 | %
|              |  |   |       |  |     |  



Seasonality



TM Systems revenues and business are not, in general, seasonal.



Raw Materials



TM Systems purchases most of its raw materials on a purchase order basis from a number of vendors. Although TM Systems tries to have
alternative supply sources for all necessary materials, some materials and services have a single source supplier. If any subcontractors or vendors are unable to provide these materials in the future, the relationships with TM Systems
customers could be seriously affected and its revenues, financial condition and cash flows could be severely damaged. Although TM Systems seeks to reduce its dependence on sole and limited source suppliers both for services and for materials,
disruption or financial, operational, production or quality assurance difficulties at any of these sources could occur and cause delivery problems.



Market Channels



TM Systems marketing channels consist primarily of the use of an in-house sales manager with a one-person sales staff, and regional agents who act as independent contractors to TM Systems. TM Systems does not
use any special sales methods such as installment sales.



Dependence on
Patents Licenses, Contracts and Processes



TM Systems is not dependent on
patents, licenses, industrial contracts, commercial contracts, financial contracts, or new manufacturing processes in such a manner that such dependence would be material to the companys business or profitability.



Material Effects of Government Regulations



Except as noted below, government regulations of the US and the State of New York related to
environmental compliance, labor conditions, and government contracting are typical in TM Systems industry and do not have a material effect on the companys business. While TM Systems complies with many of the ISO requirements, it is not
ISO-9002 certified.



TM Systems sells its products to the military/defense
industry, which is subject to the business risks of changes in governmental appropriations (Department of Defense) and changes in national defense policies and priorities. All of TM Systems contracts with prime US Government contractors
contain customary provisions permitting termination at any time, at the convenience of the US Government or the prime contractors upon payment to the company for costs incurred plus a reasonable profit. If the company experiences significant
reductions or delays in procurements of its products by the US Government, or terminations of government contracts or subcontracts, its operating results could be materially and adversely affected. Certain contracts are also subject to price
renegotiation in accordance with US Government sole source procurement provisions.



US and international military program sales, follow-on procurement, contract continuance, and future program awards, upgrades and spares support are subject to: US and international military budget



36



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constraints and determinations; US congressional and international legislative body discretion; US and international government administration policies and
priorities; changing world military threats, strategies and missions; competition from foreign manufacturers of platforms and equipment; NATO country determinations regarding participation in common programs; changes in US and international
government procurement timing, strategies and practices; and the general state of world military readiness and deployment.



Revenue Breakdown



Set forth below is a breakdown of the Companys revenues by business and by geographical market (where the customer is located) for the fiscal years ended May 31, 2005, May 31, 2004 and
May 31, 2003.



For the fiscal years ended May 31,
2005, May 31, 2004 and May 31, 2003



Revenues by Category of
Activity:



|                           |  |      |            |      |   |            |  |   |          
|-------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------
|                           |  | 2005 |            | 2004 |   | 2003(1)   
|APIs Activities           |  | $    | 3,713,000  |      | $ | 2,375,000  |  | $ | 2,688,000
|Filtran Groups Activities |  | $    | 6,012,000  |      | $ | 5,760,000  |  | $ | 4,648,000
|TM Systems Activities      |  | $    | 2,822      |      | $ | 3,143,000  |  | $ | 918,000  
|                           |  |      |            |      |   |            |  |   |          
|Total Revenues             |  | $    | 12,547,000 |      | $ | 11,278,000 |  | $ | 8,254,000
|                           |  |      |            |      |   |            |  |   |          



Revenues by Geographic Market:



|               |  |   |            |  |   |            |  |   |          
|-------------- |  | - | ---------- |  | - | ---------- |  | - | ---------
|United States  |  | $ | 9,629,000  |  | $ | 8,934,000  |  | $ | 4,699,000
|Canada         |  | $ | 836,000    |  | $ | 944,000    |  | $ | 3,555,000
|United Kingdom |  | $ | 1,659,000  |  | $ | 1,058,000  |  | $ | 0        
|South America  |  | $ | 160,000    |  | $ | 201,000    |  | $ | 0        
|All Other      |  | $ | 263,000    |  | $ | 141,000    |  | $ | 0        
|               |  |   |            |  |   |            |  |   |          
|Total Revenues |  | $ | 12,547,000 |  | $ | 11,278,000 |  | $ | 8,254,000
|               |  |   |            |  |   |            |  |   |          

---

|(1) | Does not include the TM Systems for the entire fiscal year because that entity acquired the assets of TM Systems, Inc. as of February 6, 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------



C. ORGANIZATIONAL STRUCTURE



The Company, with its subsidiaries as described below, is a part of a group. The corporate
office of API Electronics Group Inc., a corporation incorporated under the laws of the province of Ontario, is located at 505 University Avenue, Suite 1400, Ontario, Canada M5G 1X3. The Company holds 100% of the ownership interest and voting power
of API Electronics, Inc., a Delaware corporation located in Hauppague, New York. API Electronics, Inc. has facilities located at 375 Rabro Drive, Hauppague, New York 11788.



The corporate office of Filtran Inc., a company incorporated under the laws of the State of New York, is located at 102 Ford Street, Bldg.
5A, Ogdensburg, NY 13669. The corporate office of Filtran Ltd., a company incorporated under the laws of Ontario, is located at 229 Colonnade Road, Nepean, Ontario K2E 7K3. Canadian Dataplex Limited, Tactron Communications (Canada) Limited and
Filtran Limited were amalgamated under the name Filtran Limited, under the Business Corporations Act of Ontario as of June 1, 2003. The Canadian Dataplex operations of designing and manufacturing power supplies are now



37



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conducted under the Filtran Limited, corporate name and building. On June 27, 2003 Filtran sold the building at 155 Terrence Matthews Crescent, Unit 5.
Canadian Dataplex previously used the building for the design and manufacturing of power supplies.



TM Systems, a Delaware corporation, has facilities located at 830 Willis Avenue, Albertson, New York 11507, and 345 Railroad Avenue, Bridgeport, Connecticut 06604. The Company holds 100% of the ownership interest and
voting power of TM Systems.



D. PROPERTY, PLANTS, AND EQUIPMENT



The Company has four manufacturing facilities. The following is the
Companys utilization capacity at each plant as at May 31, 2005:



|                      |  |                 |  |    |  
|--------------------- |  | --------------- |  | -- | -
|API Electronics, Inc. |  | Hauppauge, NY   |  | 80 | %
|Filtran Limited       |  | Nepean, Ontario |  | 79 | %
|Filtran Inc.          |  | Ogdensburg, NY  |  | 66 | %
|TM Systems            |  | Bridgeport, CT  |  | 90 | %



The executive offices of the Company
are located in leased facilities at 505 University Avenue, Suite 1400, Toronto, Ontario, Canada M5G 1X3. The Companys wholly-owned subsidiary, API Electronics, Inc., owns outright, without any major encumbrances, a 15,000 square foot
manufacturing facility in Hauppauge, New York. The productive capacity of this manufacturing facility is sufficient to meet its present needs and its needs in the foreseeable future. All of APIs products are produced at this manufacturing
facility, which is located at 375 Rabro Drive, Hauppauge, New York 11788. To the Companys knowledge, except as generally described in Item 3D of this Annual Report above, there are no environmental issues that may affect the Companys
utilization of the assets located at this manufacturing facility.



The
executive offices for Filtran Limited are located at 229 Colonnade Road, Nepean, Ontario K2E 7K3. Filtran Limited owns the facility and there are no outstanding mortgages on the property. The facility is approximately 16,000 square feet and it is
used to manufacture electronic components comprised primarily of: transformers, filters, inductors and power supplies. Filtran Limited received a Certificate of Approval (Air) from the Ministry of the Environment for atmospheric emissions sources at
its facility at 229 Colonnade Road. To the Companys knowledge, except as generally described above, there are no environmental issues that may affect the Companys utilization of the assets located at this manufacturing facility. The
Company believes that the capacity of this manufacturing facility is sufficient to meet the present needs of Filtran Limited and its needs in the foreseeable future.



The executive office for Filtran Inc. is located at 102 Ford Street, Bldg 5A, Ogdensburg, NY 13669. Filtran Inc. has a lease to own
agreement with the City of Ogdensburg for the facility. Filtran Inc. has financed the purchase of this facility. As of May 31, 2005, the outstanding principal balance on the note evidencing such financing was $33,005. The loan is
secured by a mortgage on the property. The facility is approximately 16,500 square feet and it is used to manufacture electronic components comprised primarily of: transformers, filters and inductors. There are no environmental issues at Filtran
Inc. that management is aware of and Filtran Inc. believes it complies with existing environmental regulations and meets existing environmental standards. The Company believes that the capacity of this manufacturing facility is sufficient to meet
the present needs of Filtran Inc. and its needs in the foreseeable future.



TM
Systems, Inc. has leased facilities located at 345 Railroad Avenue, Bridgeport, Connecticut 06604. The plant in Bridgeport is approximately 2,500 square feet and is used primarily for the manufacture of glide slope indicators and stabilized platform
systems. The annual rent for this facility is $27,600. There are no environmental issues at TM Systems facilities that management is aware of. The Company believes that these plants are sufficient to meet the present needs of TM Systems and
the needs of TM Systems for the foreseeable future.



38



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During the fiscal year ended May 31, 2003, API upgraded its manufacturing facility in Hauppauge, New York, and has
invested more than $400,000 in its building and equipment. As of the date of this Annual Report, the Company does not have any other material plans to construct, expand, or improve its facilities or the facilities of its subsidiaries.



ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS (IN US$)



A. OPERATING RESULTS



Acquisition of API Electronics, Inc.



Effective on August 31, 2001, the Company completed its acquisition of API, a Delaware corporation, which then became a wholly-owned subsidiary of the Company. This
transaction constituted a reverse take-over of the Company by API, the deemed acquiring company. At the time of the reverse take-over until the acquisition of the Filtran Group, the primary business of the Company became the manufacture and supply
of semiconductors and microelectronic circuits for military, aerospace and commercial applications.



API is deemed to be the acquiror for Cdn. GAAP. For US GAAP, API is also deemed to be the acquirer. Accordingly, comparative figures for the fiscal years ended May 31, 2001 for Cdn. GAAP and US GAAP
included in the Companys selected financial data are those of API and are derived from the financial statements of API which have been audited by Perry Colletti, CPA. API has been in operations for approximately 27 years.



Acquisition of the Filtran Group



Effective May 31, 2002, the Company acquired the Filtran Group of companies, consisting
of Filtran, Inc., Filtran Ltd., Canadian Dataplex Limited and Tactron Communications (Canada) Limited, the holding company for Filtran Limited. Canadian Dataplex, Tactron Communications (Canada) Inc. and Filtran Limited were amalgamated under the
name Filtran Limited as of June 1, 2003. The Filtran Group of companies are suppliers of electronic components (primarily inductors, transformers and filters) for customers in the communications, computer, instrumentation and process control
industries, with manufacturing facilities in the United States and Canada.



The
notes to the consolidated financial statements included in Part III, Item 17 of this Annual Report describes the Filtran Acquisition of the outstanding shares of Filtran Limited, Filtran Ltd., Canadian Dataplex Limited and Tactron
Communications (Canada) Limited as of May 31, 2002. For Cdn. GAAP and US GAAP, the Filtran Group acquisition has been accounted for using the purchase method.



Acquisition of Assets of TM Systems, Inc.



Effective February 6, 2003, the Company through its wholly-owned subsidiary, TM Systems, acquired the assets of TM Systems, Inc., a manufacturer of naval landing
and launching equipment, flight control and signaling systems, radar systems alteration, data communication and test equipment, and aircraft ground control equipment for military use. As part of the asset purchase, TM Systems assumed the leases for
two facilities operated by TM Systems, Inc., one located in Albertson, New York and the other in Bridgeport, Connecticut.



39



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The notes to the consolidated financial statements included in Part III, Item 17 of this Annual Report describes the
TM Systems Acquisition of the assets of TM Systems, Inc., as of February 6, 2003. For Cdn. GAAP and US GAAP, the TM Systems acquisition has been accounted using the purchase method.



Closure of US Operations of IL Data Canada, Inc.



Prior to April 30, 2001, the Company ceased operations of the InvestorLinks.com
website. During the three-month period ending July 31, 2001, the Company closed down the US operations of that business, terminated the employment of all US employees, and transferred the Companys US assets to Canada. The assets of the
website, which constituted the Companys prior business, were disposed of during the fiscal year ended May 31, 2002.



Results of Operations



Overview



The Company is a North
American based company focused on the manufacture of specialized electronic components and microelectronic circuits. The corporate office of the Company is located in Toronto, Canada. Overviews of its subsidiaries are discussed below:



| |  |  | API of Hauppauge, New York is a designer and manufacturer of power transistors, small signal transistors, tuning diodes, hybrid circuits, resistor/capacitor networks, diodes, and
other critical elements with precisely defined functional capabilities for advanced military, industrial, commercial, automotive and medical applications. The company is a supplier of defense electronic components to the U.S. Department of Defense
and its subcontractors as well as having a strong commercial user base. In March 2004, API purchased certain assets of Islip Transformer & Metal Co. Inc. (Islip), a private company that supplies critical systems and components
to the U.S. Department of Defense. The acquisition further augments APIs in-demand components and systems for both government and corporate clients.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Filtran Inc. of Ogdensburg, New York and Filtran Limited of Nepean, Ontario, Canada (Filtran Group). Filtran Group is a global supplier of superior quality electronic
components to major producers of communications equipment, military hardware, computer peripherals, process control equipment and instrumentation. In business since 1969, Filtran Group is ISO 9001 registered and offers off-the-shelf and custom
designed products and regularly ships components to clients in more than 32 countries. The Company acquired Filtran Group in May 2002. The acquisition broadened APIs product offerings for current and potential customers as well as providing
synergies in the areas of engineering and technological capabilities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | TM Systems II of Albertson, New York (TM II). In business for over 30 years, TM II supplies the defence sector with naval landing and launching equipment, flight control
and signalling systems, radar systems alteration, data communication and test equipment as well as aircraft ground support equipment. The Company acquired TM II in February 2003 thereby expanding APIs core-military and defence-related
electronics business. TM II maintains a manufacturing facility in Bridgeport, Connecticut.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys business strategy for the past several years has been to strengthen its leadership position for its components through continued emphasis on technological advances, operational efficiencies, cost
reductions, competitiveness and acquisitions. The Companys objectives are to seek long-term stable growth for all of its operating segments (API, Filtran Group, and TM Systems) through continuous capital investment, employing todays
production methods and technologies, and by demanding uncompromising quality control.



40



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The following discussion of the results of operations of the Company is a comparison of the Companys two fiscal
year periods ended May 31, 2005 and 2004.



Sales Revenue



|                    |  |      |            |      |   |            |  |       |  
|------------------- |  | ---- | ---------- | ---- | - | ---------- |  | ----- | -
|Sales by Subsidiary |  | 2005 |            | 2004 |   | % Change   | 
|API                 |  | $    | 3,712,734  |      | $ | 2,375,239  |  | +56.3 | %
|Filtran Group       |  | $    | 6,012,306  |      | $ | 5,759,835  |  | +4.4  | %
|TM Systems          |  | $    | 2,822,511  |      | $ | 3,143,113  |  | -10.2 | %
|                    |  |      |            |      |   |            |  |       |  
|                    |  | $    | 12,547,551 |      | $ | 11,278,187 |  | +11.3 | %
|                    |  |      |            |      |   |            |  |       |  



The Company recorded strong sales
growth in 2005 as total sales revenue increased by 11.3% over 2004.



API
Electronics sales revenues increased by an impressive 56.3% in 2005 and this was attributed primarily to the Islip acquisition in March, 2004 adding significantly to 2005 sales revenue. Islip product sales revenue in 2005 was $879,771 compared to
$66,625 for fiscal 2004.



Filtran Group saw sales revenue increase by 4.4% in
2005. The increase was attributed to increased demand for their filter and power supply products in the Military Defence sector.



TM II recorded sales revenue levels in 2005 that were 10.2% less than 2004. The decrease was attributed primarily to the timing of TM IIs sales as demand and orders
for TM IIs products continues to be strong.



The Companys
electronic products are sold through operations in Canada and the US to several countries around the world.



|                         |  |              |            |                                                    |   |            |  |                                                    |            |  |   |           
|------------------------ |  | ------------ | ---------- | -------------------------------------------------- | - | ---------- |  | -------------------------------------------------- | ---------- |  | - | ----------
|Geographical Information |  | May 31, 2005 |            | May 31, 2004                                      
|                         |  | Revenue      |            | Capital Assets,Intangible Assets,Goodwill andOther |   | Revenue    |  | Capital Assets,Intangible Assets,Goodwill andOther
|United States            |  | $            | 9,629,218  |                                                    | $ | 6,572,759  |  | $                                                  | 8,933,612  |  | $ | 6,480,097 
|Canada                   |  |              | 836,335    |                                                    |   | 6,073,569  |  |                                                    | 944,039    |  |   | 4,697,087 
|United Kingdom           |  |              | 1,659,463  |                                                    |   |           |  |                                                    | 1,057,691  |  |   |          
|South America            |  |              | 159,936    |                                                    |   |           |  |                                                    | 201,465    |  |   |          
|All Other                |  |              | 262,599    |                                                    |   |           |  |                                                    | 141,380    |  |   |          
|                         |  |              |            |                                                    |   |            |  |                                                    |            |  |   |           
|                         |  | $            | 12,547,551 |                                                    | $ | 12,646,328 |  | $                                                  | 11,278,187 |  | $ | 11,177,184
|                         |  |              |            |                                                    |   |            |  |                                                    |            |  |   |           



The Company saw United States sales
increase by 7.8% from $8,933,612 in 2004 to $9,629,218 in 2005, Canadian sales decreased by 11.4% from $944,039 in 2004 to $836,335 in 2005, and UK sales increased by 56.9% from $1,057,691 in 2004 to $1,659,463 in 2005. Sales to South America
decreased by 20.6% from $201,465 in 2004 to $159,936 in 2005 and sales to other countries increased by 85.7% from $141,380 in 2004 to $262,599 in 2005.



41



---

The US Department of Defence and its Subcontractors accounts for a significant amount of the Companys sales revenue
as follows:



|                                          |  |      |   |  |      |  
|----------------------------------------- |  | ---- | - |  | ---- | -
|                                          |  | 2005 |   |  | 2004 |  
|Revenue                                   |  |      |   |  |      |  
|U.S. Department of Defence                |  | 12   | % |  | 17   | %
|U.S. Department of Defence subcontractors |  | 39   | % |  | 40   | %



Cost of Goods Sold and Gross Margin



|                                |  |      |   |  |      |   |  |             |  
|------------------------------- |  | ---- | - |  | ---- | - |  | ----------- | -
|Gross Margin by Segment Company |  | 2005 |   |  | 2004 |   |  | %age Change |  
|API Electronics                 |  | 32.8 | % |  | 16.6 | % |  | +16.2       | %
|                                |  |      |  
|Filtran Group                   |  | 23.6 | % |  | 19.3 | % |  | +4.3        | %
|                                |  |      |  
|TM II                           |  | 34.5 | % |  | 34.9 | % |  | -0.4        | %
|                                |  |      |   |  |      |   |  |             |  
|Overall                         |  | 27.1 | % |  | 23.1 | % |  | +4.0        | %
|                                |  |      |   |  |      |   |  |             |  



The Companys overall gross
margin was 27.1% of sales in 2005, which represents a substantial increase from the 23.1% gross margin posted in 2004. Accordingly, the overall cost of sales was 72.9% in 2005 compared to 76.9% in 2004.



API Electronics posted a gross margin improvement by 16.2% in 2005 to the 32.8% level. This
increase is attributed to substantially higher sales revenues, improved manufacturing efficiencies, and more profitable sales mix in 2005 including products related to the Islip acquisition.



Filtran Group saw their gross margin increase to 23.6% in 2005 from the 19.3% margin posted
in 2004. The increase was attributed to a more profitable sales mix and improved manufacturing efficiencies.



TM IIs gross margin saw a slight decrease of 0.4% to 34.5% in 2005.



The major components of Cost of Sales are as follows:



|                       |  |      |           |               |      |   |      |   |               |  |      |  
|---------------------- |  | ---- | --------- | ------------- | ---- | - | ---- | - | ------------- |  | ---- | -
|                       |  | 2005 |           | %age of sales |      |   | 2004 |   | %age of sales | 
|Materials Used         |  | $    | 3,499,033 |               | 30.1 | % |      | $ | 3,766,825     |  | 33.4 | %
|                       |  |      |           |              
|Manufacturing Labour   |  | $    | 2,377,026 |               | 19.0 | % |      | $ | 2,283,916     |  | 20.3 | %
|                       |  |      |           |              
|Manufacturing Overhead |  | $    | 2,927,716 |               | 23.3 | % |      | $ | 2,390,769     |  | 21.2 | %



As a percentage of sales, each of the
2005 Manufacturing Labour and 2005 Manufacturing Overhead were reasonably in line with their comparative percentage of sales in 2004. The 2005 Materials Used percentage improved significantly over 2004 as a result of efficiencies and quality control
in the manufacturing process.



Selling Expenses



Selling expenses increased to $1,124,522 for the year ended May 31, 2005 from $843,308
for the year ended May 31, 2004. As a percentage of sales the 2005 selling expenses came in at 8.9%, which represents an increase of 1.4% over selling expenses of 7.5% posted in 2004.



42



---

The major components of Selling Expenses are as follows:



|              |  |      |         |               |     |   |      |   |               |  |     |  
|------------- |  | ---- | ------- | ------------- | --- | - | ---- | - | ------------- |  | --- | -
|              |  | 2005 |         | %age of sales |     |   | 2004 |   | %age of sales | 
|Payroll Sales |  | $    | 467,238 |               | 3.7 | % |      | $ | 401,058       |  | 3.6 | %
|Commissions   |  | $    | 351,586 |               | 2.8 | % |      | $ | 99,921        |  | 0.9 | %



The overall increase in Selling
Expenses was attributed to higher sales revenue in 2005. As a percentage of sales, the 2005 Payroll Sales was reasonably in line with their comparative percentage of sales in 2004. Commissions expense increased in 2005 as a result of recent
acquisitions (TM Systems and Islip) whereby commissions were payable at specific percentages on certain sales orders.



Business Development



Business development expense decreased to $43,131 in 2005 from $71,088 in 2004. In the first few years as a public company, large expenditures on investor relations were considered critical to gain shareholder and
investor awareness of the Company. While this continues to be important, expenditures in this area were scaled back in 2005.



Stock-Based Compensation



Effective June 1, 2004, the Company adopted the revised CICA Handbook Section 3870, Stock-Based Compensation and Other Stock-based Payments which
requires the application of a fair value method of accounting to all stock-based compensation payments to employees. The stock-based compensation expense represents the fair value of stock options granted and vested during the period. Prior to
June 1, 2004, the Company had been using the settlement based method of accounting for stock options and disclosed the pro-forma costs only with no expense recorded. Accordingly, an adjustment to retained earnings was made on June 1, 2004
in the amount of $1,876,956. This adjustment represents the total compensation expense which would have been recorded had the fair value method been used for stock options granted and warrants modified after June 1, 2002. During the year the
Company modified existing stock options and issued new stock options and recognized a compensation expense during 2005 of $920,500 (2004 - $10,000) as now required by Canadian generally accepted accounting principles.



General and Administrative Expenses



General and administrative expenses decreased to $1,972,134 for 2005 from $2,106,206
incurred during 2004. As a percentage of sales, the 2005 general and administration expenses were 15.7% and this was an improvement over the 18.7% posted in 2004.



The major components of General and Administrative Expenses are as follows:



|                         |  |      |         |      |   |          |  |   |         |  
|------------------------ |  | ---- | ------- | ---- | - | -------- |  | - | ------- | -
|                         |  | 2005 |         | 2004 |   | $ Change | 
|Officer Salaries         |  | $    | 225,950 |      | $ | 303,453  |  | $ | (77,503 | )
|Rent and Management Fees |  | $    | 183,364 |      | $ | 178,228  |  | $ | 5,136   |  
|Professional Services    |  | $    | 206,361 |      | $ | 286,855  |  | $ | (80,494 | )
|Office Salaries          |  | $    | 225,950 |      | $ | 209,271  |  | $ | 16,679  |  



Officer salaries expense decreased to
$225,950 in 2005 from $303,453 in 2004. This was attributed primarily to the retirement of an individual at Filtran Group in 2005.



Rent and management fees increased slightly to $183,364 in 2005 from $178,228 in 2004  an increase of 3%.



43



---

Professional services include legal, accounting, audit and taxation services. The 2005 expense was $206,361 which was a
slight improvement from the 2004 expense amount of $286,855. The decrease was attributed to a large settlement of old legal fees in the amount of $34,392 in 2004 and in general a more concerted effort to perform more services in-house in 2005.



Office salaries increased to $225,950 in 2005 from $209,271 in 2004 - an
increase of 8%.



Operating Income (Loss)



The Company posted operating income (loss) for the year ended May 31, 2005 of
($654,889) a decline over the operating income (loss) of ($421,622) for the year ended May 31, 2004. The decline is attributed to the non-cash compensation charge in the amount of $920,500 in 2005 (2004 - $10,000) and the increase in
selling expenses discussed above.



Amortization



Amortization decreased to $764,933 during the year ended May 31, 2005 from the $803,807
amount for the year ended May 31, 2004. The 5% decrease is attributed to certain assets becoming fully amortized during the period.



Other Income and Expense



Other income during the quarter was an expense amount of $25,616 for the year ended May 31, 2005 compared to other income of $117,956 for the year ended May 31,
2004. The major components in 2005 were investment income in the amount of $21,079, a loss on foreign currency translation of $46,304, and a loss on sale of marketable securities of $391.



The major components in 2004 were the gain on settlement of debt in the amount of $39,000, the gain on sale of marketable securities of
$45,795, and investment income in the amount of $40,941, loss on foreign currency translation of $5,323 and miscellaneous expense of $2,457.



Other expense relates to interest on long-term debt and the Company saw a decrease from $85,063 in 2004 to $28,049 in 2005. The decrease was attributed to lower debt
levels in 2005.



Income Taxes



The provision for income taxes was a recovery of $104,160 in 2005 compared to a recovery of
$46,335 in 2004. The effective tax rate for 2005 was 34.2% (2004  35.63%). The Company and its subsidiaries have non capital losses of approximately $1,354,000 to apply against future taxable income. The losses will expire as follows: $94,000
in 2009, $796,000 in 2010, $272,000 in 2011, and $192,000 in 2012.



Net Loss



The Company incurred a net loss for the year ended May 31, 2005 of
$604,394($0.24/share) compared to a net loss of $342,394($0.15/share) for year ended May 31, 2004.



44



---

Quarterly Financial Information



Two-Year Summary by Quarter (Unaudited)



|                                             |  |                         |           |   |    |   |           |    |  |    |           |  |   |           |  
|-------------------------------------------- |  | ----------------------- | --------- | - | -- | - | --------- | -- |  | -- | --------- |  | - | --------- | -
|                                             |  | Year ended May 31, 2005 |          
|                                             |  | Q4                      |           |   | Q3 |   |           | Q2 |  | Q1 |          
|Sales Revenue                                |  | $                       | 3,506,945 |   |    | $ | 3,080,705 |    |  | $  | 3,107,634 |  | $ | 2,852,267 |  
|                                             |  |                         |           |  
|Net Income (Loss)*                           |  | $                       | (97,414   | ) |    | $ | (542,938  | )  |  | $  | 161,958   |  | $ | (126,000  | )
|                                             |  |                         |           |  
|Earnings (Loss), basic and diluted per share |  | $                       | (0.04     | ) |    | $ | (0.22     | )  |  | $  | 0.07      |  | $ | (0.05     | )
|                                             |  |                         |           |  
|*Includes Stock-based Compensation expense   |  | $                       | 2,500     |   |    | $ | 918,000   |    |  | $  |          |  | $ |          |  
|                                             | 
|                                             |  | Year ended May 31, 2004 |          
|                                             |  | Q4                      |           |   | Q3 |   |           | Q2 |  | Q1 |          
|Sales Revenue                                |  | $                       | 3,095,820 |   |    | $ | 2,861,572 |    |  | $  | 2,886,715 |  | $ | 2,434,080 |  
|                                             |  |                         |           |  
|Net Income (Loss)*                           |  | $                       | (235,622  | ) |    | $ | (12,446   | )  |  | $  | 26,703    |  | $ | (121,029  | )
|                                             |  |                         |           |  
|Earnings (Loss), basic and diluted per share |  | $                       | (0.10     | ) |    | $ | (0.01     | )  |  | $  | 0.01      |  | $ | (0.05     | )
|                                             |  |                         |           |  
|*Includes Stock-based Compensation expense   |  | $                       | 10,000    |   |    | $ |          |    |  | $  |          |  | $ |          |  



On July 19, 2004 the Company
announced that the directors had approved a ten for one reverse split of the Companys common shares. All share and per share figures prior to that date have been presented to reflect this change for comparative purposes.



During fiscal 2005, the Company continued to see quarterly year-over-year revenue growth. The
majority of the growth came from the acquisition of Islip and some organic growth in Filtran Group and API Electronics. The 2005 sales revenue experienced growth from quarter to quarter with a slight pause in Q3, and then on to record quarterly
sales revenue in Q4.



The Companys revenues are not, in general,
seasonal.



Liquidity and Capital Resources



Liquidity



At May 31, 2005, the Company had cash reserves of $1,513,130 compared to $634,058 as at May 31, 2004. In addition, the Company had
marketable securities of $329,855 at May 31, 2005 (May 31, 2004 - $2,144).



The following table identifies the Contractual Obligations of the Company as at May 31, 2005.



|                              |  |       |         |                 |   |              |  |           |        |              |   |       |  |   |  
|----------------------------- |  | ----- | ------- | --------------- | - | ------------ |  | --------- | ------ | ------------ | - | ----- |  | - | -
|                              |  | Total |         | Less Than 1year |   | 1 to 3 years |  | 4-5 years |        | After 5Years
|Capital Lease Obligations     |  | $     | 87,026  |                 | $ | 45,514       |  | $         | 39,484 |              | $ | 2,028 |  | $ | 
|                              |  |       |         |                 |  
|Mortgages Payable             |  | $     | 33,005  |                 | $ | 33,005       |  | $         |       |              | $ |      |  | $ | 
|                              |  |       |         |                 |  
|Operating Leases              |  | $     | 50,948  |                 | $ | 31,284       |  | $         | 19,664 |              | $ |      |  | $ | 
|                              |  |       |         |                 |   |              |  |           |        |              |   |       |  |   |  
|                              |  |       |         |                 |  
|Total Contractual Obligations |  | $     | 170,979 |                 | $ | 109,803      |  | $         | 59,148 |              | $ | 2,028 |  | $ | 
|                              |  |       |         |                 |   |              |  |           |        |              |   |       |  |   |  



45



---

At May 31, 2005 working capital totaled $4,103,057 compared to $3,073,853 at May 31, 2004. The current ratio at
May 31, 2005 remained at the 2.58:1 ratio as at May 31, 2004. The quick ratio (which excludes inventory and prepaid expenses from current assets) was 1.29:1 at May 31, 2005  an increase from the 0.85:1 posted at May 31,
2004.



As at May 31, 2005, the Companys working capital was
sufficient to meet the Companys current requirements.



Inventory
decreased a slight 0.1% from $3,262,983 as at May 31, 2004 to $3,258,856 as at May 31, 2005. Accounts receivable increased 38.8% from $1,028,508 as at May 31, 2004 to $1,427,395 as at May 31, 2005. The increase is attributed to
higher sales volume and a lower turnover rate in 2005. Accounts payable decreased 4.4% from $1,517,304 at May 31, 2004 to $1,450,502 as at May 31, 2005. The decrease is attributed to the timing of payments. Deferred revenue increased 415%
from $124,723 at May 31, 2004 to $643,028 as at May 31, 2005. The increase is attributed to the increased orders in production.



Long-term debt (current and long-term portion) decreased from $174,643 at May 31, 2004 to $120,031 at May 31, 2005.



The debt to equity ratio (total debt to total shareholders equity) increased slightly
to 0.33 as at May 31, 2005 compared to 0.30 as at May 31. 2004.



Total assets increased to $12,646,328 at May 31. 2005 from $11,177,184 as at May 31, 2004. This is attributed primarily to the increase in cash, marketable securities and accounts receivable and an offsetting decrease in
intangible assets through amortization.



Operating, Investing and
Financing Activities



Cash generated (used) in operating activities
increased to $1,113,944 for year ended May 31, 2005 compared to $650,906 for the year ended May 31, 2004. This was attributed to higher cash generated by operations and reduced investments in non-cash working capital.



The major source of cash in 2005 was provided through the issue of common shares in the
amount of $1,056,000, proceeds on sale of marketable securities in the amount of $79,240, and bank indebtedness advances of $199,758.



The major source of cash in 2004 was provided through the issue of common shares in the amount of $705,000, proceeds on sale of land and building of $104,439, proceeds on
sale of marketable securities in the amount of $474,819, and bank indebtedness advances of $128,616.



The major use of cash during 2005 was the purchase of capital assets in the amount of $333,960, the repurchase of common shares in the amount of $723,289, the purchase of marketable securities in the amount of
$458,318, and the repayment of long-term debt in the amount of $54,612.



The
major use of cash during 2004 was the purchase of capital assets in the amount of $222,967, the business acquisition of Islip in the amount of $50,000, and the repayment of long-term debt in the amount of $2,718,044.



46



---

Capital Resources



The Companys subsidiary API Electronics has a working capital line of credit of $500,000. At May 31, 2005, the corporation had borrowed $167,000 (2004 -
$100,000) against this line. The credit is secured by all of its assets pursuant to a general security agreement. The bank indebtedness is due on demand and bears interest at prime plus 1%.



The Companys subsidiary Filtran Limited has a line of credit of $796,000
(Cdn$1,000,000). At May 31, 2005, the corporation had borrowed $175,090 (2004 - $28,675). The credit is secured by a general security agreement and a first collateral mortgage on Filtran Limiteds asset and building. The bank indebtedness
bears interest at prime.



The Company is not committed to any significant
capital expenditures at present.



The Company holds cash and cash equivalents
in Canadian currency. Two of the companys subsidiaries (TM Systems and API) hold cash and cash equivalents in Us currency. The Companys other group of subsidiaries (Filtran Group) holds cash and cash equivalents in US and Canadian
currencies. Neither the Company nor any of its subsidiaries uses financial instruments for hedging.



API believes that cash flows from operations, funds available under its credit facilities and other sources of cash will be sufficient to meet its anticipated cash requirements.



Off Balance Sheet Arrangements



During 2005 and 2004, the Company did not use Off Balance Sheet Arrangements.



Share Capital



As of May 31, 2005 there were 2,684,396 common shares issued and outstanding, 164,958 warrants outstanding at an exercise prices of
$7.50 with remaining average contractual lives of 0.25 years, 410,000 stock options outstanding at exercise prices ranging from $2.50 to $7.50 with remaining average contractual lives of 4.8 years.



During 2005, 440,000 common shares were issued upon the exercise of stock options for
proceeds of $1,056,000.



During 2004, 125,000 common shares were issued upon
the exercise of warrants for proceeds of $705,000.



On February 17, 2005,
the Board of Directors authorized the Company to purchase in open-market transactions up to 5% of the issued and outstanding common shares. During the year ended May 31, 2005, the Company acquired 139,735 common shares at an average cost of
$5.18 per share.



The following discussion of the results of operations of
the Company is a comparison of the Companys two fiscal year periods ended May 31, 2004 and 2003.



Sales Revenue



|                    |  |      |            |      |   |           |  |        |  
|------------------- |  | ---- | ---------- | ---- | - | --------- |  | ------ | -
|Sales by Subsidiary |  | 2004 |            | 2003 |   | % Change  | 
|API                 |  | $    | 2,375,239  |      | $ | 2,688,063 |  | -11.6  | %
|                    |  |      |           
|Filtran Group       |  | $    | 5,759,835  |      | $ | 4,647,361 |  | +23.9  | %
|                    |  |      |           
|TM Systems          |  | $    | 3,143,113  |      | $ | 918,117   |  | +242.3 | %
|                    |  |      |            |      |   |           |  |        |  
|                    |  | $    | 11,278,187 |      | $ | 8,253,541 |  | +36.6  | %
|                    |  |      |            |      |   |           |  |        |  



47



---

The Company recorded strong sales growth in 2004 as total sales revenue increased by 36.6% over 2003.



APIs sales revenues decreased by 11.6% in 2004 compared to 2003. This decrease is
attributable to price pressures, competition, and a general decline in APIs market space. Demand is increasing in the following areas:



| | (i) | Military radio business has continued to improve and in addition, markets for specialty radios for Homeland Security (fire, police and other services) are also beginning to develop.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Relay market business is also on a steadily increasing trend.
| | ---- | -------------------------------------------------------------



| | (iii) | Helicopter systems through the newly acquired Islip continue to grow favorably.
| | ----- | -------------------------------------------------------------------------------



Filtran Group saw sales revenue increase by an impressive 23.9% margin in 2004. The increase is attributable to increased demand for their
products in the Defense sector.



TM Systems recorded sales revenue levels in
2004 that were 242.3% greater than 2003. The increase was attributed primarily to TM Systems having a full year of operations in 2004 compared to approximately one-third of a year following the February 2003 acquisition by the Company.



The Companys electronic products are sold through operations in Canada and the US to
several countries around the world.



|                         |  |              |            |                                                   |   |            |  |                                                    |           |  |   |           
|------------------------ |  | ------------ | ---------- | ------------------------------------------------- | - | ---------- |  | -------------------------------------------------- | --------- |  | - | ----------
|Geographical Information |  | May 31, 2004 |            | May 31, 2003                                     
|                         |  | Revenue      |            | Capital Assets,IntangibleAssets,Goodwill andOther |   | Revenue    |  | Capital Assets,Intangible Assets,Goodwill andOther
|United States            |  | $            | 8,933,612  |                                                   | $ | 6,187,097  |  | $                                                  | 4,698,497 |  | $ | 7,494,671 
|Canada                   |  |              | 944,039    |                                                   |   | 4,697,087  |  |                                                    | 3,555,044 |  | $ | 5,952,019 
|United Kingdom           |  |              | 1,057,691  |                                                   |   |           |  |                                                    |          |  |   |          
|South America            |  |              | 201,465    |                                                   |   |           |  |                                                    |          |  |   |          
|All Other                |  |              | 141,380    |                                                   |   |           |  |                                                    |          |  |   |          
|                         |  |              |            |                                                   |   |            |  |                                                    |           |  |   |           
|                         |  | $            | 11,278,187 |                                                   | $ | 10,884,184 |  | $                                                  | 8,253,541 |  | $ | 13,446,690
|                         |  |              |            |                                                   |   |            |  |                                                    |           |  |   |           



API saw US sales increase by 47.4%
from $4,698,497 in 2003 to $8,933,612 in 2004. Canadian sales decreased by 73.4% from $3,555,044 in 2003 to $944,039 in 2004 but this was partially offset by sales totaling $1,400,536 in the United Kingdom, South America and Other.



48



---

Cost of Goods Sold and Gross Margin



|                                |  |      |   |  |      |   |  |          |  
|------------------------------- |  | ---- | - |  | ---- | - |  | -------- | -
|Gross Margin by Segment Company |  | 2004 |   |  | 2003 |   |  | % Change |  
|API                             |  | 16.6 | % |  | 8    | % |  | +8.6     | %
|                                |  |      |  
|Filtran Group                   |  | 19.5 | % |  | 27   | % |  | -7.5     | %
|                                |  |      |  
|TM Systems                      |  | 34.2 | % |  | 49   | % |  | -14.8    | %
|                                |  |      |   |  |      |   |  |          |  
|                                |  |      |  
|The Company                     |  | 23.1 | % |  | 23.3 | % |  | -0.2     | %
|                                |  |      |   |  |      |   |  |          |  



The Companys overall gross
margin was 23.1% of sales in 2004 and a slight decrease from the 23.3% gross margin posted in 2003. Accordingly, the overall cost of sales was 76.9% in 2004 compared to 76.7% in 2003.



API posted a gross margin improvement by 8.6% in 2004 to the 16.6% level. This 16.6% mark is approaching its historical gross margin levels.
The 2003-year saw a large inventory write down of approximately $399,000 and led to such a low gross margin in that year.



Filtran Group saw their gross margin decrease to 19.5% in 2004 from the 27% margin posted in 2003. The decrease was attributed to a changing manufacturing mix. Filtran
Group has been increasing its subcontracting to China where completed units are manufactured. Filtran Group accepts smaller margins on this type of product because there is no space required to manufacture, test and support this product. However, in
2004, the margins decreased as a result of price pressures on those goods manufactured in China.



TM Systems gross margin saw a decrease of 14.8% to 34.2% in 2004. This was attributed to an inventory write down of approximately $230,000



The major components of Cost of Sales for the Company as a whole are as follows:



|                       |  |      |           |            |      |   |      |   |            |  |      |  
|---------------------- |  | ---- | --------- | ---------- | ---- | - | ---- | - | ---------- |  | ---- | -
|                       |  | 2004 |           | % of sales |      |   | 2003 |   | % of sales | 
|Manufacturing Labor    |  | $    | 2,283,916 |            | 20.3 | % |      | $ | 1,782,763  |  | 21.6 | %
|Manufacturing Overhead |  | $    | 2,373,921 |            | 21.1 | % |      | $ | 1,746,104  |  | 21.2 | %
|Cost of Materials Used |  | $    | 3,766,825 |            | 33.0 | % |      |   | 2,661,984  |  | 32.3 | %



As a percentage of sales, each of the
2004 Manufacturing, Labor, 2004 Manufacturing Overhead and 2004 Cost of Materials Used were reasonably in line with their comparative percentage of sales in 2003. The 2004 Manufacturing Labour percentage improved slightly over 2003 as labor
efficiencies in the manufacturing process were realized.



49



---

Selling Expenses



Selling expenses increased to $843,308 for the year ended May 31, 2004 from $666,138 for the year ended May 31, 2003. As a percentage of sales the 2004 selling
expenses came in at 7.5% an improvement over the 8.1% posted in 2003.



The
major components of Selling Expenses are as follows:



|                         |  |      |         |            |     |   |      |   |            |  |     |  
|------------------------ |  | ---- | ------- | ---------- | --- | - | ---- | - | ---------- |  | --- | -
|                         |  | 2004 |         | % of sales |     |   | 2003 |   | % of sales | 
|Payroll Sales            |  | $    | 401,058 |            | 3.6 | % |      | $ | 320,020    |  | 3.9 | %
|Travel and Entertainment |  | $    | 137,660 |            | 1.2 | % |      | $ | 84,368     |  | 1.0 | %
|Commissions              |  | $    | 99,921  |            | 0.9 | % |      | $ | 52,170     |  | 0.6 | %



The overall increase in Selling
Expenses was attributed to higher sales revenue in 2004. As a percentage of sales, each of the 2004 Payroll Sales, 2004 Travel and Entertainment, and 2004 Commissions were reasonably in line with their comparative percentage of sales in 2003.



General and Administrative Expenses



General and administrative expenses increased to $2,116,206 for 2004 from $1,527,307
incurred during 2003. As a percentage of sales, the 2004 general and administration expenses were 18.7% and this was consistent with the 18.5% posted in 2003.



The major components of General and Administrative Expenses are as follows:



|                         |  |      |         |      |   |          |  |   |         |  
|------------------------ |  | ---- | ------- | ---- | - | -------- |  | - | ------- | -
|                         |  | 2004 |         | 2003 |   | $ Change | 
|Officers Salaries        |  | $    | 303,453 |      | $ | 203,437  |  | $ | 100,016 |  
|Rent and Management Fees |  | $    | 195,998 |      | $ | 32,841   |  | $ | 163,157 |  
|Professional Services    |  | $    | 286,855 |      | $ | 301,117  |  | $ | (14,262 | )
|Offices Salaries         |  | $    | 209,271 |      | $ | 252,369  |  | $ | (43,098 | )



Officers salary expense
increased to $303,453 in 2004 from $203,437. This was attributed to a full year of TM Systems officer salary included in 2004 compared to approximately one-third in 2003 following the February 2003 acquisition. In addition, a retirement
package of $54,000 was provided for the president of Filtran Group in 2004.



Rent and management fees increased to $195,998 in 2004 from $32,841 in 2003. This was attributed to a new oral management services agreement effective June 1, 2003 whereby a related corporation will provide executive office space,
office equipment and supplies, telecommunications, personnel, and management services to the Company. Management services are being provided to the Company effective June 1, 2003.



Professional services include legal, accounting, audit and taxation services. This expense in 2004 was $286,855 which was a slight
improvement from the 2003 expense amount of $301,117.



Office salaries
decreased to $209,271 in 2004 from $252,369 in 2003. This was attributed primarily to personnel services at the executive office, which is now being covered by the oral management services agreement referred to above.



50



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Business Development



Business development expense decreased to $71,088 in 2004 from $355,042 in 2003. In the first few years as a public company, large expenditures on investor relations were
considered critical to gain shareholder and investor awareness of the Company. While this continues to be important, expenditures in this area were scaled back in 2004.



Amortization



Amortization increased to $803,807 during the year ended May 31, 2004 from the $785,979 amount for the year ended May 31, 2003. The increase resulted from the
overall increase in the capital and intangible asset base that arose from the acquisition of TM Systems in February 2003.



Other Income and Expense



Other income during the quarter was $117,956 for the year ended May 31, 2004 compared to $89,316 for the year ended May 31, 2003. The major components in 2004
were the gain on settlement of debt in the amount of $39,000, the gain on sale of marketable securities of $45,795, and investment income in the amount of $40,941. The major components in 2003 were the gain on early repayment of promissory note in
the amount of $40,969, the recovery of capital tax of $34,118, investment income in the amount of $41,300, and a loss on foreign currency translation of $65,580.



Other expense relates to interest on long-term debt and the Company had a decrease from $107,789 in 2003 to $85,063 in 2004. The decrease
was attributed to lower debt levels in 2004.



Income Taxes



The provision for income taxes was a recovery of $46,335 in 2004 compared to a recovery
of $41,413 in 2003. The effective tax rate for 2004 was 35.63% (2003  37.79%). The Company and its subsidiaries have non-capital losses of approximately $1,560,000 to apply against future taxable income. The losses will expire as follows:
$601,000 in 2009, $713,000 in 2010, and $246,000 in 2011.



Operating Income
(Loss)



The Company posted operating income (loss) for the year ended
May 31, 2004 of ($421,622) a substantial improvement over the operating income (loss) of ($620,486) for the year ended May 31, 2003. The improvement in 2004 was attributable to the acquisition of TM Systems.



Net Loss



The Company incurred a net loss for the year ended May 31, 2004 of $342,394 ($0.15/share) compared to a net loss of $597,546
($0.34/share) for year ended May 31, 2003.



51



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Quarterly Financial Information



Two-Year Summary by Quarter (Unaudited)



|                                  |  |                         |           |   |    |   |           |    |  |   |           |   |  |   |           |  
|--------------------------------- |  | ----------------------- | --------- | - | -- | - | --------- | -- |  | - | --------- | - |  | - | --------- | -
|                                  |  | Year ended May 31, 2004 |          
|                                  |  | Q4                      |           |   | Q3 |   |           | Q2 |  |   | Q1        |  
|Sales Revenue                     |  | $                       | 3,095,820 |   |    | $ | 2,861,572 |    |  | $ | 2,886,715 |   |  | $ | 2,434,080 |  
|Net Loss                          |  | $                       | (235,622  | ) |    | $ | (12,446   | )  |  | $ | 26,703    |   |  | $ | (121,029  | )
|Loss, basic and diluted per share |  | $                       | (0.10     | ) |    | $ | (0.01     | )  |  | $ | 0.01      |   |  | $ | (0.05     | )
|                                  | 
|                                  |  | Year ended May 31, 2003 |          
|                                  |  | Q4                      |           |   | Q3 |   |           | Q2 |  |   | Q1        |  
|Sales Revenue                     |  | $                       | 2,729,718 |   |    | $ | 2,079,512 |    |  | $ | 1,802,716 |   |  | $ | 1,641,595 |  
|Net Loss                          |  | $                       | (308,322  | ) |    | $ | (176,877  | )  |  | $ | (20,498   | ) |  | $ | (91,849   | )
|Loss, basic and diluted per share |  | $                       | (0.17     | ) |    | $ | (0.10     | )  |  | $ | (0.01     | ) |  | $ | (0.06     | )



On September 15, 2004 the Company
effected a ten (10) for one (1) common share consolidation. All share and per share figures have been presented to reflect this change as if it occurred before the period end.



During fiscal 2004, the Company continued to see quarterly year-over-year revenue growth. The majority of the growth came from the
acquisition of TM Systems, although Filtran Group did realize some growth. The 2004 sales revenue experienced growth from quarter to quarter with a slight pause in Q3, and then on to record increased quarterly sales revenue in Q4.



The Company also experienced a narrowing of its quarterly year-over-year net loss and loss
per share.



The Companys revenues are not, in general, seasonal.



Liquidity and Capital Resources



Liquidity



At May 31, 2004 itthe Company had cash reserves of $634,058 compared to $1,561,199 at May 31, 2003. In addition, the Company had
marketable securities of $2,144 at May 31, 2004 (May 31, 2003 - $431,168). The reduction in cash and marketable securities was attributed primarily to the repayment of the Filtran and TM Systems promissory notes that had balances of $1,098,418
and $1,475,652 respectively as at May 31, 2003.



At May 31, 2004
working capital totalled $3,073,853 compared to $2,195,522 at May 31, 2003. The current ratio at May 31, 2004 increased to 2.58:1 from the 1.46:1 ratio as at May 31, 2003. The quick ratio (which excludes inventory and prepaid expenses
from current assets) was 0.85:1 at May 31, 2004  a slight increase from the 0.83:1 posted at May 31, 2003.



52



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As at May 31, 2004, the Companys working capital was sufficient to meet the Companys current
requirements.



Inventory rose 11.3% from $2,931,924 as at May 31, 2003 to
$3,262,983 as at May 31, 2004. The increase was attributable to increased purchases to support higher sales levels in 2004. Accounts receivable decreased 36.5% from $1,619,487 as at May 31, 2003 to $1,028,508 as at May 31, 2004. The
decrease was attributable to a higher turnover rate in 2004. Accounts payable increased 19.9% from $1,265,458 at May 31, 2003 to $1,517,304 as at May 31, 2004. The increase was attributable to increased purchases to support higher sales
levels in 2004.



Long-term debt (current and long-term portion) decreased from
$2,931,687 at May 31, 2003 to $174,643 at May 31, 2004 as a result of the repayments of the Filtran and TM Systems promissory notes that were due during 2004 and are now repaid in full.



As a result of the two promissory note repayments, the total liabilities to equity ratio
improved to 0.26 at May 31, 2004 compared to 0.63 at May 31, 2003.



Total assets decreased to $11,177,184 at May 31. 2004 from $13,446,690 at May 31, 2003. This was attributed to the repayment of the Filtran and TM Systems promissory notes from the Companys cash and equivalents on hand.



Operating, Investing and Financing Activities



Cash generated (used) in operating activities increased to $650,906 for year ended
May 31, 2004 compared to $40,131 for the year ended May 31, 2003. This was attributed to higher cash generated by operations and reduced investments in non-cash working capital.



The major source of cash in 2004 was provided through the issuance of common shares in the amount of $705,000, proceeds on the sale of land
and building of $104,439, proceeds on the sale of marketable securities in the amount of $474,819, and bank indebtedness advances of $128,616.



The major source of cash in 2003 was provided through the issuance of common shares in the amount of $4,102,500.



The major use of cash during 2004 was the purchase of capital assets in the amount of
$222,967, the acquisition of the assets of Islip in the amount of $50,000, and the repayment of long-term debt in the amount of $2,718,044.



The major use of cash in 2003 was the purchase of capital assets of $725,789, the purchase of marketable securities in the amount of $428,739, bank indebtedness
repayments of $284,488, the long-term debt repayments in the amount of $1,046,394 and the TM Systems business acquisition in the amount of $1,521,958.



Capital Resources



The Companys subsidiary, API, has a working capital line of credit of $500,000. At May 31, 2004, that corporation had borrowed $100,000 against this line. The credit is secured by all of its assets pursuant
to a general security agreement. The bank indebtedness is due on demand and bears interest at prime plus 1%.



53



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On June 1, 2004, the Companys subsidiary Filtran Limited secured a line of credit of $734,000. At May 31,
2004 had borrowed $28,675 on such line of credit. The credit is secured by a general security agreement and a first collateral mortgage on Filtran Limiteds assets and building. The bank indebtedness bears interest at prime plus 1%



The Company is not committed to any significant capital expenditures at present.



The Company believes that cash flows from operations, funds available under
its credit facilities and other sources of cash will be sufficient to meet its anticipated cash requirements.



The Company holds cash and cash equivalents in Canadian currency. Two of the companys subsidiaries (TM Systems and API) hold cash and cash equivalents in US currency. The Companys other group of
subsidiaries (Filtran Group) holds cash and cash equivalents in US and Canadian currencies. Neither the Company nor any of its subsidiaries uses financial instruments for hedging.



The Company did not have material commitments for capital expenditures as of the end of its fiscal year ending May 31, 2004.



Critical Accounting Policies



Our significant accounting policies are fully described in the notes to the consolidated
financial statements. Some of APIs accounting policies involve estimates that require managements judgment in the use of assumptions about matters that are uncertain at the time the estimate is made. Different estimates, with respect to
key variables used for the calculations, or changes to estimates, could potentially have a material impact on APIs financial position or results of operations. The development and selection of the critical accounting estimates are described
below.



Goodwill and Intangible Assets



We account for our business acquisitions under the purchase method of accounting. The total
cost of an acquisition is allocated to underlying net assets based on their respective estimated fair values. As part of this allocation process, we must identify and attribute values and estimated lives to the intangible assets acquired. Such
determinations involve considerable judgment, and often involve the use of significant estimates and assumptions, including those with respect to future cash inflows and outflows, discount rates, and asset lives. These determinations will affect the
amount of amortization expense recognized in future periods.



Goodwill is
initially recorded when the initial purchase price for an acquisition exceeds the fair value of the net identified tangible and intangible assets acquired. Goodwill is not amortized but rather is periodically assessed for impairment. We perform an
annual review or more frequently if circumstances indicate that a potential impairment exists, to determine if the recorded goodwill is impaired.



We also review amortizable intangible assets for impairment whenever circumstances indicate that the carrying value of an asset may not be recoverable from the estimated
future cash flows.



Inventories



Inventories are valued at the lower of cost and net realizable value. Due provision has been
made for slow moving and obsolete inventories. As a result of a high rate of technological change management closely monitors the quality and profile of inventories to identify items which may present a risk. Management reviews inventory items on a
regular basis which minimizes overall risk. Estimated unrecoverable amounts are charged to earnings in the period in which the risk is identified.



54



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Receivables



Management follows conservative practices in granting trade credit and diligently practices several credit minimizing techniques. Management regularly reviews the entire
accounts receivable portfolio and updates, based on most current available information, its estimate of unrecoverable amounts. The amounts form the basis of the Companys allowance for doubtful accounts.



Accounting for Income Taxes



Significant management judgment is required in determining our provision for income taxes,
our income tax assets and liabilities, and any valuation allowance recorded against income tax assets. We operate in multiple geographic jurisdictions, and to the extent we have profits in each jurisdiction, these profits are taxed pursuant to the
tax laws of their jurisdiction. In preparing the consolidated financial statements, the Corporation is required to estimate its income tax obligations. This process involves estimating the actual tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in future income tax assets and liabilities, which are recorded on the consolidated balance sheet. The Company assesses,
based on all available evidence, the likelihood that the future income tax assets will be recovered from future taxable income and, to the extent that recovery is not more likely than not, a valuation allowance is established. If the
valuation allowance is changed in a period, an expense or benefit must be included within the tax provision on the consolidated income statement.



Revenue Recognition



We follow specific guidelines in measuring revenue, however certain judgments affect the application of the policies. Revenue from contracts is recognized using the percentage of completion method. The degree of
completion is estimated based on the costs incurred, excluding costs that are not representative of progress to completion as a percentage of total costs anticipated for each contract. Provision is made for losses on contracts in progress when such
losses first become known. Revisions in cost and profit estimates, which can be significant, are reflected in the accounting period when the relevant facts are known.



Provisions for warranty claims and other allowances are made based on contract terms and prior experience.



The Company recognizes non-contract revenue when it is realized and earned.
The Company considers non-contract revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery does
not occur until products have shipped and risk of loss and ownership has transferred to the Client.



Changes in Accounting Policies



Stock Based Compensation



Effective June 1, 2004, the
Company adopted the revised CICA Handbook Section 3870, Stock-Based Compensation and Other Stock-based Payments which requires the application of a fair value method of accounting to all stock-based compensation payments to
employees. Under this method, the Company is required to recognize a charge to the income statement based on an option-pricing model for all stock options that were granted and vested in the period, with a corresponding credit to Contributed Surplus
under the Shareholders Equity section of the Balance Sheet. In accordance with the transitional provisions of Section 3870, the Company has retroactively applied the fair value method of accounting to stock option awards and warrant
extensions granted since June 1, 2002 using the Black-Scholes option pricing model. An



55



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adjustment to the opening deficit at June 1, 2004 in the amount of $1,876,956 has been recorded representing the
total stock-based compensation expense had the fair value method been used for employee stock options granted and warrants modified after June 1, 2002. The offset to deficit is an increase in contributed surplus in the amount of $1,876,956
resulting in no net change to shareholders equity.



Amortization of
Customer Contracts



During the year ended May 31, 2004, the Company
changed its accounting policy for the amortization of customer contracts from the straight line basis to a basis which more closely matches the revenue earned from these contracts to the amortization for the year. The effect of this change was a
reduction of amortization for fiscal 2004 of $135,881. The change has been accounted for on a retroactive basis with restatement of the prior year figures. The effect of the change is to increase amortization in the 2003 year by $48,531, the deficit
of the 2003 year by $48,531 and reduce the 2004 year deficit by $87,350.



Impairment of Long-Lived Assets



Effective June 1, 2004,
API prospectively adopted the new CICA recommendations for the impairment of long-lived assets. A long-lived asset is an asset that does not meet the definition of a current asset. The new standard requires recognition of an impairment loss when the
carrying value of a long-lived asset is not recoverable and exceeds its fair value. Under the new standards, and impairment loss is measured as the amount by which the carrying value of a long-lived asset exceeds its fair value. The new standard is
not expected to have any material impact on our consolidated financial position or results of operation on adoption.



Impact of New Accounting Pronouncements



Variable Interest Entities



We plan to adopt the CICA Accounting Guideline 15 (AcG-15) on the consolidation of variable interest entities which is effective for annual and interim periods beginning
on or after November 1, 2004. Variable interest entities refer to those entities that are subject to control on a basis other than ownership of voting interest. AcG-15 provides guidance for identifying variable interest entities and the
criterion for determining consolidation. We have determined that adoption of this standard will not have any material effect in our results form operations or financial position.



Financial Instruments - Disclosure and Presentation



In November, 2003, CICA Handbook Section 3860, Financial Instruments  Disclosure and Presentation was amended to require
certain obligations that may be settled at the issuers option in cash or the equivalent value by a variable number of the issuers own equity instruments be presented as a liability. The amendments are expected to be effective for fiscal
years beginning after November 1, 2004, and would be applied retroactively, thus requiring restatement.



We are currently evaluating the impact of the adoption of this standard on our results of operations or financial position.



Financial Instruments  Recognition and Measurement



In January 2005, the CICA released new Handbook Section 3855, Financial Instruments  Recognition and Measurement, effective for annual and interim
periods beginning after October 1, 2006. This new section



56



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prescribes when a financial instrument is to be recognized on the balance sheet and at what amount, sometimes using fair
values; at other times using cost-based measures. It also specifies how financial instruments gains and losses are to be presented, and defines financial instruments to include accounts receivable and payable, investments in debt and equity
securities and derivative contracts



C. RESEARCH AND DEVELOPMENT, PATENTS
AND LICENSES, ETC.



During the last three fiscal years ended May 31,
2005, May 31, 2004 and May 31, 2003, the Company did not spend material amounts of money on research and development activities, and did not have formal research and development policies.



D. TREND INFORMATION



|                                      |  |      |            |   |      |   |            |      |  |   |            |  
|------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                      |  | 2005 |            |   | 2004 |   |            | 2003 | 
|Sales Revenue                         |  | $    | 12,547,551 |   |      | $ | 11,278,187 |      |  | $ | 8,253,541  |  
|Net Loss                              |  | $    | 604,394    |   |      | $ | (342,394   | )    |  | $ | (597,546   | )
|Loss, basic and diluted, per share    |  | $    | (0.24      | ) |      | $ | (0.15      | )    |  | $ | (0.34      | )
|Total Assets                          |  | $    | 12,646,328 |   |      | $ | 11,177,184 |      |  | $ | 13,446,690 |  
|Total long term financial liabilities |  | $    | 120,031    |   |      | $ | 174,643    |      |  | $ | 2,931,687  |  
|Cash dividends declared               |  | $    | Nil        |   |      | $ | Nil        |      |  | $ | Nil        |  



The Company realized an 11.3% increase
in year over year sales in 2005 and an increase of 36.6% in year over year sales in 2004. The increase in 2005 was attributed primarily to the acquisition of Islip which had sales revenue in 2005 of $879,771 compared to $66,625 a year earlier. The
increase in 2004 was due primarily to the February 2003 acquisition of TM II that added sales revenue of $3,143,113 in 2004 compared to partial year amount of $918,117 in 2003.



API Electronics believes that new orders should increase as a result of the $447B military budget approved for 2005 by the US Congress. The
Company has spent more than $400,000 on upgrades to its Hauppauge, New York facility in the past few years. In addition it has also put in place its ISO 9000-2000 system and on June 1, 2005 received military certification from the Defence
Logistics Agency as a certified manufacturer of silicon high power transistor devices in accordance with the requirements of MIL-PRF-19500M. These factors should enable API Electronics to realize higher quality standards, improved products, a lower
cost structure and higher demand. API Electronics expects 2006 sales revenue to increase by 10-12% over the 2005 level as demand continues to be strong and the recent military certification MIL-PRF-19500M adds benefit.



Filtran Groups main markets are with military subcontractors where they have strong
demand for filters, power supplies, transformers and inductors. Filtran Group has outsourced the manufacturing of certain products to manufacturers in China and is working closely with them to maintain quality control and decrease the cost to
manufacture. Growth was realized through major efforts Filtran Group expects sales revenue to grow a further 5% in 2006.



Filtran Group is aggressively pursuing growth strategies with the recent hiring of additional sales persons in the US, setting up a nationwide representative market, and
a product catalogue. Filtran Group has also developed a synergistic partnership with API Electronics targeting the military relay market.



57



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TM IIs customer base consists primarily of various US government departments, including the US Navy, as well as
numerous domestic and foreign corporations. The US government has recently approved significant funds for ongoing Defense and homeland security. TM II believes that new domestic orders should increase as a result of this development. Furthermore,
foreign country demand may also increase in response to global terror concerns. TM II expects sales revenue growth levels to remain relatively flat in 2006.



TM IIs Stabilized Glide Slope Indicator (SGSI) is an electo-hydraulic-optical landing system and designed for use on air capable and amphibious assault ships.
Increasing operational readiness will require the Navy to be independent of land-based command centers. Furthermore, political conflicts have led to a reduction of land-bases available in certain foreign countries.



TM IIs Stabilized Glide Slope Indicator (SGSI) is an electo-hydraulic-optical landing
system and designed for use on air capable and amphibious assault ships. Increasing operational readiness will require the Navy to be independent of land-based command centers. Furthermore, political conflicts have led to a reduction of land-bases
available in certain foreign countries.



E. OFF-BALANCE SHEET ARRANGEMENTS



The Company has no off-balance sheet
financing arrangements or transactions.



F. TABULAR DISCLOSURE OF
CONTRACTUAL OBLIGATIONS



|                                                                                                                                                                 |  |       |         |                  |   |           |  |           |         |                   |   |       |  |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | ------- | ---------------- | - | --------- |  | --------- | ------- | ----------------- | - | ----- |  | -
|Contractual Obligations                                                                                                                                          |  | Total |         | Less than 1 Year |   | 1-3 Years |  | 3-5 Years |         | More than 5 Years
|Long-Term Debt Obligations                                                                                                                                       |  | $     | 33,005  |                  | $ | 33,005    |  | $         |        |                   | $ |      |  | 
|                                                                                                                                                                 |  |       |         |                  |  
|Capital (Finance) Lease Obligations                                                                                                                              |  |       | 87,026  |                  |   | 45,514    |  |           | 39,484  |                   |   | 2,028 |  | 
|                                                                                                                                                                 |  |       |         |                  |  
|Operating Lease Obligations                                                                                                                                      |  |       | 50,948  |                  |   | 31,284    |  |           | 19,664  |                   |   |      |  | 
|                                                                                                                                                                 |  |       |         |                  |  
|Purchase Obligations                                                                                                                                             |  |       |        |                  |   |          |  |           |        |                   |   |      |  | 
|                                                                                                                                                                 |  |       |         |                  |  
|Other Long-Term Liabilities Reflected on the Companys Balance Sheet under the GAAP of the Primary Financial Statements (represents future income tax liability) |  |       | 586,400 |                  |   | 85,400    |  |           | 501,000 |                   |   |       |  |  



58



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G. FORWARD-LOOKING STATEMENTS



The Company desires to take advantage of the safe harbor provided in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and is making this cautionary statement in connection with such safe harbor legislation. This Form 20-F, or any other written or oral statements made by or on our behalf may include
forward-looking statements which reflect our current views with respect to future events and financial performance. The words believe, expect, anticipate, intends, estimate,
forecast, project and similar expressions, as they relate to the Company or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future
events, the outcome of which is subject to certain risks, including among others, general economic and market conditions, the state of the international, federal, state and local regulatory environment, lack of demand for the Companys products
and services, and other risks described in this Item 3D of this Annual Report and elsewhere. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated, expected, intended or planned.



ITEM 6. DIRECTORS, SENIOR MANAGEMENT, AND EMPLOYEES



|A. | DIRECTORS, SENIOR MANAGEMENT AND KEY EMPLOYEES AND PERSONNEL AS OF THE DATE OF THIS ANNUAL REPORT
|-- | -------------------------------------------------------------------------------------------------



Phillip DeZwirek



Phillip DeZwirek is director, the Chairman, Chief Executive Officer and Treasurer of the Company. From August 31, 2001 until the end of the 2001
calendar year, Phillip DeZwirek had been a director, Chairman of the Board, Chief Executive Officer and Treasurer of the Company and was the Chief Financial Officer of the Company from August 2001 until Claudio Mannarino assumed that position in
2004. From the end of 2001 until 2004, he also was the Vice-Chairman and Treasurer of the Company. Phillip DeZwirek has been a director, Chairman of the Board and the Chief Executive Officer of CECO Environmental Corp. since August 1979.
Mr. DeZwireks principal occupations during the past five years have been serving as Chairman of the Board and Chief Executive Officer of CECO; and serving as President of Can-Med Technology, Inc. d/b/a Green Diamond Oil Corp. (since
1990). Mr. DeZwirek has also been involved in private investment activities for the past five years.



Date of Birth:December 5, 1937



Current Outside Business Activities:



Chairman of the Board and Chief Executive Officer of CECO Environmental Corp.

President of Can-Med Technology, Inc. d/b/a Green Diamond Oil Corp.



Thomas W. Mills



On August 31, 2001 Thomas W. Mills became a director and the President and Chief Operating Officer of the Company. Thomas W. Mills is President and
Chief Operating Officer of the Companys wholly-owned subsidiary, API Electronics, Inc. He has worked within the electronics industry since 1967 and has specialized in semiconductors since 1969. His management career has spanned Production
Control, Production/Manufacturing, Quality Control/Assurance, Program



59



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/Project Operation, and Vice President of Operations. Mr. Mills, who has been with API Electronics,
Inc. since 1981, holds an economics degree and has taken courses in Industrial Engineering.



Date of Birth: January 31, 1945



Current Outside Business Activities: None.



Jason DeZwirek



Jason DeZwirek is a director and the Secretary of the Company. From August 31, 2001 until the end of the 2001 calendar year, Jason DeZwirek was a director, Executive Vice President, and Secretary of the Company. From the end of 2001
until 2004, he was the Chairman and Chief Executive Officer of the Company. Jason DeZwirek has been Vice President and a Director of CECO Environmental Corp. since February 1994 and the Secretary of CECO since February 20, 1998. He also serves
as Vice President of Can-Med Technology, Inc. d/b/a Green Diamond Oil Corp. Mr. DeZwireks principal occupation since October 1999 has been as Founder and President of Kaboose Inc., a company that operates an online Media Company servicing
the childrens and family markets. Mr. DeZwirek has also been involved in private investment activities for the past five years.



Date of Birth: September 3, 1970



Current Outside Business Activities:



President of Kaboose Inc.

Vice President,
Secretary and Director of CECO Environmental Corp.

Vice President of Can-Med Technology, Inc. d/b/a Green Diamond Oil Corp.



Koang Eng Lim, M.Sc, P.Eng



Koang E. Lim is Chief Engineer at Filtran Group. Koang E. Lim has over 35
years of specialized experience in electrical network design starting in 1965 with Bell-Northern Research in London, England. He graduated from London University with Bachelor and Master Degrees in Engineering in 1958 and 1963, respectively, and is
registered with the Professional Engineers of Ontario. He spent 6 years with BNR in the network group doing research and development of filters, equalizers and software. He was granted a patent for Active Lattice Networks in 1968.



Koang E. Lim was a Senior Lecturer in the University of Singapore from
1972-78, responsible for teaching electrical communication and network theory to 3rdand 4thyear students. From 1978 to 1981, he was with Spar Aerospace in St. Anne de Bellevue, Montreal, working on filters, amplitude
and delay equalizers for satellite communications. From 1981 to 1982, he was with Gandalf, engaged in the development of active filters for use in modems.



Koang E. Lim joined Filtran Group in August 1982. He retired in 2000 and now works for the Company on a consulting basis. As a Chief Engineer at Filtran
Group, he is responsible for engineering designs and completing quote files and is a liaison with customers for technical issues. His responsibilities include final approval of products made at Filtran Groups facilities and offshore
facilities.



60



---

Date of Birth: June 9, 1931



Current Outside Business Activities: None



Claudio A. Mannarino, B.Com, C.M.A.



Claudio Mannarino is the Chief Financial Officer and Vice President of the Company, with over 10 years of professional
accounting and finance experience. He holds a Bachelor of Commerce Degree from the University of Ottawa and is a Certified Management Accountant.



Mr. Mannarino spent three years as Controller for two divisions of GTC Transcontinental a Canadian publicly traded company on the TSE. After three
years in progressive roles at GTC he joined a Project Management Company as a senior accountant, whose role centered on developing long-term business strategies and improving business practices.



In addition to his role at GTC, Mr. Mannarino started his own business
in 1994, which he successfully grew and then sold in 1999.



Mr. Mannarino joined Filtran Group in April of 2000. He was later named CFO and VP of Finance for the Company. His responsibilities include managing the financial reporting function for the Company, and the finance, human resource and
IT departments of the Filtran Group. Mr. Mannarino has also gained experience in business acquisitions specifically related to due diligence activities and has carried out several cost reduction initiatives at Filtran Group.



Date of Birth: April 24, 1970



Current Outside Business Activities: None



Miki Narui, B.A.Sc., P.Eng.



Miki Narui is the Engineering Manager at Filtran, with over thirteen years
experience in power electronics, specializing in magnetic component design at Bell Northern Research / Nortel Networks, and later at the Canadian division of Pulse Engineering Ltd as its design center manager.



She graduated from University of Toronto in 1991 with a Bachelors
degree in Applied Science and Engineering with honours in Electrical Engineering. From 1991 to 1995, she was a Ph.D. candidate and a research and teaching assistant in the Power Systems and Devices Group at the University of Toronto, specializing in
the modeling of high power vortex stabilized arc lamps and the accompanying power supplies.



Miki Narui joined the Filtran Group in May 2003. As the engineering manager, she is responsible for the development of all varieties of magnetic components and special purpose power supplies from initial quotation
stage, to final production run. She supervises a team of four electrical designers, a manufacturing process engineer, a senior power supply designer, a mechanical designer / documentation controller, and a lab technician.



61



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Date of Birth: July 19, 1968



Current Outside Business Activities: None



Arnie Markowitz



Arnie Markowitz is General Manager at Filtran Group. Mr. Markowitz has over 20 years of specialized experience in sales and marketing of electronic
components and corporate management of electrical and electronic component manufacturers. He graduated from New York University in 1981.



From 1981 through 1984 he was employed as an account executive and sales manager for Tec Electronics a data communications equipment manufacturer and
distributor in New York. From 1984 through 1987 he was a territory manager for Tritech Electronics / Bittan Associates an electronic component distributor / representative in New Jersey. From 1988 through 1998 he was worldwide sales manager for
Sussex Semiconductor a manufacturer of semiconductors in New Jersey and Florida. From 1999 through 2002 he was a principal in and General Manager of Edal Industries a manufacturer of semiconductors and electronic assemblies in East Haven,
Connecticut.



Mr. Markowitz joined Filtran Group joined in
October 2002 as Director of New Business Development. He became General Manager in July 2004.



Date of Birth: October 16, 1958



Current Outside Business Activities: None



Jason DeZwirek is Phillip DeZwireks son. There are no other family relationships between any two or more of the directors or officers or senior management members named above. There are no arrangements or understandings with major
shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management.



The Companys directors and executive officers as of the end of the most recent fiscal year and as of the date of this Annual Report are summarized in the following
table:



|                     |  |                                                          
|-------------------- |  | ---------------------------------------------------------
|Name                 |  | Position(s)                                              
|                     | 
|Phillip DeZwirek     |  | Director, Chairman, Chief Executive Officer and Treasurer
|                     | 
|Thomas W. Mills      |  | Director, President and Chief Operating Officer          
|                     | 
|Jason DeZwirek       |  | Director and Secretary                                   
|                     | 
|Claudio A. Mannarino |  | Chief Financial Officer and Vice President               
|                     | 
|Arnie Markowitz      |  | General Manager of Filtran Group                         



62



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B. COMPENSATION



Compensation Required to be Disclosed Under the Ontario Securities Act



The Ontario Securities Act requires that the Company disclose information about the
compensation paid to, or earned by the Companys Chief Executive Officer and each of the other four most highly compensated executive officers of the Company earning more than Canadian $150,000 in total salary and bonus for the fiscal year in
question. The only executive officers of the Company for whom disclosure is required under the Ontario Securities Act for the fiscal year ended May 31, 2005 are: Phillip DeZwirek, the Chief Executive Officer, Chairman and Treasurer, Jason
DeZwirek, a director and Secretary, Thomas W. Mills, President and Chief Operating Officer, Jerome Rabinowitz, Vice President-Sales at API, and Claudio Mannarino, Chief Financial Officer and Vice President.



Summary of Compensation



The following table is a summary of compensation paid to the Named Executive Officers for
the Companys most-recently completed fiscal year:



|                                                                 |  |                         |  |                     |         |                        |     |                          |   |                                 |  |                       |  |   |       
|---------------------------------------------------------------- |  | ----------------------- |  | ------------------- | ------- | ---------------------- | --- | ------------------------ | - | ------------------------------- |  | --------------------- |  | - | ------
|                                                                 |  |                         |  | Annual Compensation |         | Long Term Compensation
|Name and Position of Principal                                   |  | FiscalYear-endingMay 31 |  | Salary              |         | Bonus                  |     | Other AnnualCompensation |   | Securities UnderOptions/Granted |  | All OtherCompensation
|                                                                 |  |                         |  |                     |         |                       
|Jason DeZwirek(1) Secretary, Director                            |  | 2005                    |  |                     | Nil     |                        | Nil |                          | $ | 57,154                          |  | 200,000               |  | $ | 4,987 
|                                                                 |  |                         |  |                     |         |                       
|Phillip DeZwirek(2) Chairman, Chief Executive Officer, Treasurer |  | 2005                    |  |                     | Nil     |                        | Nil |                          |   | 183,364                         |  | 200,000               |  |   | Nil   
|                                                                 |  |                         |  |                     |         |                       
|Thomas W. Mills(3)(4) President, Chief Operating Officer         |  | 2005                    |  | $                   | 111,800 |                        | Nil |                          |   | Nil                             |  | Nil                   |  |   | 14,340
|                                                                 |  |                         |  |                     |         |                       
|Jerome Rabinowitz(5) Vice President  Sales and Marketing        |  | 2005                    |  | $                   | 130,000 |                        | Nil |                          |   | Nil                             |  | Nil                   |  | $ | 7,200 
|                                                                 |  |                         |  |                     |         |                       
|Claudio Mannarino(6) Chief Financial Officer, Vice President     |  | 2005                    |  | $                   | 65,802  |                        | Nil |                          |   | Nil                             |  | Nil                   |  | $ | 2,388 

---

|(1) | Jason DeZwirek was elected a Director and appointed Secretary and Executive Vice President on August 31, 2001. He continued as Secretary and additionally assumed the positions
of Chairman and Chief Executive Officer at the end of the 2001 calendar year. In 2004 he became Vice-Chairman and resigned as Chief Executive Officer. Later that year he resigned as Vice Chairman. Amounts paid to Jason DeZwirek by the Company were
paid to him as consulting fees. The Company paid consulting fees of $4,987 to Kaboose, Inc., a company controlled by Mr. DeZwirek.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Phillip DeZwirek was elected a Director and appointed Treasurer, Chief Financial Officer and Chairman on August 31, 2001. He continued as a Director and was elected to the
positions of Vice-Chairman, Chief Financial Officer and Treasurer at the end of the 2001 calendar year. Mr. DeZwirek again became the Chairman and Chief Executive Officer in 2004. The Company paid Green Diamond Oil Corp., a corporation of which
Mr. DeZwirek is an officer and director and shareholder, $183,364 to cover all overhead costs and expenses of the Corporations executive office in Toronto, Ontario, Canada, including, but not limited to, rent, utilities, telephone, and
secretarial and administrative support. All costs and expenses were invoiced by Green Diamond Oil Corp.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Thomas Mills was elected a Director and appointed President on August 31, 2001.
|--- | -------------------------------------------------------------------------------

|(4) | Thomas Mills received the use of a company car, resulting in expenses of $14,340 to the Company.
|--- | ------------------------------------------------------------------------------------------------

|(5) | Jerome Rabinowitz was appointed Vice President  Sales and Marketing of the Company on August 31, 2001. Mr. Rabinowitzs employment with the Company ended in
October 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Jerome Rabinowitz received the use of a company car, resulting in expenses of $7,200 to the Company.
| | ----------------------------------------------------------------------------------------------------

|(6) | Claudio Mannarino became Chief Financial Officer of the Company in 2004. Claudio Mannarino received the use of a company car resulting in expenses of $2,388 to the Company.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



63



---

Compensation Previously Disclosed Publicly



The Company disclosed compensation to certain of the Companys officers and directors
in an August 22, 2005 Notice of Special Meeting of Shareholders to be held September 22, 2005 (2005 Annual Meeting) and Management Information Circular relating to its election of directors, and the appointment of auditors (the
Circular), which Circular was publicly disclosed in a Form 6-K filing with the United States Securities and Exchange Commission.



In the Circular, the Company disclosed that API, the Companys wholly-owned subsidiary, paid Thomas W. Mills an annual salary of $111,800, and an annual car
allowance of $14,340. API paid Jerome Rabinowitz an annual salary of $130,000 and an annual car allowance of $7,200. The Company paid $183,364 in rent, utilities, personnel, telecommunications, secretarial, administrative support and other expenses
to a corporation of which Phillip DeZwirek is a director and officer. The Company paid Jason DeZwirek annual consulting compensation of $57,154 and also paid $4,987 in consulting fees to a corporation of which Jason DeZwirek is a director and
officer. API paid Claudio Mannarino an annual salary of $65,802 and an annual car allowance of $2,388. API does not pay any further compensation to Mr. Mills, Phillip DeZwirek, Jason DeZwirek, Mr. Rabinowitz, Mr Mannarino,
Mr. Markowitz or to any of its directors.



Cash Compensation of Directors During the Financial Year Ended May 31, 2005



No directors of the Company were compensated in cash by the Company or any of its subsidiaries during the financial year ended May 31, 2005, for their services in their capacity as directors.



Stock Option Plan



On August 1, 2003, the board of directors of the Company authorized a stock option plan
(2003 Option Plan) for directors, officers, employees and consultants of the Company and its subsidiaries, which reserves an aggregate of 460,326 Common Shares (as adjusted to reflect the one (1) for ten (10) common share
consolidation) for issuance on the exercise of such options. The terms of the 2003 Option Plan restrict options granted, at any one point in time, to a maximum of 20% of the outstanding Common Shares. Also, no optionee can be granted options of more
than 5% of the outstanding Common Shares at any one point in time. The maximum term of any option granted is five years. The 2003 Option Plan was approved by the Company stockholders at the Annual Meeting of Shareholders held on October 8,
2003.



64



---

Stock Options Granted to Directors and Officers



The Company granted stock options to its officers or directors after the close of its fiscal
year ending May 31, 2005 as follows.



|                 |  |          |  |               |  |                    |  |                 |  |                
|---------------- |  | -------- |  | ------------- |  | ------------------ |  | --------------- |  | ---------------
|Optionee         |  | Position |  | Date of Grant |  | Number of Options* |  | Exercise Price* |  | Expiration Date
|Jason DeZwirek   |  | Director |  |               |  | 200,000            |  | US$2.50         |  | January 4, 2010
|Phillip DeZwirek |  | Director |  |               |  | 200,000            |  | US$2.50         |  | January 4, 2010
|                 |  |          |  |               |  |                    |  |                 |  |                
|TOTAL            |  |          |  |               |  | 400,000            |  |                 |  |                
|                 |  |          |  |               |  |                    |  |                 |  |                



Long-Term Incentive Plan Awards



The Company did not have a
long-term incentive plan (the definition of long-term incentive plan contained in the Ontario Securities Act expressly excludes a stock option plan) during the financial year ended May 31, 2005.



Pension and Retirement Benefits



During the fiscal year ending May 31, 2005, the Company provided its employees and
employees of its subsidiaries with a simplified retirement benefit plan whereby the Company matched employees contributions up to the lesser of three percent of each employees annual income or $6,000. The total cost to the Company for
such contributions for the fiscal year ended May 31, 2005 was $22,859. Neither the Company nor its subsidiaries have set aside or accrued any funds for the purpose of providing pension, retirement, or similar benefits.



C. BOARD PRACTICES



The Company has three directors. The three directors named below continue to serve as of the date of this Annual Report. The current terms
of each of the Companys directors began on September 22, 2005, the date of the Companys 2005 Annual Meeting of Shareholders, and will expire on the date of the Companys 2006 Annual Meeting of Shareholders. Each of the
directors named below has served as a Director of the Company since the date set forth beside his name:



|                 |  |                     |  |                     
|---------------- |  | ------------------- |  | --------------------
|Name             |  | Beginning of Tenure |  | Expiration of Term  
|                 |  |                    
|Phillip DeZwirek |  | August 31, 2001     |  | 2006 annual meeting*
|                 |  |                    
|Thomas W. Mills  |  | August 31, 2001     |  | 2006 annual meeting*
|                 |  |                    
|Jason DeZwirek   |  | August 31, 2001     |  | 2006 annual meeting*

---

|* | such directors may be re-elected at such meeting
|- | ------------------------------------------------



None of the Companys directors are parties to service contracts with the Company or any of its subsidiaries providing for benefits upon termination of employment.



The Company does not have a remuneration committee. As of the date of this
Annual Report, the Companys audit committee consists of two non-independent directors, Phillip DeZwirek and Jason DeZwirek, both of whom are executive officers and directors of the Company. Phillip DeZwirek and



65



---

Jason DeZwirek also are major shareholders of the Company. Phillip and Jason DeZwirek are father and son. The members are
appointed by the Companys directors at the conclusion of the annual meeting to hold office until the next annual meeting or until their successors are elected or appointed. The audit committee appoints the Companys auditors, which
appointment also is subject to shareholder approval, approves the terms of the auditors engagement and approves, in advance, any additional work to be performed for the Company by its auditors. The audit committee reviews the financial
statements of the Company and reports thereon to the Companys Board of Directors before the financial statements are approved by the Board of Directors.



In the event the Company applies for and is accepted for quotation in the NASDAQ small cap market, then a majority of the members of the Companys Board of
Directors will have to be independent directors as defined by NASDAQ. The independent directors must have regularly scheduled meetings at which only independent directors are present. Compensation of the chief executive officer of the Company must
be determined, or recommended to the Board of Directors for determination, either by (i) a majority of the independent directors, or (ii) a compensation committee comprised solely of independent directors, and the chief executive officer
cannot be present during voting or deliberations. Compensation of all other executive officers must be determined, or recommended to the Board of Directors either by (i) a majority of the independent directors, or (ii) a compensation
committee comprised solely of independent directors. Director nominees must either be selected, or recommended for selection by the Board of Directors either by (i) a majority of the independent directors, or (ii) a nominations committee
comprised solely of independent directors. The nominations process must be set forth in a formal written charter or a Board of Directors resolution. The Companys audit committee will have to be comprised of at least three
(3) members, all of whom are independent as defined by NASDAQ and under SEC Rule 10A-3(b)(1), and who have not participated in the preparation of the financial statements of the Company or any subsidiary of the Company during the past three
years. Each member of the audit committee must be able to read and understand fundamental financial statements, including an issuers balance sheet, income statement and cash flow statement. One member of the audit committee must have
employment experience in finance or accounting, professional certification in accounting, or any other comparable experience or background which results in the individuals financial sophistication, including being or having been a chief
executive officer, chief financial officer or other senior officer with financial oversight responsibilities. These rules became effective for small business filers such as the Company on July 31, 2005. Accordingly, these rules would require
that the Company appoint three independent directors to serve on its audit committee. NASDAQ also requires that all listed issuers adopt a written audit committee charter that covers specified responsibilities and duties. The audit committee must
review and reassess the adequacy of the written audit committee charter on an annual basis.



66



---

D. EMPLOYEES



The Company, including its subsidiaries, employed the following numbers of employees as of the dates and at the locations set forth below:



|                         |  |         |  |         |  |         |  |         |  |         |  |        
|------------------------ |  | ------- |  | ------- |  | ------- |  | ------- |  | ------- |  | -------
|Location                 |  | 5/31/03 |  | 10/1/03 |  | 5/31/04 |  | 10/1/04 |  | 5/31/05 |  | 10/1/05
|Toronto, Ontario, Canada |  | 0       |  | 0       |  | 0       |  | 0       |  | 0       |  | 0      
|Hauppauge, New York      |  | 28      |  | 31      |  | 32      |  | 35      |  | 45      |  | 40     
|Ogdensburg, New York     |  | 18      |  | 18      |  | 15      |  | 18      |  | 17      |  | 20     
|Nepean, Ontario          |  | 138     |  | 132     |  | 129     |  | 126     |  | 122     |  | 126    
|Kanata, Ontario          |  | 0       |  | 0       |  | 0       |  | 0       |  | 0       |  | 0      
|Albertson, New York      |  | 3       |  | 3       |  | 0       |  | 0       |  | 0       |  | 0      
|Bridgeport, Connecticut  |  | 6       |  | 6       |  | 6       |  | 6       |  | 3       |  | 3      
|                         |  |         |  |         |  |         |  |         |  |         |  |        
|TOTAL                    |  | 193     |  | 190     |  | 182     |  | 185     |  | 187     |  | 189    
|                         |  |         |  |         |  |         |  |         |  |         |  |        



67



---

The Company, including its subsidiaries, employed the following numbers of employees as of the dates and in the
categories of activities set forth below:



|                                                    |  |         |  |         |  |         |  |         |  |         |  |        
|--------------------------------------------------- |  | ------- |  | ------- |  | ------- |  | ------- |  | ------- |  | -------
|Activity                                            |  | 5/31/03 |  | 10/1/03 |  | 5/31/04 |  | 10/1/04 |  | 5/31/05 |  | 10/1/05
|Corporate Offices                                   |  | 0       |  | 0       |  | 0       |  | 0       |  | 0       |  | 0      
|Website Management                                  |  | 0       |  | 0       |  | 0       |  | 0       |  | 0       |  | 0      
|API * Management                                    |  | 2       |  | 2       |  | 2       |  | 2       |  | 2       |  | 2      
|API Sales                                           |  | 2       |  | 2       |  | 2       |  | 2       |  | 2       |  | 2      
|API Design Engineering                              |  | 1       |  | 1       |  | 2       |  | 2       |  | 2       |  | 2      
|API Testing / Environmental Engineering             |  | 1       |  | 1       |  | 2       |  | 2       |  | 2       |  | 2      
|API Process Engineering                             |  | 1       |  | 1       |  | 1       |  | 1       |  | 1       |  | 1      
|API Quality Assurance                               |  | 2       |  | 2       |  | 2       |  | 2       |  | 2       |  | 2      
|API Production Management                           |  | 1       |  | 2       |  | 2       |  | 2       |  | 2       |  | 2      
|API Assembly                                        |  | 17      |  | 19      |  | 14      |  | 17      |  | 25      |  | 22     
|API Accounting / Human Resources                    |  | 1       |  | 1       |  | 2       |  | 2       |  | 2       |  | 2      
|Filtran * Management                                |  | 1       |  | 1       |  | 1       |  | 1       |  | 1       |  | 1      
|Filtran Sales                                       |  | 3       |  | 2       |  | 3       |  | 3       |  | 3       |  | 4      
|Filtran Design Engineering                          |  | 8       |  | 8       |  | 9       |  | 10      |  | 8       |  | 7      
|Filtran Testing / Environmental Engineering         |  | 11      |  | 10      |  | 11      |  | 11      |  | 11      |  | 11     
|Filtran Quality Assurance                           |  | 5       |  | 4       |  | 3       |  | 3       |  | 6       |  | 5      
|Filtran Production Management                       |  | 9       |  | 8       |  | 6       |  | 5       |  | 3       |  | 2      
|Filtran Assembly                                    |  | 99      |  | 99      |  | 92      |  | 91      |  | 90      |  | 100    
|Filtran Accounting/ Human Resources                 |  | 3       |  | 3       |  | 3       |  | 3       |  | 3       |  | 3      
|Filtran Purchasing, Stock, Shipping and Maintenance |  | 17      |  | 15      |  | 17      |  | 17      |  | 14      |  | 13     
|Filtran Production                                  |  | 0       |  | 0       |  | 0       |  | 0       |  | 0       |  | 0      
|TM Systems Management***                            |  | 1       |  | 1       |  | 1       |  | 1       |  | 1       |  | 1      
|TM Systems Sales                                    |  | 1       |  | 1       |  | 1       |  | 1       |  | 0       |  | 0      
|TM Systems Design Engineering                       |  | 1       |  | 1       |  | 1       |  | 1       |  | 1       |  | 1      
|TM Systems Testing/ Environmental Engineering       |  | 1       |  | 1       |  | 1       |  | 1       |  | 1       |  | 1      
|TM Systems Product Management                       |  | 1       |  | 1       |  | 1       |  | 1       |  | 1       |  | 1      
|TM Systems Assembly                                 |  | 3       |  | 3       |  | 3       |  | 3       |  | 3       |  | 1      
|TM Systems Accounting & Human Resources             |  | 1       |  | 1       |  | 1       |  | 1       |  | 1       |  | 1      
|                                                    |  |         |  |         |  |         |  |         |  |         |  |        
|TOTAL                                               |  | 193     |  | 190     |  | 182     |  | 185     |  | 187     |  | 189    
|                                                    |  |         |  |         |  |         |  |         |  |         |  |        

---

|* | API = API Electronics, Inc., a wholly-owned subsidiary of the Company.
|- | ----------------------------------------------------------------------

|** | Filtran = Filtran Inc., and Filtran Limited, wholly owned subsidiaries of the Company.
|-- | --------------------------------------------------------------------------------------

|*** | TM Systems = TM Systems II, Inc., a wholly-owned subsidiary of the Company.
|--- | ---------------------------------------------------------------------------



68



---

E. SHARE OWNERSHIP



Share Ownership of Directors and Officers and Senior Management



As of October 31, 2005, an aggregate of 2,572,453 Common Shares of the Company were issued and outstanding. The table below sets forth
the share ownership in the Company of the persons listed in subsection 6.B of this Item 6 above as of October 31, 2005, based on numbers reported to the Company by the persons set forth below. None of the persons set forth below have
different voting rights.



69



---

|                  |  |                              |     |  |                                                     |  
|----------------- |  | ---------------------------- | --- |  | --------------------------------------------------- | -
|Name              |  | Number of Common Shares Held |     |  | Percentage of Issued andOutstanding CommonShares(d) |  
|Phillip DeZwirek  |  | 511,174                      | (a) |  | 19.87                                               | %
|Thomas W. Mills   |  | 32,825                       | (b) |  | 1.28                                                | %
|Jason DeZwirek    |  | 453,678                      | (c) |  | 17.64                                               | %
|Jerome Rabinowitz |  | None                         |     |  |                                                    |  
|Claudio Mannarino |  | None                         |     |  |                                                    |  
|Arnie Markowitz   |  | None                         |     |  |                                                    |  

---

Notes:

|(a) | Mr. Phillip DeZwirek holds 50% of Icarus Investments Corp., which in turn holds 50.01% of Can-Med Technology, Inc. Can-Med Technology, Inc. (doing business as Green Diamond Oil
Corp.) held 261,178 Common Shares of the Company as of October 31, 2005. All of such shares are attributed to Mr. DeZwirek, which represent approximately 10.15% of the outstanding Common Shares of the Company. Mr. Phillip DeZwirek
controls Technapower Industries Corporation, a company that held 16,496 Common Shares of the Company, representing an additional 0.69% of the Companys Common Shares, as of October 31, 2005. Mr. Phillip DeZwirek directly holds 233,500
shares of common stock of the Company, which represents approximately 9.07% of the outstanding Common Shares of the Company. Mr. DeZwirek also holds 200,000 options to purchase common stock of the Company, which are not included in this chart.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Excludes options to purchase 10,000 shares of common stock of the Company held by Mr. Mills.
|--- | --------------------------------------------------------------------------------------------

|(c) | Mr. Jason DeZwirek holds 50% of Icarus Investments Corp., which in turn holds 50.01% of Can-Med Technology, Inc. Can-Med Technology Inc. (doing business as Green Diamond Oil
Corp.) held 261,178 Common Shares of the Company as of October 31, 2005. All of such shares are attributed to Mr. DeZwirek, which represents approximately 10.15% of the outstanding Common Shares of the Company. Mr. Jason DeZwirek
directly holds 192,500 shares of common stock of the Company, which represents approximately 7.48% of the outstanding Common Shares of the Company. Mr. DeZwirek also holds 200,000 options to purchase common stock of the Company, which are not
included in this chart.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Percentages are computed by dividing the number of Common Shares held (excluding options and warrants to purchase Common Shares), by the 2,572,453 Common Shares of the Company
issued and outstanding as of October 31, 2005. Note that percentages held by the Companys major shareholders, as disclosed in Item 7A below, which reflect shares beneficially owned (including options and warrants), may be higher.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Stock Option Plan



On August 1, 2003, the board of directors authorized the 2003 Option
Plan for directors, officers, employees and consultants of the Company and its subsidiaries. The terms of the plan restrict options granted at any point in time to 20% of the outstanding shares of the Company. Also, no optionee can be granted
options of more than 5% of the outstanding Common Shares of the Company at one point in time. The maximum term of any option granted is five years. The 2003 Option Plan replaced the Companys then existing 1995 stock option plan. Pursuant to
the terms of the 2003 Option Plan, the outstanding options issued under the Companys 1995 stock option plan were deemed to be re-granted under the 2003 Option Plan.



Stock Options Held by Directors and Officers and Senior Management



The following table sets forth all outstanding stock options and the value of exercised and
unexercised options held by directors and officers of the Company for whom individual disclosure is required under Ontario law or for whom the Company has elected to disclose publicly as of the date of this Annual Report. The Company issued 200,000
options to Phillip DeZwirek and 200,000 options to Jason DeZwirek during January 2005. During that same month 220,000 options held by each of Phillip DeZwirek and Jason



70



---

DeZwirek were cancelled. Thomas Mills options were issued during the fiscal year ended May 31, 2002 under the
Companys 1995 stock option plan and are deemed regranted under the 2003 Option Plan.



Common Share Purchase Options (1)



|                  |  |                 |  |                |      |                 |                 |                                                                   |           
|----------------- |  | --------------- |  | -------------- | ---- | --------------- | --------------- | ----------------------------------------------------------------- | ----------
|Optionee          |  | Numberof Shares |  | Exercise Price |      | Expiration Date |                 | Value ofUnexercised In-The-MoneyOptions/SARs atMay 31, 2004(2)(3)
|Phillip DeZwirek  |  | 200,000         |  | $              | 2.50 |                 | January 4, 2010 |                                                                   | 450,000   
|Thomas W. Mills   |  | 5,000           |  | $              | 4.50 |                 | August 31, 2006 |                                                                   | 1,2502,500
|Thomas W. Mills   |  | 5,000           |  | $              | 7.50 |                 | August 31, 2006 |                                                                   | -0-       
|Jason DeZwirek    |  | 200,000         |  | $              | 2.50 |                 | January 4, 2010 |                                                                   | 450,000   
|Jerome Rabinowitz |  | None            |  |                |     |                 |                |                                                                   |          
|Claudio Mannarino |  | None            |  |                |     |                 |                |                                                                   |          
|Arnie Markowitz   |  | None            |  |                |     |                 |                |                                                                   |          

---

|(1) | No purchase price was associated with any of the stock options set forth above. The number of shares and exercise prices associated with the stock options set forth above reflect
post-consolidation and post one (1) for ten (10) common share consolidation numbers and pricessee Note 9(d) to the financial statements contained in Part III, Item 17 of this Annual Report.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The closing price of the Companys shares of Common Stock on May 31, 2005, that last trading day of the Companys 2005 fiscal year, was $4.75
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In January 2005, Jason DeZwirek and Phillip DeZwirek each exercised 220,000 stock options
|--- | -----------------------------------------------------------------------------------------



Warrants Held by Directors and Officers and Senior Management



None.

There are no arrangements between the Company and its employees involving the issue or grant of options or shares or securities of the Company.



71



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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS



A. MAJOR SHAREHOLDERS



The following table discloses all known major shareholders beneficially owning 5% or more of the Companys issued and outstanding
shares of Common Stock as of October 31, 2005 (plus Thomas Mills, who owns under 5%). As of October 31, 2004 (and as of the date of this Annual Report), an aggregate of 2,572,453 Common Shares of the Company were issued and outstanding.
None of the major shareholders have different voting rights.



|                                                                    |  |                                          |     |  |                                                      |  
|------------------------------------------------------------------- |  | ---------------------------------------- | --- |  | ---------------------------------------------------- | -
|Name                                                                |  | Number of CommonShares BeneficiallyOwned |     |  | Percentage of Issued andOutstanding CommonShares (a) |  
|Can-Med Technology, Inc., doing business as Green Diamond Oil Corp. |  | 261,178                                  | (a) |  | 10.15                                                | %
|Phillip DeZwirek                                                    |  | 711,174                                  | (b) |  | 27.65                                                | %
|Jason DeZwirek                                                      |  | 653,678                                  | (c) |  | 25.41                                                | %
|Thomas W. Mills                                                     |  | 42,825                                   | (d) |  | 1.66                                                 | %

---

Notes:

|(a) | Computed by dividing the number of shares beneficially held by each shareholder, including Common Shares underlying options exercisable within 60 days, by the total number of issued
and outstanding Common Shares of the Company plus such shareholders Common Shares underlying options exercisable within 60 days.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Includes 261,178 Common Shares held of record by Can-Med Technology, Inc. d/b/a Green Diamond Oil Corp. (Green Diamond Corp.). Mr. Phillip DeZwirek is the President
of Green Diamond Corp., and holds a 50% equity interest in Icarus Investments Corp., which in turn holds a 50.01% equity interest in Green Diamond Corp. Also includes 16,496 Common Shares held of record by Technapower Industries Corporation, a
corporation controlled by Mr. Phillip DeZwirek. Mr. Phillip DeZwirek directly holds 233,500 shares of common stock of the Company. Also includes 200,000 Common Shares underlying options exercisable within 60 days held of record by Phillip
DeZwirek.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Includes 261,178 Common Shares held of record by Green Diamond Corp. Mr. Phillip DeZwirek, Mr. Jason DeZwireks father, is the President of Green Diamond Corp., and
Mr. Jason DeZwirek holds a 50% equity interest in Icarus Investments Corp., which in turn holds a 50.01% equity interest in Green Diamond Corp. Mr. Jason DeZwirek directly holds 192,500 shares of common stock of the Company. Also includes
200,000 Common Shares underlying options exercisable within 60 days held of record by Jason DeZwirek.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Includes 32,825 Common Shares and 10,000 Common Shares underlying options exercisable within 60 days held of record by Thomas Mills.
|--- | ------------------------------------------------------------------------------------------------------------------------------------



Each of the major shareholders listed above obtained his or its Common Shares effective
August 31, 2001. There have been no other significant changes in the percentage ownership held by any of the above major shareholders prior to August 31, 2001, or after such date.



The following table discloses the geographic distribution of the holders of record of the
Companys Common Stock as of October 31, 2005:



|                             |  |                       |  |                 |  |                           |  |                    
|---------------------------- |  | --------------------- |  | --------------- |  | ------------------------- |  | -------------------
|Country                      |  | Number ofShareholders |  | Number ofShares |  | Percentage ofShareholders |  | Percentage ofShares
|Canada                       |  | 1,042                 |  | 2,027,732       |  | 80.34                     |  | 78.82              
|United States (host country) |  | 247                   |  | 543,249         |  | 19.04                     |  | 21.12              
|Australia`                   |  | 5                     |  | 129             |  | 0.38                      |  | 0.01               
|Denmark                      |  | 1                     |  | 1               |  | 0.08                      |  | 0.00               
|Botswana                     |  | 1                     |  | 1,334           |  | 0.08                      |  | 0.05               
|England                      |  | 1                     |  | 8               |  | 0.08                      |  | 0.00               
|                             |  |                       |  |                 |  |                           |  |                    
|Total                        |  | 1,297                 |  | 2,572,453       |  | 100.00                    |  | 100.00             
|                             |  |                       |  |                 |  |                           |  |                    



The Company may be indirectly
controlled by Green Diamond Corp., which, as of October 31, 2005, held 261,178 shares of Common Stock of the Company, representing approximately 10.15% of the Companys issued and outstanding shares of Common Stock as of October 31,
2005. The Company may be indirectly controlled by Phillip DeZwirek, who indirectly, through his ownership of a portion of Green Diamond Corp. and Technapower Industries Corporation and his direct ownership of shares, held approximately 19.87% of the
Companys issued and outstanding shares of Common Stock (excluding options) as of October 31, 2005. The Company may be indirectly controlled by Jason DeZwirek, who indirectly, through his ownership of a portion of Green Diamond Corp. and
his direct ownership of shares, held approximately 17.649% of the Companys issued and outstanding shares of Common Stock (excluding options) as of October 31, 2005. The Company is not aware of any other corporations, foreign



72



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governments, natural persons, or legal persons that may directly or indirectly own or control the Company. All of the
shares of common stock held by Green Diamond Corp. are attributed to both Phillip DeZwirek and Jason DeZwirek.



There are no arrangements known to the Company, the operation of which may at a subsequent date result in a change in control of the Company.



B. RELATED PARTY TRANSACTIONS SINCE JUNE 1, 2004



The Company is a party to an oral agreement with Green Diamond Corp., a major shareholder of the Company that is controlled by Jason
DeZwirek, the Vice-Chairman, Secretary and a director of the Company, and Phillip DeZwirek, the Chairman, Chief Executive Officer, Treasurer and a director of the Company. The agreement provides that Green Diamond Corp. will provide executive office
space, office equipment and supplies, telecommunications, personnel and management services to the Company for an annual fee of $170,000 (plus certain expenses). During the year ended May 31, 2005, the Company paid Green Diamond Corp. $183,364
for such services.



The Company acquired API as of August 31, 2001. In
connection with that transaction, the Company issued to the stockholders of API, in exchange for all of the outstanding stock of API, 650,000 units of the Company, each unit consisting of one common share and 1/2 of one Series A common share
purchase warrant exercisable at $4.50 per share, originally expiring March 30, 2003 and 1/2 of one Series B common share purchase warrant exercisable at $7.50 per share, originally expiring September 30, 2003. The expiration dates of these
warrants were extended to February 28, 2004 and August 30, 2004, respectively, effective February 25, 2003 and to February 28, 2005 and August 30, 2005, respectively, effective January 9, 2004. The warrants expired and
are no longer outstanding. As a result of the share exchange, the Company issued to (i) Green Diamond Corp., which is 50.01% owned by Icarus Investments Corp., which is owned 50% by Phillip DeZwirek and 50% by Jason DeZwirek, 261,178 shares of
common stock, 140,214 Series A warrants and 140,214 Series B warrants, (ii) Technapower Industries, a company controlled by Phillip DeZwirek, 16,496 shares of common stock, 8,248 Series A warrants and 8,248 Series B warrants, and
(iii) Thomas Mills, 32,825 shares of common stock, 16,496 Series A warrants and 16,496 Series B warrants. The unit number, share and warrant numbers, and the warrant exercise prices have been adjusted to reflect the one (1) for ten
(10) common share consolidation, effective September 15, 2004. All of these warrants have expired.



The Company acquired 39,630 shares of CECO Environmental Corp. (CECO) for $139,747 in February and March 2005. The market value of such shares was $88,771 on May 31, 2005. The Company acquired an
additional 1,200 shares of CECO in August 2005 and 8,000 shares of CECO in September 2005. In October 2005, the Company sold 33,330 shares of CECO. As of October 31, 2005, the Company held 15,500 shares of CECO with a market value of $71,300.
CECO is a publicly traded company whose shares are quoted on NASDAQ. Phillip DeZwirek, the Chairman and Chief Executive Officer, director and major shareholder of the Company is the Chairman and Chief Executive Officer, a director and a major
shareholder of CECO. Jason DeZwirek, the Secretary, a directory and a major shareholder of the Company is the Secretary, a director and a major shareholder of CECO.



The bank debt of API is guaranteed by Phillip DeZwirek and Thomas W. Mills. See Note 6 to the financial statements included in
Part III, Item 17 of this Annual Report.



See Item 6.B. for current
compensation paid to officers and directors of the Corporation.



73



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C. INTERESTS OF EXPERTS AND COUNSEL



Not Applicable.



ITEM 8. FINANCIAL INFORMATION



Consolidated Financial Statements



See the Consolidated Financial Statements set forth in Part III, Item 17 hereof and filed as a part of this Annual Report.



Export Sales



Export sales did not constitute a significant portion of the Companys total sales volume as of May 31, 2005, the end of the
Companys most recent fiscal year.



Legal or Arbitration Proceedings



As of the date of this Annual Report, there are no legal or arbitration
proceedings that may have, or have had in the recent past, significant effects on the Companys financial position or profitability.



Company Policy on Dividend Distributions



The Company does not intend to pay dividends in cash or in kind in the foreseeable future. The Company expects to retain its earnings to finance the further growth of the
Company. The directors of the Company will determine if and when dividends should be declared and paid in the future based upon the earnings and financial conditions of the Company at the relevant time and such other factors as the directors may
deem relevant. All of the Common Shares of the Company are entitled to an equal share in any dividends declared and paid.



Significant Changes



No significant changes have occurred since May 31, 2005, the date of the Consolidated Financial Statements set forth in Part III, Item 17 hereof and filed as a part of this Annual Report.



ITEM 9. THE OFFER AND LISTING



Not applicable except for Item 9A(4) and Item 9C.



A(4). PRICE HISTORY



Price History in the Canadian Market



The following table sets forth the reported high and low sale prices and, as applicable, the volume of trading of the Companys common shares, as adjusted to reflect
a 1:10 consolidation of the Companys common shares, effective September 15, 2004, a 1:3 consolidation of the Companys common shares effective September 10, 2001 and a 1:10 consolidation of the Companys common shares
effective May 18, 1999, and as reported by the Canadian Dealing Network Inc. (CDN) (prior to December 22, 2000) or the TSX Venture Exchange, formerly known as the Canadian Venture Exchange (CDNX) (after
December 22, 2000 through August 8, 2001), as applicable, for the periods indicated:



74



---

|      |  |                              |  |            |                |     |   |     
|----- |  | ---------------------------- |  | ---------- | -------------- | --- | - | ----
|      |  |                              |  | Canadian $
|      |  | Period                       |  | High       |                | Low
|      |  | Past 6 Calendar Months(a)    |  |            | Not Applicable |     |   |     
|      |  | Quarterly Data Since Q1 2003 |  |            | Not Applicable |     |   |     
|      |  |                              | 
|2005: |  | FYE 5/31/05(a)               |  |            | N/A            |     |   | N/A 
|2004: |  | FYE 5/31/04(a)               |  |            | N/A            |     |   | N/A 
|2003: |  | FYE 5/31/03(a)               |  |            | N/A            |     |   | N/A 
|2002: |  | FYE 5/31/02(b)               |  | $          | 15.00          |     | $ | 2.70
|2001: |  | FYE 4/30/01(c,d)             |  |            | 22.80          |     |   | 7.50

---

|(a) | The Companys trading was halted on the CDNX as of August 8, 2001. The Companys Board of Directors determined not to seek to re-establish trading of its common
shares on the CDNX and delisted voluntarily from the CDNX.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | The Companys common shares ceased trading in Canada as of August 8, 2001. Accordingly, the information is for the period beginning May 1, 2001 and ending
August 8, 2001.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Beginning December 22, 2000, the date on which trading commenced on the CDNX.
|--- | -----------------------------------------------------------------------------

|(d) | The Companys common shares were not traded in Canada from March 3, 2000 until December 22, 2000.
|--- | -------------------------------------------------------------------------------------------------



Prior to December 22, 2000, the Companys common shares were traded on the CDN, and
were traded under the symbol OPUS from May 1999 until March 3, 2000. On March 3, 2000, when the Company announced a transaction with IL Data Corporation, the Companys common shares were removed from the visible quotation provided by
the CDN because the transaction represented a change in control, a change in business and a change of name for the Company. The IL Data Corporation transaction was completed on June 6, 2000, the name change occurred on July 25, 2000, and
the Company filed an application for quotation with CDN on August 11, 2000.



In the meantime, some companies that were quoted on CDN were invited to apply for listing on the CDNX. The Company made the application for listing on the CDNX and filed the necessary documentation, and began listing the shares of the
Company on Tier 3 of CDNX as of December 22, 2000.



For the period from
December 22, 2000 through August 8, 2001, the common shares of the Company were listed on the CDNX under the symbol YIK and CUSIP #461459109. The Companys trading was halted on the CDNX as of August 8, 2001, and its
shares no longer trade on CDNX. This is a result of the fact that the Companys Board of Directors, based on business and timing factors, decided not to obtain pre-approval from the CDNX for its August 31, 2001 acquisition of API
Electronics, Inc., which constituted a reverse take-over transaction requiring pre-approval. The Companys Board of Directors determined not to seek to re-establish trading of its common shares on the CDNX, and requested to be delisted
voluntarily from the CDNX.



Price History in the United States Market



During the fiscal year ending April 30, 2001 and through
September 7, 2001, while the Companys name was InvestorLinks.com Inc., the Common Stock of the Company was traded over-the-counter on the



75



---

OTCBB under the symbol IVLKF. On August 30, 2001, the Companys shareholders approved a change of
the Companys name from InvestorLinks.com Inc. to API Electronics Group Inc., and the consolidation of the authorized common shares on the basis that every three pre-consolidation Common Shares were to be converted into one post-consolidation
Common Share. The name change and share consolidation became effective on September 10, 2001, when the Company filed Articles of Amendment in Ontario. On September 10, 2001, shares of the Companys Common Stock began trading on the
OTC under the symbol APIEF. At the Companys 2003 annual meeting, the Companys shareholders approved the consolidation of the authorized common shares on the basis that every ten pre-consolidation common shares were to be
converted into one post-consolidation common share. On September 15, 2004, the 1:10 common share consolidation became effective. In connection with that common share consolidation, the Company changed its name to API Electronics Group Corp. and
its trading symbol to AEGCF.



The Company may apply for listing on
the NASDAQ small cap market. The Company does not know whether its application will be accepted or whether its Common Stock will be listed on NASDAQ. The Company does not know if and when the NASDAQ application will be filed.



The following table sets forth the reported high and low bid prices of the common shares, as
adjusted to reflect a 1:10 consolidation of the Companys common shares effective September 15, 2004, a 1:3 consolidation of the Companys common shares effective September 10, 2001 and a 1:10 consolidation of the Companys
common shares effective May 18, 1999, and as reported by the NASD for the fiscal periods indicated (the common stock commenced trading on the OTCBB in February 1997). Such over-the-counter market quotations are based on closing prices and
reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.



76



---

|             |  |                                 |  |        |  |     
|------------ |  | ------------------------------- |  | ------ |  | ----
|             |  | Period                          |  | High   |  | Low 
|             |  | Past 6 Calendar Months          |  |        |  |     
|             |  |                                 | 
|2005:        |  | October                         |  | 5.30   |  | 3.85
|             |  | September                       |  | 5.18   |  | 4.50
|             |  | August                          |  | 5.55   |  | 5.03
|             |  | July                            |  | 6.24   |  | 5.60
|             |  | June                            |  | 6.40   |  | 5.25
|             |  | May                             |  | 5.00   |  | 4.00
|             |  |                                 | 
|Fiscal 2006  |  | Second Quarter (until 10/31/05) |  | 5.30   |  | 3.85
|             |  | First Quarter (8/31/05)         |  | 6.40   |  | 5.03
|             |  |                                 | 
|Fiscal 2005  |  | Fourth Quarter (5/31/05)        |  | 5.20   |  | 3.75
|             |  | Third Quarter (2/28/05)         |  | 5.25   |  | 2.33
|             |  | Second Quarter (until 11/30/04) |  | 4.00   |  | 2.30
|             |  | First Quarter (8/31/04)         |  | 5.50   |  | 3.50
|             |  |                                 | 
|Fiscal 2004: |  | Fourth Quarter (5/31/04)        |  | 7.50   |  | 5.00
|             |  | Third Quarter (2/28/04)         |  | 7.00   |  | 5.40
|             |  | Second Quarter (11/30/03)       |  | 9.90   |  | 6.30
|             |  | First Quarter (8/31/03)         |  | 12.00  |  | 7.90
|             |  |                                 | 
|2005:        |  | FYE 5/31/05                     |  | 5.50   |  | 2.30
|             |  |                                 | 
|2004:        |  | FYE 5/31/04                     |  | 12.00  |  | 5.00
|             |  |                                 | 
|2003:        |  | FYE 5/31/03                     |  | 39.80  |  | 4.70
|             |  |                                 | 
|2002:        |  | FYE 5/31/02                     |  | 34.80  |  | 2.50
|             |  |                                 | 
|2001:        |  | FYE 4/30/01                     |  | 101.25 |  | 3.75



The Companys common stock is not
registered to trade in the United States in the form of American Depository Receipts (ADRs) or similar certificates.



The Companys common stock is issued in registered form and the following information is taken from the records of Equity Transfer Services Inc. (located in Toronto,
Ontario, Canada), the registrar and transfer agent for the Common Stock. The Companys common stock is not subject to any special restrictions on transfer.



As of October 31, 2005, the stockholders list for the Companys common shares showed 1,297 registered stockholders and 2,572,453 common shares
outstanding. Since a portion of the Companys common shares is held by agents in street name, and the Company (pursuant to applicable Canadian and corporate law) only sends information concerning the Company, including with respect to its
Annual General Meeting, to shareholders who request this information, the Company cannot accurately estimate the total number of beneficial holders of its common shares. For the same reason the Company is unaware of how many of its outstanding
common shares are held beneficially by United States residents. In accordance with Rule 12g5-1 of the Securities Exchange Act of 1934, the Companys share register indicated, as of October 31, 2005, 247 stockholders of record having
addresses in the United States (including voting trustees, depositories, share transfer agents, or any person acting on behalf of the Company within the United States), which persons held 543,249 of the Companys issued and outstanding common
shares, representing approximately 21.12% of the total issued and outstanding common shares as of such date.



77



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C. MARKETS



See Item 9A(4) above.



ITEM 10. ADDITIONAL INFORMATION



A.
SHARE CAPITAL



Not applicable.



B. MEMORANDUM AND ARTICLES OF ASSOCIATION



The Companys corporation number as assigned by the Ontario Ministry of Consumer and
Commercial Relations is 1028514. The Companys Articles of Amalgamation do not contain the Companys purpose or its objectives, as neither is required under the laws of Ontario.



Neither the Articles of Amalgamation nor the Bylaws prohibit a director of the Company from voting on any resolution to approve a material
contract or transaction in which such director has a material interest. Neither the Articles of Amalgamation nor the Bylaws of the Company limit the directors power, in the absence of an independent quorum, to vote compensation to themselves
or any members of their body. The Bylaws provide that directors shall receive remuneration, as the board of directors shall determine from time to time. (Bylaws, Paragraph 4.11). The board of directors may, without the authorization of the
shareholders, (i) borrow money upon the credit of the Company; (ii) issue, reissue, sell or pledge debt obligations of the Company; whether secured or unsecured (iii) give a guarantee on behalf of the Company to secure performance of
obligations; and (iv) charge, mortgage, hypothecate, pledge or otherwise create a security interest in all currently owned or subsequently acquired real or personal, movable or immovable, tangible or intangible, property of the Company to
secure obligations of the Company. (Bylaws, Paragraph 10.1). Neither the Articles of Amalgamation nor the Bylaws of the Company discuss the retirement or non-retirement of directors under an age limit requirement, and there is no number of shares
required for director qualification.



A description of the rights, preferences
and restrictions attached to each class of the Companys shares as set forth in the Companys Articles of Amalgamation follows:



The Companys Articles of Amalgamation provide that the Company is authorized to issue an unlimited number of Common Shares (Common Shares) and an
unlimited number of Special Shares (Special Shares). Of the Special Shares, the Company has designated a class of up to 500,000 Preference Shares (Preference Shares). While the Company has issued Common Shares, it has not
issued any Preference Shares or other Special Shares.



Dividend Rights. The
Companys Articles of Amalgamation provide that no dividends shall be declared, set aside, or paid on the Preference Shares. Thus, only holders of Common Shares are entitled to be paid dividends under the Companys current Articles of
Amalgamation.



Voting Rights. Neither the Companys Articles of
Amalgamation nor its Bylaws provide for the election or reelection of directors at staggered intervals. The holders of Common Shares and Preference Shares have equal voting rights at meetings of the Companys shareholders.



78



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Rights to Share in the Companys Profits. See Dividend Rights above.



Rights to Share in Any Surplus in the Event of Liquidation. Under the Companys Articles
of Amalgamation, upon the dissolution, winding up or liquidation of the Company, holders of Preference Shares are entitled to receive a sum equivalent to the amount paid for the Preference Shares prior to any distribution to the holders of Common
Shares or shares ranking junior to the Preference Shares. Holders of Preference Shares are not entitled to share in any further distribution of the assets or property of the Company. Holders of the Common Shares are entitled to receive the remaining
property of the Company upon dissolution.



Redemption Provisions. Under the
Companys Articles of Amalgamation, the Company, when redeeming shares:



| |  |  | Shall not redeem Preference Shares prior to the expiration of five years from the issuance date without the prior consent of the holder of the Preference Shares to be redeemed;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Shall, at least thirty days prior to the redemption date, mail a notice to all registered holders of Preference Shares stating its intention to redeem such shares. The notice shall
set forth the redemption price, the date on which redemption is to occur, and the number of the holders shares that are to be redeemed. If only a portion of the holders shares is to be redeemed, the Company shall issue such holder a new
certificate for the balance of such shares. After the redemption date, the holders shall not be entitled to exercise any rights of shareholders unless the Company failed to pay the redemption price;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | May at any time, with the consent of the holder, purchase for cancellation all or part of the Preference Shares; and
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | May purchase any of its issued Common Shares subject to the provisions of the Ontario Business Corporations Act.
| | - |  | ----------------------------------------------------------------------------------------------------------------



Sinking Fund Provisions. Neither the Companys Articles of Amalgamation nor its Bylaws
contain sinking fund provisions.



Liability to Further Capital Calls by the
Company. Neither the Companys Articles of Amalgamation nor its Bylaws contain provisions allowing the Company to make further capital calls with respect to any shareholder of the Company.



Discriminatory Provisions Based on Substantial Ownership. Neither the Companys Articles
of Amalgamation nor its Bylaws contain provisions which discriminate against any existing or prospective holders of securities as a result of such shareholder owning a substantial number of shares.



Miscellaneous Provisions. Under the Companys Articles of Amalgamation, holders of
Preference Shares shall not be entitled to sell, assign, transfer or dispose of Preference Shares without the previous, express consent of the directors and the prior written consent of the Ontario Securities Commission. In the event the Company was
to pay dividends on the issued and outstanding shares, the dividend must be claimed within six years of the payment date and payment shall be forfeited and shall revert to the Company if not so claimed.



Neither the Articles of Amalgamation nor the Bylaws of the Company address the process by
which the rights of holders of stock may be changed. The general provisions of the Ontario Business Corporations Act apply to this process, and require shareholder meetings and independent voting for such changes.



79



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Annual general meetings of the Companys shareholders are held on such day as is determined by resolution of the
directors. (Bylaws, Paragraph 6.1). Special meetings of the Companys shareholders may be convened by unanimous shareholder agreements or by order of the board of directors. (Bylaws, Paragraph 6.2). Shareholders of record must be given notice
of such special meeting not less than 21 days nor more than 50 days before the date of the meeting. Notices of meetings of shareholders, other than for consideration of the financial statements and auditors reports, election of directors and
reappointment of incumbent auditors, must state the nature of the business to be transacted in detail and must include the text of any special resolution or bylaw to be submitted to the meeting. (Bylaws, Paragraph 6.3). The Companys board of
directors is permitted to fix a record date for any meeting of the shareholders that is between 21 and 50 days prior to such meeting. (Bylaws, Paragraph 6.5). However, as a result of Ontario securities laws applicable to the Company, the record date
must be no fewer than 30 and no more than 60 days prior to the meeting date. The only persons entitled to admission at a meeting of the shareholders are shareholders entitled to vote, the Companys directors, the Companys auditors, and
others entitled by law, by invitation of the chairman of the meeting, or by consent of the meeting. (Bylaws, Paragraph 6.7).



Neither the Articles of Amalgamation nor the Bylaws of the Company discuss limitations on the rights to own securities or exercise voting rights thereon.



There is no provision of the Companys Articles of Amalgamation or Bylaws that would
delay, defer or prevent a change in control of the Company, and that would operate only with respect to a merger, acquisition, or corporate restructuring involving the Company (or any of its subsidiaries). The Companys Bylaws do not contain a
provision indicating the ownership threshold above which shareholder ownership must be disclosed. With respect to the matters discussed in this Item 10B, the law applicable to the Company is not significantly different from United States law.
Neither the Articles of Amalgamation nor Bylaws contain provisions governing changes in capital that are more stringent than the conditions required by law.



C. MATERIAL CONTRACTS



The following table summarizes each material contract, other than contracts entered into in the ordinary course of business, to which the Company or any member of the Companys group is a party, for the two years
immediately preceding the publication of this Annual Report:



|                |  |                                                                |  |                                        |  |                                                                                                                                                                    |  |                                                           
|--------------- |  | -------------------------------------------------------------- |  | -------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------
|Date            |  | Parties                                                        |  | Type                                   |  | Terms and Conditions                                                                                                                                               |  | Consideration                                             
|March 23, 2004  |  | The Company and Islip Transformer & Metal Co. Inc.             |  | Asset Purchase Agreement               |  | Agreement whereby the Company acquired machinery and equipment and inventory of Islip Transformer & Metal Co. Inc.                                                 |  | $50,000 in cash plus 10% of the amount of confirmed orders
|                |  |                                                                |  |                                       
|January 1, 2005 |  | The Company and Can-Med Technology (d/b/a Green Diamond Corp.) |  | Oral Agreement for management services |  | Renewal of oral Agreement whereby Green-Diamond Corp. provides office space, office equipment and supplies, telecommunications, personnel and management services. |  | $183,364 for fiscal year ended May 31, 2005               



80



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D. EXCHANGE CONTROLS



There are no governmental laws, decrees or regulations in Canada that restrict the export or import of capital, or affect the remittance of dividends, interest or other
payments to a non-resident holder of Common Stock of the Company, other than withholding tax requirements (see Item 7  Taxation).



Except as provided in the Investment Canada Act discussed below, there are no limitations imposed under the laws of Canada, the Province of Ontario, or by the constituent
documents of the Company on the right of a non-resident to hold or vote the Common Stock of the Company.



The Investment Canada Act (the ICA), which became effective on June 30, 1985, regulates the acquisition by non-Canadians of control of a Canadian business enterprise. In effect, the ICA requires
review by Investment Canada, the agency which administers the ICA, and approval by the Canadian government, in the case of an acquisition of control of a Canadian business by a non-Canadian where: (i) in the case of a direct acquisition (for
example, through a share purchase or asset purchase), the assets of the business are Canadian $5 million or more in value; or (ii) in the case of an indirect acquisition (for example, the acquisition of the foreign parent of the Canadian
business) where the Canadian business has assets of Canadian $5 million or more in value or if the Canadian business represents more than 50% of the assets of the original group and the Canadian business has assets of $5 million or more in value.
Review and approval are also required for the acquisition or establishment of a new business in areas concerning Canadas cultural heritage or national identity such as book publishing, film production and distribution, television
and radio production and distribution of music, and the oil and natural gas industry, regardless of the size of the investment.



As applied to an investment in the Company, three methods of acquiring control of a Canadian business would be regulated by the ICA: (i) the acquisition of all or
substantially all of the assets used in carrying on the Canadian business; (ii) the acquisition, directly or indirectly, of voting shares of a Canadian corporation carrying on the Canadian business; or (iii) the acquisition of voting
shares of an entity which controls, directly or indirectly, another entity carrying on a Canadian business. An acquisition of a majority of the voting interests of an entity, including a corporation, is deemed to be an acquisition of control under
the ICA. An acquisition of less than one-third of the voting shares of a corporation is deemed not to be an acquisition of control. An acquisition of less than a majority, but one-third or more, of the voting shares of a corporation is presumed to
be an acquisition of control unless it can be established that the acquisition the corporation is not, in fact, controlled by the acquirer through the ownership of voting shares. For partnerships, trusts, joint ventures or other unincorporated
entities, an acquisition of less than a majority of the voting interests is deemed not to be an acquisition of control.



In 1988, the ICA was amended, pursuant to the Free Trade Agreement dated January 2, 1988 between Canada and the United States, to relax the restrictions of the ICA.
As a result of these amendments, except where the Canadian business is in the cultural, oil and gas, uranium, financial services or transportation sectors, the threshold for direct acquisition of control by US investors and other foreign investors
acquiring control of a Canadian business from US investors has been raised from Canadian $5 million to Canadian $150 million of gross assets, and indirect acquisitions are not reviewable.



In addition to the foregoing, the ICA requires that all other acquisitions of control of Canadian businesses by non-Canadians are subject to
formal notification to the Canadian government. These provisions require a foreign investor to give notice in the required form, which notices are for information, as opposed to review, purposes.



81



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E. TAXATION



Certain Canadian Federal Income Tax Consequences



Management of the Company has been advised by its Canadian legal counsel that the following general summary fairly describes the principal Canadian federal income tax
consequences applicable to a holder of Common Shares of the Company who is a resident of the United States and who is not a resident of Canada, who holds his or her Common Shares in the Company as capital property and who does not use or hold, and
is not deemed to use or hold, his or her Common Shares of the Company in connection with carrying on a business in Canada (a non-resident shareholder).



This summary is based upon the current provisions of the Income Tax Act (Canada) (the ITA), the regulations thereunder (the
Regulations), the current publicly announced administration and assessing policies of the Canada Revenue Agency, and all specific proposals (the Tax Proposals) to amend the ITA and Regulations announced by the Minister of
Finance (Canada) prior to the date hereof. This description is not exhaustive of all possible Canadian federal income tax consequences and, except for the Tax Proposals, does not take into account or anticipate any changes in law, whether by
legislative, governmental or judicial action, nor does it take into account provincial or foreign tax considerations which may differ significantly from those discussed herein. The following discussion is for general information only and is not
intended to be, nor should it be construed to be, legal or tax advice to any holder of Common Shares of the Company, and no opinion or representation with respect to the Canadian Federal Income Tax consequences to any such holder or prospective
holder is made. Accordingly, holders and prospective holders of Common Shares of the Company should consult with their own tax advisors about the federal, provincial and foreign tax consequences of purchasing, owning and disposing of Common Shares
of the Company.



Dividends



Dividends paid on the Common Shares of the Company to a non-resident holder will be subject
to withholding tax under the ITA. The Canada-US. Income Tax Convention (1980) (the Treaty) provides that the normal 25% withholding tax rate is reduced to 15% on dividends paid on shares of a corporation resident in Canada (such as
the Company) to residents of the United States, and also provides for a further reduction of this rate to 5% where the beneficial owner of the dividends is a corporation which is a resident of the United States which owns at least 10% of the voting
shares of the corporation paying the dividend.



Capital Gains



A non-resident of Canada is subject to tax under the ITA in respect of a
capital gain realized upon the disposition of a share of a corporation if the shares are considered to be taxable Canadian property of the holder within the meaning of the ITA and no relief is afforded under any applicable tax treaty.
For purposes of the ITA, the Common Shares of the Company will be taxable Canadian property to a non-resident holder unless the Common Shares are listed on a prescribed stock exchange. The Common Shares are not listed on a prescribed stock exchange.
If the common shares become listed on the NASDAQ small cap market, the common shares will be listed on a prescribed stock exchange.



In the case of a non-resident holder to whom Common Shares of the Company represent taxable Canadian property and who is a resident of the United States and not a former
resident of Canada, no Canadian taxes will be payable on a capital gain realized on such shares by reason of the Treaty unless the value of such shares is derived principally from real property situated in Canada within the meaning of the Treaty.



82



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Certain United States Federal Income Tax Consequences



The following is a general discussion of certain possible United States federal income tax
consequences, under current law, generally applicable to a US Holder (as defined below) of Common Shares of the Company. This discussion does not address all potentially relevant federal income tax matters and does not address consequences peculiar
to persons subject to special provisions of federal income tax law, such as those described below as excluded from the definition of a US Holder. In addition, this discussion does not cover any state, local or foreign tax consequences (See
Certain Canadian Federal Income Tax Consequences above).



The
following discussion is based upon the sections of the Internal Revenue Code of 1986, as amended (the Code), Treasury Regulations, published Internal Revenue Service (IRS) rulings, published administrative positions of the
IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time. The following discussion is for general information only and it is not intended to
be, nor should it be construed to be, legal or tax advice to any holder or prospective holder of Common Shares of the Company, and no opinion or representation with respect to the United States federal income tax consequences to any such holder or
prospective holder is made. Accordingly, holders and prospective holders of Common Shares of the Company should consult their own tax advisors about the federal, state, local, and foreign tax consequences of purchasing, owning and disposing of
Common Shares of the Company.



US Holders



As used herein, a US Holder includes a holder of Common Shares of the Company
who is a citizen or legal resident of the United States, a corporation created or organized in or under the laws of the United States or of any political subdivision thereof and any other person or entity whose ownership of Common Shares of the
Company is effectively connected with the conduct of a trade or business in the United States. A US Holder does not include persons subject to special provisions of federal income tax law, such as tax-exempt organizations, qualified retirement
plans, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals or foreign corporations whose ownership of Common Shares of the Company is not
effectively connected with the conduct of a trade or business in the United States and shareholders who acquired their stock through the exercise of employee stock options or otherwise as compensation.



Distributions on Common Shares of Company



US Holders receiving dividend distributions (including constructive dividends) with respect
to Common Shares of the Company are required to include in gross income for United States federal income tax purposes the gross amount of such distributions to the extent that the Company has current or accumulated earnings and profits, without
reduction for any Canadian income tax withheld from such distributions. Such Canadian tax withheld may be credited, subject to certain limitations, against the US Holders United States federal income tax liability or, alternatively, may be
deducted in computing the US Holders United States federal taxable income by those who itemize deductions. (See more detailed discussions at Foreign Tax Credit below). To the extent that distributions exceed current or accumulated
earnings and profits of the Company, they will be treated first as a return of capital up to the US Holders adjusted basis in the Common Shares and thereafter as gain from the sale or exchange of the Common Shares.



Preferential tax rates for long-term capital gains are applicable to a US Holder that is an
individual, estate or trust. There are no preferential tax rates for long-term capital gains for a US holder that is a corporation.



83



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Dividends paid on the Common Shares of the Company will not generally be eligible for the dividends received-deduction
provided to corporations receiving dividends from certain United States corporations. Preferential tax rates for dividends are applicable to a US Holder that is an individual, estate or trust. A US Holder which is a corporation may, under certain
circumstances, be entitled to a 70% deduction of the United States source portion of dividends received from the Company (unless the Company qualified as a foreign personal holding company or a passive foreign investment
company, as defined below) if such US Holder owns shares representing at least 10% of the voting power and value of the Company. The availability of this deduction is subject to several complex limitations, which are beyond the scope of this
discussion.



Foreign Tax Credit



A US Holder who pays (or has withheld from distributions) Canadian income tax with respect
to the ownership of Common Shares of the Company may be entitled, at the option of the US Holder, to either a deduction or a tax credit for such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit because a credit
reduces United States federal income taxes on a dollar for dollar basis, while a deduction merely reduces the taxpayers income subject to tax. This election is made on a year by year basis and applies to all foreign taxes paid by (or withheld
from) the US Holder during that year. There are significant and complex limitations, which apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the US Holders United States income
tax liability that the US Holders foreign source income bears to his or her or its worldwide taxable income. In the determination of the application of this limitation, the various items of income deduction must be classified into foreign and
domestic sources. Complex rules govern this classification process. There are further limitations on the foreign tax credit for certain types of income such as passive income, high withholding tax interest, financial
services income, shipping income, and certain other classifications of income. The availability of the foreign tax credit and the application of the limitations on the credit are fact specific and holders and prospective holders of
Common Shares of the Company should consult their own tax advisors regarding their individual circumstances.



Disposition of Common Shares of Company



A US Holder will recognize gain or loss upon the sale of Common Shares of the Company equal to the difference, if any, between the amount of cash plus the fair market value of any property received, and the shareholders tax basis in
the Common Shares of the Company. This gain or loss will be capital gain or loss if the Common Shares are a capital asset in the hands of the US Holder. In such event the gain or loss will be short-term or long-term capital gain or loss depending
upon whether the holding period of the US Holder is more than twelve months. Gains and losses are netted and combined according to special rules in arriving at the overall capital gain or loss for a particular tax year. Deductions for net capital
losses are subject to significant limitations. For US Holders who are individuals, any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted. For US Holders that
are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years from the loss year and carried forward five years from the loss year to be offset against capital gains until
such net capital loss is thereby exhausted.



84



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Other Considerations



In the following circumstances, the above sections of this discussion may not describe the United States federal income tax consequences resulting from the holding and
disposition of Common Shares of the Company:



Foreign Personal Holding
Company.If at any time during a taxable year more than 50% of the total combined voting power or the total value of the Companys outstanding shares is owned, actually or constructively, by five or fewer individuals who are
citizens or residents of the United States and 60% or more of the Companys gross income for such year was derived from certain passive sources (e.g. from dividends received from its subsidiaries), the Company would be treated as a
foreign personal holding company. In that event, US Holders that hold Common Shares of the Company would be required to include in gross income for such year their allowable portions of such passive income to the extent the Company does
not actually distribute such income.



Foreign Investment Company.If 50% or more of the combined voting power or total value of the Companys outstanding shares are held, actually or constructively, by citizens or residents of the United States, United States domestic partnerships or corporations, or
estates or trusts other than foreign estates or trusts (as defined by the Code Section 7701(a)(31)), and the Company is found to be engaged primarily in the business of investing, reinvesting, or trading in securities, commodities, or any
interest therein, it is possible that the Company might be treated as a foreign investment company as defined in Section 1246 of the Code, causing all or part of any gain realized by the US Holder selling or exchanging Common Shares
of the Company to be treated as ordinary income rather than capital gain.



Passive Foreign Investment Company.For any taxable year of the Company, if at least 75% of the Companys gross income is Passive income (as defined in the Internal Revenue Code of 1986, as
amended (the Code)), or if at least 50% of the Companys assets, by average fair market value, are assets that produce or are held for the production of passive income, the Company will be a Passive Foreign Investment Company
(PFIC). There can be no assurance that the Company will not be determined to be a PFIC in its current or future taxable years.



If the Company is a PFIC for any taxable year during which a U.S. Holder owns any Common Stock, the U.S. Holder will be subject to special U.S. federal income tax rules,
set forth in Sections 1291 to 1297 of the Code, with respect to all of such U.S. Holders Common Stock. For example, gifts, exchanges pursuant to corporate reorganizations and use of the Common Stock as security for a loan may be treated as
taxable dispositions, and a stepped-up basis upon the death of such a U.S. Holder may not be available. Furthermore, in the absence of an election by such U.S. Holder to treat the Company as a qualified electing fund (the QEF
election), as discussed below, the U.S. Holder would be required to (i) report any gain on disposition of any Common Stock as ordinary income rather than capital gain, (ii) to compute the tax liability on such gain and on certain
distributions as if the Items had been earned pro rata over the U.S. Holders holding period (or a certain portion thereof) for the Common Stock, and (iii) would be subject to the highest ordinary income tax rate for each taxable year of
the U.S. Holder in which the Items were treated as having been earned. Such U.S. Holder would also be liable for interest (which may be non-deductible by certain U.S. Holders) on the foregoing tax liability as if such liability had been due with
respect to each such prior year.



If the Company is a PFIC for any taxable year
during which a U.S. Holder owns any Common Stock, the adverse taxation of disposition gains and certain distributions may be avoided by any U.S. Holder who makes a QEF Election on or before the due date (including extensions) for filing such U.S.
Holders tax return for such taxable year. Such a U.S. Holder would be taxed on dividends and capital gains as if the Company had never been a PFIC, but would also be taxed on its pro-rata share of the Companys earnings



85



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and profits for the Companys taxable year in which it was (or was treated as) a PFIC and which ends with or within such U.S. Holders taxable
year, regardless of whether such amounts are actually distributed by the Company. Should such an election be made (and if the Company is a PFIC, U.S. Holders are strongly urged to consider this special election), there are a number of specific rules
and requirements applicable thereto, and such an electing U.S. Holder is strongly urged to consult his own tax advisor in that regard.



Controlled Foreign Corporation. If more than 50% of the voting power of all classes of stock or the total value of the stock of the Company is owned,
directly or indirectly, by citizens or residents of the United States, United States domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of whom own 10% or more of the total combined voting power of
all classes of stock of the Company or the total value of the stock of the Company (United States shareholder), the Company could be treated as a controlled foreign corporation under Subpart F of the Code. This classification
would result in many complex consequences including the required inclusion into income by such United States shareholders of their pro rata shares of Subpart F income (as specially defined by the Code) of the Company and the
Companys earnings invested in US property and previously excluded Subpart F withdrawn from certain types of investments (as specifically defined by the Code). In addition, under Section 1248 of the Code, gain from the sale or exchange of
Common Shares of the Company by a US person who is or was a United States shareholder (as defined in the Code, a holder of Common Shares of the Company who is or was a United States shareholder at any time during the five year period ending with the
sale or exchange) is treated as ordinary dividend income to the extent of earnings and profits of the Company attributable to the stock sold or exchanged. Because of the complexity of Subpart F, and because it is not clear that Subpart F would apply
to the holders of Common Shares of the Company, a more detailed review of these rules is outside the scope of this discussion.



F. DIVIDENDS AND PAYING AGENTS



Not applicable.



G. STATEMENT BY EXPERTS



Not
applicable.



H. DOCUMENTS ON DISPLAY



The documents concerning the Company which are referred to in this Annual Report may be
inspected at the Companys executive offices located at 505 University Avenue, Suite 1400, Toronto, Ontario M5G 1X3.



The Company also files reports, including annual reports on Form 20-F, periodic reports on Form 6-K and other information with the Securities and Exchange Commission
(SEC) pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You also may access materials the Company has filed with the SEC, which are publicly available through Edgar files, at the SECs website at
www.sec.gov.



I. SUBSIDIARY INFORMATION



A list of subsidiaries is set forth in Item 4C, Organizational Structure.



86



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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Not applicable. The Company is a small business issuer, in accordance with
Section 12(b)-2 of the Act.



ITEM 12. DESCRIPTION OF SECURITIES OTHER
THAN EQUITY SECURITIES



Not applicable.



PART II



ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES



There are no reportable events for Item 13.



ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS



Not applicable.



ITEM 15. CONTROLS AND PROCEDURES



We maintain disclosure controls and procedures, as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that
information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our
management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of May 31, 2005. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer
and Chief Financial Officer concluded that as of May 31, 2005 our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that material information relating to us, is made known to the Chief Executive
Officer and Chief Financial Officer by others within our company during the period in which this report was being prepared. There have been no changes in the Companys internal control over financial reporting during the most recent fiscal year
that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



ITEM 16. RESERVED



ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT



The Company does not have an audit committee financial expert. The Companys audit committee members are Phillip DeZwirek and Jason DeZwirek, both of whom are executive officers and directors of the Company. The Company is not required
to have an audit committee.



87



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ITEM 16B. CODE OF ETHICS



The Company has adopted a code of ethics applicable to its senior executive officers and all other employees. A copy of the Companys code of ethics is filed as
an exhibit to the Annual Report on Form 20-F and the Company will provide a copy thereof to any person upon request to the Companys Chairman and its Chief Executive Officer.



ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES



(a) Audit Fees



The aggregate fees to be billed for professional services rendered by BDO Dunwoody LLP, the principal accountant for the Company, for the audits of the
Companys annual financial statements and services normally provided by such accountants in connection with the Companys statutory and regulatory filings for the Companys fiscal year ended May 31, 2005, will be Cdn $123,000 and
for the Companys fiscal year ended May 31, 2004 was Cdn $137,000.



(b) Audit-Related Fees



There
were no additional fees billed for assurance and related services by BDO Dunwoody LLP, the principal accountant for the Company that are reasonably related to the performance of the audit or review of the Companys financial statements and are
not reported above, for the Companys fiscal year ended May 31, 2005 or the Companys fiscal year ended May 31, 2004.



(c) Tax Fees



The aggregate fees billed for professional services rendered by BDO Dunwoody LLP, the principal accountant for the Company, for tax compliance, tax advice
and tax planning for the Companys fiscal year ended May 31, 2005, were Cdn $2,500, and for the Companys fiscal year ended May 31, 2004, were Cdn $2500. Additional fees billed by BDO Dunwoody LLP for the Companys fiscal
year ended May 31, 2005 for services rendered were Cdn $Nil. Additional fees billed by BDO Dunwoody LLP for the Companys fiscal year ended May 31, 2004 for services rendered were Cdn $2500. Such services included a memorandum on tax
consequences of moving to a foreign jurisdiction.



(d) All
Other Fees



BDO Dunwoody LLP, the principal accountant for the
Company, did not bill any amounts for products and services other than the fees reported above in this Item 16C above, for the Companys fiscal years ended May 31, 2005 and May 31, 2004.



(e) Audit Committees Pre-Approval Policies



The audit committee approves the engagement terms for all audit and non-audit
services to be provided by the Companys accountants before such services are provided to the Company or any of its subsidiaries.



The audit committee approved one hundred percent (100%) of the services provided to the Company and its subsidiaries described in Items 16C
(b) through (d) above.



88



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(f) Auditors Use of Non-Permanent Employees



None of the hours expended by BDO Dunwoody LLP on its engagement to audit the Companys financial statements for the
fiscal year ended May 31, 2005 were performed by persons other than fulltime permanent employees of BDO Dunwoody LLP.



ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES



Not applicable. The securities of the Company are not listed on a national securities exchange or quoted on an automated inter-dealer quotation system operated by a
national securities association.



ITEM 16E. PURCHASES OF EQUITY SECURITIES
BY THE ISSUER AND AFFILIATED PURCHASERS



None



|                                              |  |                                               |  |                                      |  |                                                                                        |  |                                                                                                                    
|--------------------------------------------- |  | --------------------------------------------- |  | ------------------------------------ |  | -------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------
|Period                                        |  | (a) Total Number ofShares (or Units)Purchased |  | (b) Average Priceper Share (orUnits) |  | (c) Total Numberof Shares(Common)Purchased asPart of PubliclyAnnouncedPlans
orPrograms |  | (d) MaximumNumber (orApproximateDollar Value) ofShares (or Units)that May Yet
BePurchased Underthe Plans orPrograms
|February 1, 2005 through February 28,
20051   |  | 37,585 Common Shares                          |  | $5.05                                |  | 37,585 Common Shares                                                                   |  | 102,150 Common Shares                                                                                              
|                                              |  |                                               |  |                                     
|March 1, 2005 through March 31,
20051         |  | 102,150 Common Shares                         |  | $5.22                                |  | 139,735 Common Shares                                                                  |  | - 0 -                                                                                                              
|                                              |  |                                               |  |                                     
|June 1, 2005 through June 30, 20052           |  | 112,675 Common Shares                         |  | $6.32                                |  | 112,675 Common Shares                                                                  |  | - 0 -                                                                                                              
|                                              |  |                                               |  |                                     
|August 1, 2005 through August 31,
20053       |  | 25,000 Common Shares                          |  | $5.26                                |  | 25,000 Common Shares                                                                   |  | 231,950 Common Shares                                                                                              
|                                              |  |                                               |  |                                     
|September 1, 2005 through September 30,
20053 |  | 38,398 Common Shares                          |  | $5.08                                |  | 63,398 Common Shares                                                                   |  | 173,552 Common Shares                                                                                              
|                                              |  |                                               |  |                                     
|October 1, 2005 through October 31,
20053     |  | 75,552 Common Shares                          |  | $5.09                                |  | 138,950 Common Shares                                                                  |  | 118,000 Common Shares                                                                                              
|Total                                         |  |                                               |  |                                      |  |                                                                                        |  |                                                                                                                    

---

|1 | On February 17, 2005, the Companys Board of Directors authorized the Company to purchase in open market transactions up to 5% of its issued and
outstanding common shares. The Company purchased 139,735 common shares under this plan.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | On June 3, 2005, the Companys Board of Directors authorized the Company to purchase in open market transactions up to 5% of its issued and outstanding
common shares. The Company purchased 112,675 common shares under this plan.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | On August 22, 2005, the Companys Board of Directors authorized the Company to purchase in open market transactions from holders of API shares resident in
the United States and other foreign jurisdictions up to 10% of its issued and outstanding common shares. The Company has purchased 138,950 common shares through October 31, 2005 and could purchase approximately 118,000 more common shares under
this plan.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



89



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PART III



ITEM 17. FINANCIAL STATEMENTS



The financial statements, which follow were prepared in accordance with Cdn GAAP and are expressed in US dollars. A reconciliation from Cdn GAAP to US GAAP is
disclosed in Note 17 to the financial statements. The financial statements include the following:



| | (i) | Auditors Report of BDO Dunwoody LLP on the consolidated financial statements for the years ended May 31, 2005, May 31, 2004 and May 31, 2003.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Consolidated Balance Sheet at May 31, 2005, 2004 and 2003.
| | ---- | ----------------------------------------------------------



| | (iii) | Consolidated Statements of Operations and Deficit for the years ended May 31, 2005, 2004 and 2003.
| | ----- | --------------------------------------------------------------------------------------------------



| | (iv) | Statements of Cash Flows for the years ended May 31, 2005, 2004, and 2003.
| | ---- | --------------------------------------------------------------------------



| | (v) | Summary of Significant Accounting Policies.
| | --- | -------------------------------------------



| | (vi) | Notes to Consolidated Financial Statements.
| | ---- | -------------------------------------------



90



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API Electronics Group Corp.

Consolidated Financial Statements

For the years ended May 31, 2005, 2004,
and 2003

(Expressed in US Dollars)



Contents

---



|                                           |  |          
|------------------------------------------ |  | ---------
|Auditors Report                           |  | 92 - 93  
|                                           | 
|Consolidated Financial Statements          |  |          
|                                           | 
|Balance Sheets                             |  | 94       
|                                           | 
|Statements of Operations and Deficit       |  | 95       
|                                           | 
|Statements of Cash Flows                   |  | 96       
|                                           | 
|Summary of Significant Accounting Policies |  | 97       
|                                           | 
|Notes to Financial Statements              |  | 101 - 118



91



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Auditors Report



---



To the Shareholders of

API
Electronics Group Corp.



We have audited the consolidated balance sheets
of API Electronics Group Corp. as at May 31, 2005, 2004 and 2003 and the consolidated statements of operations and deficit and cash flows for the years then ended. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our audits.



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



In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at
May 31, 2005, 2004 and 2003 and the results of its operations and its cash flows for the years then ended in accordance with generally accepted accounting principles in Canada.



(signed) BDO Dunwoody LLP



Chartered Accountants



Toronto, Ontario

July 28, 2005



92



---

---

Comments by Auditors for U.S. Readers

on Canada - U.S. Reporting Conflict



---



In the United States, reporting standards for auditors
require the addition of an explanatory paragraph (following the opinion paragraph) when changes in an accounting policy, such as those involving amortization of customer contracts described in note 11, have a material effect on the consolidated
financial statements. Our report to the shareholders dated July 28, 2005 is expressed in accordance with Canadian reporting standards which do not require a reference to such events and conditions in the auditors report when these are
adequately disclosed in the financial statements.



(signed) BDO Dunwoody LLP



Chartered Accountants



Toronto, Ontario

July 28, 2005



93



---

---

API Electronics Group Corp.

Consolidated Balance Sheets

(Expressed in US Dollars)



|                                                   |  |            |            |   |            |   |            |  
|-------------------------------------------------- |  | ---------- | ---------- | - | ---------- | - | ---------- | -
|                                                   |  | May 312005 |            |   | May 312004 |  
|Assets                                             |  |            |            |   |            |   |            |  
|                                                   |  |           
|Current                                            |  |            |            |   |            |   |            |  
|Cash and cash equivalents                          |  | $          | 1,513,130  |   |            | $ | 634,058    |  
|Marketable securities (Note 2)                     |  |            | 329,855    |   |            |   | 2,144      |  
|Accounts receivable                                |  |            | 1,427,395  |   |            |   | 1,028,508  |  
|Inventories (Note 3)                               |  |            | 3,258,856  |   |            |   | 3,262,983  |  
|Future tax asset (Note 8)                          |  |            | 76,000     |   |            |   |           |  
|Prepaid expenses                                   |  |            | 97,360     |   |            |   | 93,516     |  
|                                                   |  |            |            |   |            |   |            |  
|                                                   |  |            | 6,702,596  |   |            |   | 5,021,209  |  
|Capital assets (Note 4)                            |  |            | 3,080,395  |   |            |   | 3,000,125  |  
|Future tax asset (Note 8)                          |  |            | 295,500    |   |            |   | 293,000    |  
|Goodwill                                           |  |            | 997,611    |   |            |   | 919,529    |  
|Intangible assets (Note 5)                         |  |            | 1,570,226  |   |            |   | 1,943,321  |  
|                                                   |  |            |            |   |            |   |            |  
|                                                   |  | $          | 12,646,328 |   |            | $ | 11,177,184 |  
|                                                   |  |            |            |   |            |   |            |  
|Liabilities and Shareholders Equity               |  |            |            |   |            |   |            |  
|                                                   |  |           
|Current                                            |  |            |            |   |            |   |            |  
|Bank indebtedness (Note 6)                         |  | $          | 342,090    |   |            | $ | 128,675    |  
|Accounts payable                                   |  |            | 1,450,502  |   |            |   | 1,517,304  |  
|Deferred revenue                                   |  |            | 643,028    |   |            |   | 124,723    |  
|Future income tax liability (Note 8)               |  |            | 85,400     |   |            |   | 108,000    |  
|Current portion of long-term debt (Note 7)         |  |            | 78,519     |   |            |   | 68,654     |  
|                                                   |  |            |            |   |            |   |            |  
|                                                   |  |            | 2,599,539  |   |            |   | 1,947,356  |  
|Future income tax liability (Note 8)               |  |            | 501,000    |   |            |   | 502,000    |  
|Long term debt (Note 7)                            |  |            | 41,512     |   |            |   | 105,989    |  
|                                                   |  |            |            |   |            |   |            |  
|                                                   |  |            | 3,142,051  |   |            |   | 2,555,345  |  
|                                                   |  |            |            |   |            |   |            |  
|Shareholders equity                               |  |            |            |   |            |   |            |  
|Share capital (Note 9(b))                          |  |            | 12,498,696 |   |            |   | 10,220,297 |  
|Contributed surplus (Note 9(f))                    |  |            | 861,768    |   |            |   | 25,000     |  
|Cumulative foreign exchange translation adjustment |  |            | 503,329    |   |            |   | 254,708    |  
|Deficit                                            |  |            | (4,359,516 | ) |            |   | (1,878,166 | )
|                                                   |  |            |            |   |            |   |            |  
|                                                   |  |            | 9,504,277  |   |            |   | 8,621,839  |  
|                                                   |  |            |            |   |            |   |            |  
|                                                   |  | $          | 12,646,328 |   |            | $ | 11,177,184 |  
|                                                   |  |            |            |   |            |   |            |  



|                       
|-----------------------
|On behalf of the Board:
|                       
|/s/ Jason DeZwirek     
|                       
|/s/ Phillip DeZwirek   



The accompanying
summary of significant accounting policies and notes are an integral part of these financial statements.



94



---

---

API Electronics Group Corp.

Consolidated Statements of Operations and Deficit

(Expressed in US Dollars)



|                                                                                                              |  |                    |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                              |  | Years Ended May 31 |           
|                                                                                                              |  | 2005               |            |   | 2004 |   |            | 2003 | 
|Sales                                                                                                         |  | $                  | 12,547,551 |   |      | $ | 11,278,187 |      |  | $ | 8,253,541  |  
|                                                                                                              |  |                    |           
|Cost of sales                                                                                                 |  |                    | 9,142,153  |   |      |   | 8,669,207  |      |  |   | 6,325,540  |  
|                                                                                                              |  |                    |            |   |      |   |            |      |  |   |            |  
|                                                                                                              |  |                    |           
|Gross profit                                                                                                  |  |                    | 3,405,398  |   |      |   | 2,608,980  |      |  |   | 1,928,001  |  
|                                                                                                              |  |                    |            |   |      |   |            |      |  |   |            |  
|Expenses                                                                                                      |  |                    |            |   |      |   |            |      |  |   |            |  
|Business development                                                                                          |  |                    | 43,131     |   |      |   | 71,088     |      |  |   | 355,042    |  
|                                                                                                              |  |                    |           
|Selling expenses                                                                                              |  |                    | 1,124,522  |   |      |   | 843,308    |      |  |   | 666,138    |  
|Stock-based compensation                                                                                      |  |                    | 920,500    |   |      |   | 10,000     |      |  |   |           |  
|General and administrative (including stock based compensation Of $920,500 (2004  $10,000, 2003-$Nil)        |  |                    | 2,892,634  |   |      |   | 2,116,206  |      |  |   | 1,527,307  |  
|                                                                                                              |  |                    |            |   |      |   |            |      |  |   |            |  
|                                                                                                              |  |                    | 4,060,287  |   |      |   | 3,030,602  |      |  |   | 2,548,487  |  
|                                                                                                              |  |                    |            |   |      |   |            |      |  |   |            |  
|Operating Income (Loss)                                                                                       |  |                    | (654,889   | ) |      |   | (421,622   | )    |  |   | (620,486   | )
|                                                                                                              |  |                    |            |   |      |   |            |      |  |   |            |  
|Other (Income) Expenses                                                                                       |  |                    |            |   |      |   |            |      |  |   |            |  
|Other income(includes loss(gain) on foreign currency                                                          |  |                    | 25,616     |   |      |   | (117,956   | )    |  |   | (89,316    | )
|exchange of $46,304; 2004-$5,323; 200365,580) Interest expense                                               |  |                    | 28,049     |   |      |   | 85,063     |      |  |   | 107,789    |  
|                                                                                                              |  |                    |            |   |      |   |            |      |  |   |            |  
|                                                                                                              |  |                    | 53,665     |   |      |   | (32,893    | )    |  |   | 18,473     |  
|                                                                                                              |  |                    |            |   |      |   |            |      |  |   |            |  
|                                                                                                              |  |                    |           
|Loss before income taxes                                                                                      |  |                    | (708,554   | ) |      |   | (388,729   | )    |  |   | (638,959   | )
|                                                                                                              |  |                    |           
|Income taxes (Note 8)                                                                                         |  |                    | (104,160   | ) |      |   | (46,335    | )    |  |   | (41,413    | )
|                                                                                                              |  |                    |            |   |      |   |            |      |  |   |            |  
|                                                                                                              |  |                    |           
|Net loss for the year                                                                                         |  |                    | (604,394   | ) |      |   | (342,394   | )    |  |   | (597,546   | )
|                                                                                                              |  |                    |           
|Deficit, beginning of year, (Note 11)                                                                         |  |                    | (1,878,166 | ) |      |   | (1,535,772 | )    |  |   | (938,226   | )
|                                                                                                              |  |                    |           
|Fair value of stock options granted and warrants Modified  Cumulative adjustment at June 1, 2004 (Note 9(e)) |  |                    | (1,876,956 | ) |      |   |           |      |  |   |           |  
|                                                                                                              |  |                    |            |   |      |   |            |      |  |   |            |  
|                                                                                                              |  |                    |           
|Deficit, end of year                                                                                          |  | $                  | (4,359,516 | ) |      | $ | (1,878,166 | )    |  | $ | (1,535,772 | )
|                                                                                                              |  |                    |            |   |      |   |            |      |  |   |            |  
|Loss per sharebasic and diluted (Note 13)                                                                    |  | $                  | (0.24      | ) |      | $ | (0.15      | )    |  | $ | (0.34      | )
|                                                                                                              |  |                    |            |   |      |   |            |      |  |   |            |  



The accompanying
summary of significant accounting policies and notes are an integral part of these financial statements.



95



---

---

API Electronics Group Corp.

Consolidated Statements of Cash Flows

(Expressed in US Dollars)



|                                                                                |  |                    |           |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                |  | Years Ended May 31 |          
|                                                                                |  | 2005               |           |   | 2004 |   |            | 2003 | 
|                                                                                |  |                    |          
|Cash provided by (used in)                                                      |  |                    |           |   |      |   |            |      |  |   |            |  
|                                                                                |  |                    |          
|Operating activities                                                            |  |                    |           |   |      |   |            |      |  |   |            |  
|Net loss for the year                                                           |  | $                  | (604,394  | ) |      | $ | (342,394   | )    |  | $ | (597,546   | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                    |           |   |      |   |            |      |  |   |            |  
|Amortization                                                                    |  |                    | 764,933   |   |      |   | 803,807    |      |  |   | 785,979    |  
|Future income taxes                                                             |  |                    | (138,613  | ) |      |   | (39,000    | )    |  |   | (70,640    | )
|Stock options expensed                                                          |  |                    | 920,500   |   |      |   | 10,000     |      |  |   |           |  
|Gain on settlement of debt                                                      |  |                    |          |   |      |   | (39,000    | )    |  |   |           |  
|Loss(Gain) on sale of marketable securities                                     |  |                    | 391       |   |      |   | (45,795    | )    |  |   |           |  
|Write-down of marketable securities                                             |  |                    | 50,976    |   |      |   |           |      |  |   |           |  
|Loss on sale of land and building                                               |  |                    |          |   |      |   | 8,688      |      |  |   |           |  
|Net change in non-cash working capital balances (Note 10)                       |  |                    | 120,151   |   |      |   | 294,600    |      |  |   | (77,662    | )
|                                                                                |  |                    |           |   |      |   |            |      |  |   |            |  
|                                                                                |  |                    | 1,113,944 |   |      |   | 650,906    |      |  |   | 40,131     |  
|                                                                                |  |                    |           |   |      |   |            |      |  |   |            |  
|Investing activities                                                            |  |                    |           |   |      |   |            |      |  |   |            |  
|Business and asset acquisitions, net of cash acquired                           |  |                    |          |   |      |   | (50,000    | )    |  |   | (1,521,958 | )
|Purchase of capital assets                                                      |  |                    | (333,960  | ) |      |   | (222,967   | )    |  |   | (725,789   | )
|Proceeds on sale of land and building                                           |  |                    |          |   |      |   | 104,439    |      |  |   |           |  
|Proceeds on sale of marketable securities                                       |  |                    | 79,240    |   |      |   | 474,819    |      |  |   |           |  
|Purchase of marketable securities                                               |  |                    | (458,318  | ) |      |   |           |      |  |   | (428,739   | )
|                                                                                |  |                    |           |   |      |   |            |      |  |   |            |  
|                                                                                |  |                    | (713,038  | ) |      |   | 306,291    |      |  |   | (2,676,486 | )
|                                                                                |  |                    |           |   |      |   |            |      |  |   |            |  
|                                                                                |  |                    |          
|Financing activities                                                            |  |                    |           |   |      |   |            |      |  |   |            |  
|Issue of share capital                                                          |  |                    | 1,056,000 |   |      |   | 705,000    |      |  |   | 4,102,500  |  
|Repurchase of common shares                                                     |  |                    | (723,289  | ) |      |   |           |      |  |   |           |  
|Bank indebtedness advances (repayments)                                         |  |                    | 199,758   |   |      |   | 128,616    |      |  |   | (284,488   | )
|Long-term debt advances (repayments)                                            |  |                    | (54,612   | ) |      |   | (2,718,044 | )    |  |   | (1,046,394 | )
|                                                                                |  |                    |           |   |      |   |            |      |  |   |            |  
|                                                                                |  |                    | 477,857   |   |      |   | (1,884,428 | )    |  |   | 2,771,618  |  
|                                                                                |  |                    |           |   |      |   |            |      |  |   |            |  
|Foreign exchange gain on cash held in foreign currency                          |  |                    | 309       |   |      |   | 90         |      |  |   | 17,299     |  
|                                                                                |  |                    |           |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in cash                                                 |  |                    | 879,072   |   |      |   | (927,141   | )    |  |   | 152,562    |  
|                                                                                |  |                    |          
|Cash, beginning of year                                                         |  |                    | 634,058   |   |      |   | 1,561,199  |      |  |   | 1,408,637  |  
|                                                                                |  |                    |           |   |      |   |            |      |  |   |            |  
|Cash, end of year                                                               |  | $                  | 1,513,130 |   |      | $ | 634,058    |      |  | $ | 1,561,199  |  
|                                                                                |  |                    |           |   |      |   |            |      |  |   |            |  



The accompanying
summary of significant accounting policies and notes are an integral part of these financial statements.



96



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---

API Electronics Group Corp.

Summary of Significant Accounting Policies

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Nature of Business          |  | API Electronics Group Corp. (the Company) business focus is the manufacture and design of high reliability semiconductor and microelectronics circuits for military, aerospace and
commercial applications. Through recent acquisitions, the Company has expanded its manufacturing and design of electronic components to include filters, transformers, inductors, and custom power supplies for land and amphibious combat systems,
mission critical information systems and technologies, shipbuilding and marine systems, and business aviation.                                                                                                                                                                                                       
|                            | 
|Business Acquisitions       |  | On May 31, 2002 the Company completed the acquisition of all the outstanding common shares of Filtran Inc. (Filtran USA), a private company incorporated under the laws of the
State of New York; Filtran Limited (Filtran Canada), a private company incorporated under the laws of Ontario; Canadian Dataplex Limited (CDL), a private company incorporated under the laws of Canada, and Tactron
Communications (Canada) Limited (TCCL), a private company incorporated under the laws of Ontario. On June 1, 2003 CDL, TCCL and Filtran Canada were amalgamated under the name Filtran Canada. Filtran USA and Filtran Canada are known
collectively as the Filtran Group. The Filtran Groups business focus is similar to that of the Company.
|                            | 
|                            |  | On May 23, 2002 the company incorporated an entity named 5/23 Corp under the laws of the State of Delaware. On January 13, 2003 5/23 Corp changed its name to
TM Systems II, Inc. (TM II). On February 6, 2003, TM II acquired certain assets of TM Systems Inc. and carries on business as TM System II, Inc. TM IIs business focus is similar to that of the Company.                                                                                                                                                                                                                                                                                                                                                                                
|                            | 
|Principles of Consolidation |  | The consolidated financial statements include the accounts of the Company (the legal parent), together with its wholly owned subsidiaries, API Electronics, TM II and the Filtran
Group.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                            | 
|Basis of Presentation       |  | These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. All amounts are disclosed in US dollars unless otherwise
indicated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                            | 
|Cash and Cash Equivalents   |  | Cash and cash equivalents consist of cash on hand, bank balances and investments in money market instruments with original maturities of three months or less.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                            | 
|Marketable Securities       |  | Temporary investments are stated at the lower of cost and market value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



The accompanying
summary of significant accounting policies and notes are an integral part of these financial statements.



97



---

---

API Electronics Group Corp.

Summary of Significant Accounting Policies

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                           
|----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------
|Inventory         |  | Raw materials are recorded at the lower of cost and net realizable value. Finished goods and work in process are stated at the lower of cost, which includes material, labor and
overhead, and net realizable value. Cost is generally determined on a first-in, first-out basis.                                                                                                                                                                                                                                                                                                                                   
|                  | 
|Capital Assets    |  | Capital assets are recorded at cost less accumulated amortization and are amortized using the straight-line basis over the following periods:                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                  |  | Buildings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 20 years                  
|                  |  | Computer equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 3 years                   
|                  |  | Computer software                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | 3 years                   
|                  |  | Furniture and fixtures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | 5 years                   
|                  |  | Machinery and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | Ranging from 5 to 10 years
|                  |  | Vehicles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 3 years                   
|                  |  | Website development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | 3 years                   
|                  | 
|Goodwill          |  | Goodwill is subject to an impairment test on at least an annual basis or upon the occurrence of certain events or circumstances. Goodwill impairment is assessed based on a
comparison of the fair value of a reporting unit to the underlying carrying value of the reporting units net assets, including goodwill. When the carrying amount of the reporting unit exceeds its fair value, the fair value of the reporting
units goodwill is compared with its carrying amount to measure the amount of impairment loss, if any. Management has determined there is no impairment in goodwill as of May 31, 2005.
|                  | 
|Intangible Assets |  | Intangible assets that have a finite life are amortized using the following basis over the following period:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                  |  | Non-compete agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | Straight line over 5 years
|                  |  | Customer contracts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Based on income earned    
|                  | 
|Income taxes      |  | The Company accounts for income taxes under the asset and liability method. Under this method, future income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial reporting and tax bases of assets and liabilities and available loss carry forwards. A valuation allowance is established to reduce tax assets if it is more likely than not that all or some
portions of such tax assets will not be realized.                                                                                                                                



98



---

---

API Electronics Group Corp.

Summary of Significant Accounting Policies

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



|                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Contract Revenue                  |  | Revenue from contracts is recognized using the percentage of completion method. The degree of completion is determined based on costs incurred, excluding costs that are not representative of
progress to completion, as a percentage of total costs anticipated for each contract. Provision is made for losses on contracts in progress when such losses first become known. Revisions in cost and profit estimates, which can be significant, are
reflected in the accounting period in which the relevant facts become known.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                  | 
|                                  |  | Provisions for warranty claims and other allowances are made based on contract terms and prior experience.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                  | 
|Non-Contract Revenue              |  | The Company recognizes non-contract revenue when it is realized or realizable and earned. The Company considers non-contract revenue realized or realizable and earned when it has persuasive
evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured. Delivery does not occur until products have been shipped and risk of loss and ownership has transferred to the
client.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                  | 
|Research and Development Expenses |  | Research and development expenses are recorded at net of applicable investment tax credits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                  | 
|Stock-Based Compensation Plans    |  | Effective June 1, 2004, the Company adopted the revised CICA Handbook Section 3870, Stock-Based Compensation and Other Stock-based Payments which requires the application of a
fair value method of accounting to all stock-based compensation payments to employees and non-employees. Under this method, the Company is required to recognize a charge to the income statement based on an option-pricing model for all stock options
that were granted and vested in the period, with a corresponding credit to Contributed Surplus under the Shareholders Equity section of the Balance Sheet. In accordance with the transitional provisions of Section 3870, the Company has
retroactively applied the fair value method of accounting, without restatement, to stock option awards and warrant extensions granted since June 1, 2002 using the Black-Scholes option pricing model. The Company has a stock-based compensation plan,
which is described in Note 9(d).



99



---

---

API Electronics Group Corp.

Summary of Significant Accounting Policies

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



|                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Financial Instruments        |  | The Companys financial instruments include certain instruments with short-term maturity and long-term debt. Unless otherwise noted, it is managements opinion that the Company is
not exposed to significant interest rate, currency or credit risks arising from its financial instruments.                                                                                                                                                                                                                                                                                                                              
|                             | 
|                             |  | The Company carries out a portion of transactions in foreign currencies. Included in the Companys cash, marketable securities, accounts receivable, accounts payable and bank
indebtedness are balances denominated in Cdn dollars in the amounts of $97,086 (2004 - $428,055), $302,921 (2004 - $2,921), $800,316 (2004 - $809,235), $825,646 (2004 - $973,229) and $220,000 (2004 - $39,078) respectively.                                                                                                                                                                                                               
|                             | 
|Foreign Currency Translation |  | The Companys functional currency is United States Dollars and the consolidated financial statements are stated in United States dollars, the reporting currency. Integrated
operations have been translated from Canadian dollars into United States dollars at the year-end exchange rate for monetary balance sheet items, the historical rate for non-monetary balance sheet items, and the average exchange rate for the year for
revenues, expenses, gains and losses. The gains or losses on translation are included in net income (loss) for the year.                                                           
|                             | 
|                             |  | Self-sustaining operations are translated at current rates of exchange. All exchange gains and losses will be accumulated in the foreign exchange translation account on the balance
sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                             | 
|Accounting Estimates         |  | The preparation of these consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. By their
nature, these estimates are subject to uncertainty and the effect on the consolidated financial statements of changes in such estimates in future periods could be material.



100



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



1. Asset Purchase Agreement



On March 31, 2004, the Company entered into an agreement to purchase certain assets of Islip Transformer & Metal Inc. The assets include
certain Department of Defense contracts, the sellers CAGE code, the right to use the sellers name, all test fixtures, test equipment, plans, specifications and files relating to previous contracts performed, inventory and equipment. The
consideration for the assets was $50,000 plus 10% of the amount of confirmed orders received pursuant to the terms of the contract.



The assets acquired at fair value, as at March 31, 2004 are as follows:

|                              |  |   |       
|----------------------------- |  | - | ------
|Inventory                     |  | $ | 10,000
|Machinery and Equipment       |  |   | 39,000
|Goodwill                      |  |   | 1,000 
|                              |  |   |       
|Fair value of assets acquired |  | $ | 50,000
|                              |  |   |       





---

2. Marketable Securities



|                                               |  |             |         |            |   |            |  |   |      
|---------------------------------------------- |  | ----------- | ------- | ---------- | - | ---------- |  | - | -----
|                                               |  | MarketValue |         | May 312005 |   | May 312004
|Shares in Canadian venture issuers             |  | $           | 11,678  |            | $ | 2,325      |  | $ | 2,144
|Units in Canadian publicly traded income trust |  |             | 235,905 |            |   | 238,759    |  |   |     
|Shares in U.S. publicly-traded issuer          |  |             | 88,771  |            |   | 88,771     |  |   |     
|                                               |  |             |         |            |   |            |  |   |      
|                                               |  | $           | 336,354 |            | $ | 329,855    |  | $ | 2,144
|                                               |  |             |         |            |   |            |  |   |      





---

3. Inventories



|                |  |            |           |            |   |          
|--------------- |  | ---------- | --------- | ---------- | - | ---------
|                |  | May 312005 |           | May 312004
|Raw Materials   |  | $          | 931,984   |            | $ | 779,685  
|Work in Process |  |            | 1,224,922 |            |   | 1,334,236
|Finished Goods  |  |            | 1,101,950 |            |   | 1,149,062
|                |  |            |           |            |   |          
|                |  | $          | 3,258,856 |            | $ | 3,262,983
|                |  |            |           |            |   |          



101



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollar)



May 31, 2005, 2004 and 2003

---



4. Capital Assets



|                           |  |              |           |                         |   |               |  |   |          
|-------------------------- |  | ------------ | --------- | ----------------------- | - | ------------- |  | - | ---------
|                           |  | May 31, 2005
|                           |  | Cost         |           | AccumulatedAmortization |   | NetBook Value
|Land                       |  | $            | 434,411   |                         | $ |              |  | $ | 434,411  
|Buildings                  |  |              | 2,431,999 |                         |   | 496,884       |  |   | 1,935,115
|Computer equipment         |  |              | 155,397   |                         |   | 137,311       |  |   | 18,086   
|Computer software          |  |              | 167,819   |                         |   | 137,209       |  |   | 30,610   
|Furniture and fixtures     |  |              | 97,200    |                         |   | 69,426        |  |   | 27,774   
|Machinery and equipment    |  |              | 2,124,131 |                         |   | 1,507,303     |  |   | 616,828  
|Vehicles                   |  |              | 47,003    |                         |   | 29,432        |  |   | 17,571   
|Web site development costs |  |              | 30,826    |                         |   | 30,826        |  |   |         
|                           |  |              |           |                         |   |               |  |   |          
|                           |  | $            | 5,488,786 |                         | $ | 2,408,391     |  | $ | 3,080,395
|                           |  |              |           |                         |   |               |  |   |          



|                           |  |              |           |                         |   |               |  |   |          
|-------------------------- |  | ------------ | --------- | ----------------------- | - | ------------- |  | - | ---------
|                           |  | May 31, 2004
|                           |  | Cost         |           | AccumulatedAmortization |   | NetBook Value
|Land                       |  | $            | 410,905   |                         | $ |              |  | $ | 410,905  
|Buildings                  |  |              | 2,223,445 |                         |   | 356,124       |  |   | 1,867,321
|Computer equipment         |  |              | 100,905   |                         |   | 76,191        |  |   | 24,714   
|Computer software          |  |              | 133,493   |                         |   | 77,049        |  |   | 56,444   
|Furniture and fixtures     |  |              | 76,655    |                         |   | 41,235        |  |   | 35,420   
|Machinery and equipment    |  |              | 1,873,128 |                         |   | 1,282,049     |  |   | 591,079  
|Vehicles                   |  |              | 24,342    |                         |   | 15,237        |  |   | 9,105    
|Web site development costs |  |              | 30,826    |                         |   | 25,689        |  |   | 5,137    
|                           |  |              |           |                         |   |               |  |   |          
|                           |  | $            | 4,873,699 |                         | $ | 1,873,574     |  | $ | 3,000,125
|                           |  |              |           |                         |   |               |  |   |          



Included in machinery and equipment is
$168,449 (May 31, 2004 - $168,449) of property held under capital leases.



Depreciation and amortization expense related to capital assets amounted to $382,751 (2004 - $424,790; 2003 - $533,821). Of this amount $183,832 (2004 - $192,546; 2003 - $164,543) was included in cost of sales.



102



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



5. Intangible Assets



|                               |  |            |           |   |            |   |           |  
|------------------------------ |  | ---------- | --------- | - | ---------- | - | --------- | -
|                               |  | May 312005 |           |   | May 312004 |  
|Non-compete agreements         |  | $          | 867,799   |   |            | $ | 858,712   |  
|Less: Accumulated amortization |  |            | (439,877  | ) |            |   | (268,134  | )
|Customer contracts             |  |            | 1,715,784 |   |            |   | 1,715,784 |  
|Less: Accumulated amortization |  |            | (573,480  | ) |            |   | (363,041  | )
|                               |  |            |           |   |            |   |           |  
|                               |  | $          | 1,570,226 |   |            | $ | 1,943,321 |  
|                               |  |            |           |   |            |   |           |  



---

6. Bank Indebtedness



|                                                                                                                                                                                                                                                                                                                                                                                                                           |  |              |         |              |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ------------ | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                           |  | May 31, 2005 |         | May 31, 2004
|The Companys wholly owned subsidiary, API Electronics has a working capital line of credit of $500,000. The credit is secured by all of its assets pursuant to a general security agreement.
The bank indebtedness is due on demand and bears interest at prime plus 1%.                                                                                                                                                  |  | $            | 167,000 |              | $ | 100,000
|                                                                                                                                                                                                                                                                                                                                                                                                                           |  |             
|The Companys wholly owned subsidiary, Filtran Limited has a working capital line of credit in the amount of $796,000 ($1,000,000 Cdn$) with a major Canadian bank. The interest on any
borrowed funds is charged at prime. The agreement also allows Filtran to lease an asset at prime plus 1% up to $33,000. The lender has a general security agreement and a 1stCollateral Mortgage on Filtrans assets and building. |  |              | 175,090 |              |   | 28,675 
|                                                                                                                                                                                                                                                                                                                                                                                                                           |  |              |         |              |   |        
|                                                                                                                                                                                                                                                                                                                                                                                                                           |  | $            | 342,090 |              | $ | 128,675
|                                                                                                                                                                                                                                                                                                                                                                                                                           |  |              |         |              |   |        



---

7. Long-term Debt



|                                                                                                                                             |  |            |         |            |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | ------- | ---------- | - | -------
|                                                                                                                                             |  | May 312005 |         | May 312004
|Mortgage payable, secured by real estate, repayable in blended monthly instalments of $3,133 at an interest rate of 8.75%                    |  | $          | 33,005  |            | $ | 66,124 
|                                                                                                                                             |  |           
|Various equipment capital leases, with monthly lease payments of $3,760 including interest at approximately 9%, secured by the leased assets |  |            | 87,026  |            |   | 108,519
|                                                                                                                                             |  |            |         |            |   |        
|                                                                                                                                             |  |            | 120,031 |            |   | 174,643
|Less: Current portion                                                                                                                        |  |            | 78,519  |            |   | 68,654 
|                                                                                                                                             |  |            |         |            |   |        
|                                                                                                                                             |  | $          | 41,512  |            | $ | 105,989
|                                                                                                                                             |  |            |         |            |   |        



103



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



7. Long-term Debt
(continued)



As at May 31, 2005 the fair market value of the
long-term debt was approximately $115,000. The fair value has been estimated by discounting future cash flows at a rate offered for debt of similar maturities and credit quality.



The debt is repayable over the next four fiscal years is as follows:



|     |  |   |       
|---- |  | - | ------
|2006 |  | $ | 78,519
|2007 |  |   | 36,900
|2008 |  |   | 2,584 
|2009 |  |   | 2,028 



The interest expense
on long-term debt is as follows:



|                                              |  |                         |        |                         |   |                         |  |   |        
|--------------------------------------------- |  | ----------------------- | ------ | ----------------------- | - | ----------------------- |  | - | -------
|                                              |  | Year ended May 31, 2005 |        | Year ended May 31, 2004 |   | Year ended May 31, 2003
|Interest expense on long-term debt            |  | $                       | 19,332 |                         | $ | 76,999                  |  | $ | 99,455 
|Interest expense on capital lease obligations |  |                         | 8,717  |                         |   | 8,064                   |  |   | 8,334  
|                                              |  |                         |        |                         |   |                         |  |   |        
|                                              |  | $                       | 28,049 |                         | $ | 85,063                  |  | $ | 107,789
|                                              |  |                         |        |                         |   |                         |  |   |        



104



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



8. Income Taxes



The significant components of future income taxes consist
of the following:



|                                 |  |             |           |   |             |   |           |  
|-------------------------------- |  | ----------- | --------- | - | ----------- | - | --------- | -
|                                 |  | May 31 2005 |           |   | May 31 2004 |  
|Future income tax assets         |  |             |           |   |             |   |           |  
|Loss carry forwards              |  | $           | 479,000   |   |             | $ | 564,000   |  
|Other                            |  |             | 20,000    |   |             |   | 18,000    |  
|Unrealized foreign exchange loss |  |             | 260,000   |   |             |   | 141,000   |  
|Marketable securities            |  |             | 106,000   |   |             |   | 89,000    |  
|Intangible assets                |  |             | 279,000   |   |             |   | 294,000   |  
|Capital assets                   |  |             | 48,000    |   |             |   | 38,000    |  
|                                 |  |             |           |   |             |   |           |  
|                                 |  |             | 1,192,000 |   |             |   | 1,144,000 |  
|                                 |  |             |           |   |             |   |           |  
|Future income tax liabilities    |  |             |           |   |             |   |           |  
|Capital assets                   |  |             | (468,000  | ) |             |   | (457,000  | )
|Non-compete agreement            |  |             | (33,000   | ) |             |   | (45,000   | )
|Inventory                        |  |             | (85,400   | ) |             |   | (108,000  | )
|                                 |  |             |           |   |             |   |           |  
|                                 |  |             | (586,400  | ) |             |   | (610,000  | )
|                                 |  |             |           |   |             |   |           |  
|Valuation allowance              |  |             | (820,500  | ) |             |   | (851,000  | )
|                                 |  |             |           |   |             |   |           |  
|                                 |  | $           | (214,900  | ) |             | $ | (317,000  | )
|                                 |  |             |           |   |             |   |           |  
|Short term  asset               |  | $           | 76,000    |   |             | $ |          |  
|- liability                      |  |             | (85,400   | ) |             |   | (108,000  | )
|Long term  assets               |  |             | 295,500   |   |             |   | 293,000   |  
|- liability                      |  |             | (501,000  | ) |             |   | (502,000  | )
|                                 |  |             |           |   |             |   |           |  
|                                 |  | $           | (214,900  | ) |             | $ | (317,000  | )
|                                 |  |             |           |   |             |   |           |  



A reconciliation between income taxes
provided at actual rates and at the basic rate of 34.2% (2004  35.63%; 2003  37.79% ) for federal and provincial taxes is as follows:



|                                          |  |             |          |   |             |   |          |             |  |   |          |  
|----------------------------------------- |  | ----------- | -------- | - | ----------- | - | -------- | ----------- |  | - | -------- | -
|                                          |  | May 31 2005 |          |   | May 31 2004 |   |          | May 31 2003 | 
|Loss before income taxes                  |  | $           | (708,554 | ) |             | $ | (388,729 | )           |  | $ | (597,546 | )
|                                          |  |             |          |   |             |   |          |             |  |   |          |  
|Recovery of income tax at statutory rates |  | $           | (242,325 | ) |             | $ | (138,504 | )           |  | $ | (225,813 | )
|Change in taxes resulting from:           |  |             |          |   |             |   |          |             |  |   |          |  
|Stock based compensation                  |  |             | 332,485  |   |             |   | 3,600    |             |  |   |         |  
|Foreign currency differences              |  |             | (79,571  | ) |             |   | 6,744    |             |  |   |         |  
|Foreign tax differences                   |  |             | (38,470  | ) |             |   |         |             |  |   |         |  
|Permanent differences and other           |  |             | (45,779  | ) |             |   | 88,825   |             |  |   | (51,600  | )
|Change in valuation allowance             |  |             | (30,500  | ) |             |   | (7,000   | )           |  |   | 236,000  |  
|                                          |  |             |          |   |             |   |          |             |  |   |          |  
|Income taxes                              |  | $           | (104,160 | ) |             | $ | (46,335  | )           |  | $ | (41,413  | )
|                                          |  |             |          |   |             |   |          |             |  |   |          |  
|Current tax                               |  | $           | 34,453   |   |             | $ |         |             |  | $ |         |  
|Future tax                                |  |             | (138,613 | ) |             |   | (46,335  | )           |  |   | (41,413  | )
|                                          |  |             |          |   |             |   |          |             |  |   |          |  
|                                          |  | $           | (104,160 | ) |             | $ | (46,335  | )           |  | $ | (41,413  | )
|                                          |  |             |          |   |             |   |          |             |  |   |          |  



The Company and its
subsidiaries have non-capital losses of approximately $1,354,000 to apply against future taxable income. These losses will expire as follows: $94,000 in 2009, $796,000 in 2010, $272,000 in 2011, and $192,000 in 2012.



105



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



9. Share Capital



a) Authorized



Unlimited special shares

Unlimited common shares



(b) Issued Common Shares



|                                             |  |                  |   |  |               |            |  
|-------------------------------------------- |  | ---------------- | - |  | ------------- | ---------- | -
|                                             |  | Number of Shares |   |  | Consideration |           
|Balance at May 31, 2003                      |  | 2,259,131        |   |  | $             | 9,515,297  |  
|                                             |  |                 
|Shares issued upon exercise of warrants      |  | 125,000          |   |  |               | 705,000    |  
|                                             |  |                  |   |  |               |            |  
|Balance at May 31, 2004                      |  | 2,384,131        |   |  | $             | 10,220,297 |  
|                                             |  |                 
|Shares issued upon exercise of stock options |  | 440,000          |   |  |               | 2,798,200  |  
|Shares repurchased                           |  | (139,735         | ) |  |               | (519,801   | )
|                                             |  |                  |   |  |               |            |  
|Balance at May 31, 2005                      |  | 2,684,396        |   |  | $             | 12,498,696 |  
|                                             |  |                  |   |  |               |            |  



(c) Warrants



Common shares purchase warrants (Warrants)



As at May 31, 2005 the following Warrants are
outstanding and exercisable:



|                  |  |                   |  |               |  |                
|----------------- |  | ----------------- |  | ------------- |  | ---------------
|NumberOutstanding |  | Share forWarrants |  | ExercisePrice |  | ExpiryDate     
|164,958           |  | 1 for 1           |  | 7.50          |  | August 30, 2005



The continuity of
common share purchase warrants is as follows:



|                                                  |  |          |  
|------------------------------------------------- |  | -------- | -
|Warrants outstanding, May 31, 2003                |  | 719,916  |  
|                                                  | 
|Exercised - Re: Private Placement  February 2003 |  | (125,000 | )
|                                                  |  |          |  
|Warrants outstanding, May 31, 2004                |  | 594,916  |  
|                                                  | 
|Expired  June 2004                               |  | (50,000  | )
|Expired  February 2005                           |  | (379,958 | )
|                                                  |  |          |  
|Warrants outstanding, May 31, 2005                |  | 164,958  |  
|                                                  |  |          |  



106



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



9. Share Capital
(continued)



(d) Stock Options:



On August 1, 2003, the board of directors of the Company authorized a
new stock option plan (2003 Option Plan) for directors, officers, employees, and consultants of the Company and its subsidiaries, which reserves an aggregate of 460,326 Common Shares for issuance on the exercise of such options. The 2003
Option Plan supplants and replaces the Companys then existing 1995 stock option plan (Former Plan). The terms of the 2003 Option Plan restrict options granted, at any one point in time, to a maximum of 20% of the outstanding Common
Shares. The maximum term of any option granted is five years. The 2003 Option Plan was approved by the Company stockholders at the 2003 Annual Meeting.



As at May 31, 2005 the following options are outstanding:



|          |  |                   |  |               |      |            |                
|--------- |  | ----------------- |  | ------------- | ---- | ---------- | ---------------
|Issued to |  | NumberOutstanding |  | ExercisePrice |      | ExpiryDate
|Directors |  | 5,000             |  | $             | 4.50 |            | August 31, 2006
|Directors |  | 5,000             |  | $             | 7.50 |            | August 31, 2006
|Directors |  | 400,000           |  | $             | 2.50 |            | January 4, 2010



The continuity of
stock options is as follows:



|                                                   |  |                  |   |  |                      |        |  
|-------------------------------------------------- |  | ---------------- | - |  | -------------------- | ------ | -
|                                                   |  | Number ofOptions |   |  | WeightedAveragePrice |       
|Options outstanding, May 31, 2003                  |  | 10,000           |   |  |                      | 6.00   |  
|                                                   |  |                 
|Issued  January, 2004                             |  | 440,000          |   |  |                      | 6.00   |  
|Issued  April, 2004                               |  | 100,000          |   |  |                      | 10.00  |  
|                                                   |  |                  |   |  |                      |        |  
|Options outstanding, May 31, 2004                  |  | 550,000          |   |  | $                    | 6.70   |  
|                                                   |  |                 
|Cancelled  July, 2004                             |  | (440,000         | ) |  |                      | (6.00  | )
|Reissued  July, 2004                              |  | 440,000          |   |  |                      | 3.50   |  
|                                                   |  |                 
|Expired  August, 2004                             |  | (50,000          | ) |  |                      | (8.00  | )
|Expired  December, 2004                           |  | (50,000          | ) |  |                      | (12.00 | )
|                                                   |  |                 
|Cancelled  January, 2005                          |  | (440,000         | ) |  |                      | (3.50  | )
|Reissued  January, 2005                           |  | 440,000          |   |  |                      | 2.40   |  
|Exercised  January, 2005                          |  | (440,000         | ) |  |                      | (2.40  | )
|                                                   |  |                 
|Issued  January, 2005                             |  | 400,000          |   |  |                      | 2.50   |  
|                                                   |  |                  |   |  |                      |        |  
|Options outstanding and exercisable  May 31, 2005 |  | 410,000          |   |  | $                    | 2.59   |  
|                                                   |  |                  |   |  |                      |        |  



107



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



9. Share Capital
(continued)



(e) Stock-based Compensation



(i) Effective June 1, 2004, the Company adopted the revised CICA Handbook
Section 3870, Stock-Based Compensation and Other Stock-based Payments which requires the application of a fair value method of accounting to all stock-based compensation payments to employees. Under this method, the Company is
required to recognize a charge to the income statement based on an option-pricing model for all stock options that were granted and vested in the period, with a corresponding credit to Contributed Surplus under the Shareholders Equity section
of the Balance Sheet. In accordance with the transitional provisions of Section 3870, the Company has retroactively applied the fair value method of accounting, without restatement, to stock option awards and warrant extensions granted since
June 1, 2002 using the Black-Scholes option pricing model. An adjustment to the opening deficit at June 1, 2004 in the amount of $1,876,956 has been recorded representing the total stock-based compensation expense had the fair value method
been used for employee stock options granted and warrants modified after June 1, 2002. The offset to deficit is an increase in contributed surplus in the amount of $1,876,956 resulting in no net change to shareholders equity.



(ii)The employee stock-based compensation expense recognized in the income statement for
the year ended May 31, 2005 is summarized below:



|                                                                                                                                                                                          |  |              |         |              |   |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ------------ | - | ------
|                                                                                                                                                                                          |  | May 31, 2005 |         | May 31, 2004
|50,000 stock options granted to a consultant on April 1, 2004 at an exercise price of $8.00 expiring August 15, 2004                                                                      |  | $            | 15,000  |              | $ | 10,000
|                                                                                                                                                                                          |  |             
|50,000 stock options granted to a consultant on April 1, 2004 at an exercise price of $12.00 expiring December 31, 2004                                                                   |  |              | 100     |              |   |      
|                                                                                                                                                                                          |  |             
|440,000 stock options previously granted to employees were modified from an exercise price of $6.00 to $3.50 and from an expiry date of January 9, 2009 to July 26, 2008 on July 26,
2004 |  |              | 130,000 |              |   |      
|                                                                                                                                                                                          |  |             
|440,000 stock options previously granted to employees were modified from an exercise price of $3.50 to $2.40 on January 3, 2005                                                           |  |              | 85,400  |              |   |      
|                                                                                                                                                                                          |  |             
|400,000 stock options were granted to employees on January 4, 2005 at an exercise price of $2.50 expiring on January 4, 2010                                                              |  |              | 690,000 |              |   |      
|                                                                                                                                                                                          |  |              |         |              |   |       
|                                                                                                                                                                                          |  | $            | 920,500 |              | $ | 10,000
|                                                                                                                                                                                          |  |              |         |              |   |       



108



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



9. Share Capital
(continued)



(e) Stock-based Compensation (continued)



The Company uses the Black-Scholes option pricing model to estimate the fair
value at the date of grant of options using the following assumptions:



|                            |  |            |  |              
|--------------------------- |  | ---------- |  | -------------
|                            |  | 2005       |  | 2004         
|Risk free interest rate (%) |  | 2          |  | 2 to 3.97    
|Expected volatility (%)     |  | 60 to 104  |  | 68           
|Expected life (in years)    |  | 3.583 to 5 |  | 0.37 to 4.667
|Expected dividend yield (%) |  | 0          |  | 0            



The following is the Companys
pro forma information with the fair value method applied to the granting of stock options and the modification of warrants applicable to fiscal 2004 and fiscal 2003:



|                                                     |  |              |            |   |              |   |           |  
|---------------------------------------------------- |  | ------------ | ---------- | - | ------------ | - | --------- | -
|                                                     |  | May 31, 2004 |            |   | May 31, 2003 |  
|Loss attributed to common shareholders  as reported |  | $            | (342,394   | ) |              | $ | (597,546  | )
|Stock-based compensation expense                     |  |              | (1,526,800 | ) |              |   |          |  
|Compensation expense on modified warrants            |  |              | (160,454   | ) |              |   | (189,702  | )
|                                                     |  |              |            |   |              |   |           |  
|Loss attributed to common shareholders  pro forma   |  | $            | (2,029,648 | ) |              | $ | (787,248  | )
|Loss per share  as reported                         |  | $            | (0.15      | ) |              | $ | (0.34     | )
|                                                     |  |              |            |   |              |   |           |  
|Loss per share  pro forma                           |  | $            | (0.86      | ) |              | $ | (0.44     | )
|                                                     |  |              |            |   |              |   |           |  
|Weighted average number of shares outstanding        |  |              | 2,339,027  |   |              |   | 1,778,090 |  
|                                                     |  |              |            |   |              |   |           |  



(f) Contributed Surplus



Contributed Surplus consists of the following:



|                                                                                                |  |              |            |   |              |   |              |  |   |  
|----------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ------------ | - | ------------ |  | - | -
|                                                                                                |  | May 31, 2005 |            |   | May 31, 2004 |   | May 31, 2003
|Consultant stock options granted April 1, 2004 expiringAugust 15, 2004 and December 31, 2004    |  | $            | 25,100     |   |              | $ | 25,000       |  | $ | 
|June 1, 2004 restatement  fair value of stock optionsgranted and warrants modified (Note 9(e)) |  |              | 1,876,956  |   |              |   |             |  |   | 
|Employee stock options modified on July 26, 2004 andJanuary 3, 2005                             |  |              | 215,400    |   |              |   |             |  |   | 
|Employee stock options granted on January 4, 2005                                               |  |              | 690,000    |   |              |   |             |  |   | 
|Stock options exercised                                                                         |  |              | (1,742,200 | ) |              |   |             |  |   | 
|Common share buyback                                                                            |  |              | (203,488   | ) |              |   |             |  |   | 
|                                                                                                |  |              |            |   |              |   |              |  |   |  
|                                                                                                |  | $            | 861,768    |   |              | $ | 25,000       |  | $ | 
|                                                                                                |  |              |            |   |              |   |              |  |   |  



109



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



9. Share Capital
(continued)



(g) Common Share Buyback



On February 17, 2005, the Board of Directors authorized the Company to purchase in
open-market transactions up to 5% of the issued and outstanding common shares. During the year ended May 31, 2005 the Company acquired 139,735 (2004 - $Nil) common shares at a total cost of $723,289 (2004 - $Nil).



---

10. Cash Flow Information



(a) Changes in non-cash working capital are as follows:



|                    |  |                    |          |   |      |   |          |      |  |   |          |  
|------------------- |  | ------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                    |  | Year Ended May 31, |         
|                    |  | 2005               |          |   | 2004 |   |          | 2003 | 
|Accounts receivable |  | $                  | (349,342 | ) |      | $ | 592,197  |      |  | $ | (507,471 | )
|Inventories         |  |                    | 75,866   |   |      |   | (319,082 | )    |  |   | (229,959 | )
|Unbilled revenue    |  |                    |         |   |      |   | 324,078  |      |  |   | (324,078 | )
|Prepaid expenses    |  |                    | (11,908  | ) |      |   | (16,428  | )    |  |   | (15,906  | )
|Accounts payable    |  |                    | (108,887 | ) |      |   | 250,518  |      |  |   | 338,346  |  
|Deferred revenue    |  |                    | 514,422  |   |      |   | (536,683 | )    |  |   | 661,406  |  
|                    |  |                    |          |   |      |   |          |      |  |   |          |  
|                    |  | $                  | 120,151  |   |      | $ | 294,600  |      |  | $ | (77,662  | )
|                    |  |                    |          |   |      |   |          |      |  |   |          |  



(b) Supplemental Cash
Flow Information



|                       |  |                    |        |      |   |        |  |   |        
|---------------------- |  | ------------------ | ------ | ---- | - | ------ |  | - | -------
|                       |  | Year Ended May 31,
|                       |  | 2005               |        | 2004 |   | 2003  
|Cash paid for interest |  | $                  | 28,049 |      | $ | 85,063 |  | $ | 107,789
|                       |  |                    |        |      |   |        |  |   |        



(c) Non-cash
transaction



|                                      |  |                    |         |      |   |        |  |   |          
|------------------------------------- |  | ------------------ | ------- | ---- | - | ------ |  | - | ---------
|                                      |  | Year Ended May 31,
|                                      |  | 2005               |         | 2004 |   | 2003  
|Note received on business acquisition |  | $                  |        |      | $ |       |  | $ | 1,475,662
|Options granted to employees          |  |                    | 905,400 |      |   |       |  |   |         
|Options granted to consultants        |  |                    | 15,100  |      |   | 25,000 |  |   |         
|                                      |  |                    |         |      |   |        |  |   |          
|                                      |  | $                  | 920,500 |      | $ | 25,000 |  | $ | 1,475,662
|                                      |  |                    |         |      |   |        |  |   |          



110



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



11. Change in
Accounting Policy



During fiscal 2004, the Company changed
its accounting policy for the amortization of customer contracts from the straight line basis to a basis which more closely matches the revenue earned from these contracts to the amortization for the year. The effect of this change was a reduction
of amortization in 2004 of $135,881. The change was accounted for on a retroactive basis with restatement of the prior year figures. The effect of the change was to increase amortization in the 2003 year by $48,531, the deficit of the 2003 year by
$48,531 and reduce the 2004 year deficit by $87,350.



---

12. Related Party Transactions



(a) Included in general and administrative expenses are consulting fees of $57,154 (2004 - $53,623; 2003 - $47,196) paid to an individual who is a director and officer of the Company and rent, management fees, and office administration fees
of $183,364 (2004 - $178,228; 2003 - $Nil) paid to a corporation in which two of the directors are also directors of the Company.



(b) Included in accounts payable at year end are amounts payable to an individual who is a director of the Company for consulting fees and expenses in the
amount of $12,106 (May 31, 2004 - $11,437).



(c) Included in
marketable securities are 39,630 common shares (May 31, 2004  Nil) acquired for $139,747 of CECO Environmental Corp. at a carrying value of $88,771 (May 31, 2004 - $Nil) acquired on the open market. CECO Environmental Corp. is a corporation in
which two of its directors are also directors of the Company.



These related party transactions were in the normal course of operations and are recorded at the exchange amount agreed to by the related parties.



---

13. Per Share Data



The weighted average number of shares issued and outstanding for the period ended May 31, 2005 was 2,535,221 (2004  2,339,027; 2003 
1,778,090).



The effect of the exercise of outstanding options
and warrants would be anti-dilutive.



---

14. Economic Dependence



The U.S. Department
of Defence (directly and through subcontractors) accounts for a significant portion of the Companys revenue. Management has determined that the Company is not economically dependent on this business as, if necessary, it could re-deploy
resources to further service the commercial/industrial user.



111



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



15. Commitments and
Contingencies



(a) Rent



The following is a schedule by years of approximate future minimum rental
payments under operating leases that have remaining non-cancelable lease terms in excess of one year as of May 31, 2005.



|     |  |   |       
|---- |  | - | ------
|2006 |  | $ | 31,284
|2007 |  |   | 14,030
|2008 |  |   | 5,634 



Included in selling
expenses are rental charges on these leases of $27,600 (2004 - $35,434, 2003 - $26,828).



(b) 401(k) Plan



During 1998,
the Company adopted a 401(k) deferred compensation arrangement. Under the provision of the plan, the Company is required to match 50% of employee contributions up to a maximum of 3% of the employees eligible compensation. Employees may
contribute up to a maximum of 15% of eligible compensation. The Company may also make discretionary contributions up to a total of 15% of eligible compensation. During the period ended May 31, 2005, the Company incurred $22,859 (2004 - $8,652,
2003 -$9,714) as its obligation under the terms of the plan, charged to general and administrative expense.



112



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



16. Segmented
Information



(a) The Companys operations are
conducted in two reportable segments which are distinguished by geographic location in Canada and United States. Both segments design and manufacture electronic components. Inter-segment sales are recorded at market value



|                               |  |        |           |   |               |   |                   |  |   |                            |   |  |       |          |   |  |   |            |  
|------------------------------ |  | ------ | --------- | - | ------------- | - | ----------------- |  | - | -------------------------- | - |  | ----- | -------- | - |  | - | ---------- | -
|Year Ended May 31, 2005        |  | Canada |           |   | United States |   | Corporate(Canada) |  |   | Inter Segment Eliminations |   |  | Total |         
|Sales to External Customers    |  | $      | 4,722,205 |   |               | $ | 7,825,346         |  | $ |                           |   |  | $     |         |   |  | $ | 12,547,551 |  
|Inter-Segment Sales            |  |        |          |   |               |   | 649,821           |  |   |                           |   |  |       | (649,821 | ) |  |   |           |  
|                               |  |        |           |   |               |   |                   |  |   |                            |   |  |       |          |   |  |   |            |  
|Total                          |  |        | 4,722,205 |   |               |   | 8,475,167         |  |   |                           |   |  |       | (649,821 | ) |  |   | 12,547,551 |  
|                               |  |        |           |   |               |   |                   |  |   |                            |   |  |       |          |   |  |   |            |  
|Gross Income                   |  |        | 398,759   |   |               |   | 1,206,551         |  |   |                           |   |  |       |         |   |  |   | 1,605,310  |  
|Corporate Head Office Expenses |  |        |          |   |               |   |                  |  |   | 574,766                    |   |  |       |         |   |  |   | 574,766    |  
|Stock-based Compensation       |  |        |          |   |               |   |                  |  |   | 920,500                    |   |  |       |         |   |  |   | 920,500    |  
|Amortization                   |  |        | 108,392   |   |               |   | 485,448           |  |   | 171,093                    |   |  |       |         |   |  |   | 764,933    |  
|Interest on Long term Debt     |  |        | 11,256    |   |               |   | 16,793            |  |   |                           |   |  |       |         |   |  |   | 28,049     |  
|Other Expense (Income)         |  |        | 68,712    |   |               |   |                  |  |   | (43,096                    | ) |  |       |         |   |  |   | 25,616     |  
|Income Tax Expense (Recovery)  |  |        | (1,837    | ) |               |   | 26,774            |  |   | (129,097                   | ) |  |       |         |   |  |   | (104,160   | )
|                               |  |        |           |   |               |   |                   |  |   |                            |   |  |       |          |   |  |   |            |  
|Net income (loss)              |  |        | 212,236   |   |               |   | 677,536           |  |   | (1,494,166                 | ) |  |       |         |   |  |   | (604,394   | )
|                               |  |        |           |   |               |   |                   |  |   |                            |   |  |       |          |   |  |   |            |  
|Segment Assets                 |  |        | 2,254,285 |   |               |   | 6,572,759         |  |   | 3,819,284                  |   |  |       |         |   |  |   | 12,646,328 |  
|                               |  |        |           |   |               |   |                   |  |   |                            |   |  |       |          |   |  |   |            |  
|Goodwill included in assets    |  |        | 997,611   |   |               |   |                  |  |   |                           |   |  |       |         |   |  |   | 997,611    |  
|Capital Expenditures           |  |        | 41,871    |   |               |   | 270,875           |  |   | 21,214                     |   |  |       |         |   |  |   | 333,960    |  



|                               |  |        |           |   |               |   |           |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|------------------------------ |  | ------ | --------- | - | ------------- | - | --------- | ----------------- |  | - | ------------------------- | - |  | ----- | -------- | - |  | - | ---------- | -
|Year Ended May 31, 2004        |  | Canada |           |   | United States |   |           | Corporate(Canada) |  |   | Inter SegmentEliminations |   |  | Total |         
|Sales to External Customers    |  | $      | 5,013,986 |   |               | $ | 6,264,201 |                   |  | $ |                          |   |  | $     |         |   |  | $ | 11,278,187 |  
|Inter-Segment Sales            |  |        | 22,639    |   |               |   | 776,243   |                   |  |   |                          |   |  |       | (798,882 | ) |  |   |           |  
|                               |  |        |           |   |               |   |           |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Total                          |  |        | 5,036,625 |   |               |   | 7,040,444 |                   |  |   |                          |   |  |       | (798,882 | ) |  |   | 11,278,187 |  
|                               |  |        |           |   |               |   |           |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Gross Income                   |  |        | 400,625   |   |               |   | 564,925   |                   |  |   |                          |   |  |       |         |   |  |   | 965,550    |  
|Corporate Head Office Expenses |  |        |          |   |               |   |          |                   |  |   | 573,365                   |   |  |       |         |   |  |   | 573,365    |  
|Stock-based Compensation       |  |        |          |   |               |   |          |                   |  |   | 10,000                    |   |  |       |         |   |  |   | 10,000     |  
|Amortization                   |  |        | 111,610   |   |               |   | 520,781   |                   |  |   | 171,416                   |   |  |       |         |   |  |   | 803,807    |  
|Interest on Long term Debt     |  |        | 2,188     |   |               |   | 44,468    |                   |  |   | 38,407                    |   |  |       |         |   |  |   | 85,063     |  
|Other Expense (Income)         |  |        | 29,774    |   |               |   | (45,232   | )                 |  |   | (102,498                  | ) |  |       |         |   |  |   | (117,956   | )
|Income Tax Expense (Recovery)  |  |        | (18,190   | ) |               |   | 18,569    |                   |  |   | (46,714                   | ) |  |       |         |   |  |   | (46,335    | )
|                               |  |        |           |   |               |   |           |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Net income (loss)              |  |        | 275,243   |   |               |   | 26,339    |                   |  |   | (643,976                  | ) |  |       |         |   |  |   | (342,394   | )
|                               |  |        |           |   |               |   |           |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Segment Assets                 |  |        | 2,052,518 |   |               |   | 6,480,097 |                   |  |   | 2,644,569                 |   |  |       |         |   |  |   | 11,177,184 |  
|                               |  |        |           |   |               |   |           |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Goodwill included in assets    |  |        | 918,529   |   |               |   | 1,000     |                   |  |   |                          |   |  |       |         |   |  |   | 919,529    |  
|Capital Expenditures           |  |        | 55,517    |   |               |   | 159,250   |                   |  |   | 8,200                     |   |  |       |         |   |  |   | 222,967    |  



|                               |  |        |           |               |   |           |                   |  |   |                           |   |  |       |         |   |  |   |            |  
|------------------------------ |  | ------ | --------- | ------------- | - | --------- | ----------------- |  | - | ------------------------- | - |  | ----- | ------- | - |  | - | ---------- | -
|Year Ended May 31, 2003        |  | Canada |           | United States |   |           | Corporate(Canada) |  |   | Inter SegmentEliminations |   |  | Total |        
|Sales to External Customers    |  | $      | 3,555,044 |               | $ | 4,698,497 |                   |  | $ |                          |   |  | $     |        |   |  | $ | 8,253,541  |  
|Inter-Segment Sales            |  |        |          |               |   | 54,470    |                   |  |   |                          |   |  |       | (54,470 | ) |  |   |           |  
|                               |  |        |           |               |   |           |                   |  |   |                           |   |  |       |         |   |  |   |            |  
|Total                          |  |        | 3,555,044 |               |   | 4,752,967 |                   |  |   |                          |   |  |       | (54,470 | ) |  |   | 8,253,541  |  
|                               |  |        |           |               |   |           |                   |  |   |                           |   |  |       |         |   |  |   |            |  
|Gross Income                   |  |        | 418,579   |               |   | 421,650   |                   |  |   |                          |   |  |       |        |   |  |   | 840,229    |  
|Corporate Head Office Expenses |  |        |          |               |   |          |                   |  |   | 674,736                   |   |  |       |        |   |  |   | 674,736    |  
|Amortization                   |  |        | 61,475    |               |   | 571,314   |                   |  |   | 153,190                   |   |  |       |        |   |  |   | 785,979    |  
|Interest on Long term Debt     |  |        | 5,537     |               |   | 32,481    |                   |  |   | 69,771                    |   |  |       |        |   |  |   | 107,789    |  
|Other Expense (Income)         |  |        | 60,264    |               |   | (38,509   | )                 |  |   | (111,071                  | ) |  |       |        |   |  |   | (89,316    | )
|Income Tax Expense (Recovery)  |  |        | 27,795    |               |   | 2,000     |                   |  |   | (71,208                   | ) |  |       |        |   |  |   | (41,413    | )
|                               |  |        |           |               |   |           |                   |  |   |                           |   |  |       |         |   |  |   |            |  
|Net income (loss)              |  |        | 263,508   |               |   | (145,636  | )                 |  |   | (715,418                  | ) |  |       |        |   |  |   | (597,546   | )
|                               |  |        |           |               |   |           |                   |  |   |                           |   |  |       |         |   |  |   |            |  
|Segment Assets                 |  |        | 1,830,470 |               |   | 7,494,671 |                   |  |   | 4,121,549                 |   |  |       |        |   |  |   | 13,446,690 |  
|                               |  |        |           |               |   |           |                   |  |   |                           |   |  |       |         |   |  |   |            |  
|Goodwill included in assets    |  |        | 918,529   |               |   |          |                   |  |   |                          |   |  |       |        |   |  |   | 918,529    |  
|Capital Expenditures           |  |        | 62,144    |               |   | 650,676   |                   |  |   | 12,969                    |   |  |       |        |   |  |   | 725,789    |  



113



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



16. Segmented
Information



|                         |  |              |            |                                                  |   |              |  |                                                   |            |         |   |                                                  |  |   |           |  |   |           
|------------------------ |  | ------------ | ---------- | ------------------------------------------------ | - | ------------ |  | ------------------------------------------------- | ---------- | ------- | - | ------------------------------------------------ |  | - | --------- |  | - | ----------
|Geographical Information |  | May 31, 2005 |            | May 31, 2004                                     |   | May 31, 2003
|                         |  | Revenue      |            | CapitalAssets,IntangibleAssets,Goodwill andOther |   | Revenue      |  | CapitalAssets,IntangibleAssets,Goodwill and Other |            | Revenue |   | CapitalAssets,IntangibleAssets,Goodwill andOther
|United States            |  | $            | 9,629,218  |                                                  | $ | 6,572,759    |  | $                                                 | 8,933,612  |         | $ | 6,480,097                                        |  | $ | 4,698,497 |  | $ | 7,494,671 
|Canada                   |  |              | 836,335    |                                                  |   | 6,073,569    |  |                                                   | 944,039    |         |   | 4,697,087                                        |  |   | 3,555,044 |  |   | 5,952,019 
|United Kingdom           |  |              | 1,659,463  |                                                  |   |             |  |                                                   | 1,057,691  |         |   |                                                 |  |   |          |  |   |          
|South America            |  |              | 159,936    |                                                  |   |             |  |                                                   | 201,465    |         |   |                                                 |  |   |          |  |   |          
|All Other                |  |              | 262,599    |                                                  |   |             |  |                                                   | 141,380    |         |   |                                                 |  |   |          |  |   |          
|                         |  |              |            |                                                  |   |              |  |                                                   |            |         |   |                                                  |  |   |           |  |   |           
|                         |  | $            | 12,547,551 |                                                  | $ | 12,646,328   |  | $                                                 | 11,278,187 |         | $ | 11,177,184                                       |  | $ | 8,253,541 |  | $ | 13,446,690
|                         |  |              |            |                                                  |   |              |  |                                                   |            |         |   |                                                  |  |   |           |  |   |           



(b) Major Customer



|                                          |  |      |   |  |      |   |  |      |  
|----------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                          |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Revenue                                   |  |      |   |  |      |   |  |      |  
|U.S. Department of Defense                |  | 12   | % |  | 17   | % |  | 3    | %
|U.S. Department of Defense subcontractors |  | 39   | % |  | 40   | % |  | 50   | %



---

17. Comparative Figures



Comparative
figures have been reclassified to conform to the current period presentation.



---

18. Subsequent events



On June 3, 2005, the Board of Directors has approved an additional buyback program through which the Company plans to repurchase up to 5% of the issued and outstanding common shares in open market transactions.



---

19. Generally Accepted
Accounting Principles in Canada and the United States



The
Companys accounting policies do not differ materially from accounting principles generally accepted in the United States (US GAAP) except as follows:



(a) Portfolio Investments



Under accounting principles generally accepted in Canada (Canadian GAAP), gains (losses) in shares of public companies are not recognized
until investments are sold unless there is deemed to be an impairment in value which is other than temporary. Under US GAAP, such investments that are not held for trading purposes are recorded at market value and the unrealized gains and losses
other than those arising from permanent impairment are recognized as a separate item in the shareholders equity section of the balance sheet



114



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



19. Generally
Accepted Accounting Principles in Canada and the United States



The Companys accounting policies do not differ materially from accounting principles generally accepted in the United States (US GAAP) except as follows:



(b) Stock Options



The Company follows APB 25 for options granted to employees. For employees, compensation expense is recognized under the intrinsic value method. Under
this method, compensation cost is the excess, if any, of the quoted market price at grant date over the exercise price. Such expense is reflected over the service period; if for prior services, expensed at date of grant; if for future services,
expensed over vesting period. During 2005, 400,000 options were issued at an exercise price that was equal to the quoted market price; therefore no compensation expense was recognized in 2005 for options granted to employees. During 2004, 440,000
options were issued at an exercise price that was equal to the quoted market price; therefore no compensation expense was recognized in 2004 for options granted to employees. No options were granted in 2003.



SFAS No. 123 Accounting for Stock-Based Compensation
established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply intrinsic value-based method
of accounting as described above and has adopted the disclosure requirements of SFAS No. 123. Stock options issued to consultants and other third parties are accounted for at their fair values in accordance with SFAS No. 123 which is
consistent with the policy applied for Canadian GAAP purposes since June 1, 2002. During 2005 there was $15,100 (2004 - $15,000, 2003 - $Nil) recorded as an expense.



Effective June 1, 2004, the Company adopted the revised CICA Handbook Section 3870, Stock-Based Compensation
and Other Stock-based Payments which requires the application of a fair value method of accounting to all stock-based compensation payments to employees. The impact in 2005 was to record compensation expense in the amount of $905,400 (2004 -
$Nil, 2003 - $Nil) relating to the award of stock options to employees under Canadian GAAP. Under U.S. GAAP, the Company is not required to record this compensation expense.



The Company has calculated the fair value of stock options granted to employees, directors and officers using the Black
Scholes option pricing model with the following assumptions:



|                            |  |            |  |               |  |     
|--------------------------- |  | ---------- |  | ------------- |  | ----
|                            |  | 2005       |  | 2004          |  | 2003
|Risk free interest rate (%) |  | 2          |  | 2 to 3.97     |  | N/A 
|Expected volatility (%)     |  | 60 to 104  |  | 68            |  | N/A 
|Expected life (in years)    |  | 3.583 to 5 |  | 0.37 to 4.667 |  | N/A 
|Expected dividend yield (%) |  | 0          |  | 0             |  | N/A 



In prior periods, the
Company modified the terms of certain warrants for one year. The intrinsic value of the warrants at the modification date was $Nil (2004 - $202,437, 2003 - $1,319,663) and an additional compensation expense in this amount was recognized in those
years.



(c) Other Comprehensive Income



Under US GAAP, comprehensive income must be reported which is defined
as all changes in equity other than those resulting from investments by owners and distributions to owners.



115



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



19. Generally
Accepted Accounting Principles in Canada and the United States  (continued)



Other comprehensive income (loss), which includes foreign currency translation adjustments, is shown for US purposes in the Statement of Shareholders Equity.



Other comprehensive income (loss) also includes the unrealized holding gains
and losses in the available-for-sale securities (note 2)



(d) Income Tax Provision



Under US GAAP,
Investment Tax Credits related to Companys research and development activities would be netted against the income tax provision rather than reducing the research and development expenses included in general and administrative expenses. Under
US GAAP, the general and administrative expenses would be higher by $14,540 (2004 - $7,731, 2003 - $22,316) and the income tax provision would be reduced by the same amount.



(e) Recently Issued United States Accounting Standards



The Financial Accounting Standards Board (FASB) has issued SFAS 154, Accounting Changes and Error
Corrections. This new standard replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, Statement 154 requires that a
voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that a change in method of
depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and correction of errors in previously issued financial statements should be
termed a restatement. The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and
correction of errors made in fiscal years beginning after June 1, 2005.



On December 16, 2004, the FASB issued SFAS 153,Exchanges of Non-monetary Assets - An Amendment of APB Opinion No. 29. Statement 153 amends APB Opinion No. 29, Accounting for Non-monetary
Transactions, which was issued in 1973. The amendments made by Statement 153 are based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate
the narrow exception for non-monetary exchanges of similar productive assets and replace it with a broader exception for exchanges of non-monetary assets that do not have commercial substance. Previously, Opinion 29 required that the
accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The provisions in Statement 153 are
effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply the standard prospectively. The adoption of SFAS 153 will not have any affect on the
Companys financial statements.



116



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



19. Generally
Accepted Accounting Principles in Canada and the United States  (continued)



(e) Recently Issued United States Accounting Standards - (continued)



In December of 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R Share Based Payments which addresses the
accounting for transactions in which an entity exchanges its equity instruments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the
entitys equity instruments or that may be settled by the issuance of those equity instruments. This statement is a revision of SFAS 123, Accounting for Stock-Based Compensation. This statement supersedes APB Opinion No. 25
Accounting for Stock Issued to Employees. Among other things, this statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the
award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award  the requisite service period (usually the vesting period). This statement is to be applied as of the beginning of
the first interim or annual period that begins after December 15, 2005, but earlier adoption is encouraged. Because the Company has disclosed pro-forma fair based value amounts in accordance with the original SFAS 123, the Company can adopt
this statement using a modified prospective approach.



On
November 24, 2004, the FASB issued SFAS 151,Inventory Costs - An amendment of ARB No. 43, Chapter 4. Statement 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as
incurred and not included in overhead. Further, Statement 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in Statement 151 are effective
for inventory costs incurred during fiscal years beginning after June 15, 2005. Companies must apply the standard prospectively. The Company has determined that the adoption of this standard will have not have a material effect on the financial
position and results of operations.



In June 2004, FASB issued
an exposure draft of a proposed Statement, Fair Value Measurements to provide guidance on how to measure the fair value of financial and non-financial assets and liabilities when required by other authoritative accounting pronouncements. The
proposed statement attempts to address concerns about the ability to develop reliable estimates of fair value and inconsistencies in fair value guidance provided by current U.S. GAAP, by creating a framework that clarifies the fair value objective
and its application in GAAP. In addition, the proposal expands disclosures required about the use of fair value to re-measure assets and liabilities. The standard would be effective for financial statements issued for fiscal years beginning after
June 15, 2005. The Company is evaluating the effect of this standard on its consolidated financial statements.



117



---

---

API Electronics Group Corp.

Notes to Consolidated Financial Statements

(Expressed in US Dollars)



May 31, 2005, 2004 and 2003

---



19. Generally
Accepted Accounting Principles in Canada and the United States  (continued)



(f) The impact of the foregoing on the financial statements is as follows:



|                                                   |  |      |            |      |   |           
|-------------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                                   |  | 2005 |            | 2004
|Total assets Canadian GAAP                         |  | $    | 12,646,328 |      | $ | 11,177,184
|Unrealized gain on investments                     |  |      | 6,500      |      |   | 7,951     
|                                                   |  |      |            |      |   |           
|Total assets US GAAP                               |  | $    | 12,652,828 |      | $ | 11,185,135
|                                                   |  |      |            |      |   |           
|Total liabilities Canadian GAAP                    |  | $    | 3,142,051  |      | $ | 2,555,345 
|                                                   |  |      |            |      |   |           
|Total liabilities per US GAAP                      |  |      | 3,142,051  |      |   | 2,555,345 
|                                                   |  |      |            |      |   |           
|Shareholders equity Canadian GAAP                 |  |      | 9,504,277  |      |   | 8,621,839 
|Unrealized gain on investments in US GAAP          |  |      | 6,500      |      |   | 7,951     
|                                                   |  |      |            |      |   |           
|Shareholders equity US GAAP                       |  |      | 9,510,777  |      |   | 8,629,790 
|                                                   |  |      |            |      |   |           
|Total liabilities and shareholders equity US GAAP |  | $    | 12,652,828 |      | $ | 11,185,135
|                                                   |  |      |            |      |   |           



|                                                                              |  |      |           |   |      |   |           |      |  |   |            |  
|----------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ---------- | -
|                                                                              |  | 2005 |           |   | 2004 |   |           | 2003 | 
|Net loss per Canadian GAAP                                                    |  | $    | (604,394  | ) |      | $ | (342,394  | )    |  | $ | (597,546   | )
|Reversal of adjustment for change accounting policy                           |  |      |          |   |      |   |          |      |  |   | 48,531     |  
|Employee stock-based compensation expense recorded for Canadian GAAP purposes |  |      | 905,400   |   |      |   |           |      |  |   |            |  
|Compensation expense-warrants modified                                        |  |      |          |   |      |   | (202,437  | )    |  |   | (1,319,613 | )
|                                                                              |  |      |           |   |      |   |           |      |  |   |            |  
|Net income (loss) before cumulative adjustment                                |  |      | 301,006   |   |      |   | (544,831  | )    |  |   | (1,868,678 | )
|Cumulative adjustment for change in accounting policy                         |  |      |          |   |      |   | (48,531   | )    |  |   |           |  
|                                                                              |  |      |           |   |      |   |           |      |  |   |            |  
|Net income (loss) per US GAAP                                                 |  |      | 301,006   |   |      |   | (593,362  | )    |  |   | (1,868,678 | )
|Unrealized gain (loss) on investments                                         |  |      | (1,451    | ) |      |   | (43,618   | )    |  |   | 48,377     |  
|                                                                              |  |      |           |   |      |   |           |      |  |   |            |  
|Comprehensive net income (loss) per US GAAP                                   |  | $    | 299,555   |   |      | $ | (636,980  | )    |  | $ | (1,820,301 | )
|                                                                              |  |      |           |   |      |   |           |      |  |   |            |  
|Basic and diluted net loss before cumulative adjustment per share             |  | $    | 0.12      |   |      | $ | (0.23     | )    |  | $ | (1.05      | )
|                                                                              |  |      |           |   |      |   |           |      |  |   |            |  
|Cumulative adjustment per share                                               |  | $    |          |   |      | $ | (0.02     | )    |  | $ |           |  
|                                                                              |  |      |           |   |      |   |           |      |  |   |            |  
|Basic and diluted net loss per share US GAAP                                  |  | $    | 0.12      |   |      | $ | (0.25     | )    |  | $ | (1.05      | )
|                                                                              |  |      |           |   |      |   |           |      |  |   |            |  
|Shares used in the computation of basic and diluted loss per share            |  |      | 2,535,221 |   |      |   | 2,339,027 |      |  |   | 1,778,090  |  
|                                                                              |  |      |           |   |      |   |           |      |  |   |            |  



118



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ITEM 18. FINANCIAL STATEMENTS



Not applicable.



ITEM 19. EXHIBITS



| | 1. | Articles of incorporation and bylaws as currently in effect:
| | -- | ------------------------------------------------------------



| | 1.1 | Articles of Amalgamation, effective May 1, 1993, amalgamating 1024680 Ontario Ltd., Shepherd Ventures Inc., Dally Development Corp. and TNK Resources Inc. into an amalgamated
corporation under the name TNK Resources Inc. under the articles of incorporation of Dally Development Corp.(1)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1.2 | By-law Number A of Shediac Bay Resources, Inc. (the Companys predecessor) dated May 14, 1985(1)
| | --- | ------------------------------------------------------------------------------------------------



| | 1.3 | Special By-law Number 1 of A of Shediac Bay Resources, Inc. (the Companys predecessor) dated May 14, 1985(1)
| | --- | -------------------------------------------------------------------------------------------------------------



| | 1.4 | Articles of Amendment filed May 18, 1999 reflecting Name Change from TNK Resources Inc. to Opus Minerals Inc.(3)
| | --- | ----------------------------------------------------------------------------------------------------------------



| | 1.5 | Articles of Amendment filed July 25, 2000 reflecting Name Change from Opus Minerals Inc. to InvestorLinks.com Inc.(4)
| | --- | ---------------------------------------------------------------------------------------------------------------------



| | 1.6 | Articles of Amendment filed September 6, 2001, effective September 10, 2001, reflecting Name Change from InvestorLinks.com Inc. to API Electronics Group Inc.(5)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1.7 | Restated Bylaws effective October 8, 2003(7)
| | --- | --------------------------------------------



| | 1.8 | Articles of Amendment filed September 1, 2004, effective September 15, 2004, reflecting name change from API Electronics Group Inc. to API Electronics Group Corp. and the 1:10
common share consolidation(8)
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Instruments defining rights of holders of equity or debt securities being registered:
| | -- | -------------------------------------------------------------------------------------



| | 2.1 | See Articles of Amalgamation described above in item 1.1.(1)
| | --- | ------------------------------------------------------------



| | 2.2 | Specimen Common Share certificate(1)
| | --- | ------------------------------------



| | 2.3 | 1995 Stock Option Plan and Board resolution defining rights of holders of Management Stock Options granted thereunder(1)
| | --- | ------------------------------------------------------------------------------------------------------------------------



| | 2.4 | Form of Share Purchase Warrant(1)
| | --- | ---------------------------------



| | 2.5 | Form of Agents Compensation Warrant(1)
| | --- | ---------------------------------------



| | 2.6 | See Consulting Agreement described below in item 3.21 for description of Consultants Options(1)
| | --- | ------------------------------------------------------------------------------------------------



119



---

| | 2.7 | 2003 Stock Option Plan(7)
| | --- | -------------------------



| | 2.8 | Shareholder Rights Plan Agreement(8)
| | --- | ------------------------------------



| | 3. | Any voting trust agreements and any amendments to those agreements.
| | -- | -------------------------------------------------------------------



| | 4. | Material contracts:
| | -- | -------------------



| | 4.1 | Republic of Botswana Prospecting License No. 142/93, dated September 8, 1993, in favor of TNK Resources Incorporated(1)
| | --- | -----------------------------------------------------------------------------------------------------------------------



| | 4.2 | Republic of Botswana Renewal Prospecting License No. 142/93, dated October 22, 1996, in favor of TNK Resources Incorporated(1)
| | --- | ------------------------------------------------------------------------------------------------------------------------------



| | 4.3 | Republic of Botswana Prospecting License No. 143/93, dated September 8, 1993, in favor of TNK Resources Incorporated(1)
| | --- | -----------------------------------------------------------------------------------------------------------------------



| | 4.4 | Republic of Botswana Renewal Prospecting License No. 143/93, dated October 22, 1996, in favor of TNK Resources Incorporated(1)
| | --- | ------------------------------------------------------------------------------------------------------------------------------



| | 4.5 | Republic of Botswana Prospecting License No. 144/93, dated September 8, 1993, in favor of TNK Resources Incorporated(1)
| | --- | -----------------------------------------------------------------------------------------------------------------------



| | 4.6 | Republic of Botswana Renewal Prospecting License No. 144/93, dated October 22, 1996, in favor of TNK Resources Incorporated(1)
| | --- | ------------------------------------------------------------------------------------------------------------------------------



| | 4.7 | Republic of Botswana Prospecting License No. 145/93, dated September 8, 1993, in favor of TNK Resources Incorporated(1)
| | --- | -----------------------------------------------------------------------------------------------------------------------



| | 4.8 | Republic of Botswana Renewal Prospecting License No. 145/93, dated October 22, 1996, in favor of TNK Resources Incorporated(1)
| | --- | ------------------------------------------------------------------------------------------------------------------------------



| | 4.9 | Republic of Botswana Prospecting License No. 146/93, dated September 8, 1993, in favor of TNK Resources Incorporated(1)
| | --- | -----------------------------------------------------------------------------------------------------------------------



| | 4.10 | Republic of Botswana Renewal Prospecting License No. 146/93, dated October 22, 1996, in favor of TNK Resources Incorporated(1)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------



| | 4.11 | Republic of Botswana Prospecting License No. 147/93, dated September 8, 1993, in favor of TNK Resources Incorporated(1)
| | ---- | -----------------------------------------------------------------------------------------------------------------------



| | 4.12 | Republic of Botswana Renewal Prospecting License No. 147/93, dated October 22, 1996, in favor of TNK Resources Incorporated(1)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------



| | 4.13 | Republic of Botswana Prospecting License No. 148/93, dated September 8, 1993, in favor of TNK Resources Incorporated(1)
| | ---- | -----------------------------------------------------------------------------------------------------------------------



| | 4.14 | Republic of Botswana Renewal Prospecting License No. 148/93, dated October 22, 1996, in favor of TNK Resources Incorporated(1)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------



120



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| | 4.15 | Republic of Botswana Prospecting License No. 149/93, dated September 8, 1993, in favor of TNK Resources Incorporated(1)
| | ---- | -----------------------------------------------------------------------------------------------------------------------



| | 4.16 | Republic of Botswana Renewal Prospecting License No. 149/93, dated October 22, 1996, in favor of TNK Resources Incorporated(1)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------



| | 4.17 | Republic of Botswana Prospecting License No. 156/93, dated October 25, 1993, in favor of TNK Resources Incorporated(1)
| | ---- | ----------------------------------------------------------------------------------------------------------------------



| | 4.18 | Republic of Botswana Prospecting License No. 157/93, dated October 25, 1993, in favor of TNK Resources Incorporated(1)
| | ---- | ----------------------------------------------------------------------------------------------------------------------



| | 4.19 | Republic of Botswana Renewal Prospecting License No. 157/93, dated October 22, 1996, in favor of Midswana Diamond Exploration Corporation(1)
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------



| | 4.20 | Republic of Botswana Prospecting License No. 158/93, dated October 25, 1993, in favor of TNK Resources Incorporated(1)
| | ---- | ----------------------------------------------------------------------------------------------------------------------



| | 4.21 | Republic of Botswana Renewal Prospecting License No. 158/93, dated October 22, 1996, in favor of Midswana Diamond Exploration Corporation(1)
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------



| | 4.22 | Contract of Work dated December 21, 1987 between the Government of the Republic of Indonesia and P.T. Marunda Wahau Mining(1)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------



| | 4.23 | Contract of Work dated December 2, 1986 between the Government of the Republic of Indonesia and P.T. Alahan Panjang Minerals(1)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------



| | 4.24 | Contract of Work dated December 2, 1986 between the Government of the Republic of Indonesia and P.T. Sungai Tembese Minerals(1)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------



| | 4.25 | Contract of Work dated December 21, 1987 between the Government of the Republic of Indonesia and P.T. Buntok Maju Minerals(1)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------



| | 4.26 | Contract of Work dated October 24, 1987 between the Government of the Republic of Indonesia and P.T. Tumbang Kuling Minerals(1)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------



| | 4.27 | Assignment Agreement, dated September 16, 1994, between TNK Resources Inc. and 1096883 Ontario Limited(1)
| | ---- | ---------------------------------------------------------------------------------------------------------



| | 4.28 | Agreement, dated September 26, 1994, between the persons shown as the 1096883 Ontario Limited Shareholders and Sommerset Industries Inc. and 1096883 Ontario Limited(1)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.29 | Memorandum of Agreement, dated February 14, 1996, between P.T. Hutan Nauli and TNK Resources Inc.(1)
| | ---- | ----------------------------------------------------------------------------------------------------



| | 4.30 | Memorandum of Agreement, dated March 26, 1996, between TNK Resources Inc. and 867323 Ontario Limited(1)
| | ---- | -------------------------------------------------------------------------------------------------------



121



---

| | 4.31 | Agreement, dated April 8, 1996, between P.T. Hutan Nauli and TNK Resources Inc.(1)
| | ---- | ----------------------------------------------------------------------------------



| | 4.32 | Letter agreement, dated April 15, 1996, between TNK Resources Inc. and Oil Springs Energy Corp.(1)
| | ---- | --------------------------------------------------------------------------------------------------



| | 4.33 | Employment Agreement, dated May 1, 1996, between TNK Resources Inc. and Elizabeth J. Kirkwood(1)
| | ---- | ------------------------------------------------------------------------------------------------



| | 4.34 | Employment Agreement, dated May 1, 1996, between Midswana Diamond Exploration Corp. and Elizabeth J. Kirkwood(1)
| | ---- | ----------------------------------------------------------------------------------------------------------------



| | 4.35 | Letter agreement dated May 24, 1996, between TNK Resources Inc. and P.T. Hutan Nauli(1)
| | ---- | ---------------------------------------------------------------------------------------



| | 4.36 | Consulting Agreement, dated August 1, 1996, between TNK Resources Inc. and 1165953 Ontario Inc.(1)
| | ---- | --------------------------------------------------------------------------------------------------



| | 4.37 | Memorandum of Agreement, dated November 15, 1996, between P.T. Hutan Nauli and TNK Resources Inc.(1)
| | ---- | ----------------------------------------------------------------------------------------------------



| | 4.38 | Prospecting Agreement (Area Agreement #1), dated February 20, 1998 between DeBeers Prospecting Botswana (Proprietary) Limited and TNK Resources Inc.(2)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.39 | Prospecting Agreement (Area Agreement #2), dated February 20, 1998 between DeBeers Prospecting Botswana (Proprietary) Limited and TNK Resources Inc.(2)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.40 | Prospecting Agreement (Area Agreement #3), dated February 20, 1998 between DeBeers Prospecting Botswana (Proprietary) Limited and TNK Resources Inc.(2)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.41 | Subscription Agreement, dated March 12, 1998 between TNK Resources Inc. and Monopros Limited(2)
| | ---- | -----------------------------------------------------------------------------------------------



| | 4.42 | Memorandum and Articles of Association of TNK Area 1 (Proprietary) Limited, dated February 11, 1998(2)
| | ---- | ------------------------------------------------------------------------------------------------------



| | 4.43 | Memorandum and Articles of Association of TNK Area 2 (Proprietary) Limited, dated February 11, 1998(2)
| | ---- | ------------------------------------------------------------------------------------------------------



| | 4.44 | Memorandum and Articles of Association of TNK Area 3 (Proprietary) Limited, dated February 11, 1998(2)
| | ---- | ------------------------------------------------------------------------------------------------------



| | 4.45 | Assignment Agreement, dated March 31, 1998 between TNK Resources Inc. and TNK Resources Area 1 (Proprietary) Limited(2)
| | ---- | -----------------------------------------------------------------------------------------------------------------------



| | 4.46 | Assignment Agreement, dated March 31, 1998 between TNK Resources Inc. and TNK Resources Area 2 (Proprietary) Limited(2)
| | ---- | -----------------------------------------------------------------------------------------------------------------------



| | 4.47 | Assignment Agreement, dated March 31, 1998 between TNK Resources Inc. and TNK Resources Area 3 (Proprietary) Limited(2)
| | ---- | -----------------------------------------------------------------------------------------------------------------------



122



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| | 4.48 | Republic of Botswana Prospecting License No. 67/97, dated May 28, 1997, in favor of TNK Resources Incorporated, in favor of TNK Resources Incorporated(2)
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.49 | TNK Resources Inc. Application for the Renewal of Prospecting Licence Nos. 142-149/93, Ghanzi District, dated August 12, 1998(2)
| | ---- | --------------------------------------------------------------------------------------------------------------------------------



| | 4.50 | Republic of Botswana Prospecting License No. 93/98, dated September 29, 1998, in favor of TNK Resources Inc.(2)
| | ---- | ---------------------------------------------------------------------------------------------------------------



| | 4.51 | Agency Agreement, dated October 12, 1999, between Taurus Capital Markets Ltd. and Opus Minerals Inc.(3)
| | ---- | -------------------------------------------------------------------------------------------------------



| | 4.52 | Form of Common Share Purchase Warrant dated as of October 12, 1999(3)
| | ---- | ---------------------------------------------------------------------



| | 4.53 | Letter Agreement, dated July 13, 1998, between Mountain Province Mining Inc. and Opus Minerals Inc.(3)
| | ---- | ------------------------------------------------------------------------------------------------------



| | 4.54 | Asset Sale Agreement, dated October 1998, between International Capri Resources Ltd. And TNK Resources Inc.(3)
| | ---- | --------------------------------------------------------------------------------------------------------------



| | 4.55 | Letter Agreement, dated November 27, 1998, regarding Baffin Island Permit Applications.(3)
| | ---- | ------------------------------------------------------------------------------------------



| | 4.56 | Letter Agreement, dated December 1, 1998, regarding Services for Baffin Island Exploration and Development.(3)
| | ---- | --------------------------------------------------------------------------------------------------------------



| | 4.57 | Letter Agreement, dated August 3, 1999, regarding Borden Peninsula, Baffin Island.(3)
| | ---- | -------------------------------------------------------------------------------------



| | 4.58 | Letter Agreement, dated August 26, 1999, between Mountain Province Mining Inc. and Opus Minerals Inc.(3)
| | ---- | --------------------------------------------------------------------------------------------------------



| | 4.59 | Agency Agreement, dated January 26, 1999, between Taurus Capital Markets Ltd. and Opus Minerals Inc. and Termination.(3)
| | ---- | ------------------------------------------------------------------------------------------------------------------------



| | 4.60 | Warrant to Purchase Common Shares of Stroud Resources Inc.(3)
| | ---- | -------------------------------------------------------------



| | 4.61 | Wolf Lake Property Option Agreement, dated April 14, 1999 between International Capri Resources Ltd. and Opus Minerals Inc.(3)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------



| | 4.62 | Letter Agreement, dated February 13, 1999 between International Capri Resources Ltd. And Opus Minerals Inc.(3)
| | ---- | --------------------------------------------------------------------------------------------------------------



| | 4.63 | Consulting agreement dated November 15, 1999 as amended by agreement dated June 26, 2000 between the Company and Investor Relations Group (Ontario) Inc. (IRG) pursuant
to which IRG will provide ongoing investor relations activities to the Company. Agreement was mutually terminated effective February 28, 2001, and the related options lapsed effective March 30, 2001.(4)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.64 | Stock option agreement dated November 15, 1999 whereunder the Company granted IRG options to acquire up to 300,000 common shares of the Company at the price of $0.90 per share
expiring November 15, 2001. Agreement was mutually terminated effective February 28, 2001, and the related options lapsed effective March 30, 2001.(4)
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



123



---

| | 4.65 | Acquisition Agreement dated January 17, 2000 between the Company and Vertex Ventures Inc. (now First Strike Diamonds Inc.) whereby the Company transferred and assigned all of
its interest in the mining properties located in Botswana, Africa and Baffin Island, Nunavut, to First Strike in consideration for the allotment and issuance of 6,266,667 common shares of First Strike.(4)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.66 | Securities Exchange Agreement made as of the 6th day of June, 2000 among the Company, IL Data Canada, Inc., all of the shareholders of IL Data Canada, Inc., as vendors and Frank J.
Kollar and Romaine Gilliland as Principals whereunder the Company acquired all of the issued and outstanding common shares of IL Data Canada, Inc. which owns the business known as InvestorLinks.com in consideration for the allotment of issuance of
6,800,000 Common Shares of the Company.(4)
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.67 | Stock option agreement dated June 26, 2000 whereunder the company granted IRG options to acquire up to 150,000 common shares of the Company at the price of $2.55 US per share
expiring June 30, 2002.(4)
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.68 | Stock option agreements dated June 26, 2000 with officers, directors, and employees of the Company.(4)
| | ---- | ------------------------------------------------------------------------------------------------------



| | 4.69 | Consulting and Advisory Board Agreements dated June 26, 2000 with Messrs. Joseph Carusone, Christos Livadas, Ben Johnson and Ms. Suzanne Wood. Mr. Livadas agreement and stock
option and grant were cancelled and forfeited by Release, dated March 1, 2001, between the parties. See Item 3.83 below. All agreements expired as of June 26, 2001, and the related options have lapsed.(4)
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.70 | Subscription Agreement dated August 2, 2000 with Stockhouse Media Corp. (Stockhouse) whereby Stockhouse subscribed for 1,500,000 Common Shares of the Company at the
price of $2.25 per share in consideration for Stockhouse providing to the Company Services (as therein described) over a period of two years. See Note 4(b)(ii) of the Financial Statements included in Item 17 of this Annual Report for further detail
regarding the termination of agreements with Stockhouse.(4)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.71 | Services Agreement dated August 2, 2000 with Stockhouse which sets out the services and functions to be performed by Stockhouse to earn the 1,500,000 Common Shares of the Company
referred to above. See Note 4(b)(ii) of the Financial Statements included in Item 17 of this Annual Report for further detail regarding the termination of agreements with Stockhouse.(4)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.72 | Subscription Agreement effective August 8, 2000 between the Company and Ming Capital Enterprises Ltd.(4)
| | ---- | --------------------------------------------------------------------------------------------------------



| | 4.73 | Warrant certificate issued to Ming Capital Enterprises Ltd. to purchase up to 680,000 common shares at the price of $3.00 on or before August 8, 2002.(4)
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



124



---

| | 4.74 | Stock Option Agreement dated June 26, 2000 granting Kathy Hobbs-Parent options to purchase up to 9,000 Common Shares at $2.55 per share, vesting at a rate of 1/3 per year for
three years. Ms. Hobbs-Parents employment was terminated effective May 31, 2001. The options expired August 29, 2001.(5)
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.75 | Stock Option Agreement dated June 26, 2000 granting Elizabeth J. Kirkwood options to purchase up to 18,000 Common Shares at $2.55 per share on or before June 30, 2005 (Released by
letter, dated July 24, 2001, signed by Ms. Kirkwood  See Exhibit 3.92 below).(5)
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.76 | Stock Option Agreement dated June 26, 2000 granting Sandra J. Hall options to purchase up to 45,000 Common Shares at $2.55 per share on or before June 30, 2005 (Released by letter,
dated July 24, 2001, signed by Ms. Hall  See Exhibit 3.93 below).(5)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.77 | Stock Option Agreement dated June 26, 2000 granting George Stubos options to purchase up to 90,000 Common Shares at $2.55 per share on or before June 30, 2005 (Cancelled by Release,
dated March 1, 2001, between the parties. See Exhibit 3.83 below).(5)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.78 | Stock Option Agreement dated June 26, 2000 granting Romaine Gilliland options to purchase up to 110,000 Common Shares at $2.55 per share on or before June 30, 2005. Mr. Gilliland
resigned effective April 10, 2001. The options lapsed July 10, 2001.(5)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.79 | Stock Option Agreement dated June 26, 2000 granting Frank Kollar options to purchase up to 290,000 Common Shares at $2.55 per share on or before June 30, 2005 (Cancelled by Release,
dated March 1, 2001, between the parties. See Exhibit 3.85 below).(5)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.80 | Stock Option Agreement dated June 26, 2000 granting Denise Gervin options to purchase up to 15,000 Common Shares at $2.55 per share, vesting at a rate of 1/3 per year for three
years. Ms. Gervins employment was terminated effective February 9, 2001. The options expired May 9, 2001.(5)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.81 | Consulting and Stock Option Agreement dated June 26, 2000 with Chris Papaioannou pursuant to which Mr. Papaioannou agrees to provide consulting services to the Company for a
three-year period commencing June 26, 2000, and in consideration, the Company agrees to provide Mr. Papaioannou (i) $2,166.67 per month, (ii) reimbursement for expenses and (iii) options to purchase up to 9,000 Common Shares at $2.55 per share for a
period of five years, vesting at a rate of 1/3 per year for three years. Mr. Papaioannou terminated the Consulting Agreement effective December 2000, and the related stock options have lapsed.(5)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.82 | Release dated March 1, 2001 by George Mr. Stubos whereby Stubos agrees to (i) fully and completely release and discharge any and all actions, causes of actions, claims and demands
arising out of any and all relationships with the Company, (ii) allow the Company to purchase for cancellation 500,000 Common Shares and (iii) cancel his option to buy 90,000 Common Shares, in exchange for a lump-sum payment by the Company of
$35,000.(5)
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



125



---

| | 4.83 | Release dated March 1, 2001 by Christos Livadas whereby Mr. Livadas agrees to (i) fully and completely release and discharge any and all actions, causes of actions, claims and
demands arising out of any and all relationships with the Company, (ii) allow the Company to purchase for cancellation 500,000 Common Shares and (iii) cancel his option to buy 90,000 Common Shares, in exchange for a lump-sum payment by the Company
of $25,000.(5)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.84 | Release and Consulting Agreement dated March 1, 2001 with Frank Kollar and Sierra Holdings Limited whereby Mr. Kollar and Sierra Holdings Limited agree to (i) fully and
completely release and discharge any and all actions, causes of actions, claims and demands arising out of any and all relationships with the Company, (ii) allow the Company to purchase for cancellation 3,890,000 Common Shares and (iii) cancel his
option to buy 290,000 Common Shares, in exchange for $209,000 to be paid by the Company immediately at the time of the Release and $60,000 to be paid as set forth in the Consulting Agreement.(5)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.85 | Letter of Agreement for Website Services dated May 11, 2001 with Elizabeth J. Kirkwood and Crossbeam Limited doing business as Crossbeam.com whereby Ms. Kirkwood and Crossbeam.com
agree to provide website set-up and maintenance services to the Company for a six-month period from May 11, 2001 through November 30, 2001 in exchange for payment by the Company of a one-time payment of $4,000 for the initial set-up and $2,000 per
month for maintenance thereafter. The Agreement is automatically renewed for additional six-month terms absent notice of cancellation. Either party may cancel on thirty days notice.(5)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.86 | Website Publisher Agreement dated June 11, 2001 with Engage, Inc. (Engage) granting Engage the right to sell advertising space on the Companys website in exchange
for Engages agreement to pay the Company a royalty of 50% on all Net Advertising Revenue.(5)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.87 | Non-binding Letter of Intent regarding potential business combination of the Company and API Electronics, Inc. (API) dated June 19, 2001.(5)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------



| | 4.88 | Letter Agreement dated June 26, 2001 with Taurus Capital Markets Ltd. as the Companys exclusive financial advisor with respect to the potential acquisition of API in exchange
for (i) a work fee of $15,000, (ii) reimbursement of certain out-of-pocket costs and (iii) in the event of and upon completion of the purchase of API, 250,000 broker warrants for Units on the same terms as Units being issued to purchase
API.(5)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.89 | Letter Agreement dated June 26, 2001 for settlement of lease, dated July 3, 2000, between Gilray, LLC and IL Data Corporation Inc., to commence August 1, 2000 and terminate July 31,
2003 whereby Gilray, LLC agrees to execute a Certificate of Satisfaction fully releasing IL Data and/or the Company from any further responsibility under the lease in exchange for $18,000 and ownership of any and all furniture abandoned by tenant on
the premises.(5)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.90 | Release dated July 24, 2001 by Elizabeth J. Kirkwood agreeing to release 45,000 stock options previously granted by the Company.(5)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------



126



---

| | 4.91 | Release dated July 24, 2001 by Sandra J. Hall agreeing to release 45,000 stock options previously granted by the Company.(5)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------



| | 4.92 | Stock Option Agreement dated August 2, 2001 granting James C. Cassina options to purchase up to 50,000 Common Shares at $0.45 per share, and up to 50,000 Common Shares at Canadian
$0.75 per share on or before July 31, 2006. The number of shares and exercise prices associated with the stock options set forth reflect post-consolidation numbers and pricessee Note 11(b) to the financial statements contained in Part III,
Item 17 of this Annual Report.(5)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.93 | Stock Option Agreement dated August 2, 2001 granting Sandra J. Hall options to purchase up to 50,000 Common Shares at $0.45 per share, and up to 50,000 Common Shares at $0.75 per
share on or before July 31, 2006. The number of shares and exercise prices associated with the stock options set forth reflect post-consolidation numbers and pricessee Note 11(b) to the financial statements contained in Part III, Item 17 of
this Annual Report.(5)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.94 | Agreement and Plan of Merger, dated July 27, 2001, between InvestorLinks.com Inc. and API Electronics, Inc. et al., whereby the Company acquired all of the issued and outstanding
shares of API Electronics, Inc., a Delaware corporation for consideration of 6,500,000 post-consolidation units at $.40 per unit. Each unit consists of one Common Share, 1/2of one Series A Common Share purchase warrant exercisable at $.45 for a period of 18 months from the date of issuance, and 1/2of one Series B Common Share purchase warrant exercisable at $.75 for a period of two years from date of issuance.(5)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.95 | Agreement of Merger, dated August 31, 2001, between API Electronics, Inc. and API Acquisition Corp., whereby API Electronics, Inc. merged with and into API Acquisition Corp. with
API Electronics, Inc. as the surviving corporation. Each share of common stock of API Acquisition Corp. outstanding on the effective date of the Agreement was cancelled and no consideration was paid with respect to any such shares. Each share of
common stock of API Electronics, Inc., the surviving corporation, outstanding on the effective date of the Agreement, was (i) exchanged with InvestorLinks.com Inc., an Ontario Corporation and the parent of API Acquisition Corp. (IC), for
33,163.27 shares of IC Common Stock and A and B warrants to purchase an aggregate of 33,163.28 shares of IC Common Stock and (ii) cancelled immediately thereafter. The surviving corporation issued a new certificate for 100 shares of common
stock to IC, which represented all of the issued and outstanding shares of the surviving corporation.(5)
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.96 | Stock Option Agreement dated August 31, 2001 granting Phillip DeZwirek options to purchase up to 50,000 Common Shares at $0.45 per share, and up to 50,000 Common Shares at $0.75 per
share on or before August 31, 2006. The number of shares and exercise price associated with the stock options set forth reflect post-consolidation numbers and prices  See Note 11(b) to the financial statements contained in Part III, Item 17 of
this Annual Report.(5)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.97 | Stock Option Agreement dated August 31, 2001 granting Thomas W. Mills options to purchase up to 50,000 Common Shares at $0.45 per share, and up to 50,000 Common Shares at $0.75 per
share on or before August 31, 2006. The number of shares and exercise price associated with the stock options set forth reflect post-consolidation numbers and prices  See Note 11(b) to the financial statements contained in Part III, Item 17 of
this Annual Report.(5)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



127



---

| | 4.98 | Stock Option Agreement dated August 31, 2001 granting Jason DeZwirek options to purchase up to 50,000 Common Shares at $0.45 per share, and up to 50,000 Common Shares at $0.75
per share on or before August 31, 2006. The number of shares and exercise price associated with the stock options set forth reflect post-consolidation numbers and prices  See Note 11(b) to the financial statements contained in Part III,
Item 17 of this Annual Report.(5)
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.99 | Share Purchase Agreement dated May 31, 2002, by and among the Company and Philip Walter White, Rose Mary White, Coranne Adele White, Jane Murphy, Coreen White, Derek White, Gillian
Pershaw, Brian Kenneth White, Edna Grace Trepannier, Filtran Inc., Filtran Limited, Canadian Dataplex Ltd., and Tactron Communications (Canada) Limited pursuant to which the Company purchased the shares of Filtran Inc., Filtran Limited, Canadian
Dataplex Ltd., and Tactron Communications (Canada) Limited from their shareholders.(6)
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.100 | Non-Competition and Confidentiality Agreement dated May 31, 2002 by and between the Company and Philip Walter White pursuant to which Mr. White in consideration of $500,000 agreed
to non-competition and non-solicitation restrictions for a term of five years and permanent confidentiality restrictions.(6)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.101 | Subscription Agreement dated June 11, 2002, between the Company and Aton Ventures Fund Ltd, pursuant to which Aton Ventures Fund Ltd. purchased from the Company in a private
placement 100,000 units for $2.35 per unit, each unit consisting of one share of common stock of the Company and one warrant to purchase one share of common stock of the Company, exercisable at $3.00 per share, for an aggregate purchase price of
$235,000.(6)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.102 | Subscription Agreement dated June 14, 2002, between the Company and Syrah Invest Corp., pursuant to which Syrah Invest Corp. purchased from the Company in a private placement
300,000 units for $2.35 per unit, each unit consisting of one share of common stock of the Company and one warrant to purchase one share of common stock of the Company, exercisable at $3.00 per share, for an aggregate purchase price of
$705,000.(6)
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.103 | Subscription Agreement dated June 11, 2002, between the Company and Aton Select Fund Ltd, pursuant to which Aton Select Fund Ltd. purchased from the Company in a private placement
100,000 units for $2.35 per unit, each unit consisting of one share of common stock of the Company and one warrant to purchase one share of common stock of the Company, exercisable at $3.00 per share, for an aggregate purchase price of
$235,000.(6)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.104 | Subscription Agreement dated January 31, 2003, between the Company and Eusibio Mario Lopez Perez pursuant to which Eusibio Mario Lopez Perez purchased from the Company in a private
placement 125,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate purchase price
of $50,000.(7)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



128



---

| | 4.105 | Stock Purchase Warrant issued by the Company to Eusibio Mario Lopez Perez to purchase an aggregate of 62,500 shares of common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.106 | Subscription Agreement dated February 3, 2003, between the Company and Thomas Christen pursuant to which Thomas Christen purchased from the Company in a private placement 650,000
units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate purchase price of
$260,000.(7)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.107 | Stock Purchase Warrant issued by the Company to Thomas Christen to purchase an aggregate of 325,000 shares of common stock of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.108 | Subscription Agreement dated February 6, 2003, between the Company and Les Immeubles Desco Inc. pursuant to which Les Immeubles Desco Inc. purchased from the Company in a private
placement 125,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate purchase price
of $50,000.(7)
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.109 | Stock Purchase Warrant issued by the Company to Les Immeubles Desco Inc. to purchase an aggregate of 62,500 shares of common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.110 | Subscription Agreement dated February 3, 2003, between the Company and Ming Capital Enterprises Inc. pursuant to which Ming Capital Enterprises Inc. purchased from the Company in a
private placement 650,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate
purchase price of $260,000.(7)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.111 | Stock Purchase Warrant issued by the Company to Ming Capital Enterprises Inc. to purchase an aggregate of 325,000 shares of common stock of the Company for an exercise price of
$0.60 per share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.112 | Subscription Agreement dated February 3, 2003, between the Company and Partner Marketing AG pursuant to which Partner Marketing AG purchased from the Company in a private placement
500,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate purchase price of
$200,000.(7)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



129



---

| | 4.113 | Stock Purchase Warrant issued by the Company to Partner Marketing AG to purchase an aggregate of 250,000 shares of common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.114 | Subscription Agreement dated February 3, 2003, between the Company and Seloz Gestion & Finance SA, Switzerland pursuant to which Seloz Gestion & Finance SA, Switzerland
purchased from the Company in a private placement 450,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60
per share, for an aggregate purchase price of $180,000.(7)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.115 | Stock Purchase Warrant issued by the Company to Seloz Gestion & Finance SA, Switzerland to purchase an aggregate of 225,000 shares of common stock of the Company for an exercise
price of $0.60 per share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.116 | Subscription Agreement dated February 3, 2003, between the Company and Shangri-La Investments Inc. pursuant to which Shangri-La Investments Inc. purchased from the Company in a
private placement 650,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate
purchase price of $260,000.(7)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.117 | Stock Purchase Warrant issued by the Company to Shangri-La Investments Inc. to purchase an aggregate of 325,000 shares of common stock of the Company for an exercise price of $0.60
per share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.118 | Subscription Agreement dated January 20, 2003, between the Company and Stick Capital Inc. pursuant to which Stick Capital Inc. purchased from the Company in a private placement
125,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate purchase price of
$50,000.(7)
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.119 | Stock Purchase Warrant issued by the Company to Stick Capital Inc. to purchase an aggregate of 62,500 shares of common stock of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.120 | Subscription Agreement dated February 3, 2003, between the Company and Syrah Invest Corp. pursuant to which Syrah Invest Corp. purchased from the Company in a private placement
450,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate purchase price of
$180,000.(7)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.121 | Stock Purchase Warrant issued by the Company to Syrah Invest Corp. to purchase an aggregate of 225,000 shares of common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



130



---

| | 4.122 | Subscription Agreement dated February 3, 2003, between the Company and Terraco Holding S.A. pursuant to which Terraco Holding S.A. purchased from the Company in a private
placement 500,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate purchase price
of $200,000.(7)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.123 | Stock Purchase Warrant issued by the Company to Terraco Holding S.A. to purchase an aggregate of 250,000 shares of common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.124 | Subscription Agreement dated February 3, 2003, between the Company and Hans Schopper pursuant to which Hans Schopper purchased from the Company in a private placement 450,000 units
for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate purchase price of
$180,000.(7)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.125 | Stock Purchase Warrant issued by the Company to Hans Schopper to purchase an aggregate of 225,000 shares of common stock of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.126 | Subscription Agreement dated January 27, 2003, between the Company and Kostas Papakostas pursuant to which Kostas Papakostas purchased from the Company in a private placement 50,000
units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate purchase price of
$20,000.(7)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.127 | Stock Purchase Warrant issued by the Company to Kostas Papakostas to purchase an aggregate of 25,000 shares of common stock of the Company for an exercise price of $0.60 per share,
exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.128 | Subscription Agreement dated January 16, 2003, between the Company and Dart Management Corporation pursuant to which Dart Management Corporation purchased from the Company in a
private placement 600,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate
purchase price of $240,000.(7)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.129 | Stock Purchase Warrant issued by the Company to Dart Management Corporation to purchase an aggregate of 300,000 shares of common stock of the Company for an exercise price of $0.60
per share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



131



---

| | 4.130 | Subscription Agreement dated February 3, 2003, between the Company and Crystal Overseas Trading Inc. pursuant to which Crystal Overseas Trading Inc. purchased from the Company
in a private placement 500,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate
purchase price of $200,000.(7)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.131 | Stock Purchase Warrant issued by the Company to Crystal Overseas Trading Inc. to purchase an aggregate of 250,000 shares of common stock of the Company for an exercise price of
$0.60 per share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.132 | Subscription Agreement dated February 6, 2003, between the Company and Bank Sal. Oppenheim jr. & Cie (Schweiz) AG pursuant to which Bank Sal. Oppenheim jr. & Cie (Schweiz)
AG purchased from the Company in a private placement 200,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60
per share, for an aggregate purchase price of $80,000.(7)
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.133 | Stock Purchase Warrant issued by the Company to Bank Sal. Oppenheim jr. & Cie (Schweiz) AG to purchase an aggregate of 100,000 shares of common stock of the Company for an
exercise price of $0.60 per share, exercisable during the two-year period beginning February 6, 2003.(7)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.134 | Subscription Agreement dated February 6, 2003, between the Company and Asian Capital Limited pursuant to which Asian Capital Limited purchased from the Company in a private
placement 500,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate purchase price
of $200,000.(7)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.135 | Stock Purchase Warrant issued by the Company to Asian Capital Limited to purchase an aggregate of 250,000 shares of common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.136 | Subscription Agreement dated February 6, 2003, between the Company and 1530403 Ontario Inc. pursuant to which 1530403 Ontario Inc. purchased from the Company in a private placement
300,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate purchase price of
$120,000.(7)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.137 | Stock Purchase Warrant issued by the Company to 1530403 Ontario Inc. to purchase an aggregate of 150,000 shares of common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



132



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| | 4.138 | Subscription Agreement dated February 6, 2003, between the Company and 1057111 Ontario Ltd. pursuant to which 1057111 Ontario Ltd. purchased from the Company in a private
placement 100,000 units for $0.40 per unit, each unit consisting of one share of common stock of the Company and one-half of a warrant to purchase one share of common stock the Company, exercisable at $0.60 per share, for an aggregate purchase price
of $40,000.(7)
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.139 | Stock Purchase Warrant issued by the Company to 1057111 Ontario Ltd. to purchase an aggregate of 50,000 shares of common stock of the Company for an exercise price of $0.60 per
share, exercisable during the two year period beginning February 6, 2003.(7)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.140 | Asset Purchase Agreement made as of February 6, 2003, by and among TM Systems, Inc., TM Systems II, Inc. and API Electronics Group Inc. pursuant to which API Electronics Group
Inc.s wholly-owned subsidiary, TM Systems II, Inc. purchased certain assets of TM Systems, Inc.(7)
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.141 | Letter of Employment dated February 6, 2003, from API Electronics Group Inc. to Irwin Shuldman, confirming Mr. Shuldmans employment as an executive officer with TM Systems II,
Inc. for a period of one year.(7)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.142 | Letter of Employment dated February 6, 2003, from API Electronics Group Inc. to Walter Weiner, confirming Mr. Weiners employment as an executive officer with TM Systems II,
Inc. for a period of one year.(7)
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.143 | Asset Sale and Purchase Agreement dated March 23, 2004 by and between API Electronics, Inc. and Islip Transformer & Metal Co., whereby API Electronics, Inc. acquired machinery,
equipment and inventory of Islip Transformer & metal Co. Inc.(9)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 8. | Miscellaneous:
| | -- | --------------



| | 8.1 | List of Subsidiaries(9)
| | --- | -----------------------



| | 11. | Code of Ethics Required by Item 16B of Form 20-F
| | --- | ------------------------------------------------



| | 11.1 | Code of Ethics(9)
| | ---- | -----------------



| | 12. | Certifications Under Section 13a-14(a) of the Securities Exchange Act:
| | --- | ----------------------------------------------------------------------



| | 12.1 | Certification Under Section 13a-14(a) of the Securities Exchange Act.(9)
| | ---- | ------------------------------------------------------------------------



| | 12.2 | Certification Under Section 13a-14(a) of the Securities Exchange Act.(9)
| | ---- | ------------------------------------------------------------------------



133



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| | 13. | Certifications Pursuant to Section 906 of the Sarbanes Oxley Act of 2002:
| | --- | -------------------------------------------------------------------------



| | 13.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(9)
| | ---- | ---------------------------------------------------------------------------



| | 13.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(9)
| | ---- | ---------------------------------------------------------------------------



Footnotes to List of Exhibits:



|(1) | Incorporated by reference from the Companys Registration Statement on Form 20-F, File No. 0-29142, filed on February 3, 1997.
|--- | ------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference from the Companys Annual Report on Form 20-F, File No. 0-29142, filed on October 31, 1998.
|--- | ---------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference from the Companys Annual Report on Form 20-F, File No. 0-29142, filed on November 1, 1999.
|--- | ---------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference from the Companys Annual Report on Form 20-F, File No. 0-29142, filed on November 14, 2000.
|--- | ----------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference from the Companys Annual Report on Form 20-F, File No. 0-29142, filed on October 31, 2001.
|--- | ---------------------------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference from the Companys Annual Report on Form 20-F, File No. 0-29142, filed on November 27, 2002.
|--- | ----------------------------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference from the Companys Annual Report on Form 20-F, File No. 0-29142, filed on November 27, 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------



|(8) | Incorporated by reference from the Companys Annual Report on Form 20-F, File No. 0-29142, filed on November 22, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------



|(9) | Filed herewith.
|--- | ---------------



134



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Signatures



Pursuant to the requirements of Section 12 of the Securities Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and
has duly caused this Annual Report on Form 20-F to be signed on its behalf by the undersigned, thereunto authorized.



Dated at Toronto, Ontario, Canada, this 28th day of November, 2005.





API ELECTRONICS GROUP INC.By:

/s/ Phillip DeZwirekPhillip DeZwirek, Chief Executive Officer




135



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As filed with the Securities and Exchange Commission on November 28, 2005

Commission File No.: 0-29142

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API ELECTRONICS GROUP INC.



ANNUAL REPORT



On



FORM 20-F



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EXHIBIT INDEX



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136



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API ELECTRONICS GROUP INC.



ANNUAL REPORT ON FORM 20-F



FILED EXHIBIT INDEX



|               |  |                                                                                                                              
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                  
|               | 
|4.143          |  | Asset Sale and Purchase Agreement dated March 23, 2004 by and between API Electronics, Inc. and Islip Transformer & Metal Co.
|               | 
|8.1            |  | List of Subsidiaries                                                                                                         
|               | 
|11.1           |  | Code of Ethics                                                                                                               
|               | 
|12.1           |  | Certification Under Section 13a-14(a) of the Securities Exchange Act.                                                        
|               | 
|12.2           |  | Certification Under Section 13a-14(a) of the Securities Exchange Act.                                                        
|               | 
|13.1           |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                     
|               | 
|13.2           |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                     



137