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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K







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

For the fiscal year ended May 31, 2009



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

For the transition period from              to

Commission file number 000-29429





API NANOTRONICS CORP.

(Exact Name of Registrant as Specified in its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 98-0200798                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|2300 Yonge Street, Suite 1710            |  |           
|Toronto, Ontario, Canada                 |  | M4P 1E4   
|(Address of Principal Executive Offices) |  | (Zip Code)

Registrants Telephone Number including area code 416-593-6543

Securities registered under Section 12 (b) of the Exchange Act:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange on Which Registered
|None                |  | None                                     

Securities registered under Section 12 (g) of the Exchange Act:

Common Stock

(Title of Class)





Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ̈    No  x

Indicate by check mark if the
registrant (1) filed all reports required to be filed by section 13 or 15 (d) of the Exchange Act during the past 12 months (or for a 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   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer, large
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                                                                       |  |                             
|---------------------------------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈                                             |  | Accelerated filer   ̈        
|Non-accelerated filer   ̈ (do not check if a smaller reporting company) |  | Smaller reporting company  x

Indicate whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of
such common equity, as of the last business day of the registrants most recently completed second fiscal quarter: $8,994,562

(ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE LAST FIVE YEARS)

Not applicable

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

As of August 19, 2009, the Company had
34,252,662 shares of common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the fiscal year
end of May 31, 2009 are incorporated by reference into Part III.









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TABLE OF CONTENTS



|           |  |                                                                                                 |  |     
|---------- |  | ----------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                 |  | Page
|           | 
|PART I     |  |                                                                                                
|           |  |                                                                                                
|ITEM 1     |  | DESCRIPTION OF BUSINESS                                                                         |  | 1   
|ITEM 1A    |  | RISK FACTORS                                                                                    |  | 13  
|ITEM 2     |  | DESCRIPTION OF PROPERTIES                                                                       |  | 23  
|ITEM 3     |  | LEGAL PROCEEDINGS                                                                               |  | 24  
|ITEM 4     |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                             |  | 24  
|           | 
|PART II    |  |                                                                                                
|           |  |                                                                                                
|ITEM 5     |  | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |  | 25  
|ITEM 7     |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS           |  | 27  
|ITEM 8     |  | CONSOLIDATED FINANCIAL STATEMENTS                                                               |  | 39  
|ITEM 9     |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE            |  | 39  
|ITEM 9A(T) |  | CONTROLS AND PROCEDURES                                                                         |  | 39  
|ITEM 9B    |  | OTHER INFORMATION                                                                               |  | 40  
|           | 
|PART III   |  |                                                                                                
|           |  |                                                                                                
|ITEM 10    |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                          |  | 41  
|ITEM 11    |  | EXECUTIVE COMPENSATION                                                                          |  | 41  
|ITEM 12    |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  |  | 41  
|ITEM 13    |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                       |  | 41  
|ITEM 14    |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                          |  | 41  
|           | 
|PART IV    |  |                                                                                                
|           |  |                                                                                                
|ITEM 15    |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                      |  | 42  



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PART I



|ITEM 1. | DESCRIPTION OF BUSINESS
|------- | -----------------------

FORWARD LOOKING
STATEMENTS

This document and the documents incorporated in this document by reference contain forward-looking statements that are
subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.

The forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to our
management. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as believes, expects, anticipates, intends, will,
may, could, would, projects, continues, estimates or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ
materially from those indicated by the forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industrys actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements.

The forward-looking statements contained or incorporated by reference in this document are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 (Securities Act) and Section 21E of the Securities Exchange Act of 1934 (Exchange Act) and are subject to the safe harbor created by the Private Securities Litigation Reform
Act of 1995. These statements include declarations regarding our plans, intentions, beliefs or current expectations.

Among the important
factors that could cause actual results to differ materially from those indicated by forward-looking statements are the risks and uncertainties described under Risk Factors and elsewhere in this document and in our other filings with the
SEC.

Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements
included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events or otherwise.

Overview of the Company

API Nanotronics Corp.
(together with its subsidiaries referred to as the Company, us, we, or our) was incorporated on February 2, 1999 under the laws of the State of Delaware under the name Rubincon Ventures Inc. We
have not been in bankruptcy, receivership or similar proceedings since our inception. On November 6, 2006, in a business combination that occurred under Ontario law, we combined with API Electronics Group Corp., an Ontario corporation
(API), and API became our wholly-owned indirect subsidiary (the Business Combination). This Business Combination was accomplished by our forming an Ontario subsidiary, RVI Sub, Inc. and now known as API Nanotronics Sub, Inc.,
which we refer to as Nanotronics Sub. API became a wholly-owned subsidiary of Nanotronics Sub pursuant to a Plan of Arrangement approved by the Ontario Superior Court of Justice. The holders of common shares of API were given the right to receive
either ten shares of our common stock, or if the shareholder elected and was a Canadian taxpayer, ten Exchangeable Shares of Nanotronics Sub (Exchangeable Shares). Each Exchangeable Share of Nanotronics Sub is exchangeable at the option
of the holder into one share of our common stock at any time during a ten-year period commencing November 6, 2006. Nanotronics Sub, a Canadian subsidiary, was incorporated solely for the purpose of effecting the Business Combination. It has no
operations. Nanotronics Sub is an Ontario corporation and operates under the Business Corporations Act (Ontario). API is a wholly-owned subsidiary of Nanotronics Sub.



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The Company, through its subsidiaries, National Hybrid Inc., (NHI), API Electronics, Inc.,
Filtran Limited, TM Systems II Inc., (TM), Keytronics, Inc., and API Nanofabrication and Research Corporation (API NRC), Cryptek USA Corp., Emcon Emanation Control Limited, Ion Network Solutions and Secure
Systems & Technologies Limited (SST) is a leading provider of high technology products, subsystems, systems and component level products. We are also engaged as a prime system contractor in TEMPEST, Ruggedization, Network
Security, Communications, and other government services. Our customers include the U.S. Department of Defense (DoD) and its prime contractors, U.S. Government intelligence agencies, the U.S. Department of Homeland Security (DHS), U.S. Department of
State (DoS) and U.S. Department of Justice (DoJ), allied foreign governments, domestic and international commercial customers and select other U.S. federal, state and local government agencies.

The Company is engaged in providing innovative design, engineering and manufacturing solutions to customers. The Company is also a manufacturer of
electronic components and systems for the defense, aerospace and communications industries, with a developed expertise in the R&D and manufacture of nanotechnology and MEMS products.

Core products produced we produce include: Tempest & Emanation products and services, ruggedized computers and peripherals, network security
appliances and software, high-performance microcircuits such as 1553 data bus products, solid state power controllers, Opto-couplers, high-density multi-chip modules and custom hybrid-microcircuit filters and transformers; naval aircraft landing and
launching equipment; and next generation product introductions based on nanotechnology and micro-electromechanical (MEMS) systems.

We
possess a broad range of instruments essential in nanofabrication and materials synthesis and fabrication. The Company seeks to extend its existing customer relationships by offering state-of-the-art nanotechnology products and services.

We also maintain high tech manufacturing of our engineered solutions as a unique competitive differentiator.

Our executive offices are located in Toronto, Ontario. Our operating subsidiaries are located in Hauppauge, New York, Ronkonkoma, New York, Somerset, New
Jersey, South Plainfield, New Jersey, Sterling, Virginia, Waterwells, United Kingdom and two facilities in Ottawa, Ontario. The mailing address and telephone number for our executive offices are: 2300 Yonge Street, Suite 1710, Toronto, Ontario,
Canada M4P 1E3. The telephone numbers of our registered office and principal place of business in Ontario, Canada are (416) 593-6543 and (800) 606-2326.

Business Strategy

Our business strategy is customer-focused and aims to increase shareholder value by providing products
and services to our customers that create value for them with responsive, high-quality and affordable solutions. Our strategy involves a flexible and balanced combination of organic growth, cost reductions, select business acquisitions and
divestitures, enabling us to grow the Company and create shareholder value. We intend to maintain and expand our position as a leading supplier of products, subsystems, systems and services to the DoD, other U.S. Government agencies, allied foreign
governments and commercial customers, both domestic and international.

We intend to continue to align our internal investments in research
and development, business development and capital expenditures to proactively address customer requirements and priorities with our products, services and solutions. We also intend to grow our sales through the introduction of new products and
services and continued increased collaboration between our businesses to offer the best quality and competitive solutions and services to our customers.



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In recent years DoD budgets have reflected increased focus on command, control, communications,
computers, collaboration and intelligence, surveillance and reconnaissance, precision-guided weapons, UAVs and other electro-mechanical robotic capabilities, networked information technologies, special operations forces, and missile defense. As a
result, defense budget program allocations continue to favor immediate war-fighting improvements and concurrent limited investment in future programs. DoDs emphasis on systems interoperability, force multipliers, advances in intelligence
gathering, and the provision of real-time relevant data to battle commanders, often referred to as the common operating picture (COP), have increased the electronic content of nearly all major military procurement and research programs. Therefore,
we expect that the DoD budget for information technologies and defense electronics will grow. We believe we are is well positioned to benefit from the expected focus in those areas. With regard to U.S. homeland defense and security, increased
emphasis in these important endeavors may increase the demand for our capabilities in areas such as security systems, information assurance and cyber security, crisis management, preparedness and prevention services, and non-DoD security operations.
It will also be our continued strategy to focus on additional acquisition activity to expand our capabilities in these areas and to further enhance our organic growth.

Historical Overview

Following the consummation of the Business Combination, on January 25,
2007, the Company acquired the stock of the National Hybrid Group, which consists of National Hybrid, Inc. and Pace Technology, Inc. National Hybrid Group is a developer and manufacturer of 1553 data bus products, solid state power controllers,
opto-couplers, high density multi-chip modules and custom hybrid micro-circuits for the military/aerospace market and the industrial process control market.

On July 17, 2007, API NRC, a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement with NanoOpto Corporation (NoC) for the purchase of substantially all of NoCs
assets, including equipment and intellectual property relating to the design and high volume nano-fabrication of nano-optic devices for optical components. In connection with such acquisition the Company obtained a 62 month lease with two five year
options on space in Somerset, New Jersey, containing a clean room facility suitable for nanotechnology manufacture and research.

The
Company continues to integrate these recent acquisitions. The Company commenced consolidating certain of its operations during fiscal 2009 that it expects to complete during fiscal 2010. At May 31, 2009, the Company had consolidated its
manufacturing facilities from eight to four. The consolidations have reduced overhead expenses, improved overall efficiencies and allowed the Company to focus additional resources to its various sales channels. At May 31, 2009 the number of
employees was approximately 250 compared to 370 at May 31, 2008. The Company anticipates the integration will have a positive affect on organic growth and profitability during fiscal 2010 and beyond.

On September 19, 2008, the Company effected a one-for-fifteen reverse stock split. The number of shares and share prices set forth in this document
reflect the reverse stock split.

Recent Developments

On July 7, 2009 the Company acquired substantially all of the operating assets of Cryptek Technologies Inc. (Cryptek) under its newly formed subsidiary API Cryptek Inc. API Cryptek Inc. operates a
global business, which includes Cryptek USA Corp., in Sterling, Virginia, Emcon Emanation Control Limited, in Ottawa, Canada, Ion Network Solutions in South Plainfield, New Jersey, and Secure Systems & Technologies Limited in Waterwells,
United Kingdom.

Cryptek offers customers various secure network and hardware solutions including Emanation Security, Tempest and secure
network access under the ION, Emcon and SST and Netgard brand names. These product offerings are sold to government and other international organizations that require the highest possible level of security in the areas of identity validation,
network access management, TEMPEST network intrusion prevention, and secure and encrypted fax, computers and telephones.



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The Cryptek acquisition was completed as an all-cash transaction with proceeds from corporate funds and a
private placement completed June 23, 2009. Crypteks consolidated revenues for its fiscal year 2008 were in excess of $30 million. Management expects this acquisition to be significantly accretive to our earnings.

The Cryptek acquisition is highly synergistic as 80-90% of both the Cryptek and Company revenues are derived from government and military customers and
there are opportunities to cross market the Companys broad networking and communications product offerings. Management regards this as an initial transaction in a larger strategic plan to position the Company as a leading global military
supplier and customer solutions technology company. This acquisition moves the Company upstream as a top-tier designer and manufacturer of systems and subsystems for some of the worlds largest companies and government agencies. As a
significantly larger company, we will continue to pursue complimentary acquisitions and accelerate internal product development.

The Companys
Nanotechnology Initiative

We derive the majority of our revenues from the United States defense industry including the majority of the
top twenty United States defense contractors and the United States government. These customers are investing heavily in next generation technologies including nanotechnology. In order to facilitate next generation product introductions to serve its
customers needs, we are developing the capability for research and development and manufacture of products based on nanotechnology and micro-electromechanical (MEMS) systems. We currently possesses a broad range of instruments essential
in nanofabrication and materials synthesis and fabrication, mainly acquired as part of the purchase of the National Hybrid Group and the assets of NanoOpto Corporation. Some of these instruments are also located at the Companys API Electronics
subsidiary. In addition to such equipment, the Company, entered into a lease for a facility that included a clean room of the appropriate class for nanotechnology and MEMS research and fabrication in connection with the acquisition of the
NanoOpto Corporation assets.

Among our early target products, using these advanced fabrication technologies will be thin film-based
electronics of exceptional precision fabricated through nano-deposition and trimming technologies and sensors based on electronic transduction in nanosystems and on the optical and photonic properties of nanostructures. In addition to the goal of
using nanotechnology and MEMS in product manufacturing, the Company is increasing its portfolio of intellectual property in the field of nanotechnology and MEMS through research and development in its own facilities and by partnering with clients
and government agencies and other partners on projects that would use facilities elsewhere.

We hired Dr. Martin Moskovits in 2007 as
our Chief Technology Officer to lead its nanotechnology initiative. Prior to joining the Company, Dr. Moskovits was a Professor of Physical Chemistry in the Department of Chemistry and Biochemistry and the Dean of the Division of
Mathematical and Physical Sciences in the College of Letters and Sciences at the University of California Santa Barbara. Dr. Moskovits has extensive research experience in the areas of the chemistry and fabrication of materials, nanoparticles
and nanostructures. Dr. Moskovits is the president and a director of the Companys subsidiary API Nanofabrication and Research Corporation, which contains the assets acquired from NanoOpto Corporation.



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Financial Information About Segments

(a) Prior to the acquisition of Cryptek, the Companys operations were 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, 2009              |  | Canada |           |   | United States |   |            | Corporate(Canada) |  |   | Inter SegmentEliminations |   |  | Total |         
|Sales to external customers          |  | $      | 7,564,910 |   |               | $ | 18,172,487 |                   |  | $ |                          |   |  | $     |         |   |  | $ | 25,737,397 |  
|Inter-segment sales                  |  |        | 69,923    |   |               |   | 40,459     |                   |  |   |                           |   |  |       | (110,382 | ) |  |   |           |  
|                                     |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Total revenue                        |  |        | 7,634,833 |   |               |   | 18,212,946 |                   |  |   |                          |   |  |       | (110,382 | ) |  |   | 25,737,397 |  
|                                     |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Loss before expenses below:          |  |        | (92,575   | ) |               |   | (4,374,288 | )                 |  |   |                          |   |  |       |         |   |  |   | (4,466,863 | )
|Corporate head office expenses       |  |        |          |   |               |   |           |                   |  |   | 1,400,299                 |   |  |       |         |   |  |   | 1,400,299  |  
|Depreciation and amortization        |  |        | 203,796   |   |               |   | 738,430    |                   |  |   | 2,868                     |   |  |       |         |   |  |   | 945,094    |  
|Other expense (income)               |  |        | (152,465  | ) |               |   | 66,043     |                   |  |   | (385,605                  | ) |  |       |         |   |  |   | (472,027   | )
|Income tax expense (benefit)         |  |        |          |   |               |   | 12,579     |                   |  |   | 91,729                    |   |  |       |         |   |  |   | 104,308    |  
|                                     |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Net loss                             |  | $      | (143,906  | ) |               | $ | (5,191,340 | )                 |  | $ | (1,109,291                | ) |  | $     |         |   |  | $ | (6,444,537 | )
|                                     |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Segment assets                       |  | $      | 4,731,703 |   |               | $ | 16,775,601 |                   |  | $ | 2,646,006                 |   |  | $     |         |   |  | $ | 24,153,310 |  
|Goodwill included in assets          |  | $      | 848,102   |   |               | $ | 282,804    |                   |  | $ |                          |   |  | $     |         |   |  | $ | 1,130,906  |  
|Capital expenditures                 |  | $      | 14,057    |   |               | $ | 745,092    |                   |  | $ | 4,717                     |   |  | $     |         |   |  | $ | 763,866    |  
|                                     |  |        |           |   |              
|Year Ended May 31, 2008              |  | Canada |           |   | United States |   |            | Corporate(Canada) |  |   | Inter SegmentEliminations |   |  | Total |         
|Sales to external customers          |  | $      | 9,044,846 |   |               | $ | 21,917,200 |                   |  | $ |                          |   |  | $     |         |   |  | $ | 30,962,046 |  
|Inter-segment sales                  |  |        | 7,800     |   |               |   | 385,826    |                   |  |   |                           |   |  |       | (393,626 | ) |  |   |           |  
|                                     |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Total revenue                        |  |        | 9,052,646 |   |               |   | 22,303,026 |                   |  |   |                          |   |  |       | (393,626 | ) |  |   | 30,962,046 |  
|                                     |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Income (loss) before expenses below: |  |        | 290,721   |   |               |   | (4,638,117 | )                 |  |   |                          |   |  |       |         |   |  |   | (4,347,396 | )
|Corporate head office expenses       |  |        |          |   |               |   |           |                   |  |   | 958,896                   |   |  |       |         |   |  |   | 958,896    |  
|Depreciation and amortization        |  |        | 123,579   |   |               |   | 1,070,104  |                   |  |   | 2,757                     |   |  |       |         |   |  |   | 1,196,440  |  
|Other expense (income)               |  |        | 177,972   |   |               |   |           |                   |  |   | 101,039                   |   |  |       |         |   |  |   | 279,011    |  
|Income tax expense (benefit)         |  |        | 1,867     |   |               |   | (40,272    | )                 |  |   | (177,228                  | ) |  |       |         |   |  |   | (215,633   | )
|                                     |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Net loss                             |  | $      | (12,697   | ) |               | $ | (5,667,949 | )                 |  | $ | (885,464                  | ) |  | $     |         |   |  | $ | (6,566,110 | )
|                                     |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Segment assets                       |  | $      | 5,332,383 |   |               | $ | 22,225,793 |                   |  | $ | 1,961,120                 |   |  | $     |         |   |  | $ | 29,519,296 |  
|Goodwill included in assets          |  | $      | 863,317   |   |               | $ | 267,589    |                   |  | $ |                          |   |  | $     |         |   |  | $ | 1,130,906  |  
|Capital expenditures                 |  | $      | 111,164   |   |               | $ | 1,644,080  |                   |  | $ | 5,761                     |   |  | $     |         |   |  | $ | 1,761,005  |  

Loss before expenses includes a reserve for obsolete and slow moving inventory in the amount of
$22,488 and $2,819,263 that was accounted for during the year ended May 31, 2009 and 2008, respectively.

b) Major Customers



|                                                   |  |      |   |  |      |  
|-------------------------------------------------- |  | ---- | - |  | ---- | -
|                                                   |  | 2009 |   |  | 2008 |  
|Revenue                                            |  |      |   |  |      |  
|United States Department of Defense                |  | 8    | % |  | 9    | %
|United States Department of Defense subcontractors |  | 63   | % |  | 70   | %



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The following discussions of the business overview does not include API Cryptek Inc., as the acquisition
of Cryptek Technologies Inc. occurred subsequent to fiscal 2009.

Business OverviewUnited States Operations (National Hybrid Group, API
Electronics, Inc., TM Systems, Keytronics and API NRC)

The United States operations of the Company include National Hybrid, API
Electronics Inc., TM Systems II and API NRC (the US Group) and have customers located primarily in the United States, Canada and Europe.

Operations, Activities and Products

The US Group respond to the military/aerospace markets
critical and growing need for reliable, high-performance microcircuits. The US Group has identified and developed products for the discontinued electronic component market niche and on the design and manufacturing of power supplies and other
electronic components.

The US Group lead the avionics industry in key military communications technologies and manufacturers state of the
art components. Through our National Hybrid Group, we have developed the worlds smallest complete Mil-Std-1553 communications terminal. Recent introductions include the Pocket Pal, a portable 1553 terminal with an USB interface. The US Group
has also developed the 15506 Aries featuring new Tails Code Key technology for enhancing frame sequencing.

The US Groups
products are designed for inclusion in the most advanced airborne platforms worldwide, including the C-17 Globemaster III and C-130J Hercules aircraft, AH-64 Apache helicopter, F-15, F-16, F-18, F-22, and EF2000 fighter aircraft programs, among
others.

The US Group also designs and manufacturers a wide variety of power transformers, charging chokes, reactors, magnetic amplifiers,
pulse transformers (radar and scr), telephone coupling transformers, switching transformers, isolation transformers, ferro resonant transformers, current transformers and saturable reactors.

The US Groups other products include the design and manufacture of electronic equipment, including power supplies, battery chargers, power
converters, hot blade rope cutters and a wide variety of special purpose electronic assemblies including capacitor modules and medical electronics.

Niche products include varactor tuning diodes, specialty suppressor diodes and custom hybrids.

Through our TM Systems product
line, the US Group 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.

API NRC is pursuing market opportunities
and growth for innovative products based on nanotechnology and MEMS. API NRC owns a number of proprietary technologies which address market needs in imaging, digital cinema camera technologies, optical communications, as well as in conformal optical
coating using proprietary atomic layer deposition (ALD) technologies. These approaches can also be applied to the nanofabrication of novel semiconductor devices and systems by using ALD, for example, to create a new generation of super-thin-film
electronics. API NRC also plans to develop a series of plasmonics-based sensors which use the special optical responses of nano-structured metals to laser light.

The US Group has 5 clean rooms and comprehensive test facilities with full environmental screening capabilities. The stringent requirements of military and aerospace quality have been certified by the applicable
agencies. Teams routinely perform design reviews, self-audits, and comprehensive error analyses at National Hybrid Group plants to insure high quality.



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The US Groups principal markets consist of the government and military as well as commercial
aerospace and industrial controls. During the year ended May 31, 2009, the US Groups major customers included Raytheon, Boeing, Lockheed Martin, BAE, Rockwell Collins, Raytheon, General Dynamics including NASSCO, and the US Government.
The focus of the operations is to continue to develop cost-effective products to meet the needs of these and other key customers for high performance solutions.

The US Group has implemented a sales and marketing program, including an in-house sales staff of five. Catalogs, brochures and data sheets are supplemented by the website describing the US Group and the Companys
products and capabilities. The US Group seeks to improve its product sales in overseas markets through the increased emphasis on sales management and improved communication with overseas sales representatives and distributors.

Principal Markets of the US Group

The US Group has customers located primarily in the United States and Europe but sells to countries all over the world.

The
geographical breakdown of revenue to external customers for the US Group (where its customers are located) for the year ended May 31, 2009 and May 31, 2008 is as follows (000s):



|              |  |             |        |              |     |   |             |   |              |  |     |  
|------------- |  | ----------- | ------ | ------------ | --- | - | ----------- | - | ------------ |  | --- | -
|              |  | 2009Revenue |        | % ofRevenues |     |   | 2008Revenue |   | % ofRevenues | 
|United States |  | $           | 14,104 |              | 78  | % |             | $ | 19,638       |  | 90  | %
|Europe        |  | $           | 1,647  |              | 9   | % |             | $ | 719          |  | 3   | %
|Other         |  | $           | 2,422  |              | 13  | % |             | $ | 1,560        |  | 7   | %
|              |  |             |        |              |     |   |             |   |              |  |     |  
|Total         |  | $           | 18,173 |              | 100 | % |             | $ | 21,917       |  | 100 | %
|              |  |             |        |              |     |   |             |   |              |  |     |  

Major Customers



|                                   |  |                     
|---------------------------------- |  | --------------------
|BAE Systems                        |  | United States/Europe
|Rockwell Collins                   |  | United States       
|Raytheon                           |  | United States       
|General Dynamics, including Nassco |  | United States       
|US Government                      |  | United States       

The volume of business provided by these customers equals approximately 44% and 52% of total sales
for the fiscal years ended May 31, 2009 and 2008, respectively, and represent 31% and 27%, respectively, of the Companys consolidated sales. No single customer represents more than 10% of total sales.

Marketing Channels

The US Group
sells its products primarily in the United States but also sells products worldwide. Marketing channels consist primarily of the use of internal sales and marketing personnel both in the United States and Europe. Independent sales representatives
are utilized to work closely with customers at the point of sale.

Dependence on Patents, Licenses, Contracts and Processes

The US 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 materially adverse to its business or profitability.



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Material Effects of Government Regulations

Government regulations of the Unites States related to environmental compliance and labor conditions are typical in the industry and do not have a
material effect on our business or operations.

Backlog of Orders

The US Groups backlog as of May 31, 2009 was $11,921,889 as compared to $12,101,254 as of May 31, 2008.

Business OverviewCanadian Operations

Principal Markets of the Canadian Operations

The Canadian operations of the Company, which includes Filtran Limited
(Filtran) has customers located primarily in the United States, Canada and the United Kingdom.

Operations, Activities and
Products

Filtran designs and manufactures electronic filters, transformers, inductors and power supplies that mainly serve the
military, aerospace electronics, telecommunications and medical equipment industry.

Filtran has always been a custom designer and
manufacturer. Its capabilities include both building the product to the customers print or designing and then building to its specifications. The products include varying types of transformers ranging from small signal types to large laminated
units weighing 50 lb. or more.

Filtran is ISO 9001:2008 certified and manufactures to MIL-PRF 27 and MIL STD-981. To further support the
Military and Aerospace industries, Filtran holds a Controlled Goods Certificate enabling it 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.

Since 2000, Filtran has established relationships to outsource the manufacturing of certain
products to companies in Asia, particularly China, and labor costs are no longer a barrier to compete for these orders.

Principal
Markets

The Filtran customers are located primarily in the United States, 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 to external customers for the years
ended May 31, 2009 and 2008 is as follows (in 000s):



|               |  |              |       |              |     |   |              |   |              |  |     |  
|-------------- |  | ------------ | ----- | ------------ | --- | - | ------------ | - | ------------ |  | --- | -
|               |  | 2009Revenues |       | % ofRevenues |     |   | 2008Revenues |   | % ofRevenues | 
|United States  |  | $            | 5,356 |              | 71  | % |              | $ | 5,394        |  | 60  | %
|Canada         |  |              | 1,173 |              | 16  | % |              |   | 1,638        |  | 18  | %
|United Kingdom |  |              | 802   |              | 11  | % |              |   | 1,571        |  | 17  | %
|All Other      |  |              | 234   |              | 2   | % |              |   | 442          |  | 5   | %
|               |  |              |       |              |     |   |              |   |              |  |     |  
|Total          |  | $            | 7,565 |              | 100 | % |              | $ | 9,045        |  | 100 | %
|               |  |              |       |              |     |   |              |   |              |  |     |  

There are three major markets for the Filtran operationsmilitary and defense,
telecommunications (telecom) companies and high-end equipment manufacturers.



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The breakdown of revenues for Filtran for the years ended May 31, 2009 and 2008, respectively by
industry of end users is as follows (in 000s):



|                               |  |      |       |   |     |   |      |   |       |  |     |  
|------------------------------ |  | ---- | ----- | - | --- | - | ---- | - | ----- |  | --- | -
|                               |  | 2009 |       | % |     |   | 2008 |   | %     | 
|High-end Equipment and Telecom |  | $    | 3,026 |   | 40  | % |      | $ | 3,443 |  | 39  | %
|Military and Defense           |  |      | 4,539 |   | 60  | % |      |   | 5,602 |  | 61  | %
|                               |  |      |       |   |     |   |      |   |       |  |     |  
|Total                          |  | $    | 7,565 |   | 100 | % |      | $ | 9,045 |  | 100 | %
|                               |  |      |       |   |     |   |      |   |       |  |     |  

Major Customers



|                                                 |  |                               
|------------------------------------------------ |  | ------------------------------
|Harris Corporation, R.F. Communications Division |  | United States                 
|TT EMS                                           |  | United States & United Kingdom
|Nanometrics                                      |  | Canada                        
|Jabil Circuit                                    |  | United States                 
|Whirlwind                                        |  | United States                 

The volume of business provided to Filtran by these customers equals approximately 66% of its
total sales.

For the fiscal years ended May 31, 2009 and 2008, Harris Corporation represented approximately 54% and 47%,
respectively, of Filtrans total sales, which represented 16% and 14%, respectively, of the Companys consolidated sales.

Marketing Channels

Principal markets are the United States, United Kingdom and Canada although products are sold in over 30
European and Asian countries. The Canadian operations primarily sell directly to customers through our internal sales force but also use independent sales representatives and distributors and uses its website as a sales channel.

Dependence on Patents, Licenses, Contracts and Processes

Canadian operations are not dependent on patents, licenses, industrial contracts, commercial contracts, financial contracts, or new manufacturing processes in such a manner that such dependence would be materially
adverse to its business or profitability.

Material Effects of Government Regulations

Government regulations of the Province of Ontario and Canada related to environmental compliance and labor conditions are typical in the industry and do
not have a material effect on our business or operations.

Backlog of Orders

Filtrans backlog as of May 31, 2009 was $1,770,202 as compared to $4,169,100 as of May 31, 2008. The backlog has been impacted by
significantly reduced selling prices for a major military sub-contractor and also weakness in demand from the United States military market.

Company
Revenue Breakdown

Set forth below is a breakdown of the Companys consolidated revenues by business and by geographical
market (where the customer is located) for the fiscal years ended May 31, 2009 and May 31, 2008.



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Revenues by Category of Activity:



|                                 |  |      |            |      |   |           
|-------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                 |  | 2009 |            | 2008
|National Hybrid Group Activities |  | $    | 12,006,369 |      | $ | 12,704,766
|API Electronics Activities       |  |      | 3,169,015  |      |   | 4,330,521 
|Filtran Activities               |  |      | 7,564,910  |      |   | 11,153,966
|TM Systems Activities            |  |      | 2,720,730  |      |   | 2,650,087 
|API NRC Activities               |  |      | 276,373    |      |   | 122,706   
|                                 |  |      |            |      |   |           
|Total Revenues                   |  | $    | 25,737,397 |      | $ | 30,962,046
|                                 |  |      |            |      |   |           
|                                 |  |     
|Revenues by Geographic Market:   |  |      |            |      |   |           
|                                 |  |     
|United States                    |  | $    | 19,459,780 |      | $ | 25,031,882
|Canada                           |  |      | 1,324,061  |      |   | 1,649,745 
|United Kingdom                   |  |      | 2,449,318  |      |   | 2,289,133 
|All Other                        |  |      | 2,504,238  |      |   | 1,991,286 
|                                 |  |      |            |      |   |           
|Total Revenues                   |  | $    | 25,737,397 |      | $ | 30,962,046
|                                 |  |      |            |      |   |           

Company Research and Development, Patents and Licenses

During the fiscal year ended May 31, 2009, the Company spent approximately $4,232,000 on research and development, of which approximately $1,222,000
was spent by the National Hybrid Group and approximately $3,010,000 was spent by API NRC.

During the fiscal year ended May 31, 2008,
the Company spent approximately $3,454,000 on research and development, of which approximately $1,153,000 was spent by the National Hybrid Group and $1,857,000 was spent by API NRC.

Under our Executive Employment Agreement with Dr. Moskovits, we are obligated to annually approve an annual research budget sufficient for
Dr. Moskovits to carry out his responsibilities of staffing and managing the engineering team of the Company.

Competition

We are engaged in an industry that is highly competitive and characterized by technological change and product life cycles. In each of our product
lines, we face significant competition from large semiconductor and electronic component companies to small specialized firms, and other companies. Many of these companies have substantially greater capital resources, industry presence, name
recognition, research and development staffs, facilities and experience at developing and manufacturing these products.

We believe that
the major competitive factors in our markets are strong customer relationships, a reputation for quality, a record of successful past delivery performance, a staff with distinctive technical competencies and competitive prices. Our failure to
compete effectively with respect to any of these or other factors could have a material adverse effect on our business, prospects, financial condition or operating results.

Some of our current major competitors include Microsemi Corporation (NASDAQ: MSCC), Semtech Corp. (NASDAQ: SMTC), Aeroflex Incorporated, Pulse
Engineering, a division of Technitrol (NYSE:TNL), Midcom Inc., Bel Fuse, Inc. (NASDAQ:BELFA and NASDAQ:BELFB), ATC Frost Magnetics, Inc., Halo Electronics, EMW, Leatherwood, S&W, and Holt Integrated Circuits. We or any of our subsidiaries may
not be able to compete successfully in the future and competitive pressures may harm our financial condition and/or operating results.



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Costs and Effects of Compliance with Environmental Laws

In the conduct of our manufacturing operations, we handle materials that are considered hazardous, toxic or volatile under federal, state and local
laws. Federal, state and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used in our semiconductor and other manufacturing processes. Under new environmental regulations, we are
responsible for determining whether certain toxic metals or certain other toxic chemicals are present in any given components we purchase and in each given product we sell. The Company has an active environmental compliance program at each of
its subsidiaries to insure compliance with all environmental regulations applicable to us. Our compliance with federal, state and local environmental laws and regulations has not had a material effect on our capital expenditures, earnings, or
competitive or financial position of the Company during the 2009 and 2008 fiscal year.

Employees

As of May 31, 2009, the Company had approximately 250 employees, all of whom are full-time, compared to approximately 370 employees as of
May 31, 2008. None of our employees are subject to a collective bargaining agreement.

Executive Officers of the Company

The following table sets forth as of August 10, 2009, the name, age, and position of each of our executive officers. The terms of all officers expire
at the next annual meeting of the board of directors and upon the election of the successors of such officers.



|                     |  |     |  |                                   |  |               
|-------------------- |  | --- |  | --------------------------------- |  | --------------
|Name                 |  | Age |  | Position Held                     |  | Term Commenced
|Phillip DeZwirek     |  | 71  |  | Chairman, Treasurer, and Director |  | 2006          
|Stephen Pudles       |  | 50  |  | Chief Executive Officer           |  | 2008          
|Claudio Mannarino    |  | 39  |  | Chief Financial Officer           |  | 2006          
|Dr. Martin Moskovits |  | 66  |  | Chief Technology Officer          |  | 2007          

Set forth below is certain biographical information regarding each of our executive officers.

Phillip DeZwirek

Phillip DeZwirek
became a director of ours and our Chairman, Chief Executive Officer and Treasurer on the effective date of the Business Combination, November 6, 2006. Mr. DeZwirek has held the positions of Chairman, and Treasurer at API since May 2002 and
held the position of Chief Executive Officer from May 2002 until Mr. Pudles assumed that position in April 2008. He also assumed the same positions with Nanotronics Sub and became a director of Nanotronics Sub on the effective date of the
Business Combination. Mr. DeZwirek has been a director of API since September 2001. From September 2001 until November 2001 Mr. DeZwirek was the Chief Executive Officer and Treasurer of API. From November 2001 until May 2002,
Mr. DeZwirek was the Vice-Chairman and Treasurer of API. Phillip DeZwirek was also the Chief Financial Officer of API from August 2001 until Claudio Mannarino assumed that position in 2004. Phillip DeZwirek has been a director, Chairman of the
Board and the Chief Executive Officer of CECO Environmental Corp. (CECO) since August 1979 (NASDAQ-CECE). 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), which he is deemed to control. Mr. DeZwirek has also been involved in private investment activities for the past five
years.

Stephen Pudles

Mr. Pudles
became our Chief Executive Officer on April 27, 2008 and our director on November 6, 2008. He brings more than 25 years of electronics industry experience to API Nanotronics. Most recently he served as



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President and CEO of Nu Visions Manufacturing and Executive VP of OnCore Manufacturing. Previously, he has held senior management positions with Tanon
Manufacturing, Electronic Associates, IEC and Restor Industries. He has been a member of IPCs Electronics Manufacturing Services Industry (EMSI) Council since 1988; was an original member of the Assembly Market Research Council (AMRC) Steering
Committee; and was the Chairman of the IPC Taskgroup that created the IPC-D-326 document defining the Documentation Requirements for Printed Circuit Board Assemblies. He also serves on the as Secretary/Treasurer and Chairman of the
Compensation Committee of the IPC and is chairman of the EMSI Management Council. Steve has a Masters of Science in management and a Bachelor of Engineering from Stevens Institute of Technology in Hoboken, New Jersey.

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

Claudio
Mannarino became our Chief Financial Officer and Vice President of Finance on the effective date of the Business Combination, November 26, 2006. He holds the same positions with Nanotronics Sub and has had the same positions at API since 2004.
Mr. Mannarino has 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 joined Filtran in April of 2000. From April 2000 to 2004, he was controller and manager of human resources and IT at Filtran Group. He
was named CFO and VP of Finance for API in 2004. His responsibilities include managing the financial reporting function for API, and the finance and IT departments of Filtran. Mr. Mannarino has no other outside business activities.

Prior to joining Filtran, Mr. Mannarino spent three years as Controller for two divisions of GTC Transcontinental, a Canadian publicly traded
company on the Toronto Stock Exchange. After three years in roles with progressively more responsibility 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.

Dr. Martin Moskovits

Dr. Martin Moskovits, 66, has been our Chief Technology Officer since May 1, 2007 and the President of API NRC subsidiary since July 2007. Dr. Moskovits was for the past five years prior to his joining
the Company a professor of Physical Chemistry in the Chemistry and Biochemistry Department and Dean of the Division of Mathematical and Physical Sciences in the College of Letters and Sciences at the University of California Santa Barbara. From
March 15, 2006 until he was employed by the Company, Dr. Moskovits served as a nanotechnology consultant for us. Dr. Moskovits research expertise includes the area of nanoscience and nanotechnology with special emphasis on nanosensors
and is also known for developing porous anodic aluminum oxide as a template platform for nanotechnology. He serves as Vice Chair of the United States Department of Energy (DOE) Basic Energy Sciences Advisory Committee and was a member of
the DOE advisory committee on the establishment of the DOEs five nanocenters.



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|ITEM 1A. | RISK FACTORS
|-------- | ------------

Additional Risk Factors to Consider:

An investment in our securities involves a high degree of risk. You should carefully consider the risk factors described below,
together with the other information included in this Annual Report on Form 10-K before you decide to invest in our securities. The risks described below are the material risks of which we are currently aware; however, they may not be the only risks
that we may face. Additional risks and uncertainties not currently known to us or that we currently view as immaterial may also impair our business. If any of these risks develop into actual events, it could materially and adversely affect our
business, financial condition, results of operations and cash flows, the trading price of your shares could decline and you may lose all or part of your investment.

Our Stock Market Price and Trading Volume May Be Volatile

The market for our common stock is
volatile. Our stock price subject to volatility in both price and volume arising from market expectations, announcements and press releases regarding our 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 like us, 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, our shares of common stock are subject to significant volatility resulting from purely market forces over which we will have no control. Further, the market for our common stock has been very thin. As a result, our
stockholders 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.

Our business may be adversely affected by the global economic downturn, the continuing uncertainties in the financial markets and our customers ability to access the capital markets.

The global economy is currently in a pronounced economic downturn. Global financial markets are continuing to experience disruptions, including severely
diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. Given these uncertainties, there is no assurance that there will
not be further deterioration in the global economy and the global financial markets. We are unable to predict the likely duration and severity of the current global economic downturn or disruptions in the financial markets. If economic conditions
deteriorate further, our business and results of operations could be materially and adversely affected.

Our business and results of
operations could also be impacted by a number of follow-on effects of the disruptions in the financial markets, including the inability of our customers, or their customers, to obtain sufficient financing to purchase historical or projected
quantities of our products. Our revenues and gross margins are dependent upon customer demand, and if our projections of their expenditures fail to materialize, due to reductions in customer purchases or otherwise, our revenues and gross margins
could be adversely affected.

Additionally, the inability of our customers to access capital efficiently, or at all, may have other adverse
effects on our financial condition. For example, financial difficulties experienced by our customers or suppliers could result in product delays; increase accounts receivable defaults; and increase our inventory exposure. These risks may increase if
our customers and suppliers do not adequately manage their business or do not properly disclose their financial condition to us.

Although
we believe we have adequate liquidity and capital resources to fund our operations internally, in light of current market conditions, our inability to access the capital markets on favorable terms, or at all, may adversely affect our financial
performance. The inability to obtain adequate financing from debt or capital sources could force us to self-fund strategic initiatives or even forgo certain opportunities, which in turn could potentially harm our performance.



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We May Have Difficulty Attracting and Holding Outside Board Members and This May Affect the Quality of Our Management

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 us to attract and retain qualified outside directors to serve on its Board.

We Do Not Expect to Pay Dividends

We intend to invest all available funds to finance our growth. Therefore our stockholders
cannot expect to receive any dividends on our common stock in the foreseeable future. Even if we were to determine that a dividend could be declared, we could be precluded from paying dividends by restrictive provisions of loans, leases or other
financing documents or by legal prohibitions under applicable corporate law.

We Have a History of Net Losses, and May Not be Profitable in the Future

We have incurred net losses for each of the last three fiscal years. We cannot assure you that we will be profitable in the future.
Even if we achieve profitability, we may experience significant fluctuations in our revenues and we may incur net losses from period to period. The impact of the foregoing may cause our operating results to be below the expectations of securities
analysts and investors, which may result in a decrease in the market value of our common stock.

Since Some of Our Director and Assets Are Located
Outside United States It May Be More Difficult to Enforce Judgments Against Us and Our Directors

More than half of our directors are
domiciled outside of the United States. As a result, it may not be possible to effect service of process upon such directors. Also, since all or a substantial portion of the assets of such directors are located outside the United States, it may be
difficult to enforce judgments obtained in United States courts against such directors. Also, because a portion of our assets will be located outside the United States, it may be difficult to enforce judgments obtained in United States courts
against us.

Some of Our Directors and Officers May be Subject to Conflicts of Interest

Some of our directors and officers 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. Our directors are required by law to act honestly and in good faith with a view to our best interests and to disclose any interest, which they may have in any project or opportunity applicable to us. 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. In determining whether or not we will participate in any project or opportunity, the directors will
primarily consider the degree of risk to which we may be exposed and our financial position at the time.

Control of Us by Our Officers and Directors
Could Adversely Affect the Companys Stockholders Because of Their Control of Our Affairs and By Discouraging Our Potential Acquisition

Our officers and directors as a group beneficially own a large percentage of our stock, treating Exchangeable Shares as the equivalent of our common stock. Therefore, directors and officers, acting together may have a controlling influence
on (i) matters submitted to our stockholders (and the trustee holding the special share of our stock issued in connection with the Business Combination which allows each holder of Exchangeable Shares one



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vote at our meeting for each Exchangeable Share) for approval (including the election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets) and (ii) our management and affairs. (Exchangeable Shares held by us and our subsidiaries have no such voting rights.) These persons, acting alone or together, do not have sufficient numbers of votes to
approve matters submitted to stockholders. However, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination or
discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. This in turn could materially adversely affect the market price of our stock.

We Are Dependent on Key Personnel

We are dependent
upon a small number of key personnel, Mr. Phillip DeZwirek was the Chairman of the Board of API prior to the Business Combination and was instrumental in directing the growth of API. We are depending upon Mr. DeZwirek to continue to act in
such capacity. Stephen Pudles, as our Chief Executive Officer, is important to the Companys future strategy as the Company continues to implement strategies for organic growth and pursues acquisition targets that will consolidate the markets
which the Company operates. Dr. Martin Moskovits is our Chief Technology Officer and the President of our subsidiary, API Nanofabrication and Research Corporation. Dr. Moskovits is leading our efforts in the nanotechnology field. The loss
of the services of such personnel could have a material adverse effect on our 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 May Require Additional Financing Which We May Not be Able to Obtain; Dilution

We 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. Our ability to arrange such financing in the future will depend in part upon the prevailing capital market conditions, as well as our business performance.
There can be no assurance that we will be successful in our efforts to arrange additional financing under satisfactory terms. If additional financing is raised by the issuance of additional shares of our common stock, our shareholders may suffer
dilution. If adequate funds are not available, or are not available on acceptable terms, we may not be able to take advantage of opportunities, or otherwise respond to competitive pressures and remain in business.

The Integration of Acquisitions May Be Difficult and May Not Yield the Expected Results

We completed the Business Combination in November, 2006. Prior to the Business Combination, API had recently expanded its operations through strategic
acquisitions, specifically, the TM Systems acquisition and the Keytronics Inc. acquisition. After the Business Combination, we acquired National Hybrid, Inc. and Pace Technologies, Inc. and the assets of NanoOpto Corporation. We acquired Cryptek
Technologies, Inc. in July 2009. We expect to continue to expand and diversify our operations with additional acquisitions. Risks are 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;
| | - |  | -----------------------------------------------------



| |  |  | consolidating and integrating operations and space, and the costs and risks associated therewith;
| | - |  | -------------------------------------------------------------------------------------------------



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



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



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| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For certain acquisitions, we have raised the capital required to make such acquisitions from
the sale of stock, warrants and options, and convertible debt, which has been dilutive to our stockholders.

Additionally, in the period
following an acquisition, we are required to evaluate goodwill and acquisition-related intangible assets for impairment. When such assets are found to be impaired, they are 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. Ultimately acquisitions may not be as profitable as expected or profitable at all.

Nanotechnology Opportunities May Not Occur or May Not be Profitable

We believe that we will benefit from the nanotechnology
expertise of Dr. Martin Moskovits, who is our Chief Technology Officer, in identifying potential nanotechnology investments and acquisitions and other nanotechnology initiatives. There can be no assurances that such investments or acquisitions
will be realized. There can be no assurance that Dr. Moskovits will continue as an employee of ours beyond the term of his employment agreement. Moreover, we have no experience with nanotechnology investments, acquisitions or manufacture, and
there can be no assurance that any such investment, if undertaken, will be profitable.

We have employed Dr. Moskovits for substantial
compensation to lead our nanotechnology initiative. Moreover, the development of any nanotechnology products will require substantial research and development expenditures. Consequently, our nanotechnology initiative will be expensive, and there can
be no assurance that these expenditures will be profitable.

Failure to maintain adequate internal controls could adversely affect our business.

Commencing with the fiscal year ended 2008, under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in each of
our annual reports on Form 10-K, a report containing our managements assessment of the effectiveness of our internal control over financial reporting. These laws, rules and regulations continue to evolve and could become increasingly stringent
in the future. We have undertaken actions to enhance our ability to comply with the requirements of the Sarbanes-Oxley Act of 2002, including, but not limited to, the engagement of consultants, the documentation of existing controls and the
implementation of new controls or modification of existing controls as deemed appropriate.

We continue to devote substantial time and
resources to the documentation and testing of our controls. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we could be subject to regulatory actions, civil or
criminal penalties or shareholder litigation. In addition, failure to maintain adequate internal controls could result in financial statements that do not accurately reflect our financial condition, results of operations and cash flows. We believe
that the out-of-pocket costs, the diversion of managements attention from running our day-to-day operations and operational changes caused by the need to comply with the requirements of Section 404 will continue to be significant.

There Are Inherent Limitations in All Internal Control Systems Over Financial Reporting, and Misstatements Due to Error or Fraud May Occur and Not Be
Detected

While we continue to take action to ensure compliance with the internal control, disclosure control and other requirements of
the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the SEC



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implementing these requirements, there are inherent limitations in our ability to control all circumstances. Our management, including our Chief Executive
Officer and Chief Financial Officer, does not expect that our internal controls and disclosure controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be evaluated in relation to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management
override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, a control may be inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.

Future Trading In Our Stock May Be Restricted By the SECs Penny Stock
Regulations, Which May Limit A Stockholders Ability To Buy And Sell Our Shares

The SEC has adopted regulations which generally
define penny stock to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our shares most likely will be covered by the
penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The term accredited investor refers generally to entities
with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income for the current and the past two years exceeding $200,000 or $300,000 jointly with their spouse.

The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations
for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customers account. The bid and offer quotations, and the
broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customers confirmation.

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must
make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchasers written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for our stock. We believe that the penny stock rules may discourage investor interest in and limit the marketability of our common stock if the price remains below $5.00.

Listing Our Stock on Markets Other than the OTCBB Could be Costly for Us

Our common stock is currently quoted and trades on the OTCBB in the United States. The OTCBB is operated by Financial Industry Regulatory Authority, Inc. (FINRA). In the future, we may file an application
to be quoted on the NASDAQ Stock Exchange or another national securities exchange (collectively, an Exchange). Unlike the OTCBB, every Exchange has corporate governance and other public interest standards, which we will have to meet.
Such standards and regulations may restrict our 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.



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The Exchange will require that a majority of the members of our Board of Directors be independent
directors as defined by the Exchange. The independent directors must have regularly scheduled meetings at which only independent directors are present. Compensation of our chief executive officer 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 our 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.

In addition,
the audit committee will have to be composed of at least three (3) members, all of whom are independent as defined by the Exchange and under SEC Rule 10A-3(c), and who have not participated in the preparation of the financial statements of us
or any subsidiary of us during the past three (3) years. One member of the audit committee must have specified employment experience in finance or accounting. Accordingly, we would have to appoint three independent directors to serve on our
audit committee and one of those audit committees members would need the required experience in finance and accounting.

We currently meet
some, but not all of these requirements. Our compensation and audit committees meet these requirements.

Shareholders May Experience Dilution Through
Employee, Director and Consultant Options; Such Options May Also Negatively Impact Our Net Income

Because our success is highly
dependent upon our employees, directors and consultants, we have and intend in the future to grant to some or all of our key employees, directors and consultants options or warrants to purchase shares of our common stock as non-cash incentives. We
have adopted an equity incentive plan for this purpose. To the extent that significant numbers of such options may be exercised when the exercise price is below the then current market price for our common stock, the interests of the other
stockholders of the company may be diluted. We have granted options to purchase over 5,244,000 shares of common stock to directors, officers, employees and consultants. In addition, on June 23, 2009 we issued $3,600,000 in convertible
subordinated debt, which is convertible into over 4,800,000 shares of common stock.

The Possibility of Goodwill Impairments Exist

We evaluate the recoverability annually or more frequently if impairment indicators arise, as required under SFAS 142, Goodwill and Other Intangible
Assets of the goodwill carried on our financial statements as an asset. Goodwill is reviewed for impairment by applying a fair-value to the reporting unit level, which is the same as the business segment level. A Goodwill impairment loss will
be reported for any goodwill impaired. Consequently an impairment of goodwill could have a significant adverse effect on our financial results.

Downturns in the Highly Cyclical Defense, Semiconductor, and/or Electronic Component Industries Would Adversely Affect Our Operating Results and Our Value

The defense, semiconductor and electronic component industries are highly cyclical, and the value of our business may decline during the down portion of these cycles. The markets for our 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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



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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 markets for National Hybrid products depend primarily upon continued
demand within the commercial aerospace, international military defense and semiconductor process instrumentation markets. These markets may experience changes in demand that could adversely affect our operating results and financial condition.

The Defense, Semiconductor and Electronic Components Industries Are Highly Competitive and Increased Competition Could Adversely Affect Our Operating
Results

The areas of the defense, semiconductor and electronic component industries in which we do business are highly competitive. We
expect 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. We anticipate that average selling prices for our products will continue to
decrease in future periods, although the timing and amount of these decreases cannot be predicted with any certainty. We compete in various markets with companies of various sizes, many of which are larger and have greater financial and other
resources than we have, 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 us may introduce competing products in the
future. We or any of our subsidiaries may not be able to compete successfully in the future and competitive pressures may harm our financial condition and/or operating results.

We Are Highly Reliant on Defense Spending

We are dependent upon the US defense industry and its
military subcontractors for the sale of many of our 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 our performance. Such occurrences are beyond our control. The upcoming elections could result in substantial
changes in defense spending. The effects of defense spending increases are difficult to estimate and subject to many sources of delay.

Our
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 us for costs incurred plus a reasonable profit. If we
experience significant reductions or delays in procurements of our products by the US Government, or terminations of government contracts or subcontracts, our operating results could be materially and adversely affected.

Because Some of Our Products are Adaptations of Existing Products, New Technologies Could Make Our Products Obsolete; Additionally, Because We Make Some of Our
Products Based on Existing Technologies, Few Barriers Exist to Others Attempting to Sell to the Same Market

The products sold by our
subsidiary, API Electronics, Inc., are typically adaptations of existing products formerly manufactured by others. Because these products are typically based on older technologies, the rapidly changing technologies and industry standards, along with
frequent new product introductions, that characterize much of the semiconductor and electronic component industries, could render our products obsolete. Our financial performance depends on our ability to design, develop, manufacture, assemble,
test, market and support new products (which for API Electronics, Inc. are typically adaptations of existing products formerly manufactured by others), and enhancements on a timely and cost-effective basis. Additionally, the lack of significant
amounts of new technology in our products means that there are not significant barriers to the entry of competitors who might attempt to sell into the markets to which we presently cater.



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

The industries in which we operate are dynamic and constantly evolving. We cannot assure that we 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 our products or technologies obsolete or noncompetitive. We 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 Insurance

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 to 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.

We provide a one-year product defect warranty from the date of sale. Historically, warranty costs have been nominal and have been
within managements expectations. The Company has accrued approximately $81,000 and $108,238 in warranty liability as of May 31, 2009 and 2008, respectively.

Our Inability to Protect Our Intellectual Property Rights or Our Infringement of the Intellectual Property Rights of Others Could Adversely Affect Our Business.

We principally rely on our skill in the manufacture of our products and not on any proprietary technologies that we develop or license on an exclusive
basis. Such manufacturing know-how is primarily embodied in our drawings and specifications, and information about the manufacture of these products purchased from others. Our future success and competitive position may depend in part upon our
ability to obtain licenses of certain proprietary technologies used in principal products from the original manufacturers of such products. Our reliance upon protection of some of our production technology as trade secrets will not
necessarily protect us from the others independently obtaining the ability to manufacture our products. We cannot assure that we will be able to maintain the confidentiality of our production technology, dissemination of which could have a material
adverse effect on our business.



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Patents of third parties may have an important bearing on our ability to offer certain of our products.
Our major competitors as well as other companies and individuals may obtain and may have obtained patents related to the types of products we offer or plan to offer. We cannot assure you that we are or will be aware of all patents containing claims
that may pose a risk of infringement by our products and services. In addition, some patent applications in the United States are confidential until a patent is issued and, therefore, we cannot evaluate the extent to which technology concerning our
products and services may be covered or asserted to be covered by claims contained in pending patent applications. In general, if one or more of our products were found by a court to infringe patents held by others, we may be required to stop
developing or marketing the products or services, to obtain licenses to develop and market the services from the holders of the patents or to redesign the products or services in such a way as to avoid infringing those patents. An adverse ruling
arising out of any intellectual property dispute could also subject us to significant liability for damages.

We cannot assess the extent
to which we may be required in the future to obtain licenses with respect to patents held by others, whether such license would be available or, if available, whether we would be able to obtain such licenses on commercially reasonable terms. If we
are unable to obtain licenses with respect to patents held by others, and are unable to redesign our products to avoid infringement of any such patents, this could materially adversely affect our business, financial condition and operating results.

Also, we hold various patents and licenses relating to certain of our products. We cannot assure you as to the breadth or degree of
protection that existing or future patents, if any, may afford us, that our patents will be upheld, if challenged, or that competitors will not develop similar or superior methods or products outside the protection of any patent issued to us. It is
possible that our existing patent rights may not be valid. We may have to expend resources to protect our patents in the event a third party infringes our patents, although we cannot assure you that we will have the resources to prosecute all or any
patent violations by third parties.

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

We sell many of our 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, we must commit resources to the production of products without
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 our holding excess or
obsolete inventory. This could cause inventory write-downs. Our inability to sell products after we have devoted significant resources to them could have a material adverse effect on our business, financial condition and results of operations.

Variability of Our Manufacturing Yields May Affect Our Gross Margins

Our manufacturing yields vary significantly among products, depending on the complexity of a particular integrated circuits design and our experience in manufacturing that type of integrated circuit. From time
to time, we have experienced difficulties in achieving planned yields, which have adversely affected our 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 our 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
| | - |  | ----------------------



| |  |  | unreliability of a subcontractor.
| | - |  | ---------------------------------

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

Our Inventories May Become Obsolete

The life cycles of some of our products depend heavily upon the life cycles of the end products into which these products are designed. Products with
short life cycles require us to manage closely our 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. We may be adversely affected in the future by obsolete or excess inventories which may result from unanticipated changes in the estimated total demand for our products or the estimated life cycles of the end products into which our
products are designed.

The Company recorded an inventory reserve for obsolete and slow moving inventory for approximately $2,378,000 and
$2,819,000 for the fiscal years ended May 31, 2009 and 2008, respectively.

Interruptions, Delays or Cost Increases Affecting Our Materials, Parts,
Equipment or Subcontractors May Impair Our Competitive Position

Some of the our products are assembled and tested by third-party
subcontractors. We do not have any long-term agreements with these subcontractors. As a result, we may not have assured control over our product delivery schedules or product quality. Due to the amount of time typically required to qualify
assemblers and testers, we could experience delays in the shipment of our products if we are 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 our
operating results and financial condition. Our operations and ability to satisfy customer obligations could be adversely affected if our relationships with these subcontractors is disrupted or terminated.



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Certain of Our Business Units Are Reliant One Key Customer

Filtran and TM are each highly reliant on a single key customer. For Filtran, Harris Corporation accounted for 54%, and 46% respectively, of divisional
sales, which translated to 16%, and 17% respectively of the Companys total annual sales for the fiscal years ended May 31, 2009, and 2008. For TM Systems II, NASSCO accounted for 53% and 41%, respectively, of divisional sales, which
translated into 6%, and 4%, respectively, of the Companys total annual sales for the fiscal years ended May 31, 2009, and 2008. If either customer should decide to purchase components from other suppliers, it could have an adverse impact
on the applicable division and our revenues and net income.

Environmental Liabilities Could Adversely Impact Our Financial Position

Federal, Canadian, state and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used
in our semiconductor and other manufacturing processes or in our finished goods. Under new environmental regulations, we are responsible for determining whether certain toxic metals or certain other toxic chemicals are present in any given
components we purchase and in each given product we sell. These environmental regulations have required us to expend a portion of our resources and capital on relevant compliance programs. In addition, under other laws and regulations, we could be
held financially responsible for remedial measures if our current or former properties are contaminated or if we send waste to a landfill or recycling facility that becomes contaminated, even if we did not cause the contamination. Also, we may be
subject to additional common law claims if we release 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, old or new, could subject us to significant liabilities and could have material adverse effects on our operating results, cash flows and
financial condition.

In the conduct of our manufacturing operations, we have handled and do handle materials that are considered
hazardous, toxic or volatile under Federal, Canadian, state and local laws. The risk of accidental release of such materials cannot be completely eliminated. In addition, we operate or own facilities located on or near real property that was
formerly owned and operated by others. These properties were used in ways that involved hazardous materials. Contaminants may migrate from, or within or through any such property. These risks may give rise to claims. Where third parties are
responsible for contamination, the third parties may not have funds, or not make funds available when needed, to pay remediation costs imposed upon us jointly with third parties under environmental laws and regulations.

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.



|ITEM 2. | DESCRIPTION OF PROPERTIES
|------- | -------------------------

Our executive offices
are located in leased facilities at 2300 Yonge Street, Suite 1710, Toronto, Ontario, Canada M4P 1X3. We occupy approximately 2,500 square feet at such facilities. We lease these facilities from an entity controlled by our Chairman of the Board for
an annual rental of approximately $185,000.

As of May 31, 2009, we had four manufacturing facilities located in Hauppauge, NY,
Ottawa, Ontario, Ronkonkoma, New York, and Somerset, New Jersey, where operations are under development. We also have two manufacturing facilities that are assets held for sale in Endicott, New York, and Ogdensburg, New York.



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With the acquisition of the assets of Cryptek Technologies Inc on July 7, 2009, the Company added
four manufacturing and design facilities located in Sterling, Virginia, Plainfield, New Jersey, Ottawa, Canada, Waterwells, and United Kingdom.

We commenced consolidating certain of our operations during fiscal 2009, which we expect to finish in fiscal 2010. To date, the consolidation process has reduced the number of manufacturing units from eight to four, and we expect to operate
in seven primary manufacturing facilities by the end of fiscal 2010 with the July 7, 2009 asset acquisition of Cryptek Technologies Inc. We believe that this consolidation will result in reduced overhead expenses and greater overall
efficiencies and profitability.

The US Group

API Electronics 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 Electronics products are produced at this manufacturing facility, which is located at 375 Rabro Drive, Hauppauge, New York 11788.

TM Systems, Inc. uses the facilities of National Hybrid Inc. in Ronkonkoma, New York for its manufacturing operations.

Keytronics uses the facilities of National Hybrid Inc. in Ronkonkoma, New York for its manufacturing operations. Keytronics also owns an approximately
10,500 square foot manufacturing facility in Endicott, New York, which currently has no operations and is held for sale.

National Hybrid
Group leases a 20,000 square feet joint executive office and manufacturing facility in Ronkonkoma, New York. The Ronkonkoma facility is leased for annual rent of $132,000. National Hybrid, Inc. has the option to buy these facilities at the end of
these leases.

API NRC leases a 35,800 square foot facility in Somerset, New Jersey. This space will be used for offices, warehousing and
laboratory use, including a clean room for nanofabrication and research. The base rent is approximately $286,000 with our subsidiary also being responsible for a share of expenses. The Company has guaranteed this lease.

Canadian Operations

The offices for Filtran are
located in Ottawa, Ontario. Filtran 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. We expect to complete the sale of the building by September 15, 2009 and move locations to a state of the art manufacturing and design centre in Kanata, Ontario.

The building for Filtran Inc., which currently has no operations, is located in Ogdensburg, New York. The facility is approximately 16,500 square feet
and is up for sale.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

There are no legal proceedings
to which we are a party or to which our property is subject, nor to the best of managements knowledge are any material legal proceedings contemplated other than routine litigation incidental to the business.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

There were no meetings of shareholders and no matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended May 31, 2009.



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PART II



|ITEM 5. | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | -----------------------------------------------------------------------------------------------

Our common stock qualifies for quotation on the OTC Bulletin Board under the symbol APIA. From November 7, 2006 through September 19, 2008, our
stock traded under the symbol APIO, and from November 2005, when we first qualified for quotation through November 7, 2006, under the symbol RBCV. None of the shares of our subsidiaries are publicly traded.

The following table sets forth the reported high and low bid prices of our common shares for each quarter as reported by the OTC Bulletin Board for the
fiscal periods indicated. Such over-the-counter market quotations are based on high and low bid prices and reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. We
effected a one-for-fifteen reverse stock split effective September 19, 2008. The bid prices below have been adjusted to give retroactive effect to the reverse stock split.



|                          |  |                 |       |     |   |      
|------------------------- |  | --------------- | ----- | --- | - | -----
|                          |  | STOCK BID PRICE
|                          |  | High            |       | Low
|Fiscal 2009               |  |                 |       |     |   |      
|Fourth Quarter (5/29/09)  |  | $               | 0.73  |     | $ | 0.30 
|Third Quarter (2/27/09)   |  | $               | 0.45  |     | $ | 0.23 
|Second Quarter (11/28/08) |  | $               | 1.20  |     | $ | 0.795
|First Quarter (8/29/08)   |  | $               | 2.925 |     | $ | 1.065
|                          |  |                
|Fiscal 2008               |  |                 |       |     |   |      
|Fourth Quarter (5/31/08)  |  | $               | 1.95  |     | $ | 1.35 
|Third Quarter (2/29/08)   |  | $               | 3.00  |     | $ | 1.80 
|Second Quarter (11/30/07) |  | $               | 3.90  |     | $ | 2.70 
|First Quarter (8/31/07)   |  | $               | 8.10  |     | $ | 2.55 

Registered Holders of our Common Stock

As of August 19, 2008 we had approximately 91 stockholders of record, although there is a large number of beneficial owners.

Dividends

Since our inception, we
have not paid any dividends on our common stock. We have no limit on our ability to pay dividends on our common stock but we do not anticipate that we will pay dividends in the foreseeable future.

Recent Sales Of Unregistered Securities

On June 23, 2009, we issued of secured, convertible promissory notes to a group of investors in the aggregate principal amount of $3,650,000. The number of shares of common stock that could be issued under the
Notes as of June 23, 2009 is 4,866,667. The number of shares issued is subject to the amount of accrued and unpaid interest under the Notes. The Notes were sold in private placement transactions to investors located outside the United States,
which sales were made pursuant to Regulation S under the Securities Act of 1933, as amended. All sales were exempt from registration under such act pursuant to such regulation. There were no underwriting discounts or commissions.



25



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##### Table of Contents

Recent Repurchases of our Stock

The following table provides information with respect to the shares of common stock repurchased by us during the fourth quarter of fiscal year 2009.



|                               |  |                                 |  |                             |      |                                                                              |        |     |                                                                                |          
|------------------------------ |  | ------------------------------- |  | --------------------------- | ---- | ---------------------------------------------------------------------------- | ------ | --- | ------------------------------------------------------------------------------ | ---------
|Period                         |  | Total Number ofShares Purchased |  | Average PricePaid Per Share |      | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |        |     | Maximum Numberof Shares that MayYet Be PurchasedUnder the Plansor Programs (1)
|March 1, 2009  March 31, 2009 |  | 10,000                          |  | $                           | 0.33 |                                                                              | 10,000 | (2) |                                                                                | 2,566,037
|April 1, 2009  April 30, 2009 |  | 28,191                          |  | $                           | 0.40 |                                                                              | 28,191 | (2) |                                                                                | 2,537,846
|May 1, 2009  May 31, 2009     |  | 4,000                           |  | $                           | 0.52 |                                                                              | 4,000  | (2) |                                                                                | 2,533,846
|Total                          |  | 42,191                          |  | $                           | 0.39 |                                                                              | 42,191 | (2) |                                                                                | 2,533,846



|(1) | In February 2009, the board of directors authorized a stock repurchase program under which we can repurchase up to 3.2 million shares of our common stock over a one-year
period.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents open market purchases made under the Companys stock repurchase plan.
|--- | --------------------------------------------------------------------------------



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##### Table of Contents

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Business Overview of API Nanotronics Corp.

The Company, through its subsidiaries, National Hybrid
Inc., (NHI), API Electronics, Inc., Filtran Limited, TM Systems II Inc., (TM), Keytronics, Inc., and API Nanofabrication and Research Corporation (API NRC), Cryptek USA Corp., Emcon Emanation Control Limited,
Ion Network Solutions and Secure Systems & Technologies Limited (SST) is engaged as a prime system contractor in TEMPEST, Ruggedization, Network Security, Communications, and other government services. API is also a leading
provider of high technology products, subsystems, systems and component level products. Our customers include the U.S. Department of Defense (DoD) and its prime contractors, U.S. Government intelligence agencies, the U.S. Department of Homeland
Security (DHS), U.S. Department of State (DoS) and U.S. Department of Justice (DoJ), allied foreign governments, domestic and international commercial customers and select other U.S. federal, state and local government agencies.

The Company is engaged in providing innovative design, engineering and manufacturing solutions to customers. The Company is also a manufacturer of
electronic components and systems for the defense, aerospace and communications industries, with a developed expertise in the R&D and manufacture of nanotechnology and MEMS products.

Core products produced we produce include: Tempest & Emanation products and services, ruggedized computers and peripherals, network security
appliances and software, high-performance microcircuits such as 1553 data bus products, solid state power controllers, Opto-couplers, high-density multi-chip modules and custom hybrid-microcircuit filters and transformers; naval aircraft landing and
launching equipment; and next generation product introductions based on nanotechnology and micro-electromechanical (MEMS) systems.

Overview

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



| |  |  | The National Hybrid Group, which consists of National Hybrid, Inc. and Pace Technology, Inc. of Ronkonkoma, New York, develops and manufactures 1553 data bus
products, solid state power controllers, opto-controllers, high density multi-chip modules and custom hybrid micro-circuit of the military/aerospace market and the industrial process control market.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | API Electronics, Inc. of Hauppauge, New York is a leading 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Filtran Limited of Ottawa, Ontario, Canada, is a leading global supplier of superior quality electronic components to major producers of communications equipment,
military hardware, computer peripherals, process control equipment and instrumentation.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | TM Systems II Inc. of Ronkonkoma, NY (TM Systems) has been in business for over 30 years. Its product offerings include naval landing and launching
equipment, flight control and signaling systems, radar systems alteration, data communication and test equipment as well as aircraft ground support equipment. TM Systems Stabilized Glide Slope Indicator (SGSI) is an electro-hydraulic-optical
landing system and is designed for use on air capable and amphibious assault ships.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Keytronics Inc. (Keytronics), in business since 1971, is a manufacturer of a wide variety of power transformers, reactors, magnetic amplifiers, power
supplies and converters and numerous special purpose electronic assemblies, including capacitor modules and medical electronics.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | API NRC, established in July 2007, possesses a broad range of instruments essential in nanofabrication and materials synthesis and fabrication. API NRC owns a
number of proprietary technologies which address market needs in imaging, digital cinema camera technologies, optical communications, as well as in conformal optical coating using proprietary atomic layer deposition (ALD) technologies.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are continuing our consolidating efforts of reducing our design and manufacturing centers to three facilities from
eight, (excluding the four facilities we now operate through the Cryptek acquisition) in order to enhance operational efficiency, including the winding up and relocating of business at certain locations. We started, in the fourth quarter of fiscal
year 2008, moving the Filtran Inc. operations in Ogdensburg, New York to the Filtran Limited facility located in Ottawa, Ontario. As of September 30, 2008 the Ogdensburg facility was effectively closed and we have retained a realtor to handle
the sale of the building. During the twelve months ended May 31, 2009, we consolidated the Pace operations in Largo, Florida with NHI at Ronkonkoma, New York. Operations at Largo, Florida have ceased and the facility is closed. As of
May 31, 2009, we have consolidated the manufacturing of the Endicott, New York facility to both the Ottawa and Ronkonkoma manufacturing facilities. We have hired a realtor to sell the Endicott, New York building. During the twelve months ended
May 31, 2009, we incurred restructuring charges totaling $1,076,141.

The current economic slowdown is not expected to have a
significant impact on the Companys near-term earnings as the United States military budget is expected to continue to grow. In addition, our continued strategy to consolidate to three facilities in order to enhance operational efficiency is
expected to further lessen the potential negative impact. We can offer no assurances, however, that the current economic situation will not materially adversely affect our business and operations.

Operating Revenues

Operating revenues of the Company
are derived from the sales of electronic components and systems, specifically semiconductors, 1553 data bus products, power controllers, transformers, inductors, filters and mission critical systems. The principal markets for these products are the
government and military, commercial equipment, and other replacement parts. Our customers are located primarily in the United States, Canada and the United Kingdom, but we also sell products to customers located throughout the world.

Semiconductor Revenues

We currently
serve a broad group of customers with the following category of semiconductor products: Varactor tuning diodes, specialty suppressor diodes for the relay market, 1553 data bus products, power controllers, custom microelectronic hybrid circuits,
small-signal transistors, silicon rectifiers, zener diodes, high-voltage diodes and resistor/capacitor networks. These 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.

Magnetic & Power Supply Revenues

Revenues are derived from the manufacturing of electronic transformers, inductors, filters and power supplies. The main demand today for these products comes from the military, aerospace, telecom, audio, video, voice,
voice/data and transportation OEMs.

Mission Critical System Revenues

The principal market for these products is the military/defense industry. These highly engineered products and systems include, naval aircraft landing and
launching equipment, Visual Landing Aids (VLA) and Stabilized Glide Slope Indicators (SGSI), flight control and signaling systems, radar systems alteration, data communication and test equipment, aircraft ground support equipment, Aircraft Radar
Indication Systems using Liquid Crystal Display (LCD) technology and other mission critical systems and components.



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##### Table of Contents

Cost of Revenues

Cost of Goods Sold primarily consists of costs that were incurred to design, manufacturer, test and ship the product. These costs include:



| |  |  | The cost of raw materials, including freight, direct labor and tooling required to design and build the parts,
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | The cost of testing (labor & equipment) the products throughout the manufacturing process and final testing before the parts are shipped to the customer,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The cost of shipping and handling the products shipped to the customer,
| | - |  | -----------------------------------------------------------------------



| |  |  | Provision for obsolete and slow moving inventory, and
| | - |  | -----------------------------------------------------



| |  |  | Restructuring charges related to the consolidation of operations.
| | - |  | -----------------------------------------------------------------

Operating Expenses

Operating Expenses consist of selling, general, administrative expenses, research
and development and restructuring charges.

Selling, general and administrative expense

Selling, general and administrative expenses include:



| |  |  | Compensation and benefit costs for all employees, including sales and customers service, sales commissions, executive, finance and human resource personnel,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Compensation related to stock-based awards to employees and directors,
| | - |  | ----------------------------------------------------------------------



| |  |  | Professional services, for accounting, legal, tax, information technology and public relations fees,
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Rent and related expenses,
| | - |  | --------------------------



| |  |  | Restructuring charges related to the consolidation of operations, and
| | - |  | ---------------------------------------------------------------------



| |  |  | Research and development expenses related to the development of next generation nanotechnology based technology and expenses related to developing next generation
product through all product lines.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Income (Expense)

Other income and (expense) consists of:



| |  |  | Interest income on cash, cash equivalents and marketable securities,
| | - |  | --------------------------------------------------------------------



| |  |  | Interest expense on notes payable, operating loans and capital leases,
| | - |  | ----------------------------------------------------------------------



| |  |  | Gain or losses on disposal of property and equipment, and
| | - |  | ---------------------------------------------------------



| |  |  | Gain or loss on foreign currency transactions.
| | - |  | ----------------------------------------------

Backlog

Management uses a number of data to measure the growth of the business. A key measure for growth is sales backlog
figures:



|                   |  |              |            |              |   |           
|------------------ |  | ------------ | ---------- | ------------ | - | ----------
|                   |  | As of       
|                   |  | May 31, 2009 |            | May 31, 2008
|Backlog by Segment |  |              |            |              |   |           
|United States      |  | $            | 11,921,889 |              | $ | 12,101,254
|Canada             |  |              | 1,770,202  |              |   | 4,169,100 
|                   |  |              |            |              |   |           
|Overall            |  | $            | 13,692,091 |              | $ | 16,270,354
|                   |  |              |            |              |   |           



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##### Table of Contents

The Companys backlog figures represent confirmed customer purchase orders that the Company has not
shipped at the time the figures were calculated, which have a delivery date within a 12-month period. The Canadian operations (Filtran) backlog figures was impacted by the re-pricing of product on a major customer account and, to a lesser
degree, the effect of the United States/Canadian exchange rate. The United States operations (US Group) backlog is inconsistent due to the nature of their product lines, which includes the design, manufacturing and assembly of long lead items in
excess of 6-12 months. We have very little insight on the timing of new contract releases and, as such, the backlog can rise or decrease significantly based on timing.

Results of Operations for the Years Ended May 31, 2009 and 2008

The following discussion of
results of operations is a comparison of the Companys years ended May 31, 2009 and 2008.

Operating Revenue



|                 |  |                    |            |      |   |            |  |       |  
|---------------- |  | ------------------ | ---------- | ---- | - | ---------- |  | ----- | -
|                 |  | Year ended May 31, |           
|                 |  | 2009               |            | 2008 |   | %Change    | 
|Sales by Segment |  |                    |            |      |   |            |  |       |  
|United States    |  | $                  | 18,172,487 |      | $ | 21,917,200 |  | -17.1 | %
|Canada           |  |                    | 7,564,910  |      |   | 9,044,846  |  | -16.4 | %
|                 |  |                    |            |      |   |            |  |       |  
|                 |  | $                  | 25,737,397 |      | $ | 30,962,046 |  | -16.9 | %
|                 |  |                    |            |      |   |            |  |       |  

The Company recorded a 16.9% decrease in revenues for the twelve months ended May 31, 2009
over the same period in 2008. The decrease is largely attributed to Filtran having to significantly reduce selling prices to a major customer for products that will be manufactured overseas over the next several quarters. Filtrans adjusted
selling price will continue to impact the Filtran revenues for the next two quarters.

Revenues from our US Group decreased by 8.3% for the
twelve months ended May 31, 2009, compared to the same period last year due mainly to a decreases in shipments to United States Military subcontractors.

Geographical Information



|               |  |                    |            |                                                   |   |            |  |                                                   |            |  |   |           
|-------------- |  | ------------------ | ---------- | ------------------------------------------------- | - | ---------- |  | ------------------------------------------------- | ---------- |  | - | ----------
|               |  | Year ended May 31,
|               |  | 2009               |            | 2008                                             
|               |  | Revenue            |            | Capital Assets,IntangibleAssets,Goodwill andOther |   | Revenue    |  | Capital Assets,IntangibleAssets,Goodwill andOther
|United States  |  | $                  | 19,459,782 |                                                   | $ | 9,059,610  |  | $                                                 | 25,031,882 |  | $ | 10,517,078
|Canada         |  |                    | 1,324,061  |                                                   |   | 1,861,560  |  |                                                   | 1,649,745  |  |   | 2,257,788 
|United Kingdom |  |                    | 2,449,318  |                                                   |   |           |  |                                                   | 2,289,133  |  |   |          
|All Other      |  |                    | 2,504,236  |                                                   |   |           |  |                                                   | 1,991,286  |  |   |          
|               |  |                    |            |                                                   |   |            |  |                                                   |            |  |   |           
|               |  | $                  | 25,737,397 |                                                   | $ | 10,921,170 |  | $                                                 | 30,962,046 |  | $ | 12,774,866
|               |  |                    |            |                                                   |   |            |  |                                                   |            |  |   |           

The United States Department of Defense and its subcontractors accounts for a significant amount
of the Companys sales revenue as follows:



|                                                   |  |                   |   |  |      |  
|-------------------------------------------------- |  | ----------------- | - |  | ---- | -
|                                                   |  | Year endedMay 31, |  
|                                                   |  | 2009              |   |  | 2008 |  
|Revenue                                            |  |                   |   |  |      |  
|United States Department of Defense                |  | 8                 | % |  | 9    | %
|United States Department of Defense subcontractors |  | 63                | % |  | 70   | %



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##### Table of Contents

Operating Expenses

Cost of Revenue and Gross Profit



|                                |  |                   |   |  |      |   |  |         |   
|------------------------------- |  | ----------------- | - |  | ---- | - |  | ------- | --
|                                |  | Year endedMay 31, |  
|                                |  | 2009              |   |  | 2008 |   |  | %Change |   
|Gross Profit by Segment Company |  |                   |   |  |      |   |  |         |   
|United States                   |  | 27.1              | % |  | 18.1 | % |  | 9.0     | % 
|Canada                          |  | 15.4              | % |  | 16.9 | % |  | (1.5    | )%
|Overall                         |  | 23.6              | % |  | 17.7 | % |  | 5.9     | % 

Gross profit margin varies from period to period and can be affected by a number of factors,
including product mix, new product introduction and production efficiency. Our overall gross profit margin was 23.6% for the twelve months ended May 31, 2009, an increase of 5.9% from the twelve months ended May 31, 2008. The increase is
attributed to several factors. First, we took a charge for inventory reserve of approximately $2,800,000 in 2008 compared to approximately $20,000 for the twelve months ended May 31, 2009. This is offset by our taking a restructuring charge of
approximately $876,000 during the twelve months ended May 31, 2009 related to the Companys initiative to consolidate operations into three manufacturing facilities from eight.

The major components of cost of sales for the years ended May 31 are as follows:



|                                           |  |      |            |           |      |   |      |   |            |  |      |  
|------------------------------------------ |  | ---- | ---------- | --------- | ---- | - | ---- | - | ---------- |  | ---- | -
|                                           |  | 2009 |            | % ofsales |      |   | 2008 |   | % ofsales  | 
|Materials Used                             |  | $    | 7,279,695  |           | 28.3 | % |      | $ | 8,231,512  |  | 26.6 | %
|Inventory Reserve                          |  | $    | 22,488     |           | 0.1  | % |      | $ | 2,819,263  |  | 9.1  | %
|Manufacturing Labor                        |  | $    | 3,912,395  |           | 15.2 | % |      | $ | 5,276,923  |  | 17.0 | %
|Manufacturing Overhead                     |  | $    | 8,446,911  |           | 32.8 | % |      | $ | 9,160,876  |  | 29.6 | %
|                                           |  |      |            |           |      |   |      |   |            |  |      |  
|Cost of Sales                              |  | $    | 19,661,489 |           | 76.4 | % |      | $ | 25,488,574 |  | 82.3 | %
|                                           |  |      |            |           |      |   |      |   |            |  |      |  
|Cost of Sales before Restructuring charges |  | $    | 18,785,348 |           | 73.0 | % |      | $ | 25,488,574 |  | 82.3 | %
|                                           |  |      |            |           |      |   |      |   |            |  |      |  

As a percentage of sales, for the year ended May 31, 2009 materials decreased by 1.7%
compared to May 31, 2008. Inventory reserve provision decreased significantly to 0.1% compared to 9.1% for the year ended May 31, 2008 as the Company felt it had adequately reserved for obsolete and slow moving inventory. Manufacturing
labor decreased by 1.8% compared to the year ended May 31, 2008. Manufacturing overhead increased by 3.2% compared to May 31, 2008.

Selling
Expenses

Selling expenses decreased to $2,162,829 for the year ended May 31, 2009 from $2,412,618 for the year ended May 31,
2008. As a percentage of sales, selling expenses were 8.4% for the year, a percentage increase of .06% from 7.8% for the year ended May 31, 2008.

The major components of selling expenses are as follows:



|                      |  |                    |         |           |     |   |      |   |           |  |     |  
|--------------------- |  | ------------------ | ------- | --------- | --- | - | ---- | - | --------- |  | --- | -
|                      |  | Year ended May 31, |        
|                      |  | 2009               |         | % ofsales |     |   | 2008 |   | % ofsales | 
|Payroll ExpenseSales |  | $                  | 823,368 |           | 3.1 | % |      | $ | 810,501   |  | 2.6 | %
|Commissions Expense   |  | $                  | 825,279 |           | 3.2 | % |      | $ | 844,547   |  | 2.7 | %



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##### Table of Contents

General and Administrative Expenses

General and administrative expenses increased by $183,616 to $6,293,341 for the twelve months ended May 31, 2009 from $6,109,725 the twelve months ended May 31, 2008.

The major components of general and administrative expenses are as follows:



|                              |  |                    |           |      |   |           |  |   |          |  
|----------------------------- |  | ------------------ | --------- | ---- | - | --------- |  | - | -------- | -
|                              |  | Year ended May 31, |          
|                              |  | 2009               |           | 2008 |   | $ Change  | 
|Officer Salary                |  | $                  | 1,666,258 |      | $ | 1,419,329 |  | $ | 246,929  |  
|Professional Services         |  | $                  | 1,073,425 |      | $ | 1,243,354 |  | $ | (169,929 | )
|Accounting and Administration |  | $                  | 1,386,628 |      | $ | 1,273,074 |  | $ | 113,554  |  

Officer salaries expense increased to $1,666,258 for the twelve months ended May 31, 2009
from $1,419,329 for the twelve months ended May 31, 2008, an increase of $246,929. The increase is primarily attributed to compensation related to the Companys CEO being included for the full twelve months in 2009 compared to
approximately one month in 2008 and due to bonuses for fiscal 2009 equaling approximately $200,000.

Professional services include legal,
accounting, audit and taxation services. These expenses decreased by $169,929 for the twelve months ended May 31, 2009. The decrease is primarily a result of decreased audit and legal expenses.

Accounting and administrative salaries increased by $113,554 for the twelve months ended May 31, 2009. The increase is largely a result of
reclassification of salaries related to administrative departments.

Research and Development Expenses

Research and development increased to $4,231,994 for the year ended May 31, 2009 from $3,453,860 for the year ended May 31, 2008. The increase
is due primarily to an increase of research and development expenses in the amount of approximately $708,000 at API NRC. API NRCs Somerset, New Jersey facility provides the Company with unique and powerful material processing and fabrication
capabilities. These capabilities span from silicon wafer processing to the very latest electronic and optical fabrication technologies based in nanoscience and MEMS. Management believes these capabilities will expand the Companys abilities to
better serve its current customers, to develop new electronic products and will open possibilities for new business based on hybrid optics. This facility is the centerpiece of the Companys research and development program.

Research and development expenses also increased by approximately $70,000 at National Hybrid Group as it continued to develop next generation products
for its entire product line including the 1553 data bus, solid state power controller and high density multi-chip modules.

We expect to
maintain current levels of research and development investment in anticipation that it will deliver next generation products using research conducted at the API NRC facility, impacting the wide range of current products we sell and generating new
product possibilities.

Operating Loss

The Company posted an operating loss for the twelve months ended May 31, 2009 of $6,812,256 compared to a loss of $6,502,731 for the twelve months ended May 31, 2008. The increase of $309,525 in operating loss is attributed to the
decrease in revenues of 16.9% combined with an increase in research and development expenses of approximately $800,000 compared to the same period in 2008, and restructuring charges of approximately $1,100,000, compared to no charge for the same
period last year offset by a decrease in charges for inventory reserve of approximately $2,800,000. The restructuring charges are related to the Companys initiative to consolidate operations into four facilities from eight.



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##### Table of Contents

Other (Income) And Expense

Total other income for the twelve months ended May 31, 2009 amounted to $472,027, compared to other expenses of $279,011 for the twelve months ended May 31, 2008.

The increase is largely attributable to a decrease in interest expense of approximately $300,000, compared to the same period in 2008, and to a foreign
currency translation gain of $424,861 for the twelve months ended May 31, 2009 versus a gain of $64,234 for the twelve months ended May 31, 2008.

Income Taxes

Income taxes amounted to an expense of $104,308 for the twelve months ended May 31, 2009, compared to a
income tax benefit of $215,633 for the twelve months ended May 31, 2008.

We have net operating loss carryforwards of approximately
$5,047,000 to apply against future taxable income. These losses will expire as follows: $14,000, $56,000, $68,000, $3,407,000 and $1,502,000 in 2010, 2012, 2017, 2028 and 2029 respectively.

Net Loss

The Company incurred a net loss for the
twelve months ended May 31, 2009 of $6,444,537, compared to a net loss of $6,566,110 for the twelve months ended May 31, 2008. The decrease in net loss compared to the same period in 2008 is attributed to a decrease in inventory reserve
charges of approximately $2,800,000, and increase in other income of approximately $750,000, offset by a 16.9% decrease in revenues, an increase in research and development expenses of approximately $800,000 and restructuring charges of
approximately $1,100,000.

Liquidity and Capital Resources

Year Ended May 31, 2009 compared to the Year Ended May 31, 2008

Liquidity

At May 31, 2009, we held cash of $2,429,928 compared to $2,667,109 at May 31, 2008.

At May 31, 2009 our working capital was sufficient to meet our current requirements.

Inventory decreased 19.9% from $7,353,596 at May 31, 2008 to $5,888,435 at May 31, 2009. This decrease was largely due to reduced revenues of
16.9% as the requirement to purchase raw materials and manufacture finished goods inventory decreased.

Accounts receivable decreased from
$4,544,860 at May 31, 2008 to $3,651,665 at May 31, 2009 as a result in revenues decreasing by approximately 17%.

Bank
indebtedness decreased to $0 at May 31, 2009 from $310,458 at May 31, 2008. The decrease in bank indebtedness is related to Filtran and API Electronics Inc. paying down their line of credit due to increases in cash from operations.

Long-term debt (current and long-term portion) decreased from $113,851 at May 31, 2008 to $89,748 at May 31, 2009 due to payment
on a note payable related to the acquisition of the assets of Sensonics in 2005.

Total assets decreased to $24,153,310 at May 31,
2009 from $29,519,296 at May 31, 2008. The decrease is attributed to the operating loss during the twelve months ended May 31, 2009.



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##### Table of Contents

Operating, Investing and Financing Activities

Cash used by operating activities was $936,261 for the twelve months ended May 31, 2009, compared to net cash used by operations of $1,481,367 for
the twelve months ended May 31, 2008, a reduction of approximately $545,000 in cash used by operations. The improvement is related to reduced net loss of approximately $122,000 and non-cash adjustments to net loss of approximately $454,000.

Investing activities for the twelve months ended May 31, 2009 consisted of fixed asset purchases of $396,877 (2008$798,705),
costs incurred for patents of $366,989 (2008$962,300), cash from the sale of fixed assets for $785,742 ($02008) and no use of cash for other asset acquisitions (2008$4,045,671).

Financing activities included net proceeds of $1,550,000 (2008-$7,750,000) from the issuance of common shares. These amounts are offset by the repurchase
of approximately $210,000 ($02008) in common shares, repayments of long-term debt $24,596 (2008$457,564), repayment of bank indebtedness of $310,458 (2008$337,762) and repayment of capital lease obligations of $6,539
(2008$8,164).

Capital Resources

The Companys US Group closed its working capital line of credit of $500,000 in January 2009. At May 31, 2008, the US Group had a balance of $270,147 against this line.

Filtran has a line of credit of approximately $900,000 (Cdn $1,000,000). At May 31, 2009, the Canadian operations had no outstanding balance (May
31, 2008$40,311). The interest rate on any borrowed funds is charged at Canadian prime. The agreement also allows Filtran to lease capital purchases at Canadian prime plus 1% up to $33,000. The lender has a general security agreement and a
first collateral mortgage on the Filtran assets and building. The line is subject to annual renewal on May 31, 2010.

On July 7,
2009, API Cryptek, Inc. (API Cryptek), a newly formed subsidiary of the Company acquired substantially all of the assets of Cryptek Technologies Inc. (Cryptek) through foreclosure on API Crypteks security interest and
liens in the Cryptek assets, and subsequent sale under the Uniform Commercial Code. API Cryptek was the successful bidder of the Cryptek assets at the sale, by bidding the total amount owed by Cryptek to API Cryptek under loan documents previously
purchased by API Cryptek for $5,000,000 (the Loan Documents). The purchase of the Loan Documents was financed with cash from corporate funds and proceeds of $3,650,00 from a private placement of secured convertible promissory notes
completed June 23, 2009.

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.

Summary of Critical Accounting Policies and Estimates

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

Principles of Consolidation

The consolidated
financial statements include the accounts of API Nanotronics Corp., together with its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.



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Inventory

Inventories, which include materials, labor, and manufacturing overhead, are stated at the lower of cost (first-in, first-out basis) or net realizable value. At May 31, 2008 and May 31, 2009, we performed an analysis of our
inventory at each operating division, based on assumptions about future demand, product mix and possible alternative uses. Each analysis concluded that: (i) an adjustment should be recorded for any inventory item that had not been moved for the
last 12 months, and (ii) an adjustment should be recorded for any item in our inventory that did not have a current order outstanding or any item that we identified as not being expected to be sold over the next 12 months based on the
information we had at the time. We will continue to periodically review and analyze our inventory management systems, and conduct inventory impairment testing annually. At May 31, 2009 and May 31, 2008 inventory reserve for obsolete and
slow moving inventory was approximately $2,378,000 and $2,819,000, respectively.

Long-Lived Assets

The Company periodically evaluates the net realizable values of long-lived assets, principally identifiable intangibles and capital assets, for potential
impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, as determined based on the estimated future undiscounted cash flows. If such assets were considered to be impaired, the
carrying value of the related assets would be reduced to their estimated fair value. Management has determined there was an impairment of long-lived assets of approximately $200,000 related to the assets available for sale as a result of the
restructuring, as of May 31, 2009.

Goodwill and Intangible Assets

Goodwill and intangible assets result primarily from business acquisitions accounted for under the purchase method. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142), goodwill and intangible assets with indefinite lives are not amortized but are subject to impairment by applying a fair value based test.

The Goodwill recorded on our consolidated financial statements relates to the acquisition of the Filtran and Filtran Inc., which was completed in 2002.
We perform goodwill impairment testing under the provisions of statement of Financial Accounting Standards no. 142, using the discounted future cash flows technique as provided by the FASB Concepts Statements No. 7, Using Cash Flow
Information and Present Value in Accounting Measurements. When the carrying amount of the assets exceeds its fair value, the implied fair value of the goodwill is compared with the carrying amount to measure whether there is an impairment
loss. The Companys impairment test based on future cash flows significantly exceeded the carrying value of the assets each quarter, and the Company has determined there was no impairment in goodwill as of May 31, 2009 and 2008.

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 revenue earned on the contract
|Computer software      |  | 3-5 years                              
|Patents                |  | Life of the patents                    

Revenue Recognition

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. A 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.



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Non-Contract Revenue

We recognize non-contract revenue when it is realized or realizable and earned. We consider 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.

Deferred Revenue

We defer revenue when
payment is received in advance of the service or product being shipped or delivered (see Contract Revenue and Non-Contract Revenue above).

Warranty

The Company provides up to a one-year product defect warranty on various products from the date of sale. Historically, warranty costs have
been nominal and have been within managements expectations. We have accrued approximately $81,000 and $108,000, in warranty liability as of May 31, 2009 and May 31, 2008, respectively, which has been included in accounts payable and
accrued expenses.

Research and Development

Research and development expenses are recorded when incurred.

Stock-Based Compensation Plans

The Company follows SFAS 123R which revised SFAS 123 Accounting for Stock-Based Compensation (SFAS 123) and supersedes Accounting
Principles Board Opinion 25 Accounting for Stock Issued to Employees. Under APB 25, the Company used the intrinsic value method for employee stock options and did not record any expense because option exercise prices equaled
the market value at the date of grant. SFAS 123R required that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and restricted stock, be recognized in the financial statements based on their
fair value at the grant date and recognized as compensation expense over their vesting periods. The Company has also considered the related guidance of the Security and Exchange Commission (SEC) included in Staff Accounting Bulletins
(SAB) No. 107 and No. 110. The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes pricing model and restricted stock based on the quoted market price. The Company also follows the
guidance in EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services for equity instruments issued to consultants.

Foreign Currency Translation and Transactions

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 shareholders equity, and the average exchange rate for the year for revenues, expenses, gains and losses. The gains or losses on
translation are included as a component of other comprehensive income (loss) for the period.

Accounting Estimates

The preparation of these consolidated financial statements in conformity with United States 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



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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.

Receivables and Credit Policies

Accounts receivable are non-interest bearing, uncollateralized customer obligations. Accounts receivable are stated at the amounts billed
to the customer. Customer account balances with invoices over 90 days old are considered delinquent. Payments of accounts receivable are allocated to the specific invoices identified on the customers remittance advice or, if unspecified, are
applied to the earliest unpaid invoices. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects managements estimate of the amounts that will not be collected.

Concentration of Credit Risk

The Company maintains cash
balances, at times, with financial institutions, which are in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC). Management monitors the soundness of these institutions and has not experienced any collection losses with
these institutions.

The United States Department of Defense (directly and through subcontractors) accounts for approximately 71 percent
and 79 percent for 2009 and 2008, respectively, of the Companys revenue.

Earnings (Loss) per Common Share

Basic earnings (loss) per share of common stock is computed by dividing income (loss) by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings (loss) per share of common stock gives effect to all dilutive potential shares of common stock outstanding during the period. The computation of diluted earnings (loss) per share does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings (loss) per share.

Comprehensive Income (Loss)

Other comprehensive income (loss), which includes foreign currency translation adjustments and unrealized gains on marketable securities,
is shown in the Statement of Changes in Stockholders Equity.

Effects of Recent Accounting Pronouncements

In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principlesa replacement of FASB Statement No. 162 (FAS 168). This statement provides for the FASB Accounting Standards Codification to become the single official source of authoritative, nongovernmental generally accepted
accounting principles in the United States. FAS 168 does not change GAAP but reorganizes the literature. This statement is effective for interim and annual periods ending after September 15, 2009.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165), which provides guidance on events that occur
after the balance sheet date but prior to the issuance of the financial statements. SFAS No. 165 distinguishes events requiring recognition in the financial statements and those that may require disclosure in the financial statements.
Furthermore, SFAS No. 165 requires disclosure of the date through which subsequent events were evaluated. SFAS No. 165 is effective for interim and annual periods after June 15, 2009. The Company will adopt SFAS No. 165 for the
quarter ended August 31, 2009.

In April 2008, the FASB issued FSP-FAS No. 142-3, Determination of the Useful Life of
Intangible Assets (FAS 142-3). FAS 142-3 amends the factors that should be considered in developing renewal or extension



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assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS
142). The objective of the Staff Position is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS
No. 141 (Revised 2007): Business Combinations (SFAS 141R) and other GAAP. FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Management is currently evaluating the effect on the Companys
consolidated financial positions, results of operations and cash flows.

In April 2009, the FASB issued FSP-FAS No. 107-1 and APB
28-1, Disclosures about Fair Value of Financial Instruments (FAS No. 107-1/APB 28-1). This FSP extends to interim periods certain disclosures about fair value of financial instruments for publicly traded companies and amends
APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim reporting periods ending after June 15, 2009. The
Companys adoption of FAS No. 107-1/APB 28-1 is not expected to have a material effect on the Companys consolidated financial position, results of operations or cash flows.

Effective June 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157Fair Value Measurements (SFAS
157) for its financial assets and liabilities that are remeasured and reported at fair value at least annually. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The adoption of SFAS 157 to the financial assets and liabilities and nonfinancial assets
and liabilities that are remeasured and reported at fair value at least annually did not have any impact on our financial results. In accordance with the provisions of FSP No. FAS 157-2Effective Date of Financial Accounting Standards
Statement No. 157, the Company has elected to defer implementation of SFAS 157 as it relates to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the consolidated financial statements on a
nonrecurring basis until June 1, 2009. The Company is evaluating the impact, if any, this deferral will have on its non-financial assets and liabilities.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan Amendment of FASB Statement No. 133. This Statement is intended to enhance the
current disclosure framework in Statement 133. The Statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use
in terms of the risks that the entity is intending to manage. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format should provide a more complete picture of the location in an entitys financial
statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential
effect on an entitys liquidity from using In derivatives. Finally, this Statement requires cross-referencing within the footnotes, which should help users of financial statements to locate important information about derivative instruments.
SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. The adoption of SFAS No. 161 is not expected to have a significant impact on the consolidated results of operations or financial position of the Company.

In December 2007, the FASB revised Statement of Financial Accounting Standard No. 141 (SFAS 141R), Business Combinations,
which is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted before that
date. SFAS 141R requires assets and liabilities recorded in a business combination to be recorded at fair value and replaces the cost-allocation process under the prior standard. In addition, SFAS 141R requires separate recognition of
acquisition costs and requires recognition of contractual contingencies at fair value as of the acquisition date. Further, the revised standard requires capitalization of research and development assets and requires fair value recognition of
contingent consideration as of the acquisition date.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests
in Consolidated Financial Statements. This Statement amends ARB 51 to establish accounting and reporting standards for the



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non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary
is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial
statements. SFAS No. 160 is effective for the Companys fiscal year beginning June 1, 2009. The Company does not believe the adoption of SFAS 160 will have a material impact on its consolidated financial statements

Off-Balance Sheet Arrangements

During 2009 and 2008, the
Company did not use off-balance sheet arrangements.



|ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS
|------- | ---------------------------------

Our financial
statements are included in this Form 10-K immediately following the signature page.



|ITEM 9. | CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | -----------------------------------------------------------------------------------

None.



|ITEM 9A(T). | CONTROLS AND PROCEDURES
|----------- | -----------------------

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 (the Exchange Act) 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, 2009. Based upon their evaluation and subject to the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded that as of May 31, 2009 our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that information we are required to
disclose in reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in SEC rules and forms.

Managements Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. All internal control systems, no
matter how well designed, have inherent limitations.

We conducted an assessment of the effectiveness of our system of internal control over
financial reporting as of May 31, 2009. This assessment was based on criteria established in the framework Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our evaluation of internal control over financial reporting, our management concluded that our internal control over financial reporting was effective as of May 31, 2009.



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This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to
provide only managements report in this annual report.

Changes in Internal Control over Financial Reporting.

During the fourth quarter of the fiscal year ended May 31, 2009, there have been no changes in the our internal control over financial reporting that
have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Inherent Limitations on
Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

Not applicable.



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PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
|-------- | -------------------------------------------------------

Directors, Executive Officers and Corporate Governance

The information called for by this Item 10 of Part III of Form
10-K is incorporated by reference to the information set forth in our definitive proxy statement relating to our 2009 Annual Meeting of Stockholders (the Proxy Statement) to be filed pursuant to Regulation 14-A under the Exchange Act by
not later than September 28, 2009. Reference is also made to the information appearing in Item 1 of Part I of this Annual Report on Form 10-K under the caption Description of BusinessExecutive Officers.

Code of Ethics

We have adopted a Code of Ethics that
applies to our directors and employees (including our principal executive officer, principal financial officer, principal accounting officer and controller and persons performing similar functions). A copy of the Code of Ethics is attached as an
exhibit to this Annual Report on Form 10-K.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The information called for
by this Item 11 of Part III of Form 10-K is incorporated by reference to our Proxy Statement, which will be filed with the Securities and Exchange Commission not later than September 28, 2009.



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

The information called for by this Item 12 of Part III of Form 10-K is incorporated by reference to the information set forth in our Proxy Statement,
which will be filed with the Securities and Exchange Commission not later than September 28, 2009.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

The information called for by this Item 13 of Part III of Form 10-K is incorporated by reference to our Proxy Statement, which will be filed with the Securities and Exchange Commission not later than
September 28, 2009.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

The
information required to be disclosed by this Item 14 of Part III of Form 10-K is incorporated by reference to our Proxy Statement, which will be filed with the Securities and Exchange Commission not later than September 28, 2009.



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------

The
following exhibits are included as part of this report by reference:



|       |  |                                                                                                                                                                                                                                                                                 
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1    |  | Certificate of Incorporation, as amended (incorporated by reference from the Companys Form 10-Q filed with the SEC on April 14, 2009).                                                                                                                                         
|       | 
|3.2    |  | By-laws (incorporated by reference from the Companys Amendment No. 1 to Registration Statement on Form S-1 filed with the SEC on October 27, 2006).                                                                                                                            
|       | 
|*10.1  |  | Compensation Arrangement between the Company and Donald A. Wright (incorporated by reference from the Companys Form 8-K filed with the SEC on March 29, 2006).                                                                                                                 
|       | 
|*10.2  |  | Option Agreement between the Company and Donald A. Wright (incorporated by reference from the Companys Form 8-K filed with the SEC March 29, 2006).                                                                                                                            
|       | 
|10.3   |  | Support Agreement dated February 6, 2006 among API Nanotronics Corp. and RVI Sub, Inc. (incorporated by reference from the Companys Amendment No. 2 to Registration Statement on Form
S-1 filed with the SEC on February 6, 2006).                                             
|       | 
|10.4   |  | Voting and Exchange Agreement dated February 6, 2006 among API Nanotronics Corp., RVI Sub, Inc. and Equity Transfer & Trust Company (incorporated by reference from the Companys
Amendment No. 2 to Registration Statement on Form S-1 filed with the SEC on February 6, 2006).
|       | 
|10.5   |  | Share Capital and Other Provisions included in the Articles of Incorporation of API Nanotronics Sub, Inc. f/k/a RVI Sub, Inc. (incorporated by reference from the Companys Amendment No. 2
to Registration Statement on Form S-1 filed with the SEC on February 6, 2006).      
|       | 
|*10.6  |  | API Nanotronics Corp. 2006 Equity Incentive Plan (incorporated by reference from Amendment No. 1 to the Companys Form S-1 filed with the SEC on October 26, 2006).                                                                                                             
|       | 
|*10.7  |  | Executive Employment Agreement between the Company and Martin Moskovits dated as of February 14, 2007 (incorporated by reference from Current Report on Form 8-K filed with the SEC on February
15, 2007).                                                                      
|       | 
|*10.8  |  | Non-Statutory Stock Option Agreement dated July 2, 2007 between the Company and Jonathan Pollack (incorporated by reference from the Companys Form 10-KSB filed with the SEC on
August 22, 2007).                                                                              
|       | 
|*10.9  |  | Non-Statutory Stock Option Agreement dated July 2, 2007 between the Company and Arthur Cape (incorporated by reference from the Companys Form 10-KSB filed with the SEC on August 22, 2007).                                                                                   
|       | 
|*10.10 |  | Incentive Stock Option Agreement dated May 30, 2008 between the Company and Claudio Mannarino (incorporated by reference from the Companys Form 10-K filed with the SEC on August 25, 2008).                                                                                   
|       | 
|*10.11 |  | Notice and Agreement of Grant of Stock Warrant dated November 6, 2006 between the Company and Phillip DeZwirek (incorporated by reference from the Companys Form 10-KSB filed with the SEC
on August 22, 2007).                                                                
|       | 
|*10.12 |  | Notice and Agreement of Grant of Stock Warrant dated November 6, 2006 between the Company and Jason DeZwirek (incorporated by reference from the Companys Form 10-KSB filed with the SEC on
August 22, 2007).                                                                  
|       | 
|*10.13 |  | Non-Statutory Stock Option Agreement, dated May 30, 2008, between the Company and Martin Moskovits (incorporated by reference from the Companys Form 10-K filed with the SEC on
August 25, 2008).                                                                              



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|       |  |                                                                                                                                                                                                                                                                                                                     
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.14 |  | Notice and Agreement of Grant of Stock Option, dated May 30, 2008, between the Company and Martin Moskovits (incorporated by reference from the Companys Form 10-K filed with the SEC on
August 25, 2008).                                                                                                         
|       | 
|*10.15 |  | Notice and Agreement of Grant of Stock Option, dated May 30, 2008, between the Company and Martin Moskovits (incorporated by reference from the Companys Form 10-K filed with the SEC on
August 25, 2008).                                                                                                         
|       | 
|*10.16 |  | The compensation arrangement with respect to the service of Arthur Cape, Jonathan Pollack and Donald Wright on the Board of Directors of the Company and its committees as set forth in
Form 8-K filed on June 22, 2007 (incorporated by reference from the Companys Form 8-K filed with the SEC on June 22, 2007).
|       | 
|10.17  |  | Lease, dated July 19, 2007, between Franklin Cottontail LLC and API Nanofabrication and Research Corporation and Guaranty of Lease by API Nanotronics Corp. (incorporated by reference from the
Companys Form 10-KSB filed with the SEC on August 22, 2007).                                                       
|       | 
|*10.18 |  | Executive Employment Agreement dated March 3, 2008 between API Nanotronics Corp. and Stephen Pudles (incorporated by reference from the Companys Form 10-K filed with the SEC on August 25,
2008).                                                                                                                 
|       | 
|*10.19 |  | Stock Option Agreement dated April 22, 2008, between the Company and Stephen Pudles (incorporated by reference from the Companys Form 10-K filed with the SEC on August 25,
2008).                                                                                                                                 
|       | 
|*10.20 |  | Agreement, General Release and Confidentiality Statement dated May 11, 2009 between API Nanotronics Corp. and Thomas Mills, Sr. (incorporated by reference from the Companys Form 8-K filed
with the SEC on May 14, 2009).                                                                                         
|       | 
|10.21  |  | Form of investor notes issued in the aggregate amount of $3,600,000 dated as of June 23, 2009 (filed herewith).                                                                                                                                                                                                     
|       | 
|10.22  |  | Security Agreement dated as of June 23, 2009 among API Nanotronics Corp., the subsidiaries party to the agreement and Icarus Investment Corp. (filed herewith).                                                                                                                                                     
|       | 
|10.23  |  | Loan Purchase Agreement between API Cryptek, Inc. and Wachovia Bank, National Association and Wachovia Capital Finance Corporation (Canada) dated June 23, 2009 (filed herewith).                                                                                                                                   
|       | 
|14     |  | Code of Ethics for the Company Directors, Officers, Employees and Agents including Principal Executive, Senior Financial Officers and Other Designated Officers (filed herewith).                                                                                                                                   
|       | 
|21     |  | Subsidiaries of the Company (filed herewith).                                                                                                                                                                                                                                                                       
|       | 
|23.1   |  | Consent of WithumSmith + Brown, PC (filed herewith).                                                                                                                                                                                                                                                                
|       | 
|31.1   |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer (filed herewith).                                                                                                                                                                                                                                 
|       | 
|31.2   |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith).                                                                                                                                                                                                                                 
|       | 
|32.1   |  | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith).                                                                                                                                                                                            
|       | 
|32.2   |  | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith).                                                                                                                                                                                            



|* | Management contracts, compensation plans, or arrangements.
|- | ----------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



API NANOTRONICS CORP./S/    STEPHEN
PUDLESStephen Pudles,Chief Executive OfficerDated: August 27, 2009


In accordance with the Exchange Act , this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                                                                              |  |                
|--------------------------------------------------------------------------------------------- |  | ---------------
|Principal Executive Officer                                                                   |  |                
|                                                                                              | 
|/S/    STEPHEN
PUDLES Stephen Pudles, Chief Executive Officer                                 |  | August 27, 2009
|                                                                                              | 
|Principal Financial and Accounting Officer                                                    |  |                
|                                                                                              | 
|/S/    CLAUDIO
MANNARINO Claudio Mannarino Vice President-Finance and Chief Financial Officer |  | August 27, 2009
|                                                                                              | 
|/S/    PHILLIP
DEZWIREK Phillip DeZwirek Chairman, Director and Treasurer                     |  | August 27, 2009
|                                                                                              | 
|/S/    JASON
DEZWIREK Jason DeZwirek, Director and Secretary                                  |  | August 27, 2009
|                                                                                              | 
|/S/    DONALD A.
WRIGHT Donald A. Wright, Director                                            |  | August 27, 2009
|                                                                                              | 
|/S/    ARTHUR
CAPE Arthur Cape, Director                                                      |  | August 27, 2009
|                                                                                              | 
|/S/    JONATHAN
POLLACK Jonathan Pollack, Director                                            |  | August 27, 2009



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Consolidated Financial Statements



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|                                                                                                     |  | Page
|                                                                                                     | 
|Report of Independent Registered Public Accounting Firm                                              |  | F-2 
|                                                                                                     | 
|Consolidated Balance Sheets at May 31, 2009 and 2008                                                 |  | F-3 
|                                                                                                     | 
|Consolidated Statements of Operations for the years ended May 31, 2009 and 2008                      |  | F-4 
|                                                                                                     | 
|Consolidated Statements of Changes in Shareholders Equity for the years ended May 31, 2009 and
2008 |  | F-5 
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the years ended May 31, 2009 and 2008                      |  | F-7 
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | F-8 



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

API Nanotronics Corp.

We have audited the consolidated balance sheets of API Nanotronics Corp. as of May 31, 2009 and 2008, and the related consolidated
statements of operations, shareholders equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of API Nanotronics Corp. as of May 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial
statements, the Company adopted the provision of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48) as of June 1, 2007.

/s/ WithumSmith+Brown, PC

New Brunswick, New Jersey

August 27, 2009



F-2



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##### Table of Contents

API NANOTRONICS CORP.

Consolidated Balance Sheets



|                                                                                                                                                                |  |             |             |   |             |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | - | ----------- | - | ----------- | -
|                                                                                                                                                                |  | May 31,2009 |             |   | May 31,2008 |  
|Assets                                                                                                                                                          |  |             |             |   |             |   |             |  
|Current                                                                                                                                                         |  |             |             |   |             |   |             |  
|Cash and cash equivalents                                                                                                                                       |  | $           | 2,429,928   |   |             | $ | 2,667,109   |  
|Marketable securities, at fair value                                                                                                                            |  |             | 129,085     |   |             |   | 461,806     |  
|Accounts receivable, less allowance for doubtful accounts of $85,152 and $69,576 at May 31, 2009 and 2008, respectively                                         |  |             | 3,651,665   |   |             |   | 4,544,860   |  
|Inventories, net (note 2)                                                                                                                                       |  |             | 5,888,435   |   |             |   | 7,353,596   |  
|Deferred income taxes                                                                                                                                           |  |             | 186,630     |   |             |   | 790,906     |  
|Prepaid expenses and other current assets                                                                                                                       |  |             | 319,237     |   |             |   | 355,044     |  
|                                                                                                                                                                |  |             |             |   |             |   |             |  
|                                                                                                                                                                |  |             | 12,604,980  |   |             |   | 16,173,321  |  
|Fixed assets, net                                                                                                                                               |  |             | 5,807,057   |   |             |   | 10,174,021  |  
|Fixed assets held for sale (note 2)                                                                                                                             |  |             | 2,493,986   |   |             |   |            |  
|Deferred income taxes                                                                                                                                           |  |             | 627,160     |   |             |   | 571,109     |  
|Goodwill                                                                                                                                                        |  |             | 1,130,906   |   |             |   | 1,130,906   |  
|Intangible assets, net                                                                                                                                          |  |             | 1,489,221   |   |             |   | 1,469,939   |  
|                                                                                                                                                                |  |             |             |   |             |   |             |  
|                                                                                                                                                                |  | $           | 24,153,310  |   |             | $ | 29,519,296  |  
|                                                                                                                                                                |  |             |             |   |             |   |             |  
|Liabilities and Shareholders Equity                                                                                                                            |  |             |             |   |             |   |             |  
|Current                                                                                                                                                         |  |             |             |   |             |   |             |  
|Short term borrowings                                                                                                                                           |  | $           |            |   |             | $ | 310,458     |  
|Accounts payable and accrued expenses                                                                                                                           |  |             | 4,008,566   |   |             |   | 3,867,449   |  
|Deferred revenue                                                                                                                                                |  |             | 228,734     |   |             |   |            |  
|Deferred income taxes                                                                                                                                           |  |             | 24,922      |   |             |   | 39,865      |  
|Current portion of long-term debt                                                                                                                               |  |             | 89,748      |   |             |   | 113,851     |  
|Current portion of capital leases payable                                                                                                                       |  |             | 6,548       |   |             |   | 6,539       |  
|                                                                                                                                                                |  |             |             |   |             |   |             |  
|                                                                                                                                                                |  |             | 4,358,518   |   |             |   | 4,338,162   |  
|Deferred income taxes                                                                                                                                           |  |             | 788,844     |   |             |   | 1,230,573   |  
|Capital leases payable, net of current portion                                                                                                                  |  |             | 12,159      |   |             |   | 18,706      |  
|                                                                                                                                                                |  |             |             |   |             |   |             |  
|                                                                                                                                                                |  |             | 5,159,521   |   |             |   | 5,587,441   |  
|                                                                                                                                                                |  |             |             |   |             |   |             |  
|Shareholders equity                                                                                                                                            |  |             |             |   |             |   |             |  
|Common stock, ($0.001 par value, 100,000,000 authorized shares, 31,753,865 and 32,466,224 shares issued and outstanding at May 31, 2009
and 2008, respectively) |  |             | 31,754      |   |             |   | 32,467      |  
|Special voting stock ($0.001 par value, 1 share authorized, issued and outstanding at May 31, 2009 and 2008)                                                    |  |             |            |   |             |   |            |  
|Additional paid-in capital                                                                                                                                      |  |             | 35,179,191  |   |             |   | 34,470,100  |  
|Subscription receivablecommon stock                                                                                                                            |  |             |            |   |             |   | (1,550,000  | )
|Accumulated deficit                                                                                                                                             |  |             | (16,462,414 | ) |             |   | (10,017,877 | )
|Accumulated other comprehensive income:                                                                                                                         |  |             |             |   |             |   |             |  
|Currency translation adjustment                                                                                                                                 |  |             | 141,677     |   |             |   | 621,174     |  
|Unrealized gain on marketable securities, net of tax                                                                                                            |  |             | 103,581     |   |             |   | 375,991     |  
|                                                                                                                                                                |  |             |             |   |             |   |             |  
|Total accumulated other comprehensive income                                                                                                                    |  |             | 245,258     |   |             |   | 997,165     |  
|                                                                                                                                                                |  |             |             |   |             |   |             |  
|                                                                                                                                                                |  |             | 18,993,789  |   |             |   | 23,931,855  |  
|                                                                                                                                                                |  |             |             |   |             |   |             |  
|                                                                                                                                                                |  | $           | 24,153,310  |   |             | $ | 29,519,296  |  
|                                                                                                                                                                |  |             |             |   |             |   |             |  

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



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##### Table of Contents

API NANOTRONICS CORP.

Consolidated Statements of Operations



|                                                          |  |                        |            |   |                        |   |            |  
|--------------------------------------------------------- |  | ---------------------- | ---------- | - | ---------------------- | - | ---------- | -
|                                                          |  | Year endedMay 31, 2009 |            |   | Year endedMay 31, 2008 |  
|Revenue, net                                              |  | $                      | 25,737,397 |   |                        | $ | 30,962,046 |  
|Cost of revenues                                          |  |                        | 18,762,860 |   |                        |   | 22,669,311 |  
|Restructuring charges (note 21)                           |  |                        | 876,141    |   |                        |   |           |  
|Provision for obsolete and slow moving inventory (note 2) |  |                        | 22,488     |   |                        |   | 2,819,263  |  
|                                                          |  |                        |            |   |                        |   |            |  
|Total cost of revenues                                    |  |                        | 19,661,489 |   |                        |   | 25,488,574 |  
|                                                          |  |                        |            |   |                        |   |            |  
|Gross profit                                              |  |                        | 6,075,908  |   |                        |   | 5,473,472  |  
|                                                          |  |                        |            |   |                        |   |            |  
|Operating expenses                                        |  |                        |            |   |                        |   |            |  
|General and administrative                                |  |                        | 6,293,341  |   |                        |   | 6,109,725  |  
|Restructuring charges (note 21)                           |  |                        | 200,000    |   |                        |   |           |  
|Research and development                                  |  |                        | 4,231,994  |   |                        |   | 3,453,860  |  
|Selling expenses                                          |  |                        | 2,162,829  |   |                        |   | 2,412,618  |  
|                                                          |  |                        |            |   |                        |   |            |  
|                                                          |  |                        | 12,888,164 |   |                        |   | 11,976,203 |  
|                                                          |  |                        |            |   |                        |   |            |  
|Operating loss                                            |  |                        | (6,812,256 | ) |                        |   | (6,502,731 | )
|Other (income) expenses                                   |  |                        |            |   |                        |   |            |  
|Interest (income) expense, net                            |  |                        | (47,166    | ) |                        |   | 343,245    |  
|Gain on foreign currency transactions, net                |  |                        | (424,861   | ) |                        |   | (64,234    | )
|                                                          |  |                        |            |   |                        |   |            |  
|                                                          |  |                        | (472,027   | ) |                        |   | 279,011    |  
|                                                          |  |                        |            |   |                        |   |            |  
|Loss before income taxes                                  |  |                        | (6,340,229 | ) |                        |   | (6,781,742 | )
|Provision for (benefit from) income taxes                 |  |                        | 104,308    |   |                        |   | (215,632   | )
|                                                          |  |                        |            |   |                        |   |            |  
|Net loss                                                  |  | $                      | (6,444,537 | ) |                        | $ | (6,566,110 | )
|                                                          |  |                        |            |   |                        |   |            |  
|                                                          |  |                       
|Loss per shareBasic                                      |  | $                      | (0.19      | ) |                        | $ | (0.26      | )
|                                                          |  |                        |            |   |                        |   |            |  
|Loss per shareDiluted                                    |  | $                      | (0.19      | ) |                        | $ | (0.26      | )
|                                                          |  |                        |            |   |                        |   |            |  
|Weighted average shares outstanding                       |  |                        |            |   |                        |   |            |  
|Basic                                                     |  |                        | 34,816,989 |   |                        |   | 24,842,847 |  
|Diluted                                                   |  |                        | 34,816,989 |   |                        |   | 24,842,847 |  

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



F-4



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##### Table of Contents

API NANOTRONICS CORP.

Consolidated Statements of Changes in Shareholders Equity



|                                                                                                                                     |  |                             |  |                   |        |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |           |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- |  | ----------------- | ------ | ------------------------- | - | ---------- | ---------------------------------- |  | - | ------------------ | - |  | ----------------------------------- | ----------- | - | ------------------------ | - | --------- | - |  | - | ---------- | -
|                                                                                                                                     |  | Commonstock-numberof shares |  | Commonstockamount |        | Additionalpaid-in capital |   |            | Subscriptionreceivablecommonstock |  |   | Accumulateddeficit |   |  | Accumulatedothercomprehensiveincome |             |   | Totalstockholdersequity |  
|Balance at May 31, 2007                                                                                                              |  | 21,664,924                  |  | $                 | 21,665 |                           | $ | 24,240,309 |                                    |  | $ |                   |   |  | $                                   | (3,451,767  | ) |                          | $ | 1,169,260 |   |  | $ | 21,979,467 |  
|Stock exchanged for subsidiary exchangeable shares and stock subject to issuance in connection with plan of arrangement(see Note
14) |  | 1,300                       |  |                   | 2      |                           |   | (2         | )                                  |  |   |                   |   |  |                                     |            |   |                          |   |          |   |  |   |           |  
|Stock based compensation expense                                                                                                     |  |                            |  |                   |       |                           |   | 940,593    |                                    |  |   |                   |   |  |                                     |            |   |                          |   |          |   |  |   | 940,593    |  
|Common stock issued                                                                                                                  |  | 10,800,000                  |  |                   | 10,800 |                           |   | 9,289,200  |                                    |  |   | (1,550,000         | ) |  |                                     |            |   |                          |   |          |   |  |   | 7,750,000  |  
|Net loss for the period                                                                                                              |  |                            |  |                   |       |                           |   |           |                                    |  |   |                   |   |  |                                     | (6,566,110  | ) |                          |   |          |   |  |   | (6,566,110 | )
|Foreign currency translation adjustment                                                                                              |  |                            |  |                   |       |                           |   |           |                                    |  |   |                   |   |  |                                     |            |   |                          |   | (163,670  | ) |  |   | (163,670   | )
|Unrealized gain(loss) on marketable securitiesnet of taxes                                                                          |  |                            |  |                   |       |                           |   |           |                                    |  |   |                   |   |  |                                     |            |   |                          |   | (8,425    | ) |  |   | (8,425     | )
|                                                                                                                                     |  |                             |  |                   |        |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |           |   |  |   |            |  
|Total comprehensive loss                                                                                                             |  |                            |  |                   |       |                           |   |           |                                    |  |   |                   |   |  |                                     |             |   |                          |   |           |   |  |   | (6,738,205 | )
|                                                                                                                                     |  |                             |  |                   |        |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |           |   |  |   |            |  
|Balance at May 31, 2008                                                                                                              |  | 32,466,224                  |  | $                 | 32,467 |                           | $ | 34,470,100 |                                    |  | $ | (1,550,000         | ) |  | $                                   | (10,017,877 | ) |                          | $ | 997,165   |   |  | $ | 23,931,855 |  
|                                                                                                                                     |  |                             |  |                   |        |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |           |   |  |   |            |  



F-5



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##### Table of Contents

API NANOTRONICS CORP.

Consolidated Statements of Changes in Shareholders Equitycontinued



|                                                                                                                                     |  |                             |   |  |                   |        |   |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | - |  | ----------------- | ------ | - | ------------------------- | - | ---------- | ---------------------------------- |  | - | ------------------ | - |  | ----------------------------------- | ----------- | - | ------------------------ | - | -------- | - |  | - | ---------- | -
|                                                                                                                                     |  | Commonstock-numberof shares |   |  | Commonstockamount |        |   | Additionalpaid-in capital |   |            | SubscriptionreceivablecommonStock |  |   | Accumulateddeficit |   |  | Accumulatedothercomprehensiveincome |             |   | Totalstockholdersequity |  
|Balance at May 31, 2008                                                                                                              |  | 32,466,224                  |   |  | $                 | 32,467 |   |                           | $ | 34,470,100 |                                    |  | $ | (1,550,000         | ) |  | $                                   | (10,017,877 | ) |                          | $ | 997,165  |   |  | $ | 23,931,855 |  
|Stock exchanged for subsidiary exchangeable shares and stock subject to issuance in connection with plan of arrangement(see Note
14) |  | 463                         |   |  |                   |       |   |                           |   |           |                                    |  |   |                   |   |  |                                     |            |   |                          |   |         |   |  |   |           |  
|Stock-based compensation expense                                                                                                     |  |                            |   |  |                   |       |   |                           |   | 918,081    |                                    |  |   |                   |   |  |                                     |            |   |                          |   |         |   |  |   | 918,081    |  
|Share repurchase                                                                                                                     |  | (712,822                    | ) |  |                   | (713   | ) |                           |   | (208,990   | )                                  |  |   |                   |   |  |                                     |            |   |                          |   |         |   |  |   | (209,703   | )
|Stock subscription received                                                                                                          |  |                            |   |  |                   |       |   |                           |   |           |                                    |  |   | 1,550,000          |   |  |                                     |            |   |                          |   |         |   |  |   | 1,550,000  |  
|Net loss for the period                                                                                                              |  |                            |   |  |                   |       |   |                           |   |           |                                    |  |   |                   |   |  |                                     | (6,444,537  | ) |                          |   |         |   |  |   | (6,444,537 | )
|Foreign currency translation adjustment                                                                                              |  |                            |   |  |                   |       |   |                           |   |           |                                    |  |   |                   |   |  |                                     |            |   |                          |   | (479,497 | ) |  |   | (479,497   | )
|Unrealized (loss) on marketable securitiesnet of taxes                                                                              |  |                            |   |  |                   |       |   |                           |   |           |                                    |  |   |                   |   |  |                                     |            |   |                          |   | (272,410 | ) |  |   | (272,410   | )
|                                                                                                                                     |  |                             |   |  |                   |        |   |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |          |   |  |   |            |  
|Total comprehensive loss                                                                                                             |  |                             |   |  |                   |        |   |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |          |   |  |   | (7,196,444 | )
|                                                                                                                                     |  |                             |   |  |                   |        |   |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |          |   |  |   |            |  
|Balance at May 31, 2009                                                                                                              |  | 31,753,865                  |   |  | $                 | 31,754 |   |                           | $ | 35,179,191 |                                    |  | $ |                   |   |  | $                                   | (16,462,414 | ) |                          | $ | 245,258  |   |  | $ | 18,993,789 |  
|                                                                                                                                     |  |                             |   |  |                   |        |   |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |          |   |  |   |            |  

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



F-6



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##### Table of Contents

API NANOTRONICS CORP.

Consolidated Statements of Cash Flows



|                                                                            |  |                    |            |   |      |   |            |  
|--------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                            |  | Years endedMay 31, |           
|                                                                            |  | 2009               |            |   | 2008 |  
|Cash flows from operating activities                                        |  |                    |            |   |      |   |            |  
|Net loss                                                                    |  | $                  | (6,444,537 | ) |      | $ | (6,566,110 | )
|Adjustments to reconcile net loss to net cash used by operating activities: |  |                    |            |   |      |   |            |  
|Depreciation and amortization                                               |  |                    | 1,329,264  |   |      |   | 1,196,440  |  
|Provision for inventory reserve                                             |  |                    | 22,488     |   |      |   | 2,819,263  |  
|Write down of fixed assets                                                  |  |                    | 212,959    |   |      |   |           |  
|Stock based compensation                                                    |  |                    | 918,081    |   |      |   | 940,593    |  
|Loss on sale of assets                                                      |  |                    | 263,468    |   |      |   |           |  
|Deferred income taxes (benefit)                                             |  |                    | 66,627     |   |      |   | (189,458   | )
|Changes in operating assets and liabilities                                 |  |                    |            |   |      |   |            |  
|Accounts receivable                                                         |  |                    | 761,648    |   |      |   | (835,158   | )
|Inventories                                                                 |  |                    | 1,299,368  |   |      |   | 188,010    |  
|Prepaid expenses and other current assets                                   |  |                    | 203,274    |   |      |   | 132,590    |  
|Accounts payable and accrued expenses                                       |  |                    | 202,365    |   |      |   | 832,463    |  
|Deferred revenue                                                            |  |                    | 228,734    |   |      |   |           |  
|                                                                            |  |                    |            |   |      |   |            |  
|Net cash used by operating activities                                       |  |                    | (936,261   | ) |      |   | (1,481,367 | )
|Cash flows from investing activities                                        |  |                    |            |   |      |   |            |  
|Purchase of fixed assets                                                    |  |                    | (396,877   | ) |      |   | (798,705   | )
|Purchase of patents                                                         |  |                    | (366,989   | ) |      |   | (962,300   | )
|Proceeds from sale of fixed assets (note 2)                                 |  |                    | 785,742    |   |      |   |           |  
|Asset acquisitions                                                          |  |                    |           |   |      |   | (4,045,671 | )
|Proceeds from life insurance                                                |  |                    |           |   |      |   | 134,164    |  
|                                                                            |  |                    |            |   |      |   |            |  
|Net cash provided (used) by investing activities                            |  |                    | 21,876     |   |      |   | (5,672,512 | )
|Cash flows from financing activities                                        |  |                    |            |   |      |   |            |  
|Proceeds from issuance of common shares and share application               |  |                    | 1,550,000  |   |      |   | 7,750,000  |  
|Repurchase of common shares                                                 |  |                    | (209,703   | ) |      |   |           |  
|Short term borrowings advances (repayments), net                            |  |                    | (310,458   | ) |      |   | (337,762   | )
|Repayment of obligationscapital lease                                      |  |                    | (6,539     | ) |      |   | (8,164     | )
|Repayment of long term debt                                                 |  |                    | (24,596    | ) |      |   | (4,357,564 | )
|Net proceedslong-term debt, related party                                  |  |                    |           |   |      |   | 4,000,000  |  
|                                                                            |  |                    |            |   |      |   |            |  
|Net cash provided by financing activities                                   |  |                    | 998,704    |   |      |   | 7,046,510  |  
|Effect of exchange rate on cash and cash equivalents                        |  |                    | (321,500   | ) |      |   | (502,990   | )
|                                                                            |  |                    |            |   |      |   |            |  
|Net decrease in cash and cash equivalents                                   |  |                    | (237,181   | ) |      |   | (610,359   | )
|Cash and cash equivalents, beginning of year                                |  |                    | 2,667,109  |   |      |   | 3,277,468  |  
|                                                                            |  |                    |            |   |      |   |            |  
|Cash and cash equivalents, end of year                                      |  | $                  | 2,429,928  |   |      | $ | 2,667,109  |  
|                                                                            |  |                    |            |   |      |   |            |  

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



F-7



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements

1.
NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

The accompanying audited consolidated financial statements have been prepared in accordance with the requirements of Form 10-K and Article 8 of Regulation S-X of the Securities and Exchange Commission (the
Commission) and include the results of API Nanotronics Corp. (API Nanotronics), formerly known as Rubincon Ventures Inc., and API Electronics Group Corp., API Electronics, Inc., the National Hybrid Group (consisting of
National Hybrid, Inc. and Pace Technology, Inc.), the Filtran Group (consisting of Filtran Limited and Filtran Inc.), TM Systems II Inc., Keytronics, Inc., and API Nanofabrication and Research Corporation, its wholly-owned subsidiaries (the
Subsidiaries), which are collectively referred to as the Company.

The Company designs and manufactures high
reliability engineered solutions, systems, subsystems, semiconductor and microelectronics circuits for military, aerospace and commercial applications. The Company, through the July 7, 2009 acquisition (see Note 23), has expanded its
manufacturing and design of military products to include ruggedized computer products, network security appliances, TEMPEST Emanation prevention products, filters, transformers, inductors, high-performance microcircuits, custom hybrid
microcircuits and custom power supplies for land and amphibious combat systems, mission critical information systems and technologies, shipbuilding and marine systems, and business aviation. The Company continues to position itself as a total
engineered Solution provider to various world governments, as well as military, defense, avionics and homeland security contractors.

On
September 19, 2008, API Nanotronics effected a 1-for-15 reverse stock split of its common stock. Since retained earnings were in a deficit position, the stocks par value was capitalized from additional paid-in capital. Each stockholder of
record at the close of business on September 19, 2008 received one share for every fifteen outstanding shares held on that date. All the references to number of shares presented in these consolidated financial statements have been adjusted to
reflect the post reverse split number of shares.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated
financial statements include the accounts of API Nanotronics, together with its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

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

On June 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements for fair value measurements. The adoption of this pronouncement did not have a material impact
on our consolidated results of operations or financial position (see Note 5).

The Companys investments in marketable equity
securities are classified as available for sale. Securities available for sale are carried at fair value using a market participant approach, with any unrealized holding gains



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API Nanotronics Corp.

Notes to Consolidated Financial Statements



and losses, net of income taxes, reported as a component of accumulated other comprehensive income (loss). Marketable equity and debt securities available
for sale are classified in the consolidated balance sheets as current assets.

The cost of each specific security sold is used to compute
realized gains or losses on the sale of securities available for sale.

Inventory

Inventories, which include materials, labor, and manufacturing overhead, are stated at the lower of cost (first-in, first-out basis) or net realizable
value. At May 31, 2009 and May 31, 2008 the Company performed an analysis of our inventory at each operating division, based on assumptions about future demand, product mix and possible alternative uses. Each analysis concluded that:
(i) an adjustment should be recorded for any inventory item that had not been moved for the last 12 months, and (ii) an adjustment should be recorded for any item in our inventory that did not have a current order outstanding or any item
that we identified as not being expected to be sold over the next 12 months based on the information we had at the time. The Company will continue to periodically review and analyze our inventory management systems, and conduct inventory impairment
testing annually. At May 31, 2009 and May 31, 2008 inventory reserve for obsolete and slow moving inventory was approximately $2,378,000 and $2,819,000, respectively.

Fixed Assets

Fixed assets are recorded at cost less accumulated depreciation and are depreciated
using the following methods over the following periods:



|                                                   |  |              
|-------------------------------------------------- |  | -------------
|Straight line basis                                |  |              
|Buildings and buildings and leasehold improvements |  | 20 years     
|Computer equipment                                 |  | 3 years      
|Furniture and fixtures                             |  | 5 years      
|Machinery and equipment                            |  | 5 to 10 years
|Vehicles                                           |  | 3 years      

Betterments are capitalized and amortized by the Company, using the same amortization basis as the
underlying assets over the remaining useful life of the original asset. Betterments will include renovations, major repairs and upgrades that will increase the service of a fixed asset and extend the useful life. Gains and losses on depreciable
assets retired or sold are recognized in the consolidated statements of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred. As of May 31, 2009, of the $2,566,000 of fixed assets acquired in
conjunction with the National Hybrid Group acquisition in 2007, approximately $1,796,000 was placed into service and approximately $770,000 was sold during the twelve months ended May 31, 2009.

Fixed Assets Held for Sale

Assets held for sale have
been classified as held for sale in the consolidated balance sheets at May 31, 2009. The Company estimated the fair value of the net assets to be sold at approximately $2,500,000 based upon preliminary sales negotiations. The amount reflects a
$200,000 impairment charge taken during the year ended May 31, 2009 (see Note 21).



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API Nanotronics Corp.

Notes to Consolidated Financial Statements



Goodwill and Intangible Assets

Goodwill and intangible assets result primarily from business acquisitions accounted for
under the purchase method. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), goodwill and intangible assets with
indefinite lives are not amortized but are subject to impairment by applying a fair value based test.

The goodwill recorded on our
consolidated financial statements relates to the acquisition of the Filtran Group, which was completed in 2002. The Company performs goodwill impairment testing under the provisions of statement of Financial Accounting Standards no. 142, using the
discounted future cash flows technique as provided by the FASB Concepts Statements No. 7, Using Cash Flow Information and Present Value in Accounting Measurements. When the carrying amount of the assets exceeds its fair value, the
implied fair value of the goodwill is compared with the carrying amount to measure whether there is an impairment loss. The Companys impairment test based on future cash flows significantly exceeded the carrying value of the assets each
quarter, and the Company has determined there was no impairment in goodwill as of May 31, 2009 and May 31, 2008.

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 revenue earned on the contract
|Computer software      |  | 3-5 years                              
|Patents                |  | 15-20 years                            

Long Lived Assets

The Company periodically evaluates the net realizable values of long-lived assets, principally identifiable intangibles and capital assets, for potential impairment when events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable, as determined based on the estimated future undiscounted cash flows. If such assets were considered to be impaired, the carrying value of the related assets would be reduced to their
estimated fair value. Management has determined there was an impairment of long-lived assets of approximately $200,000 related to the fixed assets held for sale as a result of the restructuring and recorded an impairment charge during the year ended
May 31, 2009.

Income taxes

Income taxes are accounted for under SFAS No. 109, Accounting for Income Taxes. Under this method, deferred 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 net operating 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.

The Company adopted the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), an interpretation of FASB Statement No. 109 as of June 1, 2007. FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprises financial statements. The interpretation
requires that the Company determine whether it is more likely than not that a tax position will not be sustained upon examination by the appropriate taxing authority. If a tax position does not meet the more likely than not recognition criterion,
FIN 48 requires that the tax position be measured at the largest amount of benefit greater than 50 percent not likely of being sustained upon ultimate settlement.



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API Nanotronics Corp.

Notes to Consolidated Financial Statements



The Companys valuation allowance was taken on the deferred tax assets of certain non-performing subsidiaries to provide for a reasonable provision, which in the Companys estimation is more likely than not
that all or some portions of such tax assets will not be realized. In determining the adequacy of the valuation allowance, we applied guidance pursuant to SFAS 109, including paragraphs 20 through 25, and considered such factors as (i) which
subsidiaries were producing income and which subsidiaries were producing losses and (ii) temporary differences occurring from depreciation and amortization which we expect to increase the taxable income over future periods. In view of the
current increase in losses we have provided for 100% valuation allowance resulting in no deferred tax assets on net basis. The position the Company takes on its deferred tax assets in the future may change, as it may be affected by the success or
failure of our short-term strategies and overall global economic conditions.

Based on the Companys evaluation, management has
concluded that there are no significant uncertain tax positions requiring recognition in the consolidated financial statements or adjustments to deferred tax assets and related valuation allowance. Open tax years include the tax years ended
May 31, 2009, 2008, 2007 and 2006.

The Company from time to time has been assessed interest or penalties by major tax jurisdictions,
although such assessments historically have been minimal and immaterial to our financial results. If the Company receives an assessment for interest and/or penalties, it would be classified in the consolidated financial statements as general and
administrative expense.

Revenue Recognition

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. A 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.

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 is not considered to have occurred until products have been shipped and risk of loss and ownership has transferred to the client.

Deferred
Revenue

The Company defers revenue when payment is received in advance of the service or product being shipped or delivered. At
May 31, 2009 the Company had deferred revenues of $228,734, compared to $0 at May 31, 2008.

Warranty

The Company provides up to a one-year product defect warranty on various products from the date of sale. Historically, warranty costs have been nominal
and have been within managements expectations. The Company has accrued approximately $81,000 and $108,000, in warranty liability as of May 31, 2009 and May 31, 2008, respectively, which has been included in accounts payable and
accrued expenses.



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API Nanotronics Corp.

Notes to Consolidated Financial Statements



Research and Development

Research and development expenses are recorded when incurred.

Stock-Based Compensation

The Company follows SFAS
123R which revised SFAS 123 Accounting for Stock-Based Compensation (SFAS 123R). SFAS 123R requires that new, modified and unvested share-based payment transactions with employees, such as grants of stock options and
restricted stock, be recognized in the financial statements based on their fair value at the grant date and recognized as compensation expense over their vesting periods. The Company has also considered the related guidance of the Security and
Exchange Commission (SEC) included in Staff Accounting Bulletins (SAB) No. 107 and No. 110. The Company estimates the fair value of stock options as of the date of grant using the Black-Scholes pricing model and
restricted stock based on the quoted market price. The Company also follows the guidance in EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services for equity instruments issued to consultants.

Financial Instruments

The fair values of financial instruments including cash and cash equivalents, marketable securities, accounts receivable, accounts payable, and short-tem
borrowings approximate their carrying values due to the short-term nature of these instruments. 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. Marketable securities are included at fair value. The recorded value of long-term debt approximates the fair value of the debt as the terms and rates approximate market rates.

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 with balances denominated in US dollars.

Foreign Currency Translation and Transactions

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. Gains and losses from foreign currency transactions are included in the determination of net income or loss.

Accounting Estimates

The preparation of these consolidated financial statements in conformity with
United States 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.

Significant estimates made by the Company includes a provision for both excess and obsolete
inventory when write-downs or write-offs are identified. The inventory valuation is based upon assumptions about future demand, product mix and possible alternative uses.



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API Nanotronics Corp.

Notes to Consolidated Financial Statements



Receivables and Credit Policies

Accounts receivable are non-interest bearing, uncollateralized customer obligations.
Accounts receivable are stated at the amounts billed to the customer. Customer account balances with invoices over 90 days old are considered delinquent. Payments of accounts receivable are allocated to the specific invoices identified on the
customers remittance advice or, if unspecified, are applied to the earliest unpaid invoices. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects managements estimate of the amounts that will not
be collected.

Advertising Costs

Advertising costs are expensed as incurred. During the years ended May 31, 2009 and 2008, advertising expense was $263,564 and $292,416, respectively.

Concentration of Credit Risk

The Company maintains cash balances, at times, with financial
institutions, which are in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC). Management monitors the soundness of these institutions and has not experienced collection issue with the institutions.

The U.S. Department of Defense (directly and through subcontractors) accounts for approximately 71% and 79% for 2009 and 2008, respectively, of the
Companys revenue. One customer represented approximately 16% and 17% of revenues respectively for the twelve months ended May 31, 2009 and May 31, 2008, respectively. No customers represented over 10% of accounts receivable as at
May 31, 2009, and May 31, 2008.

Earnings (Loss) per Share of Common Stock

Basic earnings (loss) per share of common stock is computed by dividing income (loss) by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings (loss) per share of common stock gives effect to all dilutive potential shares of common stock outstanding during the period. The computation of diluted earnings (loss) per share does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings (loss) per share. (see Note 18)

Comprehensive Income
(Loss)

Comprehensive income (loss), which includes foreign currency translation adjustments and unrealized gains and losses on
marketable securities, is shown in the Statement of Changes in Shareholders Equity.

3. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principlesa replacement of FASB Statement No. 162 (FAS 168). This statement provides for the FASB Accounting Standards Codification to become the single official source of authoritative, nongovernmental
generally accepted accounting principles in the United States. FAS 168 does not change GAAP but reorganizes the literature. This statement is effective for interim and annual periods ending after September 15, 2009.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165), which provides guidance on events that occur
after the balance sheet date but prior to the issuance of the financial statements. SFAS No. 165 distinguishes events requiring recognition in the financial statements and those that may require



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API Nanotronics Corp.

Notes to Consolidated Financial Statements



disclosure in the financial statements. Furthermore, SFAS No. 165 requires disclosure of the date through which subsequent events were evaluated. SFAS
No. 165 is effective for interim and annual periods after June 15, 2009. The Company will adopt SFAS No. 165 for the quarter ended August 31, 2009.

In April 2008, the FASB issued FSP-FAS No. 142-3, Determination of the Useful Life of Intangible Assets (FAS 142-3). FAS 142-3 amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). The objective of the Staff Position is to improve the consistency
between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (Revised 2007): Business Combinations (SFAS 141R) and
other GAAP. FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Management is currently evaluating the effect on the Companys consolidated financial positions, results of operations and cash flows.

In April 2009, the FASB issued FSP-FAS No. 107-1 and APB 28-1, Disclosures about Fair Value of Financial Instruments (FAS
No. 107-1/APB 28-1). This FSP extends to interim periods certain disclosures about fair value of financial instruments for publicly traded companies and amends APB Opinion No. 28, Interim Financial Reporting, to require those
disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim reporting periods ending after June 15, 2009. The Companys adoption of FAS No. 107-1/APB 28-1 is not expected to have a
material effect on the Companys consolidated financial position, results of operations or cash flows.

Effective June 1, 2008,
the Company adopted Statement of Financial Accounting Standards No. 157Fair Value Measurements (SFAS 157) for its financial assets and liabilities that are remeasured and reported at fair value at least annually. SFAS 157
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. The adoption of SFAS 157 to the financial assets and liabilities and nonfinancial assets and liabilities that are remeasured and reported at fair value at least annually did not have any impact on our financial
results. In accordance with the provisions of FSP No. FAS 157-2Effective Date of Financial Accounting Standards Statement No. 157, the Company has elected to defer implementation of SFAS 157 as it relates to our non-financial
assets and non-financial liabilities that are recognized and disclosed at fair value in the consolidated financial statements on a nonrecurring basis until June 1, 2009. The Company is evaluating the impact, if any, this deferral will have on
its non-financial assets and liabilities.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activitiesan Amendment of FASB Statement No. 133. This Statement is intended to enhance the current disclosure framework in Statement 133. The Statement requires that objectives for using derivative instruments be
disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. Disclosing the fair values of derivative instruments and
their gains and losses in a tabular format should provide a more complete picture of the location in an entitys financial statements of both the derivative positions existing at period end and the effect of using derivatives during the
reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential effect on an entitys liquidity from using In derivatives. Finally, this Statement requires cross-referencing
within the footnotes, which should help users of financial statements to locate important information about derivative instruments. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. The adoption of SFAS
No. 161 is not expected to have a significant impact on the consolidated results of operations or financial position of the Company.

In December 2007, the FASB revised Statement of Financial Accounting Standard No. 141 (SFAS 141R), Business Combinations, which is effective for business combinations for which the acquisition date is on or after



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API Nanotronics Corp.

Notes to Consolidated Financial Statements



the beginning of the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted before that
date. SFAS 141R requires assets and liabilities recorded in a business combination to be recorded at fair value and replaces the cost-allocation process under the prior standard. In addition, SFAS 141R requires separate recognition of
acquisition costs and requires recognition of contractual contingencies at fair value as of the acquisition date. Further, the revised standard requires capitalization of research and development assets and requires fair value recognition of
contingent consideration as of the acquisition date.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests
in Consolidated Financial Statements. This Statement amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined the impact, if any, that SFAS No. 160
will have on its consolidated financial statements. SFAS No. 160 is effective for the Companys fiscal year beginning June 1, 2009. The Company does not believe the adoption of SFAS 160 will have a material impact on its consolidated
financial statements.

4. ASSET ACQUISITIONS

On July 17, 2007, API NRC, a wholly-owned subsidiary of the Company, incorporated on July 3, 2007, entered into an Asset Purchase Agreement with NanoOpto Corporation (NoC) for the purchase of substantially all of
NoCs assets (the Purchase), including equipment and intellectual property relating to the design and high volume nano-fabrication of nano-optic devices for optical components. The purchase price was $4,000,000, and the Purchase was
completed on July 19, 2007. The Company has allocated the purchase price to machinery and equipment and intellectual property.

The
purchase price of NoCs assets was satisfied through the payment of cash in the amount of $3,970,000 (a $30,000 credit was received for a piece of equipment in need of repair). The Company also incurred legal costs and professional fees in
connection with the acquisition in the amount of $45,671, giving a total acquisition cost of $4,045,671.

The fair value assigned to
tangible assets acquired are as follows:



|                                |  |   |          
|------------------------------- |  | - | ---------
|Fixed assets                    |  | $ | 3,314,050
|Patents & intellectual property |  |   | 731,621  
|                                |  |   |          
|Fair value of assets acquired   |  | $ | 4,045,671
|                                |  |   |          

The Company borrowed the $4,000,000 pursuant to a promissory note (the Note) from a
member of the Board of Directors who is also the Secretary of the Company (see Note 11). The Note had a 61 month term, with 12% per annum. The loan and interest was repaid during the year ended May 31, 2008.

The Company considered the acquisition of the assets of NoC on July 17, 2007 an asset acquisition and not as the acquisition of an operating
business because: (1) on July 2, 2007 NoC had filled articles of dissolution with the Delaware Secretary of State pursuant to the resolutions of the board of directors of NoC to liquidate the business, (2) at the time of the purchase
of the NoC acquisition, NoCs limited number of employees were engaged in the shutdown of the business and not in the active conduct of the business and NoC had effectively ceased operations, and (3) the Company negotiated the purchase of
the assets of NoC from an outside liquidator who had been engaged by the board of directors of NoC to liquidate the saleable assets of NoC.



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API Nanotronics Corp.

Notes to Consolidated Financial Statements



5. MARKETABLE SECURITIES

Marketable securities, which are classified as available for sale, consisted of the following at
May 31 and are included in current assets:



|                                   |  |      |       |        |   |         |  |        |       |  |   |        
|---------------------------------- |  | ---- | ----- | ------ | - | ------- |  | ------ | ----- |  | - | -------
|                                   |  | 2009 |       | 2008  
|                                   |  | Cost |       | Market |   | Cost    |  | Market
|Shares in Canadian venture issuers |  | $    | 2,674 |        | $ | 129,085 |  | $      | 2,944 |  | $ | 461,806

Pursuant to the requirements of SFAS 157, the Company has provided fair value disclosure
information for relevant assets and liabilities in these consolidated financial statements. The following table summarizes assets which have been accounted for at fair value on a recurring basis as of May 31, 2009:



|                             |  |       |         |                                         |   |        
|---------------------------- |  | ----- | ------- | --------------------------------------- | - | -------
|                             |  | Total |         | Quoted Prices inActive Markets(Level 1)
|Marketable equity securities |  | $     | 129,085 |                                         | $ | 129,085
|                             |  |       |         |                                         |   |        
|Total                        |  | $     | 129,085 |                                         | $ | 129,085
|                             |  |       |         |                                         |   |        

For applicable assets and liabilities subject to this pronouncement, the Company will value such
assets and liabilities using quoted market prices in active markets for identical assets and liabilities to the extent possible. To the extent that such market prices are not available, the Company will next attempt to value such assets and
liabilities using observable measurement criteria, including quoted market prices of similar assets and liabilities in active and inactive markets and other corroborated factors. In the event that quoted market prices in active markets and other
observable measurement criteria are not available, the Company will develop measurement criteria based on the best information available.

Gross unrealized holding gains amounted to $126,411 and $458,862, respectively at May 31, 2009 and 2008.

6. INVENTORIES

Inventories consisted of the following as of May 31:



|                                                       |  |      |            |   |      |   |            |  
|------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                       |  | 2009 |            |   | 2008 |  
|Raw materials                                          |  | $    | 4,959,254  |   |      | $ | 4,891,161  |  
|Work in progress                                       |  |      | 1,369,842  |   |      |   | 2,110,371  |  
|Finished goods                                         |  |      | 1,938,139  |   |      |   | 3,171,327  |  
|Less: Provision for obsolete and slow moving inventory |  |      | (2,378,800 | ) |      |   | (2,819,263 | )
|                                                       |  |      |            |   |      |   |            |  
|Total                                                  |  | $    | 5,888,435  |   |      | $ | 7,353,596  |  
|                                                       |  |      |            |   |      |   |            |  

The Company records a provision for both excess and obsolete inventory when write-downs or
write-offs are identified. The inventory valuation is based upon assumptions about future demand, product mix and possible alternative uses.

Reserve for obsolete and slow moving inventory was $2,378,800 and $2,819,263 as of May 31, 2009 and May 31, 2008, respectively.



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API Nanotronics Corp.

Notes to Consolidated Financial Statements



7. FIXED ASSETS

Fixed assets consisted of the following as of May 31:



|                                     |  |      |            |                         |   |               |  |   |           
|------------------------------------ |  | ---- | ---------- | ----------------------- | - | ------------- |  | - | ----------
|                                     |  | 2009
|                                     |  | Cost |            | AccumulatedDepreciation |   | Net BookValue
|Land                                 |  | $    | 147,875    |                         | $ |              |  | $ | 147,875   
|Buildings and leasehold improvements |  |      | 1,344,479  |                         |   | 461,201       |  |   | 883,278   
|Computer equipment                   |  |      | 340,092    |                         |   | 262,228       |  |   | 77,864    
|Furniture and fixtures               |  |      | 461,204    |                         |   | 349,196       |  |   | 112,008   
|Machinery and equipment              |  |      | 8,072,929  |                         |   | 3,488,119     |  |   | 4,584,810 
|Vehicles                             |  |      | 29,582     |                         |   | 28,360        |  |   | 1,222     
|                                     |  |      |            |                         |   |               |  |   |           
|Fixed assets, net                    |  | $    | 10,396,161 |                         | $ | 4,589,104     |  | $ | 5,807,057 
|                                     |  |      |            |                         |   |               |  |   |           
|                                     | 
|                                     |  | 2008
|                                     |  | Cost |            | AccumulatedDepreciation |   | Net BookValue
|Land                                 |  | $    | 1,375,482  |                         | $ |              |  | $ | 1,375,482 
|Buildings and leasehold improvements |  |      | 3,158,358  |                         |   | 754,942       |  |   | 2,403,416 
|Computer equipment                   |  |      | 310,884    |                         |   | 182,407       |  |   | 128,477   
|Furniture and fixtures               |  |      | 462,951    |                         |   | 304,827       |  |   | 158,124   
|Machinery and equipment              |  |      | 8,965,002  |                         |   | 2,863,277     |  |   | 6,101,725 
|Vehicles                             |  |      | 29,582     |                         |   | 22,785        |  |   | 6,797     
|                                     |  |      |            |                         |   |               |  |   |           
|Fixed assets, net                    |  | $    | 14,302,259 |                         | $ | 4,128,238     |  | $ | 10,174,021
|                                     |  |      |            |                         |   |               |  |   |           

Depreciation expense amounted to $917,210 and $761,625 for the years ended May 31, 2009 and
2008, respectively. Included in these amounts are $6,420 and $8,386 of amortization of assets under capital lease for the years ended May 31, 2009 and 2008, respectively.



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API Nanotronics Corp.

Notes to Consolidated Financial Statements



8. GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consisted of the following at May 31:



|                                           |  |      |            |   |      |   |            |  
|------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                           |  | 2009 |            |   | 2008 |  
|Goodwill not subject to amortization:      |  |      |            |   |      |   |            |  
|Beginning balance, net                     |  | $    | 1,130,906  |   |      | $ | 1,130,906  |  
|                                           |  |      |            |   |      |   |            |  
|Ending balance, net                        |  | $    | 1,130,906  |   |      | $ | 1,130,906  |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  |     
|                                           |  | 2009 |            |   | 2008 |  
|Intangible assets subject to amortization: |  |      |            |   |      |   |            |  
|Non-compete agreements                     |  | $    | 951,100    |   |      | $ | 951,100    |  
|Less: Accumulated amortization             |  |      | (951,100   | ) |      |   | (951,100   | )
|Customer contracts                         |  |      | 1,831,784  |   |      |   | 1,831,784  |  
|Less: Accumulated amortization             |  |      | (1,811,319 | ) |      |   | (1,558,847 | )
|Computer software                          |  |      | 423,684    |   |      |   | 358,952    |  
|Less: Accumulated amortization             |  |      | (214,541   | ) |      |   | (124,250   | )
|Patents                                    |  |      | 1,329,288  |   |      |   | 962,300    |  
|Less: Accumulated amortization             |  |      | (69,675    | ) |      |   | 0          |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  | $    | 1,489,221  |   |      | $ | 1,469,939  |  
|                                           |  |      |            |   |      |   |            |  

Amortization expense amounted to $412,054, and $434,815 for the years ended May 31, 2009 and
2008, respectively. Amortization expense is expected to be approximately $81,000, $86,000, $89,000, $91,000 and $94,000 for the years ending May 31, 2010, 2011, 2012, 2013 and 2014, respectively.

9. SHORT-TERM BORROWINGS

Short-term borrowings
consisted of the following at May 31:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |      |   |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | - | ---- | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | 2009 |   | 2008
|The Companys wholly owned subsidiary, API Electronics had 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 US prime plus 1%. The line was closed in January 2009                                                                                                                                                                                                               |  | $    |  |      | $ | 270,147
|The Companys wholly owned subsidiary, Filtran Limited has a working capital line of credit in the amount of approximately $900,000
($1,000,000 Cdn$) with a major Canadian bank. The interest on any borrowed funds is charged at Canadian prime. The agreement also allows Filtran to lease an asset at Canadian prime plus 1% up to $33,000. The lender has a general security agreement
and a 1st Collateral Mortgage on Filtrans assets and building. The line is subject to an annual renewal provision on May 31, 2010 |  |      |  |      |   | 40,311 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |      |   |      |   |        
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | $    |  |      | $ | 310,458
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |      |   |      |   |        

At May 31, 2009 and 2008, the US prime rate was 2.25 and 5.00 percent per annum,
respectively, and the Canadian prime rate was 3.25 and 3.25 percent per annum, respectively.



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following at May 31:



|                                      |  |      |           |      |   |          
|------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                      |  | 2009 |           | 2008
|Accounts payable and accrued expenses |  | $    | 2,906,388 |      | $ | 3,086,784
|Wage and vacation accrual             |  |      | 1,034,997 |      |   | 676,944  
|Audit and accounting fees             |  |      | 67,181    |      |   | 103,721  
|                                      |  |      |           |      |   |          
|Total                                 |  | $    | 4,008,566 |      | $ | 3,867,449
|                                      |  |      |           |      |   |          

11. LONG-TERM DEBT

Long-term debt consisted of the following at May 31:



|                                                                                                                                                                                                                                        |  |      |        |      |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | -------
|                                                                                                                                                                                                                                        |  | 2009 |        | 2008
|Promissory note, repayable based on 25% of the gross profit earned by the Company on all orders or contracts received by it on or after
August 29, 2005, for product previously manufactured or sold by Sensonics. Non-interest bearing |  | $    | 89,748 |      | $ | 113,851
|Less: Current Portion                                                                                                                                                                                                                   |  |      | 89,748 |      |   | 113,851
|                                                                                                                                                                                                                                        |  |      |        |      |   |        
|Long-term debt, net of current portion                                                                                                                                                                                                  |  | $    |       |      | $ |       
|                                                                                                                                                                                                                                        |  |      |        |      |   |        

12. OBLIGATIONS UNDER CAPITAL LEASES

The Company is the lessee of equipment under various capital leases expiring by February 2012. The asset and liability under the capital leases are
recorded at the fair value of the asset. The assets are amortized over the lower of their related lease terms or its estimated productive life.

A summary of property held under capital leases and included in Note 7, is as follows:



|                               |  |         |        |      |   |       
|------------------------------ |  | ------- | ------ | ---- | - | ------
|                               |  | May 31,
|                               |  | 2009    |        | 2008
|Equipment                      |  | $       | 32,100 |      | $ | 45,020
|Less: Accumulated amortization |  |         | 8,560  |      |   | 16,875
|                               |  |         |        |      |   |       
|Equipment, net                 |  | $       | 23,540 |      | $ | 28,145
|                               |  |         |        |      |   |       

Obligations under capital leases consist of the following:



|                                                                                                                                                                              |  |         |        |      |   |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- | ------ | ---- | - | ------
|                                                                                                                                                                              |  | May 31,
|                                                                                                                                                                              |  | 2009    |        | 2008
|Equipment capital leases, with monthly lease payments of $651 and $866 for 2009 and 2008, respectively, including interest at approximately
8%, secured by the leased assets. |  | $       | 18,707 |      | $ | 25,245
|Less: Current maturities                                                                                                                                                      |  |         | 6,548  |      |   | 6,539 
|                                                                                                                                                                              |  |         |        |      |   |       
|Obligations under capital leases, less current maturities                                                                                                                     |  | $       | 12,159 |      | $ | 18,706
|                                                                                                                                                                              |  |         |        |      |   |       



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



Future minimum lease payments for the next five years are as follows:



|                       |  |        |       
|---------------------- |  | ------ | ------
|Year                   |  | Amount
|2010                   |  | $      | 7,808 
|2011                   |  |        | 7,808 
|2012                   |  |        | 5,856 
|2013                   |  |        |      
|2014                   |  |        |      
|                       |  |        |       
|                       |  |        | 21,472
|Less: Imputed Interest |  |        | 2,765 
|                       |  |        |       
|                       |  | $      | 18,707
|                       |  |        |       

13. INCOME TAXES

The geographical sources of loss before income taxes for the years ended May 31, 2009 and 2008 were as follows:



|                                    |  |      |            |   |      |   |            |  
|----------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                    |  | 2009 |            |   | 2008 |  
|Loss before income taxes (benefit): |  |      |            |   |      |   |            |  
|Unites States                       |  | $    | (5,675,599 | ) |      | $ | (6,398,202 | )
|Non-United States                   |  |      | (664,630   | ) |      |   | (383,540   | )
|                                    |  |      |            |   |      |   |            |  
|Total                               |  | $    | (6,340,229 | ) |      | $ | (6,781,742 | )
|                                    |  |      |            |   |      |   |            |  

The income tax provision (benefit) is summarized as follows:



|                               |  |      |         |      |   |          |  
|------------------------------ |  | ---- | ------- | ---- | - | -------- | -
|                               |  | 2009 |         | 2008 |  
|Current:                       |  |      |         |      |   |          |  
|Unites States                  |  | $    | 12,759  |      | $ | (38,119  | )
|Non-United States              |  |      | 24,922  |      |   |         |  
|                               |  |      |         |      |   |          |  
|                               |  |      | 37,681  |      |   | (38,119  | )
|                               |  |      |         |      |   |          |  
|Deferred:                      |  |      |         |      |   |          |  
|Unites States                  |  |      |        |      |   |         |  
|Non-United States              |  |      | 66,627  |      |   | (177,514 | )
|                               |  |      |         |      |   |          |  
|                               |  |      | 66,627  |      |   | (177,514 | )
|                               |  |      |         |      |   |          |  
|Income tax provision (benefit) |  | $    | 104,308 |      | $ | (215,633 | )
|                               |  |      |         |      |   |          |  

The consolidated effective tax (benefit) rate (as a percentage of income (loss) before income
taxes (benefit) and cumulative effect of change in accounting principle) is reconciled to the U.S. federal statutory tax rate as follows:



|                                          |  |       |    |  |       |   
|----------------------------------------- |  | ----- | -- |  | ----- | --
|                                          |  | 2009  |    |  | 2008  |   
|U.S. federal statutory tax rate (benefit) |  | (34.0 | )% |  | (34.0 | )%
|Non-deductible expenses                   |  | (1.1  | )  |  | 47.7  |   
|Change in valuation allowance             |  | 72.3  |    |  | (42.8 | ) 
|Other items, net                          |  | (38.9 | )  |  | 26.0  |   
|                                          |  |       |    |  |       |   
|Effective tax rate (benefit)              |  | (1.7  | )% |  | (3.1  | )%
|                                          |  |       |    |  |       |   



F-20



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



The components of deferred taxes are as follows:



|                                 |  |      |            |   |      |   |            |  
|-------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                 |  | 2009 |            |   | 2008 |  
|Future income tax assets         |  |      |            |   |      |   |            |  
|Loss carryforwards               |  | $    | 3,039,246  |   |      | $ | 1,317,626  |  
|Other                            |  |      | 19,531     |   |      |   | 75,532     |  
|Unrealized foreign exchange loss |  |      | 496,136    |   |      |   | 578,469    |  
|Marketable securities            |  |      | 52,932     |   |      |   | 79,853     |  
|Intangible assets                |  |      | 536,967    |   |      |   | 508,813    |  
|Stock based compensation         |  |      | 1,124,217  |   |      |   | 880,530    |  
|Inventory                        |  |      | 469,563    |   |      |   | 840,749    |  
|Capital assets                   |  |      | 90,192     |   |      |   | 62,297     |  
|                                 |  |      |            |   |      |   |            |  
|                                 |  |      | 5,828,784  |   |      |   | 4,343,869  |  
|                                 |  |      |            |   |      |   |            |  
|Future income tax liabilities    |  |      |            |   |      |   |            |  
|Capital assets                   |  |      | (788,838   | ) |      |   | (1,217,604 | )
|Intangibles                      |  |      |           |   |      |   | (12,969    | )
|Other                            |  |      | (24,922    | ) |      |   | (119,718   | )
|                                 |  |      |            |   |      |   |            |  
|                                 |  |      | (813,760   | ) |      |   | (1,350,921 | )
|                                 |  |      |            |   |      |   |            |  
|Valuation Allowance              |  |      | (5,015,000 | ) |      |   | (2,902,000 | )
|                                 |  |      |            |   |      |   |            |  
|                                 |  | $    | 24         |   |      | $ | 91,578     |  
|                                 |  |      |            |   |      |   |            |  



|                                                              |  |      |         |   |      |   |          |  
|------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | -
|                                                              |  | 2009 |         |   | 2008 |  
|Analysis of changes in deferred taxes                         |  |      |         |   |      |   |          |  
|Income statement effect                                       |  | $    | 66,627  |   |      | $ | (177,514 | )
|Liabilities in connection with acquisition of National Hybrid |  |      |        |   |      |   | 243,507  |  
|Other comprehensive income effect                             |  |      | (60,311 | ) |      |   | 8,425    |  
|Cumulative translation adjustment                             |  |      | (97,414 | ) |      |   | 198,731  |  
|                                                              |  |      |         |   |      |   |          |  
|Change in deferred taxes                                      |  | $    | (91,098 | ) |      | $ | 273,149  |  
|                                                              |  |      |         |   |      |   |          |  



|                                        |  |      |          |   |      |   |            |  
|--------------------------------------- |  | ---- | -------- | - | ---- | - | ---------- | -
|                                        |  | 2009 |          |   | 2008 |  
|Balance sheet presentation              |  |      |          |   |      |   |            |  
|Deferred income tax assets  current    |  | $    | 186,630  |   |      | $ | 790,906    |  
|Deferred income tax assets  long-term  |  |      | 627,160  |   |      |   | 571,110    |  
|Deferred income tax liability  current |  |      | (24,922  | ) |      |   | (39,865    | )
|Deferred tax liabilities  long-term    |  |      | (788,844 | ) |      |   | (1,230,573 | )
|                                        |  |      |          |   |      |   |            |  
|Net deferred tax liabilities            |  | $    | 24       |   |      | $ | (91,578    | )
|                                        |  |      |          |   |      |   |            |  

At May 31, 2009, the accompanying consolidated financial statements include $106,000 of
deferred tax assets associated with operating loss carryforwards in tax jurisdictions outside the United States and deferred tax assets associated with operating loss carryforwards in the United States of $2,933,000. At May 31, 2008, the
accompanying consolidated financial statements include $104,000 of deferred tax assets associated with operating loss carryforwards in tax jurisdictions outside the United States and deferred tax assets associated with operating loss carryforwards
in the United States of $1,214,000.



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



The valuation allowance as of May 31, 2009 totaled $5,015,000 which consisted principally of established reserves for deferred tax assets on carry forward losses from our entities in the United States of America
and of foreign entities. The valuation allowance as of May 31, 2008 totaled $2,902,000 which consisted principally of established reserves for deferred tax assets of foreign entities.

The Company has not provided additional taxes for the anticipated repatriation of certain earnings of its non-U.S. subsidiaries. It is not practicable to
determine the amount of applicable taxes that would be incurred if any of such earnings were repatriated.

The American Jobs Creation Act
of 2004 (the Act), which was enacted during the fourth quarter of 2004, creates a temporary incentive for U.S. corporations to repatriate accumulated earnings of non-U.S. subsidiaries by providing an 85 percent deduction for certain
dividends from controlled foreign corporations. the Company continues to evaluate the provisions of the new tax law and, as of the current date, as final guidance has not been issued, management cannot reasonably estimate the amount, if any, of
repatriations which would be subject to temporary tax relief. In accordance with FASB Staff Position No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004, the tax deduction, if any, will be recorded in the period in which the effect becomes estimable.

The Company and its
subsidiaries have net operating loss carryforwards of approximately $5,047,000 to apply against future taxable income. These losses will expire as follows: $14,000, $56,000, $68,000, $3,407,000 and $1,502,000 in 2010, 2012, 2017, 2028 and 2029
respectively.

As of May 31, 2009, the Company had no unrecognized tax benefits, and no adjustment to its financial position, results
of operations or cash flows was required. The Company does not expect that unrecognized tax benefits will increase within the next twelve months. The Company records interest and penalties related to tax matters within other expense on the
accompanying Consolidated Statement of Operations. These amounts are not material to the consolidated financial statements for the periods presented. The Companys U.S. tax returns are subject to examination by federal and state taxing
authorities. Generally, tax years 2006-2009 remain open to examination by the Internal Revenue Agency or other tax jurisdictions to which the Company is subject. The Companys Canadian tax returns are subject to examination by federal and
provincial taxing authorities in Canada. Generally, tax years 2006-2009 remain open to examination by the Canadian Customs and Revenue Agency or other tax jurisdictions to which the Company is subject.

14. SHAREHOLDERS EQUITY

Pursuant to the
court-approved Plan of Arrangement API Nanotronics Sub, Inc., formerly known as RVI Sub, Inc., became the sole Stockholder of API, and each holder of API common shares was granted the right to receive for each API common share four shares (50
pre-reverse split) of API Nanotronics Corp. common stock, or if an eligible Canadian shareholder elected, four (50 pre-reverse split) API Nanotronics Sub, Inc. exchangeable shares. Each API Nanotronics Sub, Inc. exchangeable share is exchangeable
into one share of API Nanotronics common stock at the option of the holder. All references in the consolidated financial statements to the number of shares outstanding, per share amounts, and stock option data of the Companys common stock
(other than in the calculation of Stockholders Equity) have been restated to reflect the effect of the Plan of Arrangement for all the periods presented. Stockholders equity reflects the Plan of Arrangement by reclassifying from
Common stock to Additional paid-in capital an amount equal to the par value of the shares arising from the Plan of Arrangement. Immediately prior to the closing of the Plan of Arrangement, Rubincon had 200,033,360 shares of
common stock outstanding.

In connection with the Plan of Arrangement that occurred on November 6, 2006, the Company was obligated to
issue 9,418,020 shares of either API Nanotronics common stock or exchangeable shares of API Nanotronics Sub, Inc. in exchange for the API common shares previously outstanding. As of February 28, 2009,



F-22



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



(i) API Nanotronics had issued 6,913,610 shares of its common stock for API common shares or upon the exchange of previously issued exchangeable shares,
(ii) API Nanotronics Sub, Inc. had issued 2,338,517 shares of its exchangeable shares for API common shares (excluding exchangeable shares held by the Company and its affiliates and exchangeable shares subsequently exchanged for our common
stock), which exchangeable shares are the substantially equivalent to our common stock, and (iii) API Nanotronics transfer agent was awaiting stockholder elections on 165,177 shares of API Nanotronics common stock or exchangeable shares
of API Nanotronics Sub, Inc. issueable with respect to the remaining API common shares. Consequently, API Nanotronics has not issued, but is obligated to issue, 2,503,911 shares of its common stock under the Plan of Arrangement either directly for
API common shares or in exchange for API Nanotronics Sub, Inc. exchangeable shares not held by API Nanotronics or its affiliates.

The API
Nanotronics Sub, Inc. exchangeable shares not held by API Nanotronics or its affiliates are substantially economically equivalent to common stock of API Nanotronics. The November 2007 5-for-1 stock split had no effect on this equivalence of
exchangeable shares and common stock because simultaneously with the split of the common stock, a 5-for-1 split of the exchangeable shares was effected on each exchangeable share outstanding.

On November 6, 2006, API Nanotronics amended its certificate of incorporation to allow it to issue one special voting share. This special voting
share was issued to a trustee in connection with the Plan of Arrangement and allows the trustee to have at meetings of stockholders of API Nanotronics the number of votes equal to the number of exchangeable shares not held by API Nanotronics or
subsidiaries of API Nanotronics (the trustee is charged with obtaining the direction of the holders of exchangeable shares on how to vote at meetings of API Nanotronics stockholders). The API Nanotronics Sub, Inc. exchangeable shares are convertible
into shares of API Nanotronics common stock at any time at the option of the holder. API Nanotronics may force the conversion of API Nanotronics Sub., Inc. exchangeable shares into shares of API Nanotronics common stock on the tenth anniversary of
the date of the Plan of Arrangement or sooner upon the happening of certain events.

On September 19, 2008, the Company filed a
Certificate of Amendment of Certificate of Incorporation which authorized the issuance of 100,000,001 shares of stock consisting of 100,000,000 shares of common stock with a par value of $0.0001 per share and one share of Special Voting Stock with a
par value of $0.01 per share and effected a one-for-fifteen reverse stock split of its common stock. All the references to number of shares presented in these consolidated financial statements have been adjusted to reflect the post reverse split
number of shares.

On February 9, 2009, the Company authorized a program to repurchase up to 10% of its common stock over the next 12
months. As of May 31, 2009, the Company repurchased 712,822 of its common stock for proceeds of $209,703.

On February 27, 2009,
the Company filed with the Secretary of State of Delaware a Certificate of Correction of Certificate of Amendment of Certificate of Incorporation to correct the number of authorized shares listed from 1,000,000,001 to 100,000,001 and the authorized
shares of common stock from 1,000,000,000 to 100,000,000.

15. STOCK BASED COMPENSATION

On October 26, 2006, the Company adopted its 2006 Equity Incentive Plan (the Equity Incentive Plan), which was approved at the 2007
Annual Meeting of Stockholders of the Company. All the prior options issued by API were carried over to this plan under the provisions of the Plan of Arrangement. Of the 5,000,000 shares authorized under the Equity Incentive Plan, 1,499,817 shares
are available for issuance pursuant to options or as



F-23



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



stock as of May 31, 2009. Options issued by Rubincon prior to the effective date of the Plan of Arrangement were not carried over to this plan. Under
the Companys Equity Incentive Plan, incentive options and non-statutory options may have a term of up to ten years and fifteen years, respectfully, from the date of grant. The stock option exercise prices are generally equal to at least 100
percent of the fair market value of the underlying shares on the date the options are granted.

As of May 31, 2009, there was $974,457
of total unrecognized compensation related to non-vested stock options, which are not contingent upon attainment of certain milestones. For options with certain milestones necessary for vesting, the fair value is not calculated until the conditions
become probable. The cost is expected to be recognized over the remaining periods of the options, which are expected to vest from 2009 to 2013.

During the twelve months ended May 31, 2009 and 2008, $918,081 and $940,593, respectively, has been recognized as stock-based compensation expense in general and administrative expense.

The fair value of each option grant is estimated at the grant date using the Black-Scholes option-pricing model based on the assumptions detailed below:



|                    |  |           |   |  |              |  
|------------------- |  | --------- | - |  | ------------ | -
|                    |  | 2009      |   |  | 2008         |  
|Expected volatility |  | 75        | % |  | 56           | %
|Expected dividends  |  | 0         | % |  | 0            | %
|Expected term       |  | 3-5 years |   |  | 5-10 years   |  
|Risk-free rate      |  | 3.14      | % |  | 2.50%  4.74 | %

The summary of the common stock options granted, cancelled, exchanged or exercised under the Plan:



|                                       |  |           |   |  |                              |      
|-------------------------------------- |  | --------- | - |  | ---------------------------- | -----
|                                       |  | Shares    |   |  | WeightedAverageExercisePrice
|Stock Options outstandingMay 31, 2007 |  | 2,241,667 |   |  | $                            | 1.488
|Exercised                              |  |          |   |  | $                            |     
|Issued                                 |  | 1,265,183 |   |  | $                            | 1.422
|                                       |  |           |   |  |                              |      
|Stock Options outstandingMay 31, 2008 |  | 3,506,850 |   |  | $                            | 1.464
|Less forfeited                         |  | (71,667   | ) |  | $                            | 2.859
|Exercised                              |  |          |   |  | $                            |     
|Issued                                 |  | 106,666   |   |  | $                            | 2.220
|                                       |  |           |   |  |                              |      
|Stock Options outstandingMay 31, 2009 |  | 3,541,849 |   |  | $                            | 1.493
|                                       |  |           |   |  |                              |      
|Stock Options exercisableMay 31, 2009 |  | 2,334,794 |   |  | $                            | 1.460
|                                       |  |           |   |  |                              |      

The weighted average grant date fair value of options granted during the twelve months ended
May 31, 2009 and May 31, 2008 was $2.054 and $1.47, respectively.



|                        |  |                                    |  |                              |       |                                     |       |                         |   |                                 |  |                              |  |                         |       |  |   |  
|----------------------- |  | ---------------------------------- |  | ---------------------------- | ----- | ----------------------------------- | ----- | ----------------------- | - | ------------------------------- |  | ---------------------------- |  | ----------------------- | ----- |  | - | -
|Options Outstanding     |  | Options Exercisable               
|Range of Exercise Price |  | Number ofOutstandingat May 31,2009 |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingLife(Years) |       | AggregateIntrinsicValue |   | NumberExercisableat May 31,2009 |  | WeightedAverageExercisePrice |  | AggregateIntrinsicValue
|$1.30  3.00            |  | 3,446,852                          |  | $                            | 1.425 |                                     | 7.195 |                         | $ |                                |  | 2,277,916                    |  | $                       | 1.460 |  | $ | 
|$3.01  6.00            |  | 94,997                             |  | $                            | 4.035 |                                     | 5.735 |                         | $ |                                |  | 56,878                       |  | $                       | 4.035 |  | $ | 
|                        |  |                                    |  |                              |       |                                     |       |                         |   |                                 |  |                              |  |                         |       |  |   |  
|                        |  | 3,541,849                          |  |                              |       |                                     | 7.156 |                         | $ |                                |  | 2,234,794                    |  |                         |       |  | $ | 
|                        |  |                                    |  |                              |       |                                     |       |                         |   |                                 |  |                              |  |                         |       |  |   |  



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



The intrinsic value is calculated at the difference between the market value as of May 31, 2009 and the exercise price of the shares. The market value as of May 31, 2009 was $0.70 as reported by the OTC
Bulletin Board.

The summary of the status of the Companys non-vested options for the year ended May 31, 2009 is as follows:



|                       |  |                                    |  |                              |  |                         |  
|---------------------- |  | ---------------------------------- |  | ---------------------------- |  | ----------------------- | -
|Range ofExercise Price |  | Number ofOutstandingat May 31,2009 |  | WeightedAverageExercisePrice |  | AggregateIntrinsicValue
|$1.38  3.00           |  | 1,168,935                          |  | $1.3956                      |  | $                       | 
|$3.01  6.00           |  | 38,120                             |  | $  4.035                     |  | $                       | 
|                       |  |                                    |  |                              |  |                         |  
|                       |  | 1,207,055                          |  |                              |  | $                       | 
|                       |  |                                    |  |                              |  |                         |  

16. SUPPLEMENTAL CASH FLOW INFORMATION



|                                                      |  |      |       |      |   |        
|----------------------------------------------------- |  | ---- | ----- | ---- | - | -------
|                                                      |  | 2009 |       | 2008
|(a) Supplemental Cash Flow Information                |  |      |       |      |   |        
|Cash paid for income taxes                            |  | $    | 6,557 |      | $ | 27,324 
|                                                      |  |      |       |      |   |        
|Cash paid for interest                                |  | $    | 5,465 |      | $ | 450,123
|                                                      |  |      |       |      |   |        
|(b) Non cash transaction                              |  |      |       |      |   |        
|Business acquisition NHIadjustment to purchase price |  | $    |      |      | $ | 134,164

17. RELATED PARTY TRANSACTIONS



| | (a) | Included in general and administrative expenses for the year ended May 31, 2009 and May 31, 2008 are consulting fees of $83,038 and $94,958, respectively, paid to an
individual who is a director and officer of the Company and rent, management fees, and office administration fees of $187,906 and $184,646, respectively paid to Icarus Investment Corp., a corporation of which two of the directors are also directors
of the Company (see Note 19(b)).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Included in interest expenses for the twelve months ended May 31, 2008 are interest charges of $297,205 from the $4,000,000 borrowed from the Secretary and a director of the
Company, which was used to fund the acquisition of the assets of NoC (Note 4). The loan and interest were paid in full by the Company as of May 31, 2008.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



18. EARNINGS (LOSS) PER COMMON SHARE

The following table sets forth the computation of weighted-average shares outstanding
for calculating basic and diluted earnings per share (EPS) for the years ended May 31:



|                                |  |            |  |            |    
|------------------------------- |  | ---------- |  | ---------- | ---
|                                |  | 2009       |  | 2008       |    
|Weighted-average shares-basic   |  | 34,816,989 |  | 24,842,847 |    
|Effect of dilutive securities   |  | *          |  | *          |    
|                                |  |            |  |            |    
|Weighted-average sharesdiluted |  | 34,816,989 |  | 24,842,847 | (1)
|                                |  |            |  |            |    

Basic EPS and diluted EPS for the years ended May 31, 2009 and 2008 have been computed by
dividing the net income (loss) by the weighted average shares outstanding. The weighted average numbers of shares of common stock outstanding includes exchangeable shares and shares to be issued under the Plan of Arrangement for the year ended
May 31, 2009 of 4,096,787 of which, only 2,505,827 shares have been exchanged as of May 31, 2009.



|* | All outstanding options aggregating 3,541,849 incremental shares, have been excluded from the May 31, 2009 (3,506,850 incremental shares from the May 31, 2008) computation
of diluted EPS as they are anti-dilutive due to the losses generated in 2009 and 2008.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19. COMMITMENTS



| | (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, 2009.



|           |  |   |          
|---------- |  | - | ---------
|2010       |  | $ | 387,707  
|2011       |  |   | 292,718  
|2012       |  |   | 301,679  
|Thereafter |  |   | 101,555  
|           |  |   |          
|Total      |  | $ | 1,083,659
|           |  |   |          

The preceding data reflects existing leases and does not include replacement upon the expiration.
In the normal course of business, operating leases are normally renewed or replaced by other leases. Rent expense amounted to $610,655, and $729,625 for the twelve months ended May 31, 2009 and May 31, 2008, respectively.



| | (b) | The Company has an oral agreement for management services with Icarus Investment Corp., formerly known as Can-Med Technology doing business as Green Diamond Corp. Under the terms of
the agreement, the Company is provided with office space, office equipment and supplies, telecommunications, personnel and management services, which renews annually. These obligations were assumed by the Company in connection with the consummation
of the Plan of Arrangement. Included in general and administrative expenses for the twelve months ended May 31, 2009 are $187,906 (2008$184,646) (see Note 17(a)).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | On March 3, 2008, the Company entered into an employment agreement (the CEO Agreement) defining the terms and conditions of employment for the
Chief Executive Officer of the Corporation, Stephen Pudles. The employment commenced on April 21, 2008. Under the terms of the CEO Agreement, the Chief Executive Officer of the Corporation is entitled to an annual base salary of
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



| | $265,000, payment of relocation expenses of up to $100,000, various other benefits and an annual bonus. The annual bonus is based on achievement of annual
EBITDA targets and other performance targets, as determined by the Board of Directors in consultation with Mr. Pudles. If the Company achieves 100% of the bonus targets, the annual bonus will equal 50% of Mr. Pudles base salary, and if the
Company achieves in excess of 100% of the targets, the Board will determine what adjustments, if any, will be made to the annual bonus. Under the employment agreement, either party may terminate the agreement for any reason, provided Mr. Pudles
must provide at least 60 days advance notice of resignation. However, if the agreement is terminated by the Company without cause, Mr. Pudles is entitled to receive six months of continuing salary if such termination occurs during the first
year of employment; twelve months of continuing salary if such termination occurs after the first year of employment, but on or before the fourth anniversary date of his employment; and eighteen months of continuing salary if such termination occurs
after the fourth year of his employment. If Mr. Pudles terminates his employment due to death or disability, he is entitled to three months of continuing salary.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, upon commencement of employment, the Chief Executive Officer was granted incentive options under the Companys 2006 Equity Incentive
Plan. The CEO Agreement contains (i) incentive options for shares of common stock, up to the amount permitted by applicable law, and non-qualified stock options for the remainder resulting in the aggregate right to purchase up to 749,110 shares
of the Companys common stock (Time Based Shares), and (ii) nonqualified options to purchase up to 499,407 shares of the Companys common stock (the Performance Shares). The per-share exercise price for such stock
options is the fair market value of a share of the Companys common stock on the date of grant. The stock options, with respect to the Time Based Shares, will vest in equal installments annually over a three-year period beginning with the
commencement of employment with the Company. The stock options, with respect to the Performance Shares, will commence vesting in equal installments annually over a three-year period beginning with the first anniversary of the date of grant. On
August 5, 2009, the stock options, with respect to the Performance Shares, were amended so that the Performance Shares will vest in equal installments annually over a five-year period commencing on the first anniversary date of the date of
grant.

20. 401(K) PLAN

The Company
has 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 years ended May 31, 2009 and 2008, the Company incurred $218,181, and $186,957 respectively, as its obligation under the terms of the plan, charged to general and administrative expense.

21. RESTRUCTURING CHARGES RELATED TO CONSOLIDATION OF OPERATIONS

In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, restructuring costs are recorded as incurred. Restructuring charges for employee workforce reductions are
recorded upon employee notification. In conjunction with the consolidation of Pace Technologies, Filtran Group and Keytronics Inc. into existing facilities, the Company accrued for restructuring costs.

During the twelve months ended May 31, 2009 restructuring actions included charges of approximately $483,000 related to workforce reductions,
primarily related to severance costs due to the reduction of approximately 120 employees. The Company incurred approximately $130,000 in charges related to property and equipment



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



disposed of or removed from service and other charges related to the closure of Filtran Inc., Pace Technologies and Keytronics Inc., including lease
commitments for facilities no longer in service. During the twelve months ended May 31, 2009, the Company realized a loss on disposal of approximately $263,000 on the sale of machinery and equipment related to the closure of Pace Technologies
and impairment charges of $200,000 on buildings available for sale in Ogdensburg and Endicott, New York. Management continues to evaluate whether other related assets have been impaired, and concluded that there should be no additional impairment
charges as of May 31, 2009.

The Companys consolidating efforts in order to enhance operational efficiency continues, including
the winding up and relocating of business at certain locations. The Company started, in the fourth quarter of fiscal year 2008, moving the Filtran Inc. operations in Ogdensburg, New York to the Filtran Limited facility located in Ottawa, Ontario. As
of May 31, 2009 the facility is effectively closed and available for sale.

During the twelve months ended May 31, 2009, the
Company consolidated the Pace operations from Largo, Florida with National Hybrid at Ronkonkoma, New York. Operations at Largo, Florida have ceased and the final rent payment was made in March 2009.

The Company completed consolidating the manufacturing of the Endicott, NY facility to both the Ottawa and Ronkonkoma manufacturing facilities. The
Endicott, New York facility is effectively closed and available for sale.

The Company engaged an auction company to sell excess
machinery and equipment assets that were not in use. The Company received approximately $790,000 from the sale of these assets during the year ended May 31, 2009. The majority of these assets were acquired in conjunction with the National
Hybrid Group acquisition on January 25, 2007.

As of May 31, 2009, the following table represents the details of restructuring
charges and the related liability:



|                                            |  |                         |          
|------------------------------------------- |  | ----------------------- | ---------
|                                            |  | WorkshareReduction Cost
|Balance, May 31, 2008                       |  | $                       |         
|Restructuring charges                       |  |                         | 876,141  
|Write-offs                                  |  |                         | 200,000  
|                                            |  |                         |          
|Total restructuring charges at May 31, 2009 |  |                         | 1,076,141
|Cash payments                               |  |                         | 683,615  
|Non-cash charges                            |  |                         | 200,000  
|                                            |  |                         |          
|Balance, May 31, 2009                       |  | $                       | 192,526  
|                                            |  |                         |          

The remaining balance at May 31, 2009 is included in accounts payable and accrued
liabilities.

22. SEGMENT INFORMATION

The Company follows SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). SFAS No. 131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in financial reports. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers.



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



SFAS No. 131 uses a management approach for determining segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance
as the source of the Companys reportable segments. The Companys operations are conducted in two reportable segments, which are distinguished by geographic location in Canada and United States. Within the US reporting segment, the Company
has aggregated two operating segments. These segments have been aggregated as they share similar economic characteristics including similar product lines and shared manufacturing processes and equipment. Both segments design and manufacture
electronic components. Inter-segment sales are presented at their market value for disclosure purposes.



|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|------------------------------ |  | ------ | --------- | - | ------------- | - | ---------- | ----------------- |  | - | ------------------------- | - |  | ----- | -------- | - |  | - | ---------- | -
|Year Ended May 31, 2009        |  | Canada |           |   | United States |   |            | Corporate(Canada) |  |   | Inter SegmentEliminations |   |  | Total |         
|Sales to external customers    |  | $      | 7,564,910 |   |               | $ | 18,172,487 |                   |  | $ |                          |   |  | $     |         |   |  | $ | 25,737,397 |  
|Inter-segment sales            |  |        | 69,923    |   |               |   | 40,459     |                   |  |   |                          |   |  |       | (110,382 | ) |  |   |           |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Total revenue                  |  |        | 7,634,833 |   |               |   | 18,212,946 |                   |  |   |                          |   |  |       | (110,382 | ) |  |   | 25,737,397 |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Income before expenses below:  |  |        | (92,575   | ) |               |   | (4,374,288 | )                 |  |   |                          |   |  |       |         |   |  |   | (4,466,863 | )
|Corporate head office expenses |  |        |          |   |               |   |           |                   |  |   | 1,400,299                 |   |  |       |         |   |  |   | 1,400,299  |  
|Depreciation and amortization  |  |        | 203,796   |   |               |   | 738,430    |                   |  |   | 2,868                     |   |  |       |         |   |  |   | 945,094    |  
|Other expense (income)         |  |        | (152,465  | ) |               |   | 66,043     |                   |  |   | (385,605                  | ) |  |       |         |   |  |   | (472,027   | )
|Income tax expense (benefit)   |  |        |          |   |               |   | 12,579     |                   |  |   | 91,729                    |   |  |       |         |   |  |   | 104,308    |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Net income (loss)              |  | $      | (143,906  | ) |               | $ | (5,191,340 | )                 |  | $ | (1,109,291                | ) |  | $     |         |   |  | $ | (6,444,537 | )
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Segment assets                 |  | $      | 4,731,703 |   |               | $ | 16,775,601 |                   |  | $ | 2,646,006                 |   |  | $     |         |   |  | $ | 24,153,310 |  
|Goodwill included in assets    |  | $      | 848,102   |   |               | $ | 282,804    |                   |  | $ |                          |   |  | $     |         |   |  | $ | 1,130,906  |  
|Capital expenditures           |  | $      | 14,057    |   |               | $ | 378,103    |                   |  | $ | 4,717                     |   |  | $     |         |   |  | $ | 396,877    |  
|                               |  |        |           |   |              
|Year Ended May 31, 2008        |  | Canada |           |   | United States |   |            | Corporate(Canada) |  |   | Inter SegmentEliminations |   |  | Total |         
|Sales to external customers    |  | $      | 9,044,846 |   |               | $ | 21,917,200 |                   |  | $ |                          |   |  | $     |         |   |  | $ | 30,962,046 |  
|Inter-segment sales            |  |        | 7,800     |   |               |   | 385,826    |                   |  |   |                          |   |  |       | (393,626 | ) |  |   |           |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Total revenue                  |  |        | 9,052,646 |   |               |   | 22,303,026 |                   |  |   |                          |   |  |       | (393,626 | ) |  |   | 30,962,046 |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Income before expenses below:  |  |        | 290,721   |   |               |   | (4,638,117 | )                 |  |   |                          |   |  |       |         |   |  |   | (4,347,396 | )
|Corporate head office expenses |  |        |          |   |               |   |           |                   |  |   | 958,896                   |   |  |       |         |   |  |   | 958,896    |  
|Depreciation and amortization  |  |        | 123,579   |   |               |   | 1,070,104  |                   |  |   | 2,757                     |   |  |       |         |   |  |   | 1,196,440  |  
|Other expense (income)         |  |        | 177,972   |   |               |   |           |                   |  |   | 101,039                   |   |  |       |         |   |  |   | 279,011    |  
|Income tax expense (benefit)   |  |        | 1,867     |   |               |   | (40,272    | )                 |  |   | (177,228                  | ) |  |       |         |   |  |   | (215,633   | )
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Net income (loss)              |  | $      | (12,697   | ) |               | $ | (5,667,949 | )                 |  | $ | (885,464                  | ) |  | $     |         |   |  | $ | (6,566,110 | )
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Segment assets                 |  | $      | 5,332,383 |   |               | $ | 22,225,793 |                   |  | $ | 1,961,120                 |   |  | $     |         |   |  | $ | 29,519,296 |  
|Goodwill included in assets    |  | $      | 863,317   |   |               | $ | 267,589    |                   |  | $ |                          |   |  | $     |         |   |  | $ | 1,130,906  |  
|Capital expenditures           |  | $      | 111,164   |   |               | $ | 1,644,080  |                   |  | $ | 5,761                     |   |  | $     |         |   |  | $ | 1,761,005  |  



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



|                         |  |                    |            |                                                   |   |            |  |                                                   |            |  |   |           
|------------------------ |  | ------------------ | ---------- | ------------------------------------------------- | - | ---------- |  | ------------------------------------------------- | ---------- |  | - | ----------
|                         |  | Year ended May 31,
|                         |  | 2009               |            | 2008                                             
|Geographical Information |  | Revenue            |            | Capital Assets,IntangibleAssets,Goodwill andOther |   | Revenue    |  | Capital Assets,IntangibleAssets,Goodwill andOther
|United States            |  | $                  | 19,459,782 |                                                   | $ | 9,059,610  |  | $                                                 | 25,031,882 |  | $ | 10,517,078
|Canada                   |  |                    | 1,324,061  |                                                   |   | 1,861,560  |  |                                                   | 1,649,745  |  |   | 2,257,788 
|United Kingdom           |  |                    | 2,449,318  |                                                   |   |           |  |                                                   | 2,289,133  |  |   |          
|All Other                |  |                    | 2,504,236  |                                                   |   |           |  |                                                   | 1,991,286  |  |   |          
|                         |  |                    |            |                                                   |   |            |  |                                                   |            |  |   |           
|                         |  | $                  | 25,737,397 |                                                   | $ | 10,921,170 |  | $                                                 | 30,962,046 |  | $ | 12,774,866
|                         |  |                    |            |                                                   |   |            |  |                                                   |            |  |   |           



|                                          |  |                   |   |  |      |  
|----------------------------------------- |  | ----------------- | - |  | ---- | -
|                                          |  | Year endedMay 31, |  
|                                          |  | 2009              |   |  | 2008 |  
|Major Customer Revenue:                   |  |                   |   |  |      |  
|U.S. Department of Defense                |  | 8                 | % |  | 9    | %
|U.S. Department of Defense subcontractors |  | 63                | % |  | 70   | %

23. SUBSEQUENT EVENTS



| | 1. | On May 11, 2009, the Company entered into an agreement to sell the land and building at 229 Colonnade Road, Nepean, Ontario, Canada for approximately $1,900,000. On
July 17, 2009 the Buyer waived all conditions on the agreement, and as such, the Company expects to close the deal on September 15, 2009. The Company plans to relocate the operations of Filtran Limited to a new manufacturing and design
centre in the Ottawa region.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | On June 2, 2009, the Company completed the deal to sell the land adjacent to National Hybrids manufacturing and design facility in Ronkonkoma, New York. The selling price
for the land was $1,000,000.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | On June 23, 2009, the Company issued secured, convertible promissory notes (Notes) to a group of investors for $3,650,000 principal amount. Interest on the notes is
payable at the annual rate of 12% at the end of each calendar quarter. The Notes are secured by the personal property of the Company and its subsidiaries. The Notes are due on June 23, 2012.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The outstanding principal amount of the Notes and/or accrued and unpaid interest or any portion thereof are convertible at the holders option, at
anytime after the date on which the Company purchased substantially all of the assets of Cryptek Technologies Inc. through the foreclosure of the Cryptek Technologies Inc. loans into shares of common stock, $.001 par value, of the Company, at a
price per share equal to the greater of (i) $.75 per share or (ii) the variable weighted average price of the common stock of the Company as reported by the OTC Bulletin Board during the three (3) consecutive trading days ending on
the date the Company purchased the Cryptek Technologies loan from Wachovia.

The Company used the proceeds of the Notes to purchase all of
the rights, title and interest of Wachovia Bank, National Association (Wachovia Bank) and Wachovia Capital Finance Corporation (Canada) (collectively with Wachovia Bank, Wachovia) in and to certain loans and financing
documents (the Cryptek Loan). The loans and financing documents include the loan to Cryptek Technologies Inc. (Cryptek) by Wachovia and security agreements covering substantially all of the assets of Cryptek.



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



| | 4. | On July 7, 2009, API Cryptek, Inc. (API Cryptek), a newly formed subsidiary of the Company acquired substantially all of the assets of Cryptek through foreclosure
on API Crypteks security interest and liens in the Cryptek assets, and subsequent sale under the Uniform Commercial Code. API Cryptek was the successful bidder of the Cryptek assets at the sale, by bidding the total amount owed by Cryptek to
API Cryptek under loan documents previously purchased by API Cryptek for $5,000,000.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cryptek develops and delivers security
solutions to various industries and government agencies. Cryptek is also a provider of emanation security products and solutions. The Cryptek acquisition is highly synergistic as 80-90% of both the Cryptek and Company revenues are derived from
government and military customers and there are opportunities to cross market the Companys broad networking and communications product offerings.

The Cryptek acquisition was completed as an all-cash transaction with proceeds from corporate funds and the private placement of Notes completed June 23, 2009. Crypteks consolidated revenues for their
fiscal year 2008 were approximately $30 million.

The Company has accounted for the acquisition using the purchase method of accounting. In
accordance with SFAS No. 141R, Business Combinations (as amended) the Company expects the total purchase price, which is still to be determined (but expected to be approximately $6,000,000) to be allocated to Crypteks net
assets based on their estimated fair values. The Company expects to assign values to assets acquired and liabilities assumed including cash, accounts receivable, fixed assets and accounts payable.



| | 5. | On August 5, 2009, the Company granted officers, directors and employees of the Company, options to purchase 1,703,109 shares of Common Stock. The option grants vest in five,
except for option grant for 550,000 shares that vests in three, equal annual installments commencing August 5, 2010, have an exercise price of $1.43 per share, and terminate on August 4, 2019.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. | On August 5, 2009, the Company amended the 2006 Equity Compensation Plan to increase the number of shares of common stock under the plan from 5,000,000 to 5,500,000.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-31