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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K







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

For the fiscal year ended May 31, 2010



| ̈ | 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 TECHNOLOGIES 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.)



|                                         |  |           
|---------------------------------------- |  | ----------
|2200 Smithtown Avenue
Ronkonkoma, N.Y.   |  | 11779     
|(Address of Principal Executive Offices) |  | (Zip Code)

Registrants Telephone Number including area code: 631-981-2400

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 large accelerated filer, 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 by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the
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: $43,130,229

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

Not applicable

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

As of August 6, 2010, the Company had 32,871,225 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, 2010 are incorporated by reference into Part III.









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TABLE OF CONTENTS



|           |  |                                                                                                              |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                              |  | Page
|           | 
|PART I     |  |                                                                                                             
|           |  |                                                                                                             
|ITEM 1     |  | BUSINESS                                                                                                     |  | 1   
|ITEM 1A    |  | RISK FACTORS                                                                                                 |  | 16  
|ITEM 2     |  | PROPERTIES                                                                                                   |  | 29  
|ITEM 3     |  | LEGAL PROCEEDINGS                                                                                            |  | 29  
|ITEM 4     |  | RESERVED                                                                                                     |  | 29  
|           | 
|PART II    |  |                                                                                                             
|           |  |                                                                                                             
|ITEM 5     |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |  | 30  
|ITEM 7     |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS                        |  | 32  
|ITEM 8     |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                  |  | 45  
|ITEM 9     |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE                         |  | 45  
|ITEM 9A(T) |  | CONTROLS AND PROCEDURES                                                                                      |  | 45  
|ITEM 9B    |  | OTHER INFORMATION                                                                                            |  | 46  
|           | 
|PART III   |  |                                                                                                             
|           |  |                                                                                                             
|ITEM 10    |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                       |  | 47  
|ITEM 11    |  | EXECUTIVE COMPENSATION                                                                                       |  | 47  
|ITEM 12    |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS               |  | 47  
|ITEM 13    |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                    |  | 47  
|ITEM 14    |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                       |  | 47  
|           | 
|PART IV    |  |                                                                                                             
|           |  |                                                                                                             
|ITEM 15    |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                   |  | 48  



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PART I



|ITEM 1. | 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 Technologies Corp. (we, us, our, the Company, or API) designs, develops
and manufactures highly engineered solutions, systems, robotics, secure communications and electronic components for military and aerospace applications, including mission critical information systems and technologies. We own and operate several
state-of-the-art manufacturing facilities throughout North America and the United Kingdom. Our customers, which include defense prime contractors, and the contract manufacturers who work for them, in the United States, Canada, the United Kingdom and
various other countries in the world, outsource many of their defense subcontracting requirements to us as a result of the combination of our design, development and manufacturing expertise.

API is a defense engineered solutions provider to various world governments, as well as military, aerospace and homeland security
contractors and equipment manufacturers. An engineering-driven organization, API supports its customers by adding value to their respective products and solutions throughout the project lifecycle, from conception, including design, engineering and
integration services to manufacturing and system assembly. Our expertise includes missile systems, electronic warfare systems, flight control systems, range finders and communication systems. Additionally, we offer highly engineered custom
products designed to meet the unique operational needs and compliance requirements of customers in its target markets. Our core capabilities span



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defense and aerospace, systems and engineering (such as missile systems, robotics, and payloads), components and subsystems, emanation security and TEMPEST, secure networking and communications
and electronics manufacturing services.

We currently have business offices in Ronkonkoma, New York, Windber,Pennsylvania, Sterling, Virginia, South Plainfield, New Jersey, Ottawa, Ontario, Canada, and Gloucester, United Kingdom. Our executive corporate office is located at 2200 Smithtown Avenue, Ronkonkoma, NY 11779, and our telephone number at that
location is (631) 981-2400. Our website, which contains links to our financial information and our filings with the SEC, is www.apitechnologies.com. The content on our website is available for information purposes only and is not
incorporated by reference. We are quoted on the OTCBB under the symbol ATNY.

Business Strategy

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

Our strategies to achieve our objectives include:



| |  |  | Leveraging Existing Customer Relationships. We intend to leverage our relationships with our Tier 1 and government customers by
continuing our superior performance on existing contracts and actively working with them on new contracts. Our experience has shown that strong performance on existing contracts enhances our ability to obtain additional business with our existing
customer base.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Grow Sales Organically. We intend to maintain and expand our position as a subcontractor to prime military contractors for military
products, systems, subsystems and services to the DoD, other U.S. Government agencies, NATO, allied foreign governments and commercial customers, both domestic and international. We believe our recent acquisitions of Cryptek and the KGC
Companies (as hereinafter defined) with complementary product lines create cross-selling opportunities within our existing global customer base. We also believe that the recent expansion of API to the United Kingdom reinforces our international
business opportunities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continuously Improve our Cost Structure and Business Processes. We intend to continue to aggressively improve and reduce our direct
contract and overhead costs, including general and administrative costs. Effective management of labor, material, subcontractor and other direct costs is a primary element of favorable contract performance. We believe continuous cost improvement
will enable us to increase our cost competitiveness, expand our operating margin and selectively invest in new product development, bids and proposals and other business development activities to organically grow sales.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Align Research & Development with Customer Priorities. We intend to continue to align our products, services, internal
investments in research and development and business development activities to proactively address customer priorities and requirements. We also intend to grow our sales through the introduction of new products and services and continued increased
collaboration among our businesses to offer the best quality and competitive solutions and services to our customers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continuing to React Quickly to the Changing Defense Environment.In addition to being well positioned for conventional warfare
roles, we intend to continue to adapt existing technologies and products, such as thermal imaging, rugged computer and communication systems, to address evolving military requirements, including rapid deployment and containment of non-conventional
threats, such
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | as terrorism and asymmetric warfare. We believe our expertise in electro-optics, rugged computers, advanced communications and network systems fits well into the DoDs current and future
technological focus.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Capitalize on the Emphasis on Transformation and Modernization. In recent years global government budgets, including the DoD budget,
have reflected increased focus on command, control, communications, computers, collaboration and intelligence, surveillance and reconnaissance, precision-guided weapons, Unmanned Aerial Vehicles (UAV) 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. The 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 global government budgets for information technologies and defense electronics will grow. We believe our Engineered Systems and Components
segment, which manufactures components for these items 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-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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pursuing Strategic Acquisitions. We plan to supplement our organic sales growth by selectively acquiring businesses that add new
products, services, technologies, programs and contracts, or provide access to select customers and provide attractive returns on investment.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Developing and Retaining Highly Qualified Management and Technical Employees. The success of our businesses, including our ability
to retain existing business and to successfully compete for new business is primarily dependent on the management, marketing and business development, contracting, engineering and technical skills, and knowledge of our employees. We intend to retain
and develop our existing employees and recruit and hire new qualified and skilled employees through training, competitive compensation, and organizational and staff development, as well as effective recruiting.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Corporate Organization and History

API was incorporated on February 2, 1999 under the laws of the State of Delaware under the name Rubincon Ventures Inc. On
November 6, 2006, we completed the business combination among API, API Nanotronics Sub, Inc., which we refer to as API Sub, and API Electronics Group Corp., which we refer to as API Ontario. We refer to the business combination in this Form
10-K as the Business Combination. In the Business Combination, which occurred under Ontario law, API combined with API Ontario, and API Ontario became APIs wholly-owned indirect subsidiary. This Business Combination was accomplished by API
forming an Ontario subsidiary, RVI Sub, Inc., which is now API Sub. API Sub is an Ontario corporation under the Business Corporations Act (Ontario), and was incorporated solely for the purpose of affecting the Business Combination. It has no
operations. API Ontario became a wholly-owned subsidiary of API Sub pursuant to a Plan of Arrangement approved by the Ontario Superior Court of Justice. The holders of common shares of API Ontario were given the right to receive either 3.33 API
common shares (which number reflects a subsequent stock split and reverse stock split), or if the shareholder elected and was a Canadian taxpayer, 3.33 Exchangeable Shares of API Sub (which number reflects a subsequent stock split and reverse stock
split). Any API Ontario common shares not exchanged into Exchangeable Shares or API common shares will be cancelled on November 6, 2016.

Prior to the completion of the Business Combination we were a shell company. We had no subsidiaries and no affiliated companies, other
than the Ontario subsidiaries that we established solely for the purpose of the Business Combination. Prior to the Business Combination, we had no operations and our assets consisted of cash



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and cash equivalents. Our business plan consisted of seeking an acquisition or business combination with an operating company. We accomplished that objective through the Business Combination with
API.

In connection with the Business Combination API changed its name to API Nanotronics Corp, which subsequently
changed its name to API Technologies Corp. on October 22, 2009.

Recent Developments

Acquisitions

In
fiscal 2010, API completed the following transactions:

Purchase of Assets of CryptekOn July 7, 2009,
API acquired substantially all of the assets of Cryptek Technologies Inc. (Cryptek) through foreclosure on API Cryptek Inc.s security interest and liens on the Cryptek assets, and subsequent sale under the Uniform Commercial Code.
Our subsidiary, API Cryptek Inc., was the successful bidder of the Cryptek assets at the sale, by bidding the total amount owed by Cryptek to API Cryptek Inc. under loan documents previously purchased by API Cryptek Inc. for $5,000,000. API Cryptek
Inc. develops and delivers security solutions to various industries and government agencies as well providing emanation security products and solutions. Products include secured communication products, including ruggedized computer products, network
security appliances, and TEMPEST emanation prevention products. API Cryptek Inc. and its subsidiaries have offices in Sterling, Virginia, South Plainfield, New Jersey, Ottawa, Ontario and Gloucester, United Kingdom.

Purchase of Assets of the KGC CompaniesOn January 20, 2010, API and three of its subsidiaries (the API
Pennsylvania Subsidiaries), entered into an asset purchase agreement with Kuchera Defense Systems, Inc. (KDS), KII, Inc. (KII) and Kuchera Industries, LLC (KI Industries and collectively with KDS and KII,
the KGC Companies) pursuant to which the API Pennsylvania Subsidiaries purchased substantially all of the assets of the KGC Companies, which included defense subcontractors specializing in highly engineered systems and robotics for the
defense, aerospace and communication industries. The API Pennsylvania Subsidiaries purchased the assets of the KGC Companies for total consideration of $28,480,000, consisting of (i) $24,000,000, comprised of $14,000,000 of cash paid at closing
and a $10,000,000 short term note (the KGC Note) dated January 20, 2010 and entered into and made by the API Pennsylvania Subsidiaries in favor of the KGC Companies and (ii) 3,200,000 shares of API common stock payable as
follows: 1,000,000 shares of common stock were issued and delivered at closing, 1,000,000 shares of common stock are to be issued and delivered on the first anniversary of the closing and 1,200,000 shares of common stock are to be issued and
delivered on the second anniversary of the closing. The stock issued and to be issued was valued at $1.40 per share, the fair value of the common stock at the transaction date. The principal amount of the KGC Note is subject to downward adjustment
in the event the value of the assets purchased is less than contemplated by the parties. The Company has issued 505,000 shares of common stock in escrow from the 2,200,000 shares of common stock remaining to be delivered. The KGC Note bears interest
at an annual rate of five percent (5%) per annum and matures on December 31, 2010. The KGC Note provides for certain monthly interest payments. The entire principal balance of the KGC Note and accrued interest is due and payable at
maturity. The KGC Note is secured by certain assets of the API Pennsylvania Subsidiaries, excluding government contracts.

Operational
Restructuring

Following the acquisitions of the assets of Cryptek and the assets of the KGC Companies in July 2009 and
January 2010, respectively, API had operating facilities in Ronkonkoma and Hauppauge, New York, Somerset, New Jersey, and Ottawa, Ontario, as well as Windber,Pennsylvania, Sterling, Virginia, South Plainfield, New Jersey, and Gloucester,United Kingdom. Commencing in May 2010, we began a cost cutting initiative to rationalize the number of facilities and personnel which will result in us consolidating our manufacturing operations from eight facilities into three facilities. As
at July 31, 2010, we had closed and sold our Hauppauge,



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New York manufacturing facility and completed the consolidation of our two Canadian facilities into one manufacturing location. We expect the rest of this process to be completed by December 2010
and should result in the reduction of approximately $4 million in annual costs.

On February 22, 2010, we announced that
we were closing our nanotechnology research and development subsidiary based in Somerset, New Jersey. This business had historically been unprofitable and the closure is expected to improve our operating results and allow us to deploy our capital
and management resources on our expanding defense business. The assets of the business were sold in June 2010.

Products and Services

Operating through two principal business segmentsEngineered Systems and Components, and Secure Communicationswe
are positioned as a total engineered solution provider to various world governments, as well as defense, aerospace and homeland security contractors. The segments are distinguished by product and service offerings.

The Engineered Systems and Components segment includes the products and services of our operating subsidiaries API Defense Inc., API
Defense USA Inc., API Systems Inc., National Hybrid Group, API Electronics, Inc., TM Systems, Keytronics and Filtran Limited. The Secure Communications segment includes the products and services of our subsidiaries Cryptek, Emcon Emanation Control
Inc., Secure Systems and Technologies and the Ion Networks division.

Our products and services fall within the following
broad categories.

Engineered Systems and Components



| |  |  | Highly Engineered Defense Solutions
| | - |  | -----------------------------------

We provide highly engineered solutions for the defense and aerospace sectors. Our advanced electronic, electromechanical systems and
engineered materials are mission-critical, standard equipment on a wide range of military platforms. Selected offerings include: missile systems, targeting systems, electronic warfare systems and control systems. Additionally, the company offers
robotic systems and payloads that are used for surveillance, targeting, as well as Explosive Ordnance Disposal (EOD).



| |  |  | Key Military and Aerospace Communications Technologies
| | - |  | ------------------------------------------------------

We provide the aerospace and avionics industries with key military communications and commercial command and control technologies and
manufacture state-of-the-art test equipment. For example, we have developed the worlds smallest complete Mil-Std-1553 communications terminal, the worlds first integrated 1553 transceiver/transformer, the worlds only fully
integrated 1553 terminal / transformer with 64K word RAM, the worlds smallest dual 1553 transceiver, and have recently introduced COTS (commercial off the shelf) circuit board implementations that allow customers to bring their products to
market in a more timely fashion with a minimum of hardware design. These products are designed into the most advanced airborne platforms worldwide, including the following types of aircrafts: C-17 Globemaster III and C-130J Hercules aircraft, AH-64
Apache helicopter, F-15, F-16, F-18, F-22, and EF2000 fighter aircrafts.



| |  |  | Systems and Subsystems
| | - |  | ----------------------

Our advanced electronic, electromechanical systems and engineered materials are mission-critical, standard equipment that are used on a
wide range of military platforms. Examples of products and systems include naval aircraft landing and launching equipment, including Visual Landing Aids (VLA) and the Stabilized Glide Slope Indicator (SGSI) flight control and signaling systems,
radar indicators, electronic countermeasures, data communication and test equipment as well as aircraft ground support equipment.



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| |  |  | Custom Hybrids and Multichip Modules
| | - |  | ------------------------------------

We focus on designing and manufacturing increasingly complex, cost-effective, high-reliability microcircuits in our MIL-PRF-38534
certified facility. Our expertise includes analog and digital designs for power, signal processing and RF applications as well as application specific integrated circuits and gate-array implementations. Extensive in-house simulation, prototype
testing and analysis facilities allow us to develop products for both standard and custom applications with heightened reliability. These products are used by leading defense contractors, aerospace and hi rel electronic
OEMs worldwide in missiles, weapons systems, communication equipment, aerospace, shipboard land vehicles and many other high reliability, or hi rel, applications.

Secure Communications

API offers customers various secure network and hardware solutions including Emanation Security, Tempest and secure network access,
ruggedized systems and secure networking products. Our products are marketed under the Cryptek, ION, Emcon, SST and Netgard brand names. These product offerings are sold to governments 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. The nature of the products and services we provide include:



| |  |  | Secure Networking Products
| | - |  | --------------------------

Our security appliances and software intelligently enable secure information sharing and systems management across organizations and
technologies. Easy-to-deploy, standards-based products apply multi-layer security to existing IT systems. Service providers, IT and communications equipment manufacturers, enterprises and government agencies rely on our secure networking products
for secure systems for remote management, database guards for secure information sharing and secure virtual enclaves.



| |  |  | Emanation Security and TEMPEST Products
| | - |  | ---------------------------------------

Our emanation security products and custom solutions safeguard the worlds most sensitive information assets by
shielding IT systems and confidential data from those who may do harm. We have developed pioneering techniques for protecting electronic devices by limiting the stray signals and electromagnetic waves they produce. Our emanation security products
include computing systems, network and communications systems and office systems.



| |  |  | Professional Services
| | - |  | ---------------------

We offer a wide range of professional services that provide government agencies and enterprises with the knowledge and expertise needed to
mitigate risk, address emerging security challenges and meet compliance mandates. Our professional services include information assurance and secure networking architecture and design solutions, emanation security testing and engineering and
security certification and validation.



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Financial Information About Segments

Our operations are conducted in two reportable segments distinguished by product and service offerings, which are Engineered Systems and
Components and Secure Communications.



|                                                                         |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|------------------------------------------------------------------------ |  | ------------------------------- | ---------- | - | -------------------- | - | ---------- | --------- |  | - | ------------------------- | - | ----- | - | - |  | - | ---------- | -
|Year ended May 31, 2010                                                  |  | EngineeredSystems andComponents |            |   | SecureCommunications |   |            | Corporate |  |   | Inter SegmentEliminations |   | Total |  
|Sales to external customers                                              |  | $                               | 46,327,058 |   |                      | $ | 22,222,972 |           |  | $ |                          |   |       | $ |  |  | $ | 68,550,030 |  
|Inter-segment sales                                                      |  |                                 |           |   |                      |   |           |           |  |   |                          |   |       |   |  |  |   |           |  
|                                                                         |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Total revenue                                                            |  |                                 | 46,327,058 |   |                      |   | 22,222,972 |           |  |   |                          |   |       |   |  |  |   | 68,550,030 |  
|                                                                         |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Operating Income (loss) before expenses below:                           |  |                                 | 3,663,121  |   |                      |   | (195,478   | )         |  |   |                          |   |       |   |  |  |   | 3,467,643  |  
|Corporate head office expenses                                           |  |                                 |           |   |                      |   |           |           |  |   | 5,676,382                 |   |       |   |  |  |   | 5,676,382  |  
|Depreciation and amortization                                            |  |                                 | 701,866    |   |                      |   | 294,828    |           |  |   | 3,294                     |   |       |   |  |  |   | 999,988    |  
|Other (income) expenses                                                  |  |                                 | (815,659   | ) |                      |   | 111,751    |           |  |   | 782,904                   |   |       |   |  |  |   | 78,996     |  
|Income tax expense                                                       |  |                                 | 34,596     |   |                      |   | 10,858     |           |  |   |                          |   |       |   |  |  |   | 45,454     |  
|                                                                         |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Net income (loss) from continuing operations                             |  |                                 | 3,742,318  |   |                      |   | (612,915   | )         |  |   | (6,462,580                | ) |       | $ |  |  | $ | (3,333,177 | )
|Loss from discontinued operations, net of tax                            |  |                                 | (5,681,864 | ) |                      |   |           |           |  |   |                          |   |       |   |  |  |   | (5,681,864 | )
|                                                                         |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Net income (loss)                                                        |  | $                               | (1,939,546 | ) |                      | $ | (612,915   | )         |  | $ | (6,462,580                | ) |       | $ |  |  | $ | (9,015,041 | )
|                                                                         |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Segment assets                                                           |  | $                               | 63,641,687 |   |                      | $ | 12,350,457 |           |  | $ | 2,618,312                 |   |       | $ |  |  | $ | 78,610,456 |  
|Goodwill included in assets                                              |  | $                               | 8,461,889  |   |                      | $ |           |           |  | $ |                          |   |       | $ |  |  | $ | 8,461,889  |  
|Capital expenditures                                                     |  | $                               | 1,314,674  |   |                      | $ | 257,172    |           |  | $ | 52,375                    |   |       | $ |  |  | $ | 1,624,221  |  
|Impairment of fixed assets held for sale                                 |  | $                               | 324,410    |   |                      | $ |           |           |  | $ |                          |   |       | $ |  |  | $ | 324,410    |  
|Impairment of long-lived assets held for sale of discontinued operations |  | $                               | 2,242,473  |   |                      | $ |           |           |  | $ |                          |   |       | $ |  |  | $ | 2,242,473  |  
|                                                                         |  |                                 |            |   |                     
|Year ended May 31, 2009                                                  |  | EngineeredSystems andComponents |            |   | SecureCommunications |   |            | Corporate |  |   | Inter SegmentEliminations |   | Total |  
|Sales to external customers                                              |  | $                               | 25,461,024 |   |                      | $ |           |           |  | $ |                          |   |       | $ |  |  | $ | 25,461,024 |  
|Inter-segment sales                                                      |  |                                 |           |   |                      |   |           |           |  |   |                          |   |       |   |  |  |   |           |  
|                                                                         |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Total revenue                                                            |  |                                 | 25,461,024 |   |                      |   |           |           |  |   |                          |   |       |   |  |  |   | 25,461,024 |  
|                                                                         |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Operating Income (loss) before expenses below:                           |  |                                 | (220,710   | ) |                      |   |           |           |  |   |                          |   |       |   |  |  |   | (220,710   | )
|Corporate head office expenses                                           |  |                                 |           |   |                      |   |           |           |  |   | 1,400,299                 |   |       |   |  |  |   | 1,400,299  |  
|Depreciation and amortization                                            |  |                                 | 831,604    |   |                      |   |           |           |  |   | 2,868                     |   |       |   |  |  |   | 834,472    |  
|Other (income) expenses                                                  |  |                                 | (86,422    | ) |                      |   |           |           |  |   | (385,605                  | ) |       |   |  |  |   | (472,027   | )
|Income tax expense (benefit)                                             |  |                                 | 7,958      |   |                      |   |           |           |  |   | 91,729                    |   |       |   |  |  |   | 99,687     |  
|                                                                         |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Net loss from continuing operations                                      |  |                                 | (973,850   | ) |                      | $ |           |           |  | $ | (1,109,291                | ) |       | $ |  |  | $ | (2,083,141 | )
|Loss from discontinued operations, net of tax                            |  |                                 | (4,361,396 | ) |                      |   |           |           |  |   |                          |   |       |   |  |  |   | (4,361,396 | )
|                                                                         |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Net loss                                                                 |  | $                               | (5,335,246 | ) |                      | $ |           |           |  | $ | (1,109,291                | ) |       | $ |  |  | $ | (6,444,537 | )
|                                                                         |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Segment assetsas of May 31, 2009                                        |  | $                               | 21,507,304 |   |                      | $ |           |           |  | $ | 2,646,006                 |   |       | $ |  |  | $ | 24,153,310 |  
|Goodwill included in assetsas of May 31, 2009                           |  | $                               | 1,130,906  |   |                      | $ |           |           |  | $ |                          |   |       | $ |  |  | $ | 1,130,906  |  
|Capital expenditures                                                     |  | $                               | 288,946    |   |                      | $ |           |           |  | $ | 4,717                     |   |       | $ |  |  | $ | 293,663    |  



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##### Table of Contents

Major Customers



|                                                   |  |      |   |  |      |  
|-------------------------------------------------- |  | ---- | - |  | ---- | -
|                                                   |  | 2010 |   |  | 2009 |  
|Revenue                                            |  |      |   |  |      |  
|United States Department of Defense                |  | 8    | % |  | 8    | %
|United States Department of Defense subcontractors |  | 47   | % |  | 63   | %

Sales and Marketing

We use an integrated sales approach to closely manage relationships at multiple levels of the customers organizations,
including management, engineering and purchasing personnel. Our sales, marketing and support team consists of approximately 35 people. Our use of experienced engineering personnel as part of the sales effort facilitates close technical
collaboration with our customers during the design and qualification phase of new equipment. We believe that close collaboration is critical to ensuring our products are incorporated into our customers equipment.

The defense sales cycle can be long in nature with a protracted design phase. However, once a product is designed into a defense system,
it may be sole-sourced to a particular supplier. Due to the extensive qualification process and potential redesign required for using an alternative source, customers are often reluctant to change the incumbent supplier. We attempt to become the
incumbent supplier by supporting customers early design and engineering efforts, thereby positioning us to realize long-term, recurring revenue throughout the lifecycle of our customers products.

Backlog and Orders

Management uses a number of indicators to measure the growth of the business. A key measure for growth is sales backlog. Our sales backlog
at May 31, 2010 was approximately $68,664,000 compared to $13,691,000 at May 31, 2009, an increase of approximately $54,973,000. API Defense Inc. and API Systems Inc. represent approximately $50,173,000 of our backlog.

Our backlog figures represent confirmed customer purchase orders that we had not shipped at the time the figures were
calculated, which have a delivery date within a 12-month period, including U.S. government contracts, to the extent the funded amounts under such a contract have been appropriated by Congress and allotted to the contract by the procuring government
agency. Our backlog does not include the value of unexercised options that may be exercised in the future on multi-year contracts, nor does it include the value of additional purchase orders that we may receive under indefinite quantity-type
contracts or basic ordering agreements. Backlog includes all firm orders for commercial/industrial products. Fluctuations in backlog generally relate to the timing and amount of defense contract awards. Our customers will on occasion request that we
purchase material on their behalf in support of future program requirements. The value of this material is carried in backlog.

We have very little insight on the timing of new contract releases and, as such, the backlog can increase or decrease significantly based
on timing of customer purchase orders. There can be no assurance that our entire funded backlog will become revenues in future periods.

Seasonality

No material
portion of our business is considered to be seasonal, except our Secure Communications segment, which typically slows down during the summer months. Various factors can affect the distribution of our revenue between accounting periods, including the
timing of government contract awards, the availability of government funding, product deliveries and customer acceptance.



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Customers

Our customers consist mainly of military prime contractors and the contract manufacturers who work for them in the United States, Canada,
the United Kingdom and various other countries in the world. Approximately 55% and 71% of total consolidated revenues for the twelve months ended May 31, 2010 and 2009, respectively, were derived directly or indirectly from defense contracts
for end use by the U.S. government and its agencies. One of these customers represented approximately 20% of revenues for the twelve months ended May 31, 2010 and a separate customer represented 16% of revenues for the year ended May 31,
2009, respectively. One customer, a tier one defense subcontractor, represented 20% of accounts receivable as of May 31, 2010.

Research and Development

We conduct research and development to maintain and advance our technology base. Our research and development efforts are funded by both
internal sources and customer-funded development contracts.

Our research and development efforts primarily involve
engineering and design relating to: developing new products, improving existing products, adapting existing products to new applications; and developing prototype components for specific programs.

Most of our product development costs are recoverable under contractual arrangements; however, some of these costs are self-funded. Our
self-funded research and development expenditures for continuing operations were approximately $2,200,000, and $841,000 for the twelve months ended May 31, 2010 and 2009, respectively.

We believe that strategic investment in process technology and product development is essential for us to remain competitive in the
markets we serve. We are committed to maintaining appropriate levels of expenditures for product development.

Competition

We are engaged in an industry that is highly competitive and characterized by technological change and product life cycles. We face
competition from large and mid-tier defense contractors, electronic contract manufacturers, 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.

Some of our principal competitors include Microsemi Corporation (Nasdaq: MSCC), Aeroflex Incorporated, Anaren, Inc. (Nasdaq: ANEN), as
well as numerous other competitors in specific business lines. Certain competitors are also our customers and suppliers. The extent of competition for any single project generally varies according to the complexity of the product and the dollar
value of the anticipated award. We believe that we compete on the basis of:



| |  |  | the performance, adaptability and competitive price of our products;
| | - |  | --------------------------------------------------------------------



| |  |  | reputation for prompt and responsive contract performance with a high quality product;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | accumulated technical knowledge and expertise;
| | - |  | ----------------------------------------------



| |  |  | breadth of our product lines; and
| | - |  | ---------------------------------



| |  |  | the capabilities of our facilities, equipment and personnel to undertake the programs for which we compete.
| | - |  | -----------------------------------------------------------------------------------------------------------



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Our future success will depend in large part upon our ability to improve existing product
lines and to develop new products and technologies in the same or related fields. Since a number of consolidations and mergers of defense suppliers has occurred, the number of participants in the defense industry has decreased in recent years. We
expect this consolidation trend to continue. As the industry consolidates, the large defense contractors are narrowing their supplier base, awarding increasing portions of projects to strategic mid- and lower-tier suppliers, and, in the process, are
becoming oriented more toward systems integration and assembly. We believe that we have and expect to continue to benefit from this defense industry trend.

Intellectual Property

We rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position.
We have certain registered trademarks, none of which we consider to be material to our current operations. We do not believe that the conduct of our business as a whole is materially dependent on any single patent, trademark or copyright.

The products we sell require a large amount of engineering design and manufacturing expertise. We have patents on certain of
our hybrid electronic components and systems, optocouplers, secure network systems, virtual data labeling systems, and secure access management systems. However, the majority of our technological capabilities are not protected by patents and
licenses. We rely on the expertise of our employees and our learned experiences in both the design and manufacture of our products. It is possible that a competitor may also learn to design and produce products with similar performance capabilities
as our products, which may result in increased competition and a reduction of sales for our products.

Our trade secret
protection for our technology is based in large part on confidentiality agreements that we enter into with our employees, consultants and other third parties. It is possible that these parties may breach these agreements. Since many agreements are
made with companies much larger than us, we may not have adequate financial resources to adequately enforce our rights which could adversely impact our ability to protect our trade secrets and lead to a reduction of sales for our products. In
addition, the laws of certain territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as the laws of the United States or Canada.

Regulatory Matters

Government
Contracting Regulations

A significant portion of our business is derived from subcontracts with prime contractors of
the U.S. government. As a U.S. government subcontractor, we are subject to federal contracting laws and regulations, including the U.S. Federal Acquisition Regulation (FAR), that: (1) impose various profit and cost controls,
(2) regulate the allocations of costs, both direct and indirect, to contracts, and (3) provide for the non-reimbursement of unallowable costs. Our extensive experience in the defense industry enables us to handle the strict requirements
that accompany these contracts.

Under federal contracting regulations, the U.S. government is entitled to examine all of our
cost records with respect to certain negotiated contracts or contract modifications for three years after final payment on such contracts to determine whether we furnished complete, accurate, and current cost or pricing data in connection with the
negotiation of the price of the contract or modification. The United States government also has the right after final payment to seek a downward adjustment to the price of a contract or modification if it determines that the contractor failed to
disclose complete, accurate and current data. In addition, the FAR governs the allowability of costs incurred by us in the performance of United States government contracts to the extent that such costs are included in its proposals or are allocated
to United States government contracts during performance of those contracts.



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As is common in the U.S. defense industry, we are subject to business risks, including
changes in the U.S. governments procurement policies (such as greater emphasis on competitive procurement), governmental appropriations, national defense policies or regulations, service modernization plans, and availability of funds. A
reduction in expenditures by the U.S. Government for products and services of the type we manufacture and provide, lower margins resulting from increasingly competitive procurement policies, a reduction in the volume of contracts or
subcontracts awarded to us or the incurrence of substantial contract cost overruns could materially adversely affect our business.

All of our U.S. Government contracts can be terminated by the U.S. Government either for its convenience or if we default by
failing to perform under the contract. Termination for convenience provisions provide only for our recovery of costs incurred or committed settlement expenses and profit on the work completed prior to termination. Termination for default provisions
provide for the contractor to be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source. Our contracts with foreign governments generally contain similar provisions relating to termination at
the convenience of the customer.

In connection with our U.S. government business, we are also subject to government audits
and reviews of our accounting procedures, business practices and procedures, and internal controls for compliance with procurement regulations and applicable laws. We also could be subject to an investigation as a result of private party
whistleblower lawsuits. We may be subject to downward contract price adjustments, refund obligations or civil and criminal penalties. In certain circumstances in which a contractor has not complied with the terms of a contract or with regulations or
statutes, the contractor might be debarred or suspended from obtaining future contracts for a specified period of time. Since defense sales account for a significant portion of our business, any such suspension or debarment would have a material
adverse effect on our business. It is our policy to cooperate with the government in any investigations of which we have knowledge, but the outcome of any such government investigation cannot be predicted with certainty. We believe we have complied
in all material respects with applicable government requirements. We are not aware of any current government investigations of our policies, procedures, and internal controls for compliance with procurement regulations and applicable laws.

A majority of our stock is owned by non-U.S. persons and the majority of the members of our Board of Directors are Canadian
citizens and residents. It is the policy of the DoD to allow foreign investment consistent with the national security interests of the United States and to utilize foreign ownership, control or influence (FOCI) mitigation procedures to
protect against foreign interests gaining unauthorized access to classified information. As a result, we are subject to FOCI mitigation procedures and are in the process of discussing with Defense Security Service (DSS) the appropriate
mitigation procedures. The FOCI mitigation procedures will create contractual agreements between us, API Defense USA, Cryptek USA Corp. and the DoD and possibly some of our foreign shareholders that will prevent the foreign shareholders and our
officers and directors from having access to classified information in the possession of our subsidiary(ies) that has access to classified information. An agreement on FOCI mitigation procedures is a prerequisite and a condition to our receipt of
the facility security clearance described above. The FOCI mitigation procedures will require that our subsidiary adopt and implement numerous compliance policies and procedures. If we and our subsidiary do not remain in compliance with the agreed
upon FOCI mitigation procedures, we may lose our facility security clearance and certain personnel security clearances, which would prevent us from continuing those business activities that require access to classified information. A portion of our
annual revenues are derived from our products or services that currently require facility security clearance.

All of our
activities that require security clearances from the Defense Industrial Security Clearance Office, which is part of the Defense Security Service, an agency of the DoD, will be performed by API Defense USA, Inc. and Cryptek USA Corp. A security
clearance is a determination by the United States government that a person or company is eligible for access to classified information. There are two types of clearances: Personnel Security Clearances and Facility Security Clearance. We have
sufficient personnel security clearances for the activities of these subsidiaries. We are in the process of applying for facility security clearances for our Windber, PA location. We intend to consolidate the activities of Cryptek USA Corp. into API
Defense USA, Inc., which is located in Windber, PA.



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We anticipate entering into a proxy agreement with the DoD with respect to API Defense USA,
Inc. (Defense USA) that will set forth our FOCI mitigation procedures. The proxy agreement will govern all operations of Defense USA and its subsidiaries. All of our activities that involve classified information and classified contracts
will be performed by Defense USA and its subsidiaries. The proxy agreement will require that the shares of Defense USA be given to a minimum of three proxy holders, each of whom must be a United States citizen with the requisite security clearance
and has had no prior or existing contractual, financial or employment relationship with us or any of our affiliates. The proxy holders will serve as directors of Defense USA and have the absolute right to vote the stock of Defense USA, except as
explicitly set forth in the proxy agreement, and will direct the management of Defense USA. We will retain our rights as owners of the stock of Defense USA to sell, transfer or pledge such stock and the proxy holders will be prohibited from engaging
in any transactions that would result in a change of control of Defense USA. The proxy agreement will require our approval for certain major corporate actions affecting Defense USA. Although none of our directors or management personnel will be able
to be involved in the business of Defense USA, the proxy agreement will require that the proxy holders act in a manner to protect our economic interests in Defense USA.

Environmental Matters

Our operations are regulated under a number of federal, state and local environmental laws and regulations, which govern, among other
things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of such materials. We currently use limited quantities of hazardous materials common to our industry in connection with the production
of our products. In addition, because of our use of such hazardous materials, we may be subject to potential financial exposure for costs associated with an investigation and remediation of sites at which we have arranged for the disposal of
hazardous wastes, if such sites become contaminated. This is true even if we fully comply with applicable environmental laws.

We believe that our current operations are in substantial compliance with all existing applicable environmental laws and permits. Our
compliance with federal, state and local laws and regulations, which govern the discharge of materials into the environment, has not had a material adverse effect upon our capital expenditures, earnings or competitive position within our markets.
There have been no claims asserted and management is unaware of any unasserted environmental claims.

International Operating and Export
Sales

We currently sell several of our products and services internationally to Canada, the United Kingdom, as well as
other NATO countries. The export of materials and data for military purposes from the United States is covered under International Traffic in Arms Regulations laws. We are registered with the U.S. Department of State and renew our registration
annually. We currently hold several licenses that allow us to export technical data and product to certain foreign companies.

In addition, international sales of our U.S. products and services are in many cases subject to export licenses granted on a case-by-case
basis by the U.S. Department of State and Department of Commerce. In certain cases, the U.S. government prohibits or restricts the export of some of our products.

We use two principal contracting methods for export sales: Direct Foreign Sales (DFS) and the U.S. governments Foreign Military
Sales (FMS). In a DFS transaction, the contractor sells directly to the foreign country and assumes all the risks in the transaction. In an FMS transaction, the sale is funded by, contracted by and made to the U.S. government, which then sells the
product to the foreign country.



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Our international operations involve additional risks for us, such as exposure to currency
fluctuations, future investment obligations and changes in international economic and political environments. In addition, international transactions frequently involve increased financial and legal risks arising from stringent contractual terms and
conditions and widely different legal systems, customs and practices in foreign countries.

Manufacturing and Supplies

Our manufacturing processes for most of our products include the assembly of purchased components and testing of products at various
stages in the assembly process. Purchased components include integrated circuits, circuit boards, sheet metal fabricated into cabinets, resistors, capacitors, semiconductors, silicon wafers and other conductive materials, and insulated wire and
cables. In addition, many of our products use machine castings and housings, motors, and recording and reproducing media.

The
most significant raw materials that we purchase for our operations are memory devices in silicon wafer and die forms. Although materials and purchased components generally are available from a number of different suppliers, several suppliers are our
sole source of certain components. We are also dependent on certain suppliers for particular customers due to their product specifications. If a supplier should cease to deliver such components, other sources probably would be available; however,
added cost and manufacturing delays might result. Despite the risks associated with purchasing from a limited number of sources, we have made the strategic decision to select limited source suppliers in order to obtain lower pricing, receive more
timely delivery and maintain quality control. We have long-standing strategic relationships with world class semiconductor suppliers. Because of these capabilities and relationships, we believe we can continue to meet our customers
requirements. We do not have specific long-term contractual arrangements with our vendors, but we believe we have good relationships with them.

Employees

As of
May 31, 2010, we had approximately 597 full-time employees, including 323 in manufacturing, 31 in sales, 31 in contracts and customer service, 86 in engineering and research and development, 71 in quality assurance, and 55 in general and
administrative. From March 1, 2010 to May 31, 2010, our headcount decreased by 59 employees from 656 as part of our ongoing business and operational strategy to consolidate operations and reduce costs. None of our employees are subject to
a collective bargaining agreement. Following completion of our facility consolidation which is expected to occur by December 31, 2010, some resources will be redeployed and others reduced.

There is a continuing demand for qualified technical personnel, and we believe that our future growth and success will depend upon our
ability to attract, train and retain such personnel. We believe that our relations with our employees generally are good.

Executive
Officers of the Registrant

The following table lists as of June 1, 2010, the name, age, and position of each of our
executive officers.



|                  |  |     |  |                                       |  |              
|----------------- |  | --- |  | ------------------------------------- |  | -------------
|Name              |  | Age |  | Position Held                         |  | TermCommenced
|Phillip DeZwirek  |  | 72  |  | Chairman, Treasurer, and Director     |  | 2006         
|Stephen Pudles    |  | 51  |  | Chief Executive Officer and Director  |  | 2008         
|Claudio Mannarino |  | 40  |  | Chief Financial Officer               |  | 2006         
|Jonathan Pollack  |  | 39  |  | Executive Vice President and Director |  | 2010         

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



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Phillip DeZwirek

Phillip DeZwirek became a director of ours and our Chairman and Treasurer on the effective date of the Business Combination,
November 6, 2006. He also held the position of Chief Executive Officer from such date until April 2008, when Stephen Pudles assumed that position. Mr. DeZwirek has held the positions of Chairman, Chief Executive Officer and Treasurer at
API Ontario since May 2002. He also assumed the same positions with API Sub and became a director of API Sub on the effective date of the Business Combination. Mr. DeZwirek has been a director of API Ontario since September 2001.
Mr. DeZwirek was also the Chief Financial Officer of API Ontario from August 2001 until Claudio Mannarino assumed that position in 2004. Mr. DeZwirek has been a director and Chairman of the Board of CECO Environmental Corp.
(CECO), a provider of air pollution control products, since August 1979 (NASDAQ-CECE), and served as CECOs Chief Executive Officer from August 1979 through February 2010. 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 Icarus Investment Corp., an Ontario corporation (since 1990). Mr. DeZwirek has also been involved in private
investment activities for the past five years.

Stephen Pudles

Stephen Pudles became Chief Executive Officer on April 22, 2008 and a director on November 6, 2008. He also serves as a
director of our subsidiaries. He brings more than 25 years of electronics industry experience to the Company. From 2000 until joining the Company, Mr. Pudles was employed by OnCore Manufacturing Services LLC (formerly known as Nu Visions
Manufacturing LLC) (OnCore), where he served as President and CEO from 2002 to 2007, Executive Vice President from 2007 until joining the Company, and Vice President from 2000 to 2001. 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 as Vice Chairman of the IPC Board of
Directors and is chairman of the EMSI Management Council. Mr. Pudles has a Masters of Science in management and a Bachelor of Engineering from Stevens Institute of Technology in Hoboken, New Jersey.

Claudio A. Mannarino

Claudio A. Mannarino, B.Com, C.M.A, 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 API Sub and has had the same positions at API Ontario since 2004. Mr. Mannarino has over 11 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
our subsidiary Filtran Limited in April of 2000. From April 2000 to 2004, he was controller and manager of human resources and IT at Filtran Limited and Filtran Inc. He was named CFO and VP of Finance for API Ontario in 2004. His responsibilities
include managing the financial reporting function for API Ontario, and the finance and IT departments of Filtran Limited. Mr. Mannarino has no other outside business activities.

Prior to joining Filtran Limited, 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.



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Jonathan Pollack

Jonathan Pollack has served as a director since June 20, 2007 and as Executive Vice President since September 4, 2009.
Mr. Pollack also served as a member of the Audit Committee and Compensation Committee from June 20, 2007 through September 4, 2009. From March 2005 through its sale in 2009, he served as the Chief Financial Officer and Corporate
Secretary of Kaboose Inc. From 2000 to 2005, Mr. Pollack was President of The JMP Group, a strategic and financial advisory firm to numerous private and public companies. Prior thereto, he worked in investment banking in New York.
Mr. Pollack is currently a director of Lifebank Corp. (TSX-V:LBK). Mr. Pollack received a Masters of Science in Finance from the London School of Economics and a Bachelors of Commerce from McGill University. He is involved in several
philanthropic organizations and is the Vice Chair of Leadership Sinai Board of Directors at the Mt. Sinai Hospital, Toronto, Ontario and is past Chair and Director of the Crescent School Foundation, Toronto, Ontario.



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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.

Risk Relating to Our Business

Our
business may be adversely affected by the global economic downturn and the continuing uncertainties in the financial markets

The global economy is currently in a prolonged 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, high 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 duration or 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.

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 or
our ability to pursue strategic growth initiatives or acquisitions.

We are dependent on defense spending by the United States
and other governments. We derive a significant portion of our revenues from defense spending by the U.S. government and other governments. Current economic conditions have caused deficits in the U.S. and other countries to rise significantly, which
is likely to result in budget cuts and reduced public spending in a number of areas. As a result, defense budgets generally are under pressure. Reduced defense spending may affect products purchased by those governments or their prime contractors
from us and may materially adversely affect our operations and financial condition.

We are highly reliant on defense spending

Our current orders from defense-related companies account for a material portion of our overall net sales and defense
spending levels depend on factors that are outside of our control. Reductions or changes in defense spending could have a material adverse effect on our sales and profits.

While the U.S. 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. For instance, government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress typically appropriates funds for a given program on a fiscal-year basis even though contract performance may take
more than one year. As a result, at the beginning of a major program, a contract is typically only partially funded, and additional monies are normally committed to the contract by the procuring agency only as Congress makes appropriations available
for future fiscal years. A change of elected officials could result in substantial changes in defense spending. In addition, a difference in philosophy and/or the worsening economic climate of the country could reduce or change appropriations.



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Our contracts with prime U.S. Government contractors contain customary provisions permitting
termination or reduction at any time, at the convenience of the U.S. Government. The Termination for Convenience clause generally limits the contractors recovery to cost incurred plus profit on work completed, and the costs of
preparing the termination settlement proposal. If we experience significant reductions or delays in procurements of our products by the U.S. Government, or terminations of government contracts or subcontracts, our operating results could be
materially and adversely affected.

Our operations are subject to numerous laws, regulations and restrictions, and failure to comply with
these laws, regulations and restrictions could subject us to fines, penalties, suspension or debarment

Our contracts and
operations are subject to various laws and regulations. Prime contracts with various agencies of the U.S. Government, and subcontracts with other prime contractors, are subject to numerous procurement regulations, including Federal Acquisition
Regulation (FAR), the False Claims Act and the International Traffic in Arms Regulations promulgated under the Arms Export Control Act, with noncompliance found by any one agency possibly resulting in fines, penalties, debarment, or suspension from
receiving additional contracts with all U.S. Government agencies. Given our dependence on U.S. Government business, suspension or debarment could have a material adverse effect on our financial results.

In addition, our international business subjects us to numerous U.S. and foreign laws and regulations, including, without limitation,
regulations relating to import-export control, technology transfer restrictions, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act and the anti-boycott provisions of the U.S. Export Administration Act. Changes in
regulations or political environments may affect our ability to conduct business in foreign markets including investment, procurement and repatriation of earnings. Failure by us or our sales representatives or consultants to comply with these laws
and regulations could result in certain liabilities and could possibly result in suspension or debarment from government contracts or suspension of our export privileges, which could have a material adverse effect on our financial results.

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 four fiscal years. We cannot assure you that we will be profitable in the future, despite
the Companys closure of the nanotechnology research and development subsidiary on February 22, 2010 and subsequent sale of the assets in June 2010. 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.

We are reliant on certain security clearances for some of our business

We are in the process of applying for a Facility Security Clearance from the Defense Industrial Security Clearance Office, which is part
of the DSS, for our facility in Windber, Pennsylvania. As part of that process we will need to adopt certain foreign ownership, control or influence mitigation procedures to protect against foreign interests gaining unauthorized access to classified
information. In the event that we cannot agree upon appropriate FOCI mitigation procedures with Defense Security Service, we would not be able to obtain a Facility Security Clearance. Not obtaining a security clearance would prevent us from
continuing those business activities that require access to classified information.

FOCI mitigation procedures will require
that our subsidiary with the Facility Security Clearance adopt and implement numerous compliance policies and procedures. Our ability to obtain and maintain our Facility Security Clearance has a direct impact on our ability to bid on or win new
contracts, complete existing contracts, or effectively re-bid on expiring contracts either directly through the U.S. Government or through U.S. Defense Contractors. The inability to obtain and maintain our Facility Security Clearance would have a
material adverse affect on our business, financial condition and operating results.



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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.

We currently
maintain a significant level of debt and our failure to service such indebtedness may adversely affect our financial and operating activities

At May 31, 2010, we had $33,705,901 in aggregate principal amount of outstanding debt net of discounts, all of which is secured
by certain of our assets. This includes a $10 million short-term promissory note to finance the asset purchase of the KGC Companies (as hereinafter defined). The $10 million principal balance and accrued interest is due and payable at maturity on
December 31, 2010. If we do not raise additional funds to repay this note through a financing prior to the maturity date of this note, we will have to refinance this note. There can be no assurance that we will be able to refinance this note on
satisfactory terms.

It also includes $20,000,000 principal amount of secured promissory notes issued to various investors in
a private placement in January 2010. These notes are due three years from issuance. Interest on such notes accrues at the annual rate of fifteen percent (15%) and is payable quarterly in arrears. The entire principal balance and all accrued and
unpaid interest on such notes will be due and payable upon maturity. The $20,000,000 notes are secured by the assets of API and its subsidiaries pursuant to security agreements, excluding real estate. It also includes $3,650,000 of secured
convertible promissory notes issued to various investors in a private placement in June 2009. These notes have a maturity date of June 23, 2012 and accrue interest at the annual rate of twelve percent (12%).

At May 31, 2010, we had line of credit facilities in place at two of our subsidiaries, one in the United Kingdom in the amount of
approximately $360,000 (250,000 GBP) and one in Canada in the amount of approximately $950,000 (Cdn $1,000,000). These facilities are secured with certain assets of each subsidiary.

Our ability to make scheduled payments of principal and interest on our indebtedness and to refinance our existing debt depends on our
future financial performance as well as our ability to access the capital markets, and the relative attractiveness of available financing terms. We do not have complete control over our future financial performance because it is subject to economic,
political, financial (including credit market conditions), competitive, regulatory and other factors affecting the aerospace and defense industry, as well as commercial industries in which we operate. It is possible that in the future our business
may not generate sufficient cash flow from operations to allow us to service our debt and make necessary capital expenditures. If this situation occurs, we may have to reduce costs and expenses, sell assets, restructure debt or obtain additional
equity capital. We may not be able to do so in a timely manner or upon acceptable terms in accordance with the restrictions contained in our debt agreements. Our level of indebtedness has important consequences to us. These consequences may include:



| |  |  | requiring a substantial portion of our net cash flow from operations to be used to pay interest and principal on our debt and therefore be unavailable
for other purposes, including acquisitions, capital expenditures, paying dividends to our shareholders, repurchasing shares of our common stock, research and development and other investments;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting our ability to obtain additional financing for acquisitions, working capital, investments or other expenditures, which, in each case, may
limit our ability to carry out our acquisition strategy;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | heightening our vulnerability to downturns in our business or in the general economy and restricting us from making acquisitions, introducing new
technologies and products or exploiting business opportunities; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting our organic growth and ability to hire additional personnel.
| | - |  | ---------------------------------------------------------------------

We may require additional financing which we may not be able to obtain; Dilution

We expect that we will require additional financing in order to support expansion, develop new or enhanced services or products, respond
to competitive pressures, acquire complementary businesses or technologies, repay debt, 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.

Net sales could decline significantly if we lose a major customer

Historically, a large portion of our net sales have been derived from sales to a small number of our customers and we expect this trend to
continue for the foreseeable future. The U.S., Canadian and United Kingdom Governments Departments of Defense (directly and through subcontractors) account for approximately 55%, 6% and 8% of the Companys twelve month revenues for the
year ended May 31, 2010, respectively, and the U.S. Government and Department of Defense (directly and through subcontractors) accounted for 71% of the Companys revenue during the twelve months ended May 31, 2009. One of these
customers represented approximately 20% of revenues for the twelve months ended May 31, 2010 and a separate customer represented 16% of revenues for the year ended May 31, 2009.

In many cases, our customers are not subject to any minimum purchase requirements and can discontinue the purchase of our products at any
time. In the event one or more of our major customers reduces, delays or cancels orders with us, and we are not able to sell our services and products to new customers at comparable levels, our net sales could decline significantly, which could
adversely affect our financial condition and results of operations. In addition, any difficulty in collecting amounts due from one or more key customers would negatively impact our results of operations.

Control of us by our officers and directors could adversely affect the Companys stockholders because of their control of our affairs

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. (Exchangeable Shares held by us and our subsidiaries have no such voting rights.) Therefore, directors and officers, acting together may have a controlling influence on (i) matters submitted to our
stockholders 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. 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 is the Chairman of the Board of API and is instrumental
in directing the growth of API. We are depending upon Mr. DeZwirek to continue to act in such capacity. Mr. Stephen Pudles, our Chief Executive Officer, is important to the Companys



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future strategy as the Company continues to implement strategies for organic growth and pursues acquisition targets that will consolidate the markets in which the Company operates. The loss of
the services of those individuals 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.

Our inability to retain employees with key technical or operational expertise may
adversely affect our business

The products that we sell require a large amount of engineering design, manufacturing and
operational expertise. However, the majority of our technological capabilities are not protected by patents and licenses. We rely on the expertise of our employees and our learned experiences in both the design and manufacture of our products. If we
were to lose one or more of our key employees, then we would likely lose some portion of our institutional knowledge and technical know-how, which could adversely affect our business.

The integration of acquisitions may be difficult and may not yield the expected results

We regularly look for strategic opportunities to grow and diversify our product offerings and services and to strengthen our current
product lines and services through acquisitions. There can be no assurance that we will identify appropriate acquisition candidates or successfully integrate products and operations with any such candidates that we may acquire. Some of the risks
that may continue to affect our ability to integrate acquired companies include those associated with:



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



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



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | transferring required governmental permits and consents;
| | - |  | --------------------------------------------------------



| |  |  | retaining customers and contracts from the acquired companies;
| | - |  | --------------------------------------------------------------



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



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



| |  |  | integrating any activities involving classified information with our FOCI mitigation policies and procedures.
| | - |  | -------------------------------------------------------------------------------------------------------------

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.



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Failure to maintain adequate internal controls could adversely affect our business

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.

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 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.

Since some of our directors and assets are located outside
United States it may be more difficult to enforce certain judgments against us and our directors

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

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



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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 than it had been in the past. Although we currently maintain directors and officers liability insurance, there are no assurances that we can continue to maintain such
insurance which would make it more difficult for us to attract and retain qualified outside directors to serve on our Board.

The
possibility of goodwill impairments exist

We evaluate the recoverability annually or more frequently if impairment
indicators arise, as required under the accounting guidance for 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 cyclical semiconductor, and/or electronic component industries would adversely affect our operating results and our value

The semiconductor and electronic component industries are 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 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 degree of 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 opportunities 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 may not be able to compete successfully in the future and such competitive pressures may harm our financial condition and/or operating results.

We depend on limited suppliers for certain critical raw materials

Our manufacturing operations require raw materials that must meet exacting standards. Additionally, certain customers require us to buy
from particular vendors due to their product specifications. We rely heavily on our ability to maintain access to steady sources of these raw materials at favorable prices. We do not have specific long-term contractual arrangements, but we believe
we are on good terms with our suppliers. We cannot be certain that we will continue to have access to our current sources of supply at favorable prices, or at all, or that we will not encounter supply problems in the future. Any interruption in our
supply of raw materials could reduce our sales in a given period, and possibly cause a loss of business to a competitor, if we could not reschedule the deliveries of our product to our customers. In addition, our gross profits could suffer if the
prices for raw materials increase, especially with respect to sales associated with military contracts where prices are typically fixed.



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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 provide any assurance 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.

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 at an acceptable price.
| | - |  | ---------------------------------------------------------

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

Cancellation or changes or delays in orders could materially reduce our net sales and operating results

We generally do not receive firm, long-term purchase commitments from our customers. Customers may cancel their orders, change production
quantities or delay production for a number of reasons. Cancellations, reductions or delays by a significant customer or by a group of customers would seriously harm our results of operations for a period by reducing our net sales in that period. In
addition, because many of our costs and operating expenses are fixed, a reduction in customer demand could harm our gross profit and operating income.

Our lengthy sales cycle may increase the likelihood that our quarterly net sales will fluctuate which may adversely affect the market price of our
common stock

Due to the complexity of our technology and the types of end uses for our products, our customers perform,
and require us to perform, extensive process and product evaluation and testing, which results in a lengthy sales cycle. Our sales cycles can often last for several months, and may last for up to a year or more. Additionally, as we are a tier three
supplier, our orders are dependent on funding and contract negotiations through multiple parties which can affect our receipt of orders due to matters outside of our control. Our business is moving towards a business base driven more by larger
orders on major defense programs. As a result of these factors, our net sales and operating results may vary unpredictably from period to period. This fact makes it more difficult to forecast our quarterly results and can cause substantial
variations in operating results from quarter to quarter that are unrelated to the long-term trends in our business. This lack of predictability in our results could adversely affect the market price of our common stock in particular periods.

We depend on military prime contractors for the sale of our products

We sell a substantial portion of our products to military prime contractors and the contract manufacturers who work for them. The timing
and amount of sales to these customers ultimately depend on sales levels and shipping schedules for the products into which our components are incorporated. We have no control over the volume and timing of products shipped by our military prime
contractors and the contract manufacturers who work for them, and we cannot be certain that our military prime contractors or the contract manufacturers who



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work for them will continue to ship products that incorporate our components at current levels, or at all. Our business will be harmed if our military prime contractors or the contract
manufacturers who work for them fail to achieve significant sales of products incorporating our components or if fluctuations in the timing or reductions in the volume of such sales occur. Failure of these customers to inform us of changes in their
production needs in a timely manner could also hinder our ability to effectively manage our business.

Our failure to comply with U.S.
government laws, regulations and manufacturing facility certifications would reduce our ability to be awarded future military business

We must comply with laws, regulations and certifications relating to the formation, administration and performance of federal government
contracts as passed down to us by our customers in their purchase orders, which affects our military business and may impose added cost on our business. We are subject to government audits and reviews of our accounting procedures, business
practices, procedures, and internal controls for compliance with procurement regulations and applicable laws. We also could be subject to an investigation as a result of private party whistleblower lawsuits. Such audits could result in adjustments
to our contract costs and profitability. If a government investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including the termination of our contracts, the
forfeiture of profits, the suspension of payments owed to us, fines, and our suspension or debarment from doing business with federal government agencies. In addition, we could expend substantial amounts defending against such charges and incur
damages, fines and penalties if such charges are proven or result in negotiated settlements. Since defense sales account for a significant portion of our business, any debarment or suspension of our ability to obtain military sales would greatly
reduce our overall net sales and profits, and would likely affect our ability to continue as a going concern.

We may lose our status as a
disadvantaged business corporation

Our recently acquired Pennsylvania facility qualifies as a small, disadvantaged
business as greater than 20% of its employees are considered disabled under applicable legislation. By maintaining this U.S. government standard, we are subject to preferred federal procurement opportunities. There can be no assurance that we will
be able to maintain our small, disadvantaged business status in the future and the failure to do so could adversely affect our ability to secure customers and may adversely impact our financial results.

Adverse resolution of litigation may harm our operating results or financial condition

At times, we are a party to lawsuits in the normal course of our business. Litigation can be unforeseeable, expensive, lengthy and
disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, operating results, or
financial condition.

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.



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We typically 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. We continually assess the necessity for a warranty provision and accrue amounts deemed necessary. The Company has accrued approximately $220,000 in warranty
liability as of May 31, 2010.

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 delivery of our services and not on any proprietary technologies that we develop or license on an exclusive basis. Our 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 other parties independently obtaining the ability to manufacture our products or deliver similar
services. In addition, there may be circumstances in which know how is not documented, but exists within the heads of various employees who may leave the Company or disclose our know how to third parties. We cannot assure you 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.

Patents of third parties may have an important bearing on our ability to offer certain of our products and services. Our major
competitors as well as other third parties may obtain and may have obtained patents related to the types of products and services 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 or services 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 products or 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,



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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 product. The difficulties that may
be experienced in the production process include: defects in subcontractors components, impurities in the materials used, equipment failure, and unreliability of a subcontractor. From time to time, we have experienced difficulties in achieving
planned yields, which have adversely affected our gross margins. 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 you 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. 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.

Interruptions, delays or cost increases affecting our materials, parts, equipment or subcontractors may impair our competitive position

Some of 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.

Environmental liabilities could adversely impact our financial position

United States, Canadian, and United Kingdom 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 chemicals are present in any given
components we purchase and in each 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 could subject us to significant liabilities and could have material adverse effects on our operating results, cash flows and financial condition.



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In the conduct of our manufacturing operations, we have handled and do handle materials that
are considered hazardous, toxic or volatile under applicable 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 may have 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.

Risks Relating to Our Stock

Our
stock market price and trading volume may be volatile

The market for our common stock is volatile. Our stock price is
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, with low priced stock have experienced wide fluctuations that 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 our common stock.

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.

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. We are contemplating filing an application to be listed on the American Stock Exchange, NASDAQ 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.

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,



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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 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 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 options and warrants

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. As of May 31, 2010, we have granted options to purchase
5,916,623 shares of common stock to directors, officers, employees and consultants of which 5,861,625 are issued at a weighted average price of $1.404 and 54,998 are issued at a weighted average price of $4.035. In addition, we issued the following:
on June 23, 2009 we issued $3,650,000 in convertible subordinated debt, which is currently convertible into 4,866,667 shares of common stock, at $0.75 per share, in December 2009 we issued 250,000 warrants with an exercise price of $1.27 per
share, and on January 20, 2010 and January 22, 2010, we issued warrants to purchase an aggregate of 3,571,447 shares of common stock with an exercise price of $1.40 per share.



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##### Table of Contents

|ITEM 2. | PROPERTIES
|------- | ----------

We operate
from leased facilities in the following locations:



|                                                 |  |                                                                                                                    |  |                                                     
|------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------
|Location                                         |  | Description                                                                                                        |  | Approximate Square Footage(excludes subleased space)
|Ronkonkoma, New York                             |  | Executive Corporate Offices and Sales Office                                                                       |  | 20,200                                              
|                                                 |  |                                                                                                                   
|Windber, Pennsylvania (Includes four facilities) |  | Manufacturing:
-   Defense & Systems
-   Secure Communications
-   Components & Subsystems
-   Engineering & Sales |  | 141,000                                             
|                                                 |  |                                                                                                                   
|Kanata (Ottawa), Ontario                         |  | Manufacturing:
-   Secure Communications
-   Components & Subsystems                                               |  | 30,000                                              
|                                                 |  |                                                                                                                   
|Sterling, Virginia                               |  | Sales office                                                                                                       |  | 29,000                                              
|                                                 |  |                                                                                                                   
|South Plainfield, New Jersey                     |  | Sales office                                                                                                       |  | 7,000                                               

We also operate from
a building we own in Gloucester, United Kingdom manufacturing secure communications, components and subsystems. The building is approximately 23,000 square feet.

Our executive corporate offices are located at 2200 Smithtown Avenue, Ronkonkoma, New York.

Our manufacturing facilities are ISO 9001:2008 certified and manufacture to MIL-PRF 27 and MIL STD-981. To further support the military
and aerospace industries, we hold a Controlled Goods Certificate enabling us 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.

We believe that our facilities are suitable and adequate to meet our needs.



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

There
are no material legal proceedings to which we are a party or to which our property is subject.



|ITEM 4. | RESERVED
|------- | --------



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS 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 ATNY. From September 22, 2008 to
October 26, 2009 our stock traded under the symbol APIA, from November 7, 2006 through September 19, 2008, 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 lists the reported high and low bid
prices of our common stock 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 on 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 2010               |  |                 |       |     |   |      
|Fourth Quarter (5/31/10)  |  | $               | 1.67  |     | $ | 1.11 
|Third Quarter (2/26/10)   |  | $               | 1.74  |     | $ | 1.01 
|Second Quarter (11/30/09) |  | $               | 1.84  |     | $ | 0.77 
|First Quarter (8/30/09)   |  | $               | 1.46  |     | $ | 0.66 
|                          |  |                
|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

Registered Holders
of our Common Stock

As of July 31, 2010, we had approximately 89 stockholders of record, although there are a large
number of beneficial owners.

Dividends

Since our inception, we have not paid any dividends on our common stock. We do not anticipate that we will pay dividends in the
foreseeable future. API Sub has not and does not intend to pay any dividends on its common stock. Dividends on Exchangeable Shares will only be paid to the extent that dividends, if any, are paid on our common stock.

Recent Sales Of Unregistered Securities

Issuances of unregistered securities during the fiscal year ended May 31, 2010 were previously reported on our Current Reports on
Form 8-K and Quarterly Reports on Form 10-Q.



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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 2010.



|                             |  |                                 |  |                             |      |                                                                                   |         |                                                                                 |          
|---------------------------- |  | ------------------------------- |  | --------------------------- | ---- | --------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------- | ---------
|Period                       |  | Total Number ofShares Purchased |  | Average PricePaid Per Share |      | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans 
orPrograms (1) |         | Maximum Numberof Shares that MayYet Be PurchasedUnder the 
Plansor Programs (2)
|March 1, 2010March 31, 2010 |  |                                |  |                             |     |                                                                                   |        |                                                                                 | 3,300,000
|April 1, 2010April 30, 2010 |  | 352,433                         |  | $                           | 1.36 |                                                                                   | 352,433 |                                                                                 | 2,947,567
|May 1, 2010May 31, 2010     |  | 56,307                          |  | $                           | 1.57 |                                                                                   | 56,307  |                                                                                 | 2,891,260
|                             |  |                                 |  |                             |      |                                                                                   |         |                                                                                 |          
|Total                        |  | 408,740                         |  | $                           | 1.39 |                                                                                   | 408,740 |                                                                                 | 2,891,260
|                             |  |                                 |  |                             |      |                                                                                   |         |                                                                                 |          



|(1) | Represents open market purchases made under the Companys stock repurchase plan.
|--- | --------------------------------------------------------------------------------

|(2) | In March 2010, the Board of Directors authorized a stock repurchase program under which we can repurchase up to 3.3 million shares of our common stock over a
one-year period.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Business Overview of API Technologies Corp.

We design, develop and manufacture highly engineered solutions, systems, robotics, secure communications and electronic components for
military and aerospace applications, including mission critical information systems and technologies. We own and operate several state-of-the-art manufacturing facilities in North America and the United Kingdom. Our customers, which include military
prime contractors, and the contract manufacturers who work for them, in the United States, Canada, the United Kingdom and various other countries in the world, outsource many of their defense electronic components and systems to us as a result of
the combination of our design, development and manufacturing expertise.

Operating through two segments, Engineered Systems
and Components, and Secure Communications, we are positioned as a total engineered solution provider to various world governments, as well as military, defense, aerospace and homeland security contractors. We provide a wide range of electronic
manufacturing services from prototyping to high volume production, with specialization in high speed surface mount circuit card assembly for military and commercial organizations. Our manufacturing and design products have recently been expanded to
include secure communication products, including ruggedized computers and peripherals, network security appliances, and TEMPEST Emanation prevention products.

Prior to the acquisition of Cryptek, our operations were conducted in two reportable segments which were distinguished by geographic
location in Canada and United States. Both geographical segments designed and manufactured electronic components.

The July
2009 Cryptek acquisition expanded our manufacturing and design of products to include secured communication products, including ruggedized computer products, network security appliances, and TEMPEST Emanation prevention products. These newly
acquired product lines contributed approximately $22,222,972, to net sales in the year ended May 31, 2010.

The newly
acquired product lines from the KGC Companies contributed approximately $23,237,000, to net sales from January 20, 2010 to May 31, 2010.

Following the acquisitions of the assets of Cryptek and the assets of the KGC Companies in July 2009 and January 2010, respectively, API
had operating facilities in Ronkonkoma and Hauppauge, New York, Somerset, New Jersey, and Ottawa, Ontario, as well as Windber, Pennsylvania, Sterling, Virginia, South Plainfield, New Jersey, and Gloucester, United Kingdom. Commencing in May 2010, we
began a cost cutting initiative to rationalize the number of facilities and personnel which will result in us consolidating our manufacturing operations from eight facilities into three facilities. As at July 31, 2010, we had closed and sold
our Hauppauge, New York manufacturing facility and completed the consolidation of our two Canadian facilities into one manufacturing location. We expect the rest of this process to be completed by December 2010 and should result in the reduction of
approximately $4 million in annual costs.

On February 22, 2010, we announced that we were closing our nanotechnology
research and development subsidiary based in Somerset, New Jersey. This business had historically been unprofitable and the closure is expected to improve our operating results and allow us to deploy our capital and management resources on our
expanding defense business. The assets of the business were sold in June 2010.

Operating Revenues

We derive operating revenues from the sales in two principal business segments: Engineered Systems and Components and Secure
Communications. The asset acquisition of Cryptek on July 7, 2009 resulted in the creation of our new Secure Communications product line, and the asset acquisition of the KGC Companies on January 20, 2010 significantly expanded our
Engineered Systems and Components revenues. 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, including NATO and European Union
countries.



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Engineered Systems and Components Revenue includes high speed surface mount
circuit card assembly for military prime contractors and advanced weapon systems including missiles, unmanned air, ground and robotic systems, Other products include naval aircraft landing and launching systems, radar systems alteration, aircraft
ground support equipment, Aircraft Radar Indication Systems using Liquid Crystal Display (LCD) technology and other mission critical systems and components.

The main demand today for our Engineered Systems and Components products come from various world governments, including militaries,
defense organizations, aerospace, homeland security and prime defense contractors.

Secure Communications Revenueincludes revenues derived from the manufacturing of TEMPEST and Emanation products and services, ruggedized computers and peripherals, network security appliances and software. The principal market for these products are the defense
industries of the United States, Canada and the United Kingdom and other NATO and European Union countries. These products and systems include: TEMPEST and Emanation products and services, ruggedized computers and peripherals, network security
appliances and software.

Cost of Revenue

We conduct all of our design and manufacturing efforts in the United States, Canada and United Kingdom. Cost of goods sold primarily
consists of costs that were incurred to design, manufacturer, test and ship the products. These costs include raw materials, including freight, direct labor, tooling required to design and build the parts, and the cost of testing (labor &
equipment) the products throughout the manufacturing process and final testing before the parts are shipped to the customer. Other material costs include 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, business acquisition and related
charges and other income or expenses.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses include compensation and benefit costs for all employees, including
sales and customer service, sales commissions, executive, finance and human resource personnel. Also included in SG&A, is compensation related to stock-based awards to employees and directors, professional services, for accounting, legal and
tax, information technology, rent and general corporate expenditures.

Research and Development Expenses

Research and development (R&D) expenses represent the cost of our development efforts. R&D expenses include
salaries of engineers, technicians and related overhead expenses, the cost of materials utilized in research, and additional engineering or consulting services. R&D costs are expensed as incurred.

Business Acquisition and Related Charges

Business acquisition charges primarily represent costs of engaging outside legal, accounting, due diligence and business valuation
consultants related to business combinations. Related charges include costs incurred related to our efforts to consolidate operations of recently acquired and legacy businesses.

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, gains or losses on disposal of property and equipment, and gains or losses on foreign currency transactions. Other income also includes acquisition-related gains when net assets acquired exceed the
purchase price of the business acquisition.



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Backlog

Management uses a number of indicators to measure the growth of the business. A key measure for growth is sales backlog. Our sales backlog
at May 31, 2010 was approximately $68,664,000 compared to $13,691,000 at May 31, 2009, an increase of approximately $54,973,000. API Defense and API Systems represent approximately $50,173,000 of our backlog. We expect to receive several
new orders during the next two quarters, which will significantly increase our backlog.

Our backlog figures represent
confirmed customer purchase orders that we had not shipped at the time the figures were calculated, which have a delivery date within a 12-month period. We have very little insight on the timing of new contract releases and, as such, the backlog can
increase or decrease significantly based on timing of customer purchase orders.

Results of Operations for the Three Months Ended
May 31, 2010 and 2009

Our three months ended May 31, 2010 represents our first full combined quarterly results
after the acquisition of the KGC Companies assets on January 20, 2010. Results from continuing operations for the three months ended May 31 are as follows:



|                                                             |  |                            |            |      |   |           |         |  |       |  
|------------------------------------------------------------ |  | -------------------------- | ---------- | ---- | - | --------- | ------- |  | ----- | -
|                                                             |  | Three months ended May 31, |           
|                                                             |  | 2010                       |            | 2009 |   |           | %Change | 
|Revenues, net                                                |  | $                          | 30,120,463 |      | $ | 6,301,792 |         |  | 378.0 | %
|Cost of revenues                                             |  |                            |            |      |   |           |         |  |       |  
|Cost of revenues                                             |  |                            | 21,658,555 |      |   | 4,405,439 |         |  | 391.6 | %
|Restructuring charges                                        |  |                            | 562,836    |      |   | 304,725   |         |  | 84.7  | %
|                                                             |  |                            |            |      |   |           |         |  |       |  
|Total cost of revenues                                       |  |                            | 22,221,391 |      |   | 4,710,164 |         |  | 371.8 | %
|                                                             |  |                            |            |      |   |           |         |  |       |  
|Gross profit                                                 |  |                            | 7,899,072  |      |   | 1,591,628 |         |  | 396.3 | %
|Operating expenses                                           |  |                            | 6,375,179  |      |   | 2,208,114 |         |  | 188.7 | %
|                                                             |  |                            |            |      |   |           |         |  |       |  
|Operating income (loss)                                      |  |                            | 1,523,893  |      |   | (616,486  | )       |  | 347.2 | %
|Other (income) expenses, net                                 |  |                            | 1,253,401  |      |   | 212,800   |         |  | 489.0 | %
|                                                             |  |                            |            |      |   |           |         |  |       |  
|Income (loss) from continuing operations before income taxes |  |                            | 270,492    |      |   | (829,286  | )       |  | 132.6 | %
|Provision for income taxes                                   |  |                            | 8,221      |      |   | 66,530    |         |  | -87.6 | %
|                                                             |  |                            |            |      |   |           |         |  |       |  
|Income (loss) from continuing operations                     |  |                            | 262,271    |      |   | (895,816  | )       |  | 129.3 | %
|                                                             |  |                            |            |      |   |           |         |  |       |  

Revenues

Net revenues from continuing operations for the three months ended May 31, 2010 increased to $30,120,463 compared to $6,301,792 for
the three months ended May 31, 2009. Revenues by segment are as follows:



|                                                             |  |                            |            |      |   |           |  |       |  
|------------------------------------------------------------ |  | -------------------------- | ---------- | ---- | - | --------- |  | ----- | -
|                                                             |  | Three months ended May 31, |           
|                                                             |  | 2010                       |            | 2009 |   | %Change   | 
|Revenues by segments:                                        |  |                            |            |      |   |           |  |       |  
|Engineered Systems and Components from continuing operations |  | $                          | 22,384,635 |      | $ | 6,301,792 |  | 255.2 | %
|Secure Communications from continuing operations             |  |                            | 7,735,828  |      |   | N/A       |  | N/A   |  
|                                                             |  |                            |            |      |   |           |  |       |  
|                                                             |  | $                          | 30,120,463 |      | $ | 6,301,792 |  | 378.0 | %
|                                                             |  |                            |            |      |   |           |  |       |  

The increase in revenues was primarily a result of the acquisition of the assets of the KGC Companies in
January 2010 and the assets of Cryptek in July 2009.



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Gross Profit

Gross profit from continuing operations was approximately $7,899,000 as compared to gross profit from continuing operations of
approximately $1,592,000 in the same quarter of 2009, which includes restructuring charges of approximately $563,000 for the fourth quarter of 2010 and $305,000 for 2009. Gross profit was favorably impacted by increased revenues and cost reductions
from ongoing operational consolidation efforts, which began in fiscal 2009 and we expect to be completed by December 2010. As a result, gross margin was 26.2% compared to 25.3% in the same quarter of 2009.

Net Income from Continuing Operations

Net income from continuing operations was $262,271 for the three months ended May 31, 2010 as compared to a net loss from continuing
operations of $895,816 in the same period in 2009, which includes approximately $1,055,000 and $305,000 of restructuring and acquisition related charges, respectively. The significant improvement in net income was primarily a direct result of the
acquisition of the assets of the KGC Companies as well as the initial results from our cost reduction program.

Results of Operations for
the Years Ended May 31, 2010 and 2009

The following discussion of results of operations is a comparison of the
Companys years ended May 31, 2010 and 2009.

Operating Revenue



|                                                             |  |                    |            |      |   |            |  |       |  
|------------------------------------------------------------ |  | ------------------ | ---------- | ---- | - | ---------- |  | ----- | -
|                                                             |  | Year ended May 31, |           
|                                                             |  | 2010               |            | 2009 |   | %Change    | 
|Sales by segments:                                           |  |                    |            |      |   |            |  |       |  
|Engineered Systems and Components from continuing operations |  | $                  | 46,327,058 |      | $ | 25,461,024 |  | 82.0  | %
|Secure Communications from continuing operations             |  |                    | 22,222,972 |      |   | N/A        |  | N/A   |  
|                                                             |  |                    |            |      |   |            |  |       |  
|                                                             |  | $                  | 68,550,030 |      | $ | 25,461,024 |  | 169.2 | %
|                                                             |  |                    |            |      |   |            |  |       |  

We recorded a 169.2% increase in revenues for the year ended May 31, 2010 over the same period in 2009.
The increase is attributed to the Cryptek and the KGC Companies acquisitions completed on July 7, 2009 and January 20, 2010, respectively.

Operating Expenses

Cost of Revenue
and Gross Profit



|                                                             |  |                    |   |  |      |  
|------------------------------------------------------------ |  | ------------------ | - |  | ---- | -
|                                                             |  | Year ended May 31, |  
|                                                             |  | 2010               |   |  | 2009 |  
|Gross profit by segments:                                    |  |                    |   |  |      |  
|Engineered Systems and Components from continuing operations |  | 25.4               | % |  | 23.0 | %
|Secure Communications from continuing operations             |  | 25.1               | % |  | N/A  |  
|Overall                                                      |  | 25.3               | % |  | 23.0 | %

Our
combined gross margin for the fiscal year ended May 31, 2010 increased by approximately 2% compared to the fiscal year ended May 31, 2009. 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. Overall cost of revenue from continuing operations as a percentage of sales decreased in the year ended May 31, 2010 from 77.0% to 74.7% compared to the same period in
2009. The Engineered Systems and Components segment cost of sales decreased compared to the same period in 2009 by 2.4%, mainly as a result of the Company realizing benefits achieved through the consolidation efforts during the last fiscal year.



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General and Administrative Expenses

General and administrative expenses from continuing operations increased to $11,980,230 for the year ended May 31, 2010 from
$5,260,490 for the year ended May 31, 2009. The increase is a result of the addition of Cryptek and the KGC Companies, which increased general and administrative expenses by approximately $6,185,000 for the year ended May 31, 2010.

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



|                      |  |                    |           |           |     |   |      |   |           |  |     |  
|--------------------- |  | ------------------ | --------- | --------- | --- | - | ---- | - | --------- |  | --- | -
|                      |  | Year ended May 31, |          
|                      |  | 2010               |           | % ofsales |     |   | 2009 |   | % ofsales | 
|Administration        |  | $                  | 3,978,177 |           | 5.8 | % |      | $ | 1,666,258 |  | 6.5 | %
|Officer Salaries      |  | $                  | 2,211,415 |           | 3.2 | % |      | $ | 1,073,425 |  | 4.5 | %
|Professional Services |  | $                  | 2,034,469 |           | 2.9 | % |      | $ | 1,386,628 |  | 3.5 | %

Research and
Development Expenses

Research and development costs from continuing operations increased to $2,199,855 for the year ended
May 31, 2010 from $840,788 for the year ended May 31, 2009. The increase is due primarily to an increase of research and development expenses in the amounts of approximately $1,113,000 and $135,000 due to the asset acquisitions of Cryptek
and the KGC Companies, respectively.

Business acquisition and related charges

Business acquisition charges primarily represent costs of engaging outside legal, accounting, due diligence and business valuation
consultants related to business combinations. For the year ended May 31, 2010, business acquisition and related charges totaled approximately $2,454,000 compared to $0 for the year ended May 31, 2009. The asset acquisitions of Cryptek and
the KGC Companies account for $938,000 and $1,442,000, respectively.

Selling Expenses

Selling expenses from continuing operations increased to $3,352,373 for the year ended May 31, 2010 from $2,020,367 for the year
ended May 31, 2009. The increase was largely due to the inclusion of selling expenses related to the asset acquisitions of Cryptek and the KGC Companies on July 7, 2009 and January 20, 2010, respectively. As a percentage of sales,
selling expenses were 4.9% for the year ended May 31, 2010, compared to 7.9% for the year ended May 31, 2009.

The
major components of selling expenses are as follows:



|                      |  |                    |           |           |     |   |      |   |           |  |     |  
|--------------------- |  | ------------------ | --------- | --------- | --- | - | ---- | - | --------- |  | --- | -
|                      |  | Year ended May 31, |          
|                      |  | 2010               |           | % ofsales |     |   | 2009 |   | % ofsales | 
|Payroll ExpenseSales |  | $                  | 1,780,650 |           | 2.6 | % |      | $ | 740,085   |  | 2.9 | %
|Commissions Expense   |  | $                  | 850,679   |           | 1.2 | % |      | $ | 825,279   |  | 3.2 | %

Operating Loss

We posted an operating loss from continuing operations for the fiscal year ended May 31, 2010 of approximately $3,209,000
compared to a loss of approximately $2,455,000 for the fiscal year ended May 31, 2009. The increased operating loss of approximately $754,000 is attributed to the acquisition related expenses of approximately $2,454,000, related to the asset
acquisitions of Cryptek and the KGC Companies, offset by increased gross margin on revenues.



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Other (Income) Expense

Total other expense for the year ended May 31, 2010 amounted to $78,996 compared to other income of $472,027 for the year ended
May 31, 2009.

The increase is largely attributable to additional interest expense of approximately $2,100,000, of which
$328,000 was a non-cash expense related to the amortization of note discounts, and reduced gain on foreign currency of approximately $492,000. The increase was partially offset by the gain on the acquisition of the Cryptek assets of approximately
$993,000, which is due to the fair value of the assets acquired exceeding the total acquisition cost. In addition, we benefited from a gain of approximately $80,000 on the sale of a parcel of land adjacent to one of the design and manufacturing
sites we lease in Long Island, New York and the sale of a building in Ottawa, Canada, which resulted in income of approximately $845,000.

Income Taxes

Income
taxes from continuing operations amounted to an expense of $45,454 for the twelve months ended May 31, 2010, compared to an expense of $99,687 for the twelve months ended May 31, 2009.

We have net operating loss carryforwards of approximately $6,289,000 to apply against future taxable income excluding any losses
generated in the current year. These losses will expire as follows: $56,000, $68,000, $3,407,000, $1,502,000 and $1,256,000 in 2012, 2017, 2028, 2029 and 2030 respectively.

Loss From Discontinued Operations

We incurred losses from discontinued operations of approximately $5,682,000 for the year ended May 31, 2010, compared to a loss from
discontinued operations of approximately $4,361,000 in the same period of fiscal 2009. These losses are attributable to the operations of and closure of our facility focused on the development of nanotechnology products. During the year ended
May 31, 2010, we recorded a write-down of long-lived assets of discontinued operations to net realizable value of approximately $2,041,000.

Net Loss

We incurred a
net loss for the year ended May 31, 2010 of approximately $9,015,000, compared to a net loss of approximately $6,445,000 for the year ended May 31, 2009. The increase in net loss is largely due to the loss from discontinued operations of
approximately $5,682,000, which includes the write-down of long-lived assets of discontinued operations of approximately $2,241,000, acquisition charges of approximately $2,454,000, restructuring charges of approximately $1,208,000, and an increase
in non-cash stock based compensation of approximately $300,000, partially offset by gains on business asset acquisition and the sale of fixed assets of $2,062,806.

Liquidity and Capital Resources

The
Year Ended May 31, 2010 Compared to the Year Ended May 31, 2009

At May 31, 2010, we held cash of $4,496,025
compared to $2,423,835 at May 31, 2009.

Cash used by continuing operating activities was approximately $2,353,000 for
the year ended May 31, 2010, compared to cash provided by continuing operations of approximately $2,701,000 for the year ended May 31, 2009, a change of approximately $5,054,000. The increase in cash used is attributed to approximately
$1,805,000 in changes in net operating assets and liabilities, plus an increase in losses due to acquisition charges of approximately $2,454,000, and restructuring charges of approximately $1,208,000, partially offset by the sale of fixed assets.



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Investing activities for the year ended May 31, 2010 consisted mainly of the asset
acquisitions of Cryptek and the KGC Companies for net cash of approximately $2,935,000 and $14,000,000, respectively, the sale of a parcel of land the Company owned in New York for proceeds of approximately $956,000 and from the sale of a building
the Company owned in Canada for proceeds of approximately $1,871,000, net of capital purchases of approximately $1,624,000.

Cash flow from financing activities for fiscal 2010 totaled $23,294,572, which are primarily from net proceeds of $3,650,000 (2009-$0)
from the issuance of convertible debt and $20,000,000 in promissory notes issued in connection with the acquisition of the assets of Cryptek and the KGC Companies, respectively, and approximately $698,000 borrowings from a secured line of credit,
net against repayment of long-term debt of approximately $483,000 and approximately $570,000 of repurchases of common stock. In 2009, cash flow from financing activities was approximately $999,000, primarily as a result from the issuance of common
shares.

We believe that cash flows from operations, cash and cash equivalents of $4,496,000 and funds available under our
credit facilities will be sufficient to meet our anticipated cash requirements for the next twelve months.

Summary of Critical Accounting
Policies and Estimates

Our significant accounting policies are fully described in the notes to our consolidated financial
statements. Some of our 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 our 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 Technologies Corp., together with its wholly-owned subsidiaries. All
significant inter-company transactions and balances have been eliminated upon consolidation.

Accounting estimates

The preparation of financial statements in conformity with generally accepted accounting principle in the United States requires
management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements, and the disclosures made in the accompanying notes. Examples of estimates include the provisions made for bad debts and
obsolete inventory, estimates associated with annual goodwill impairment tests, and estimates of deferred income tax and liabilities. The Company also uses estimates when assessing fair values of assets and liabilities acquired in business
acquisitions as well as any fair value and any related impairment charges related to the carrying value of machinery and equipment, other long-lived assets, fixed assets held for sale and discontinued operations and in determining their remaining
economic lives. In addition, the Company uses assumptions when employing the Black-Scholes valuation model to estimate the fair value of stock options. Despite the Companys intention to establish accurate estimates and use reasonable
assumptions, actual results may differ from these estimates.

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

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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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. 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.

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 |  | 5-40 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 include renovations, major repairs and upgrades that 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.

Fixed Assets Held for Sale

Fixed assets held for sale have been classified as held for sale in the consolidated balance sheets. The Company estimated the fair value
of the net assets to be sold in fiscal 2010 at approximately $930,000 compared to $2,500,000 at May 31, 2009. The decrease is primarily attributed to the sale of land it owned adjacent to one of the Companys manufacturing sites in the
United States and the sale of land and a building of a manufacturing site in Canada.

Discontinued Operations

Components of the Company that have been or will be disposed of are reported as discontinued operations. The assets and liabilities
relating to API Nanofabrication and Research Corporation (NanoOpto) have been reclassified as discontinued operations in the consolidated balance sheets for fiscal 2009 and 2010 and the results of operations of NanoOpto for the current
and prior periods are reported as discontinued operations and not included in the continuing operations figures.

Goodwill and Intangible
Assets

Goodwill and intangible assets result primarily from business acquisitions accounted for under the purchase method.
Goodwill and intangible assets with indefinite lives are not amortized but are subject to impairment by applying a fair value based test.



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The goodwill recorded in the consolidated financial statements relates to previous
acquisitions, including the KGC Companies in fiscal 2010. The Company performs goodwill impairment testing annually using the discounted future cash flows technique. 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 and the Company has
determined there was no impairment in goodwill as of May 31, 2010 and May 31, 2009.

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 and customer related intangibles |  | 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.

Income taxes

The Company follows the authoritative guidance for accounting for income taxes. 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 guidance
concerning accounting for uncertainty in income taxes, which clarifies the accounting and disclosure for uncertainty in tax positions as of June 1, 2007. The guidance 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, the guidance 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.

The Companys valuation
allowance was taken on the deferred tax assets of certain 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, the Company applied the authoritative guidance, 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 the Company expects to increase the taxable income over future periods. In view of the current increase in losses the Company has 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 its short-term or long-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, 2010, 2009, 2008, 2007 and 2006.



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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

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 collectability 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. 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. Revenue from contracts under the percentage of completion method is not significant to the financials.

Deferred Revenue

The Company
defers revenue when payment is received in advance of the service or product being shipped or delivered. For some of the larger government contracts, the Company will bill upon meeting certain milestones. These milestones are established by the
customer and are specific to each contract. Unearned revenue is recorded as deferred revenue. The Company recognizes revenue on these contracts when items are shipped.

At May 31, 2010, the Company had deferred revenues of approximately $7,777,000 compared to approximately $229,000 at May 31,
2009. The asset acquisition of the KGC Companies accounted for approximately $7,493,000 of the increase.

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 $220,000 and $81,000, in warranty liability as of May 31, 2010 and May 31, 2009, respectively, which has been included in accounts
payable and accrued expenses. The asset acquisition of Cryptek accounted for approximately $100,000 of the May 31, 2010 amount.

Shipping
and Handling

Shipping and handling costs are expensed as incurred and included in cost of revenues.

Sales Taxes

The Company
records sales tax on the sale of its products as a liability, and does not include such amounts in revenue.

Research and Development

Research and development expenses are recorded when incurred.

Advertising Costs

Advertising
costs are expensed as incurred and were $236,892 and $190,533 for the years ending May 31, 2010 and 2009, respectively.



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Stock-Based Compensation

The Company follows the authoritative guidance for accounting for stock-based compensation. The guidance 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 fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model which takes into account as of the grant date the exercise price and expected life of the option, the current price of
the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the option. The Company also follows the guidance 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 period-end exchange rate for monetary balance sheet items, the historical rate for fixed assets and
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.

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.

Financial Instruments

The fair
values of financial instruments including cash and cash equivalents, marketable securities, accounts receivable, accounts payable, and short-term 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 as well as a mortgage loan
denominated in Pound Sterling.

Long-term Debt Discount

In accordance with accounting standards the Company recognized the value of detachable warrants issued in conjunction with the issuance of
the secured promissory notes and the modification of the convertible promissory notes. The Company valued the warrants using the Black-Scholes pricing model. The Company recorded the warrant relative fair value as an increase to additional
paid-in capital and a discount against the related debt. The discount attributed to the value of the warrants is amortized over the term of the underlying debt using the effective interest method.

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) and Canadian Deposit Insurance Corporation (CDIC). Management monitors the soundness of these institutions and has not experienced any collection losses with these institutions.



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The US, Canadian and United Kingdom Governments Departments of Defense (directly and
through subcontractors) accounts for approximately 55%, 6% and 8% of the Companys 2010 revenues, respectively, while the US Government Department of Defense (directly and through subcontractors) accounted for 71% of the Companys revenue
in 2009. One of these customers represented approximately 20% of revenues for the year ended May 31, 2010 and a separate customer represented 16% of revenues for the year ended May 31, 2009, respectively. One customer, a tier one Defense
subcontractor, represented 20% of accounts receivable as of May 31, 2010. No one customer represented over 10% of our accounts receivable at May 31, 2009.

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.

Comprehensive
Income (Loss)

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

Comparative Reclassifications

Certain amounts from 2009 have been reclassified to conform to the 2010 financial statement presentation. The
reclassifications had no effect on previously reported net loss or the balance sheet.

Effects of Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued guidance which stipulates the FASB Accounting
Standards Codification is the source of authoritative U.S. Generally Accepted Accounting Principles (GAAP) recognized by the FASB to be applied by non-governmental entities, and supersedes all existing non-SEC standards. This guidance is
effective for the Companys fiscal year beginning August 1, 2009. The adoption of this guidance did not have a significant impact on the Companys consolidated financial statements.

In June 2009, the Company adopted the accounting standard regarding the general standards for accounting for, and disclosure of, events
that occur after the balance sheet date but before the financial statements are issued. This standard was effective prospectively for all interim and annual reporting periods after June 15, 2009. Since this standard only formalizes existing
GAAP, the adoption of this pronouncement did not have a material impact on the Companys 2010 consolidated financial statements.

In April 2008, the FASB issued guidance related to determining the useful life of intangible assets. This guidance amends the factors
that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The objective of the guidance is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair value of the asset. The adoption of this guidance did not have a significant impact on the Companys consolidated financial statements.

In April 2009, the FASB issued guidance related to the disclosures about fair value of financial instruments. This guidance extends to
interim periods certain disclosures about fair value of financial instruments for publicly traded companies and amends guidance on interim financial reporting, to require those disclosures in summarized financial information at interim reporting
periods. The Companys adoption of this guidance did not have a material effect on the Companys consolidated financial position, results of operations or cash flows.



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In April 2008, the Company adopted the FASB issued guidance related to the fair value
measurement of financial assets and liabilities that are remeasured and reported at fair value at least annually. The guidance 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. Effective June 1, 2009 the Company adopted the provisions of this guidance for
non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the consolidated financial statements on a nonrecurring basis. The application of the guidance 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 March 2008, the FASB issued guidance related to the disclosures about derivative instruments and hedging activities. This guidance is
intended to enhance the current financial statement disclosure framework. The guidance 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 the derivatives. Finally, this guidance requires cross-referencing within the footnotes, which should help users of financial statements to locate important information
about derivative instruments. The adoption of this guidance did not have a significant impact on the consolidated results of operations or financial position of the Company.

In December 2007, the FASB issued an amendment to an existing accounting standard which provides guidance related to business
combinations. The amendment requires that full fair value accounting be used for all business combinations and for an acquirer to be identified for each business combination. This amendment also establishes principles and requirements for how the
acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This amendment applies prospectively
to 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. An entity may not apply it before that date. This guidance is effective for the
Companys fiscal year beginning June 1, 2009. The adoption of this guidance resulted in the Company recognizing a gain associated with the Cryptek Technologies Inc. asset acquisition and expensing the transaction costs associated with the
Cryptek Technologies Inc. and KGC Companies asset acquisitions.

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued guidance related to revenue recognition for arrangements with multiple deliverables. This guidance
eliminates the residual method of allocation and requires the relative selling price method when allocating deliverables of a multiple-deliverable revenue arrangement. The determination of the selling price for each deliverable requires the use of a
hierarchy designed to maximize the use of available objective evidence including, vendor specific objective evidence, third party evidence of selling price, or estimated selling price. The guidance is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted in the same period using the same transition method. If adoption is elected in a period other than the beginning of a
fiscal year, the amendments in these standards must be applied retrospectively to the beginning of the fiscal year. Full retrospective application of these amendments to prior fiscal years is optional. Early adoption of these standards may be
elected. We are currently evaluating the impact of these new accounting standards on our consolidated financial statements.



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Off-Balance Sheet Arrangements

During 2010 and 2009, we did not use off-balance sheet arrangements.



|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

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



|ITEM 9. | CHANGES IN AND DISAGREEMENTS 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 recognizes 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 is 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, 2010. Based
on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of May 31, 2010.

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, 2010. 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, 2010.

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.



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Scope of Managements Evaluation and Report on Internal Control over Financial Reporting

The Company acquired the assets of the KGC Companies and Cryptek during fiscal 2010. The acquired assets related to these
acquisitions totaled approximately $59,507,000 million as of May 31, 2010 and represented approximately $45,459,000 of revenues for 2010. The Company did not conduct an assessment of the effectiveness of internal control over financial
reporting for these entities as permitted by the rules and regulations of the SEC.

Changes in Internal Control over Financial Reporting.

During the fourth quarter of the fiscal year ended May 31, 2010, there have been no changes in 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
|-------- | -----------------

None.



46



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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 2010 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, 2010. 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 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). The Code of Ethics
is posted on our website at www.apitechnologies.com on the Investor Relations section. We will post on our website any amendments to or waivers of the Code of Ethics for executive officers or directors in accordance with applicable laws and
regulations.



|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, 2010.



|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, 2010.



|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, 2010.



|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, 2010.



47



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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:



|      |  |                                                                                                                                                                                                                                                                                                                                                 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1   |  | Asset Purchase Agreement (incorporated by reference from Exhibit 2.1 of our Current Report on Form 8-K filed with the SEC on March 2, 2010.)                                                                                                                                                                                                    
|      | 
|3.1   |  | Amended and Restated Certificate of Incorporation, (incorporated by reference from Exhibit 3.1 of the Companys Form 8-K filed with the SEC on October 27,
2009).                                                                                                                                                                               
|      | 
|3.2   |  | Amended and Restated By-laws (incorporated by reference from Exhibit 3.2 of the Companys Form 8-K filed with the SEC on October 27, 2009).                                                                                                                                                                                                     
|      | 
|10.1  |  | Support Agreement dated February 6, 2006 among API Nanotronics Corp. k/n/a API Technologies Corp. and RVI Sub, Inc. k/n/a API Nanotronics 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).                                                
|      | 
|10.2  |  | Voting and Exchange Agreement dated February 6, 2006 among API Nanotronics Corp. k/n/a API Technologies Corp. and RVI Sub, Inc. k/n/a API Nanotronics 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).
|      | 
|10.3  |  | 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).                                                                      
|      | 
|*10.4 |  | Amended and Restated API Technologies Corp. 2006 Equity Incentive Plan (filed herewith).                                                                                                                                                                                                                                                        
|      | 
|*10.5 |  | Form of Incentive Option Agreement under the Companys 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 of the Companys Form 10-Q filed October 15,
2009).                                                                                                                                                                
|      | 
|*10.6 |  | Form of Non-Statutory Stock Option Agreement under the Companys 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 of the Companys Form 10-Q filed
October 15, 2009.)                                                                                                                                                      
|      | 
|*10.7 |  | 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).                            
|      | 
|*10.8 |  | 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).                                                                                                                                             
|      | 
|10.9  |  | Form of investor notes issued in the aggregate amount of $3,650,000 dated as of June 23, 2009 (incorporated by reference from the Companys Form 10-K filed with the SEC on
August 27, 2009).                                                                                                                                                   
|      | 
|10.10 |  | Security Agreement dated as of June 23, 2009 among API Nanotronics Corp., the subsidiaries party to the agreement and Icarus Investment Corp. (incorporated by reference from the
Companys Form 10-K filed with the SEC on August 27, 2009).                                                                                                   
|      | 
|10.11 |  | Loan Purchase Agreement between API Cryptek, Inc. and Wachovia Bank, National Association and Wachovia Capital Finance Corporation (Canada) dated June 23, 2009 (incorporated by
reference from the Companys Form 10-K filed with the SEC on August 27, 2009).                                                                                 
|      | 
|10.12 |  | First Amendment to Note and Security Agreement dated December 22, 2009 (incorporated by reference from Exhibit 10.1 of the Companys Form 10-Q filed April 13,
2010).                                                                                                                                                                           
|      | 
|10.13 |  | Promissory Note dated January 20, 2010 in the principal amount of $10,000,000 (incorporated by reference from Exhibit 10.2 of the Companys Form 10-Q filed April 13, 2010).                                                                                                                                                                    



48



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##### Table of Contents

|       |  |                                                                                                                                                                                                                                                         
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14  |  | Form of Secured Promissory Note issued January 20, 2010 and January 22, 2010 to investors under Regulation D in aggregate principal amount of $2,900,000 (incorporated by
reference from Exhibit 10.3 of the Companys Form 10-Q filed April 13, 2010). 
|       | 
|10.15  |  | Form of Secured Promissory Note issued January 20, 2010 and January 22, 2010 to investors under Regulation S in aggregate principal amount of $17,100,000 (incorporated by reference
from Exhibit 10.4 of the Companys Form 10-Q filed April 13, 2010).
|       | 
|10.16  |  | Form of Warrant issued January 20, 2010 and January 22, 2010 to investors under Regulation D for an aggregate amount of 517,861 shares of common stock (incorporated by reference
from Exhibit 10.5 of the Companys Form 10-Q filed April 13, 2010).   
|       | 
|10.17  |  | Form of Warrant issued January 20, 2010 and January 22, 2010 to investors under Regulation S for an aggregate amount of 3,053,586 shares of common stock (incorporated by reference
from Exhibit 10.6 of the Companys Form 10-Q filed April 13, 2010). 
|       | 
|10.18  |  | Form of Warrant issued December 2009 to investors for aggregate amount of 250,000 shares of common stock (incorporated by reference from Exhibit 10.7 of the Companys Form 10-Q
filed April 13, 2010).                                                 
|       | 
|10.19  |  | Revolving credit facility between EMCON Emanation Control Ltd. and Royal Bank of Canada (incorporated by reference from Exhibit 10.8 of the Companys Form 10-Q filed April 13,
2010).                                                                  
|       | 
|10.20  |  | General Security Agreement between EMCON Emanation Control Ltd. and Royal Bank of Canada(incorporated by reference from Exhibit 10.9 of the Companys Form 10-Q filed April 13,
2010).                                                                  
|       | 
|10.21  |  | Security Agreement dated January 15, 2010 (incorporated by reference from Exhibit 10.10 of the Companys Form 10-Q filed April 13, 2010).                                                                                                               
|       | 
|10.22  |  | Security Agreement dated January 20, 2010 (incorporated by reference from Exhibit 10.11 of the Companys Form 10-Q filed April 13, 2010).                                                                                                               
|       | 
|10.23  |  | First Amendment to Security Agreement dated February 4, 2010 (incorporated by reference from Exhibit 10.12 of the Companys Form 10-Q filed April 13, 2010).                                                                                            
|       | 
|*10.24 |  | Agreement and Release dated March 18, 2010 between API Technologies Corp. and Martin Moskovits (incorporated by reference from Exhibit 10.1 of the Companys Form 8-K filed
March 22, 2010).                                                            
|       | 
|*10.25 |  | Consulting Agreement between the Company and JMP Fam Holdings Inc. (incorporated by reference from Exhibit 10.28 of the Companys Post-Effective Amendment No. 4 on Form
S-1 filed with the SEC on June 4, 2010).                                       
|       | 
|21     |  | Subsidiaries of the Company (filed herewith).                                                                                                                                                                                                           
|       | 
|23.1   |  | Consent of WithumSmith+Brown, P C (filed herewith).                                                                                                                                                                                                     
|       | 
|31.1   |  | Rule 13a-14(a)/15(d)-14(a) Certification by Chief Executive Officer (filed herewith).                                                                                                                                                                   
|       | 
|31.2   |  | Rule 13a-14(a)/15(d)-14(a) Certification by 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.
|- | ---------------------------------------------------------



49



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##### Table of Contents

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 TECHNOLOGIES CORP./S/    STEPHEN
PUDLESStephen Pudles,Chief Executive OfficerDated: August 10, 2010


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 10, 2010
|                                                                                              | 
|Principal Financial and Accounting Officer                                                    |  |                
|                                                                                              | 
|/S/    CLAUDIO
MANNARINO Claudio Mannarino
Vice President-Finance and Chief Financial Officer |  | August 10, 2010
|                                                                                              | 
|/S/    PHILLIP
DEZWIREK Phillip DeZwirek
Chairman, Director and Treasurer                     |  | August 10, 2010
|                                                                                              | 
|/S/    JASON
DEZWIREK Jason DeZwirek,
Director and Secretary                                  |  | August 10, 2010
|                                                                                              | 
|/S/    JONATHAN
POLLACK Jonathan Pollack,
Executive Vice President and Director               |  | August 10, 2010
|                                                                                              | 
|/S/    BERNARD
KRAFT Bernard Kraft,
Director                                                  |  | August 10, 2010
|                                                                                              | 
|/S/    DONALD A.
WRIGHT Donald A. Wright,
Director                                            |  | August 10, 2010
|                                                                                              | 
|/S/    ARTHUR
CAPE Arthur Cape,
Director                                                      |  | August 10, 2010



50



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##### Table of Contents

Consolidated Financial Statements



|                                                                                                      |  |     
|----------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                      |  | Page
|                                                                                                      | 
|Report of Independent Registered Public Accounting Firm                                               |  | F-2 
|                                                                                                      | 
|Consolidated Balance Sheets at May 31, 2010 and 2009                                                  |  | F-3 
|                                                                                                      | 
|Consolidated Statements of Operations for the years ended May 31, 2010 and 2009                       |  | F-4 
|                                                                                                      | 
|Consolidated Statements of Changes in Shareholders Equity for the years ended May 
31, 2010 and 2009 |  | F-5 
|                                                                                                      | 
|Consolidated Statements of Cash Flows for the years ended May 31, 2010 and 2009                       |  | F-7 
|                                                                                                      | 
|Notes to Consolidated Financial Statements                                                            |  | F-8 



F-1



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

API Technologies Corp.

We have audited the consolidated balance sheets of API Technologies Corp. as of May 31, 2010 and 2009, 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 Technologies Corp. as of May 31, 2010 and 2009, 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 described in Notes 3
and 4, for the year ended May 31, 2010, the Company adopted new accounting standards for business combinations.

/s/ WithumSmith+Brown,
PC

New Brunswick, New Jersey

August 10, 2010



F-2



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##### Table of Contents

API TECHNOLOGIES CORP.

Consolidated Balance Sheets



|                                                                                                                                                                        |  |             |             |   |             |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | - | ----------- | - | ----------- | -
|                                                                                                                                                                        |  | May 31,2010 |             |   | May 31,2009 |  
|Assets                                                                                                                                                                  |  |             |             |   |             |   |             |  
|Current                                                                                                                                                                 |  |             |             |   |             |   |             |  
|Cash and cash equivalents                                                                                                                                               |  | $           | 4,496,025   |   |             | $ | 2,423,835   |  
|Marketable securities, at fair value                                                                                                                                    |  |             | 200,474     |   |             |   | 129,085     |  
|Accounts receivable, less allowance for doubtful accounts of $101,911 and $85,152 at May 31, 2010 and 2009, respectively                                                |  |             | 15,115,117  |   |             |   | 3,644,304   |  
|Inventories, net (note 7)                                                                                                                                               |  |             | 29,761,594  |   |             |   | 5,888,435   |  
|Deferred income taxes                                                                                                                                                   |  |             | 1,277,452   |   |             |   | 186,630     |  
|Prepaid expenses and other current assets                                                                                                                               |  |             | 1,370,407   |   |             |   | 266,018     |  
|Current assets of discontinued operations (note 5)                                                                                                                      |  |             | 44,172      |   |             |   | 66,673      |  
|                                                                                                                                                                        |  |             |             |   |             |   |             |  
|                                                                                                                                                                        |  |             | 52,265,241  |   |             |   | 12,604,980  |  
|Fixed assets, net                                                                                                                                                       |  |             | 11,493,384  |   |             |   | 2,445,992   |  
|Fixed assets held for sale (note 2)                                                                                                                                     |  |             | 931,075     |   |             |   | 2,493,986   |  
|Deferred income taxes                                                                                                                                                   |  |             | 257,290     |   |             |   | 627,160     |  
|Goodwill (note 9)                                                                                                                                                       |  |             | 8,461,889   |   |             |   | 1,130,906   |  
|Intangible assets, net (note 9)                                                                                                                                         |  |             | 3,160,422   |   |             |   | 221,823     |  
|Long-lived assets of discontinued operations (note 5)                                                                                                                   |  |             | 2,041,155   |   |             |   | 4,628,463   |  
|                                                                                                                                                                        |  |             |             |   |             |   |             |  
|                                                                                                                                                                        |  | $           | 78,610,456  |   |             | $ | 24,153,310  |  
|                                                                                                                                                                        |  |             |             |   |             |   |             |  
|Liabilities and Shareholders Equity                                                                                                                                    |  |             |             |   |             |   |             |  
|Current                                                                                                                                                                 |  |             |             |   |             |   |             |  
|Bank indebtedness                                                                                                                                                       |  | $           | 697,654     |   |             | $ |            |  
|Accounts payable and accrued expenses                                                                                                                                   |  |             | 16,215,900  |   |             |   | 3,386,435   |  
|Deferred revenue                                                                                                                                                        |  |             | 7,776,622   |   |             |   | 228,734     |  
|Deferred income taxes                                                                                                                                                   |  |             | 1,301,364   |   |             |   | 24,922      |  
|Sellers note payable (note 12)                                                                                                                                         |  |             | 10,000,000  |   |             |   |            |  
|Current portion of long-term debt (note 13)                                                                                                                             |  |             | 289,638     |   |             |   | 96,296      |  
|Current liabilities of discontinued operations (note 5)                                                                                                                 |  |             | 439,633     |   |             |   | 622,131     |  
|                                                                                                                                                                        |  |             |             |   |             |   |             |  
|                                                                                                                                                                        |  |             | 36,720,811  |   |             |   | 4,358,518   |  
|Deferred income taxes                                                                                                                                                   |  |             | 233,354     |   |             |   | 788,844     |  
|Long-term debt, net of current portion and discount of $3,286,871 and $0 at May 31, 2010 and 2009, respectively (note
13)                                               |  |             | 22,718,609  |   |             |   | 12,159      |  
|                                                                                                                                                                        |  |             |             |   |             |   |             |  
|                                                                                                                                                                        |  |             | 59,672,774  |   |             |   | 5,159,521   |  
|                                                                                                                                                                        |  |             |             |   |             |   |             |  
|Commitments and contingencies (note 21)                                                                                                                                 |  |             |             |   |             |   |             |  
|Shareholders equity                                                                                                                                                    |  |             |             |   |             |   |             |  
|Common stock, ($0.001 par value, 100,000,000 authorized shares, 32,845,275 and 31,753,865 shares issued and outstanding at
May 31, 2010 and May 31, 2009, respectively) |  |             | 32,845      |   |             |   | 31,754      |  
|Special voting stock ($0.01 par value, 1 share authorized, issued and outstanding at May 31, 2010 and May 31, 2009,
respectively)                                       |  |             |            |   |             |   |            |  
|Additional paid-in capital                                                                                                                                              |  |             | 41,544,341  |   |             |   | 35,179,191  |  
|Common stock subscribed but not issued                                                                                                                                  |  |             | 2,373,000   |   |             |   |            |  
|Accumulated deficit                                                                                                                                                     |  |             | (25,477,455 | ) |             |   | (16,462,414 | )
|Accumulated other comprehensive income:                                                                                                                                 |  |             |             |   |             |   |             |  
|Currency translation adjustment                                                                                                                                         |  |             | 302,874     |   |             |   | 141,677     |  
|Unrealized gain on marketable securities, net of tax                                                                                                                    |  |             | 162,077     |   |             |   | 103,581     |  
|                                                                                                                                                                        |  |             |             |   |             |   |             |  
|Total accumulated other comprehensive income                                                                                                                            |  |             | 464,951     |   |             |   | 245,258     |  
|                                                                                                                                                                        |  |             |             |   |             |   |             |  
|                                                                                                                                                                        |  |             | 18,937,682  |   |             |   | 18,993,789  |  
|                                                                                                                                                                        |  |             |             |   |             |   |             |  
|                                                                                                                                                                        |  | $           | 78,610,456  |   |             | $ | 24,153,310  |  
|                                                                                                                                                                        |  |             |             |   |             |   |             |  

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



F-3



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##### Table of Contents

API TECHNOLOGIES CORP.

Consolidated Statements of Operations



|                                                              |  |                        |            |   |                        |   |            |  
|------------------------------------------------------------- |  | ---------------------- | ---------- | - | ---------------------- | - | ---------- | -
|                                                              |  | Year endedMay 31, 2010 |            |   | Year endedMay 31, 2009 |  
|Revenue, net                                                  |  | $                      | 68,550,030 |   |                        | $ | 25,461,024 |  
|Cost of revenues                                              |  |                        |            |   |                        |   |            |  
|Cost of revenues                                              |  |                        | 50,564,787 |   |                        |   | 18,718,719 |  
|Restructuring charges (note 22)                               |  |                        | 636,458    |   |                        |   | 876,141    |  
|                                                              |  |                        |            |   |                        |   |            |  
|Total cost of revenues                                        |  |                        | 51,201,245 |   |                        |   | 19,594,860 |  
|                                                              |  |                        |            |   |                        |   |            |  
|Gross profit                                                  |  |                        | 17,348,785 |   |                        |   | 5,866,164  |  
|                                                              |  |                        |            |   |                        |   |            |  
|Operating expenses                                            |  |                        |            |   |                        |   |            |  
|General and administrative                                    |  |                        | 11,980,230 |   |                        |   | 5,260,490  |  
|Selling expenses                                              |  |                        | 3,352,373  |   |                        |   | 2,020,367  |  
|Research and development                                      |  |                        | 2,199,855  |   |                        |   | 840,788    |  
|Business acquisition and related charges                      |  |                        | 2,453,542  |   |                        |   |           |  
|Restructuring charges (note 22)                               |  |                        | 571,512    |   |                        |   | 200,000    |  
|                                                              |  |                        |            |   |                        |   |            |  
|                                                              |  |                        | 20,557,512 |   |                        |   | 8,321,645  |  
|                                                              |  |                        |            |   |                        |   |            |  
|Operating loss                                                |  |                        | (3,208,727 | ) |                        |   | (2,455,481 | )
|Other (income) expenses, net                                  |  |                        |            |   |                        |   |            |  
|Interest (income) expense, net                                |  |                        | 2,068,600  |   |                        |   | (47,166    | )
|Other (income) expense, net                                   |  |                        | (2,056,993 | ) |                        |   |           |  
|(Gain) loss on foreign currency transactions, net             |  |                        | 67,389     |   |                        |   | (424,861   | )
|                                                              |  |                        |            |   |                        |   |            |  
|                                                              |  |                        | 78,996     |   |                        |   | (472,027   | )
|                                                              |  |                        |            |   |                        |   |            |  
|Loss from continuing operations before income taxes           |  |                        | (3,287,723 | ) |                        |   | (1,983,454 | )
|Provision for income taxes                                    |  |                        | 45,454     |   |                        |   | 99,687     |  
|                                                              |  |                        |            |   |                        |   |            |  
|Loss from continuing operations                               |  |                        | (3,333,177 | ) |                        |   | (2,083,141 | )
|Loss from discontinued operations, net of tax                 |  |                        | (5,681,864 | ) |                        |   | (4,361,396 | )
|                                                              |  |                        |            |   |                        |   |            |  
|Net loss                                                      |  | $                      | (9,015,041 | ) |                        | $ | (6,444,537 | )
|                                                              |  |                        |            |   |                        |   |            |  
|Loss per share from continuing operationsBasic and diluted   |  | $                      | (0.10      | ) |                        | $ | (0.06      | )
|Loss per share from discontinued operationsBasic and diluted |  | $                      | (0.16      | ) |                        | $ | (0.13      | )
|                                                              |  |                        |            |   |                        |   |            |  
|Net loss per shareBasic and diluted                          |  | $                      | (0.26      | ) |                        | $ | (0.19      | )
|                                                              |  |                        |            |   |                        |   |            |  
|Weighted average shares outstanding                           |  |                        |            |   |                        |   |            |  
|Basic                                                         |  |                        | 34,773,993 |   |                        |   | 34,816,989 |  
|Diluted                                                       |  |                        | 34,773,993 |   |                        |   | 34,816,989 |  

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



F-4



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##### Table of Contents

API TECHNOLOGIES CORP.

Consolidated Statement of Changes in Shareholders Equity



|                                                                                                                                      |  |                             |   |  |                   |        |   |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | - |  | ----------------- | ------ | - | ------------------------- | - | ---------- | ---------------------------------- |  | - | ------------------ | - |  | ----------------------------------- | ----------- | - | ------------------------ | - | -------- | - |  | - | ---------- | -
|                                                                                                                                      |  | 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
16) |  | 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.



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##### Table of Contents

API TECHNOLOGIES CORP.

Consolidated Statements of Changes in Shareholders Equitycontinued



|                                                                                                                                     |  |                             |   |  |                   |        |   |                           |   |            |                                     |  |                    |           |  |                                     |             |                          |  |   |         |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | - |  | ----------------- | ------ | - | ------------------------- | - | ---------- | ----------------------------------- |  | ------------------ | --------- |  | ----------------------------------- | ----------- | ------------------------ |  | - | ------- |  | - | ---------- | -
|                                                                                                                                     |  | Commonstock-numberof shares |   |  | Commonstockamount |        |   | Additionalpaid-in capital |   |            | Commonstocksubscribedbut not issued |  | AccumulatedDeficit |           |  | Accumulatedothercomprehensiveincome |             | Totalstockholdersequity | 
|Balance at May 31, 2009                                                                                                              |  | 31,753,865                  |   |  | $                 | 31,754 |   |                           | $ | 35,179,191 |                                     |  | $                  |          |  | $                                   | (16,462,414 | )                        |  | $ | 245,258 |  | $ | 18,993,789 |  
|Stock exchanged for subsidiary exchangeable shares and stock subject to issuance in connection with plan of arrangement(see
Note 16) |  | 150                         |   |  |                   |       |   |                           |   |           |                                     |  |                    |          |  |                                     |            |                          |  |   |        |  |   |           |  
|Stock-based compensation expense                                                                                                     |  |                            |   |  |                   |       |   |                           |   | 1,215,010  |                                     |  |                    |          |  |                                     |            |                          |  |   |        |  |   | 1,215,010  |  
|Stock repurchase                                                                                                                     |  | (413,740                    | ) |  |                   | (414   | ) |                           |   | (570,061   | )                                   |  |                    |          |  |                                     |            |                          |  |   |        |  |   | (570,475   | )
|Stock issued as part of acquisition                                                                                                  |  | 1,000,000                   |   |  |                   | 1,000  |   |                           |   | 1,399,000  |                                     |  |                    |          |  |                                     |            |                          |  |   |        |  |   | 1,400,000  |  
|Stock issued in escrow                                                                                                               |  | 505,000                     |   |  |                   | 505    |   |                           |   | 706,495    |                                     |  |                    |          |  |                                     |            |                          |  |   |        |  |   | 707,000    |  
|Stock subscribed but not issued                                                                                                      |  |                            |   |  |                   |       |   |                           |   |           |                                     |  |                    | 2,373,000 |  |                                     |            |                          |  |   |        |  |   | 2,373,000  |  
|Warrants issued                                                                                                                      |  |                            |   |  |                   |       |   |                           |   | 3,614,706  |                                     |  |                    |          |  |                                     |            |                          |  |   |        |  |   | 3,614,706  |  
|Net loss for the period                                                                                                              |  |                            |   |  |                   |       |   |                           |   |           |                                     |  |                    |          |  |                                     | (9,015,041  | )                        |  |   |        |  |   | (9,015,041 | )
|Foreign currency translation adjustment                                                                                              |  |                            |   |  |                   |       |   |                           |   |           |                                     |  |                    |          |  |                                     |            |                          |  |   | 161,197 |  |   | 161,197    |  
|Unrealized gain on marketable securitiesnet of taxes                                                                                |  |                            |   |  |                   |       |   |                           |   |           |                                     |  |                    |          |  |                                     |            |                          |  |   | 58,496  |  |   | 58,496     |  
|                                                                                                                                     |  |                             |   |  |                   |        |   |                           |   |            |                                     |  |                    |           |  |                                     |             |                          |  |   |         |  |   |            |  
|Total comprehensive loss                                                                                                             |  |                             |   |  |                   |        |   |                           |   |            |                                     |  |                    |           |  |                                     |             |                          |  |   |         |  |   | (8,795,348 | )
|                                                                                                                                     |  |                             |   |  |                   |        |   |                           |   |            |                                     |  |                    |           |  |                                     |             |                          |  |   |         |  |   |            |  
|Balance at May 31, 2010                                                                                                              |  | 32,845,275                  |   |  | $                 | 32,845 |   |                           | $ | 41,544,341 |                                     |  | $                  | 2,373,000 |  | $                                   | (25,477,455 | )                        |  | $ | 464,951 |  | $ | 18,937,682 |  
|                                                                                                                                     |  |                             |   |  |                   |        |   |                           |   |            |                                     |  |                    |           |  |                                     |             |                          |  |   |         |  |   |            |  

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



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##### Table of Contents

API TECHNOLOGIES CORP.

Consolidated Statements of Cash Flows



|                                                                            |  |                    |             |   |      |   |            |  
|--------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ---- | - | ---------- | -
|                                                                            |  | Years EndedMay 31, |            
|                                                                            |  | 2010               |             |   | 2009 |  
|Cash flows from operating activities                                        |  |                    |             |   |      |   |            |  
|Net loss                                                                    |  | $                  | (9,015,041  | ) |      | $ | (6,444,537 | )
|Less: Loss from discontinued operations                                     |  |                    | 5,681,864   |   |      |   | 4,361,396  |  
|Adjustments to reconcile net loss to net cash used by operating activities: |  |                    |             |   |      |   |            |  
|Depreciation and amortization                                               |  |                    | 999,988     |   |      |   | 834,472    |  
|Amortization of note discounts                                              |  |                    | 327,835     |   |      |   |           |  
|Write down of fixed assets held for sale                                    |  |                    | 324,410     |   |      |   | 212,959    |  
|Stock based compensation                                                    |  |                    | 1,215,010   |   |      |   | 918,081    |  
|Gain on business asset acquisition                                          |  |                    | (992,855    | ) |      |   |           |  
|(Gain) loss on sale of fixed assets                                         |  |                    | (1,069,951  | ) |      |   | 263,468    |  
|Deferred income taxes                                                       |  |                    | 7,506       |   |      |   | 66,627     |  
|Changes in operating asset and liabilities, net of business acquisitions    |  |                    |             |   |      |   |            |  
|Accounts receivable                                                         |  |                    | (3,007,762  | ) |      |   | 724,908    |  
|Inventories                                                                 |  |                    | (255,154    | ) |      |   | 1,321,856  |  
|Prepaid expenses and other current assets                                   |  |                    | 1,702,116   |   |      |   | 223,092    |  
|Accounts payable and accrued expenses                                       |  |                    | 6,100,007   |   |      |   | (9,632     | )
|Deferred revenue                                                            |  |                    | (4,370,512  | ) |      |   | 228,734    |  
|                                                                            |  |                    |             |   |      |   |            |  
|Net cash (used) provided by continuing activities                           |  |                    | (2,352,539  | ) |      |   | 2,701,424  |  
|Net cash used by discontinued operations                                    |  |                    | (3,104,056  | ) |      |   | (3,637,685 | )
|                                                                            |  |                    |             |   |      |   |            |  
|Net cash used by operating activities                                       |  |                    | (5,456,595  | ) |      |   | (936,261   | )
|Cash flows from investing activities                                        |  |                    |             |   |      |   |            |  
|Purchase of fixed assets                                                    |  |                    | (1,624,221  | ) |      |   | (293,663   | )
|Proceeds from disposal of fixed assets (note 2)                             |  |                    | 3,002,012   |   |      |   | 785,742    |  
|Business acquisitions net of cash acquired of $2,071,270 (note 4)           |  |                    | (16,928,730 | ) |      |   |           |  
|Discontinued operations (note 5)                                            |  |                    | (44,623     | ) |      |   | (470,203   | )
|                                                                            |  |                    |             |   |      |   |            |  
|Net cash (used) provided by investing activities                            |  |                    | (15,595,562 | ) |      |   | 21,876     |  
|Cash flows from financing activities                                        |  |                    |             |   |      |   |            |  
|Proceeds from issuance of common shares and share application               |  |                    |            |   |      |   | 1,550,000  |  
|Repurchase and retirement of common shares                                  |  |                    | (570,474    | ) |      |   | (209,703   | )
|Short-term borrowings advances (repayments)                                 |  |                    | 697,654     |   |      |   | (310,458   | )
|Repayment of long-term debt                                                 |  |                    | (482,608    | ) |      |   | (31,135    | )
|Net proceedslong-term debt (note 13 and 19)                                |  |                    | 23,650,000  |   |      |   |           |  
|                                                                            |  |                    |             |   |      |   |            |  
|Net cash provided by financing activities                                   |  |                    | 23,294,572  |   |      |   | 998,704    |  
|Effect of exchange rate on cash and cash equivalents                        |  |                    | (160,725    | ) |      |   | (321,500   | )
|                                                                            |  |                    |             |   |      |   |            |  
|Net change in cash and cash equivalents                                     |  |                    | 2,081,690   |   |      |   | (237,181   | )
|Cash and cash equivalents, beginning of periodcontinuing operations        |  |                    | 2,423,835   |   |      |   | 2,657,156  |  
|Cash and cash equivalents, beginning of perioddiscontinued operations      |  |                    | 6,093       |   |      |   | 9,953      |  
|                                                                            |  |                    |             |   |      |   |            |  
|Cash and cash equivalents, beginning of period                              |  |                    | 2,429,928   |   |      |   | 2,667,109  |  
|Cash and cash equivalents, end of period                                    |  | $                  | 4,511,618   |   |      | $ | 2,429,928  |  
|Less: cash and cash equivalents of discontinued operations, end of period   |  |                    | 15,593      |   |      |   | 6,093      |  
|                                                                            |  |                    |             |   |      |   |            |  
|Cash and cash equivalents of continuing operations, end of period           |  | $                  | 4,496,025   |   |      | $ | 2,423,835  |  
|                                                                            |  |                    |             |   |      |   |            |  

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



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

API
Technologies Corp. (API, and together with its subsidiaries, the Company), designs, develops and manufactures high reliability engineered solutions, systems, secure communications and electronic components for military and
aerospace applications, including mission critical information systems and technologies.

On January 20, 2010, API and
three newly formed subsidiaries, API Systems, Inc. (API Systems), API Defense, Inc. (API Defense) and API Defense USA, Inc. (API USA and collectively with API Systems and API Defense, the API Pennsylvania
Subsidiaries) entered into an asset purchase agreement with Kuchera Defense Systems, Inc. (KDS), KII, Inc. (KII) and Kuchera Industries, LLC (K Industries and collectively with KDS and KII, the
KGC Companies) dated January 20, 2010 pursuant to which the API Pennsylvania Subsidiaries purchased substantially all of the assets of the KGC Companies (see Note 4). The KGC Companies included defense subcontractors specializing in
highly engineered systems and robotics for various world governments, as well as military, defense, aerospace and homeland security prime contractors.

API, through the July 7, 2009 acquisition of Cryptek Technologies Inc. (see Note 4), expanded its manufacturing and design of
products to include secured communication products, including ruggedized computer products, network security appliances, and TEMPEST Emanation prevention products. API continues to position itself as a total engineered solution provider to
various world governments, as well as military, defense, aerospace and homeland security contractors.

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
Technologies Corp., formerly known as API Nanotronics Corp. and previously Rubincon Ventures Inc., and API Electronics Group Corp., API Electronics, Inc., the National Hybrid Group (consisting of National Hybrid, Inc., Pace Technology, Inc., TM
Systems II Inc., and Keytronics, Inc.), the Filtran Group (consisting of Filtran Limited and Filtran Inc.), the API Pennsylvania Subsidiaries, API Cryptek Inc. and its wholly-owned subsidiaries, Emcon Emanation Control Ltd., Secure
Systems & Technologies, Ltd., and its division Ion Networks (DBA Ion) and API Nanofabrication and Research Corporation (NanoOpto), its wholly-owned subsidiaries (the Subsidiaries), which are collectively
referred to as the Company. There are no other significant operating entities controlled by the Company, either directly or indirectly.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Accounting estimates

The preparation of financial statements in conformity with generally accepted accounting principle in the United States requires
management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements, and the disclosures made in the accompanying notes. Examples of estimates include the provisions made for bad debts
and obsolete inventory, estimates associated with annual goodwill impairment tests, and estimates of deferred income tax and liabilities. The Company also uses estimates



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



when assessing fair values of assets and liabilities acquired in business acquisitions as well as any fair value and any related impairment charges related to the carrying value of machinery and
equipment, other long-lived assets, fixed assets held for sale and discontinued operations. The Company also uses estimates in determining the remaining economic lives of long-lived assets. In addition, the Company uses assumptions when
employing the Black-Scholes valuation model to estimate the fair value of stock options. Despite the Companys intention to establish accurate estimates and use reasonable assumptions, actual results may differ from these estimates.

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

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 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.

Inventories

Inventories, which include materials, labor, and manufacturing overhead, are stated at the lower of cost (first-in, first-out basis) or
net realizable value. 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.

The Company will continue to periodically review and analyze our inventory management systems, and conduct inventory
impairment testing on an annual basis.

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 leasehold improvements |  | 5-40 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 include renovations, major



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



repairs and upgrades that 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.

Fixed Assets Held for Sale

Fixed assets held for sale have been classified as held for sale in the consolidated balance sheets. The Company estimated
the fair value of the net assets to be sold at approximately $930,000 at May 31, 2010 compared to $2,500,000 at May 31, 2009. The decrease is primarily attributed to the sale of land it owned adjacent to one of the Companys
manufacturing sites in the United States and the sale of land and a building of a manufacturing site in Canada.

Discontinued Operations

Components of the Company that have been or will be disposed of are reported as discontinued operations. The assets and
liabilities relating to API Nanofabrication and Research Corporation (NanoOpto) have been reclassified as discontinued operations in the consolidated balance sheets for fiscal 2009 and 2010 and the results of operations of NanoOpto for
the current and prior periods are reported as discontinued operations and not included in the continuing operations figures. (Note 5)

Goodwill and Intangible Assets

Goodwill and intangible assets result primarily from business acquisitions accounted for under the purchase method. 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 in the consolidated financial statements relates to acquisitions, including the KGC Companies in fiscal 2010. The
Company performs goodwill impairment testing annually using the discounted future cash flows technique. 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 exceeded the carrying value of the assets and the Company has determined there was no impairment in goodwill as of May 31, 2010 and
May 31, 2009.

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
|Computer software            |  | 3-5 years                 
|Customer related intangibles |  | 10-15 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.

Income taxes

The Company follows the authoritative guidance for accounting for income taxes. Deferred income tax assets and liabilities are recognized
for the future tax consequences attributable to differences between financial



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



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 guidance concerning accounting for
uncertainty in income taxes, which clarifies the accounting and disclosure for uncertainty in tax positions as of June 1, 2007. The guidance 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, the guidance 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.

The Companys valuation allowance was taken on the
deferred tax assets of certain 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, the Company applied the authoritative guidance, 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 the Company expects to increase the taxable income over future periods. In view of the current increase in losses the Company has 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 its short-term or long-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, 2010, 2009, 2008, 2007 and 2006.

The Company from time to time has been assessed interest or penalties by major tax jurisdictions, however 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

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 collectability 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. 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. Revenue
from contracts under the percentage of completion method is not significant to the financials.

Deferred Revenue

The Company defers revenue when payment is received in advance of the service or product being shipped or delivered. For some of the
larger government contracts, the Company will bill upon meeting certain



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



milestones. These milestones are established by the customer and are specific to each contract. Unearned revenue is recorded as deferred revenue. The Company recognizes revenue on the contracts
when items are shipped.

At May 31, 2010, the Company had deferred revenues of approximately $7,777,000 compared to
approximately $229,000 at May 31, 2009. The asset acquisition of the KGC Companies accounted for approximately $7,493,000 of the increase.

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 $220,000 and
$81,000, in warranty liability as of May 31, 2010 and May 31, 2009, respectively, which has been included in accounts payable and accrued expenses. The asset acquisition of Cryptek accounted for approximately $100,000 of the May 31,
2010 amount.

Shipping and Handling

Shipping and handling costs are expensed as incurred and included in cost of revenues.

Sales Taxes

The Company
records sales tax on the sale of its products as a liability, and does not include such amounts in revenue.

Research and Development

Research and development expenses are recorded when incurred.

Advertising Costs

Advertising costs are expensed as incurred and were $236,892 and $190,533 for the years ending May 31, 2010 and 2009, respectively.

Stock-Based Compensation

The Company follows the authoritative guidance for accounting for stock-based compensation. The guidance 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 fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model which takes into account as of the grant date the exercise price and expected life of the option, the current price of
the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the option. The Company also follows the guidance 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



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



Canadian dollars or British Pounds Sterling into United States dollars at the period-end exchange rate for monetary balance sheet items, the historical rate for fixed assets and
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.

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.

Financial Instruments

The fair values of financial instruments including cash and cash equivalents, marketable securities, accounts receivable, accounts
payable, and short-term 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 Canadian dollars or Pound Sterling as well as a mortgage loan denominated in Pound Sterling. The translation adjustment related to these accounts have been
reflected as a component of comprehensive income.

Long-term Debt Discount

In accordance with accounting standards the Company recognized the value of detachable warrants issued in conjunction with the issuance of
the secured promissory notes and the modification of the convertible promissory notes. The Company valued the warrants using the Black-Scholes pricing model. The Company recorded the warrant relative fair value as an increase to additional
paid-in capital and a discount against the related debt. The discount attributed to the value of the warrants is amortized over the term of the underlying debt using the effective interest method.

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) and Canadian Deposit Insurance Corporation (CDIC). Management monitors the soundness of these institutions and has not experienced any collection losses with these institutions.

The US, Canadian and United Kingdom Governments Departments of Defense (directly and through subcontractors) accounts for
approximately 55%, 6% and 8% of the Companys 2010 revenues, respectively, while the US Government Department of Defense (directly and through subcontractors) accounted for 71% of the



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API Technologies Corp.

Notes to Consolidated Financial Statements



Companys revenue in 2009. One of these customers represented approximately 20% of revenues for the year ended May 31, 2010 and a separate customer represented 16% of revenues for the
year ended May 31, 2009, respectively. One customer, a tier one Defense subcontractor, represented 20% of accounts receivable as of May 31, 2010. No one customer represented over 10% of our accounts receivable at May 31, 2009. A loss
of a significant customer could adversely impact the future operations of the Company.

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 (Note 20).

Comprehensive Income (Loss)

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

Comparative Reclassifications

Certain amounts from 2009 have been reclassified to conform to the 2010 financial statement presentation. The reclassifications had
no effect on previously reported net loss or the balance sheet.

3. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued guidance which stipulates the FASB Accounting Standards
Codification is the source of authoritative U.S. Generally Accepted Accounting Principles (GAAP) recognized by the FASB to be applied by non-governmental entities, and supersedes all existing non-SEC standards. This guidance is effective
for the Companys fiscal year beginning August 1, 2009. The adoption of this guidance did not have a significant impact on the Companys consolidated financial statements.

In June 2009, the Company adopted the accounting standard regarding the general standards for accounting for, and disclosure of, events
that occur after the balance sheet date but before the financial statements are issued. This standard was effective prospectively for all interim and annual reporting periods after June 15, 2009. Since this standard only formalizes existing
GAAP, the adoption of this pronouncement did not have a material impact on the Companys 2010 consolidated financial statements.

In April 2008, the FASB issued guidance related to determining the useful life of intangible assets. This guidance amends the factors
that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The objective of the guidance is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair value of the asset. The adoption of this guidance did not have a significant impact on the Companys consolidated financial statements.



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API Technologies Corp.

Notes to Consolidated Financial Statements



In April 2009, the FASB issued guidance related to the disclosures about fair value of financial instruments. This guidance extends to
interim periods certain disclosures about fair value of financial instruments for publicly traded companies and amends guidance on interim financial reporting, to require those disclosures in summarized financial information at interim reporting
periods. The Companys adoption of this guidance did not have a material effect on the Companys consolidated financial position, results of operations or cash flows.

In April 2008, the Company adopted the FASB issued guidance related to the fair value measurement of financial assets and liabilities
that are remeasured and reported at fair value at least annually. The guidance 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. Effective June 1, 2009 the Company adopted the provisions of this guidance for non-financial assets and non-financial liabilities
that are recognized and disclosed at fair value in the consolidated financial statements on a nonrecurring basis. The application of the guidance 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 the Companys financial results.

In March 2008, the
FASB issued guidance related to the disclosures about derivative instruments and hedging activities. This guidance is intended to enhance the current financial statement disclosure framework. The guidance 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 the derivatives. Finally, this guidance
requires cross-referencing within the footnotes, which should help users of financial statements to locate important information about derivative instruments. The adoption of this guidance did not have a significant impact on the consolidated
results of operations or financial position of the Company.

In December 2007, the FASB issued an amendment to an existing
accounting standard which provides guidance related to business combinations. The amendment requires that full fair value accounting be used for all business combinations and for an acquirer to be identified for each business combination. This
amendment also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; b)
recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of
the business combination. This amendment applies prospectively to 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. An entity may not
apply it before that date. This guidance is effective for the Companys fiscal year beginning June 1, 2009. The adoption of this guidance resulted in the Company recognizing a gain associated with the Cryptek Technologies Inc. asset
acquisition and expensing the transaction costs associated with the Cryptek Technologies Inc. and KGC Companies asset acquisitions (see note 4).

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued guidance related to revenue recognition for arrangements with multiple deliverables. This guidance
eliminates the residual method of allocation and requires the relative selling price method when allocating deliverables of a multiple-deliverable revenue arrangement. The determination of the



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



selling price for each deliverable requires the use of a hierarchy designed to maximize the use of available objective evidence including, vendor specific objective evidence, third party evidence
of selling price, or estimated selling price. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted in the same period
using the same transition method. If adoption is elected in a period other than the beginning of a fiscal year, the amendments in these standards must be applied retrospectively to the beginning of the fiscal year. Full retrospective application of
these amendments to prior fiscal years is optional. Early adoption of these standards may be elected. We are currently evaluating the impact of these new accounting standards on our consolidated financial statements.

4. ASSET ACQUISITIONS

a) Cryptek
Technologies Inc.

On July 7, 2009, API Cryptek Inc. (API Cryptek), a wholly-owned subsidiary of the
Company, incorporated on June 23, 2009, acquired substantially all of the assets of Cryptek Technologies Inc. (Cryptek), including its wholly-owned subsidiaries, Emcon Emanation Control Ltd., located in Canada and Secure
Systems & Technologies, Ltd., located in the United Kingdom and its Ion Networks division (DBA Ion) located in the United States, through the 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 developed and delivered secure communication solutions to various industries and government agencies.
Cryptek also was a provider of emanation security products and solutions.

The Cryptek acquisition was completed with proceeds
from corporate funds and the private placement of secured, convertible promissory notes completed June 23, 2009. (Note 13a)

The Company has accounted for the acquisition using the purchase method of accounting in accordance with the guidance on business
combinations. The Company also incurred legal costs, reorganization charges and professional fees in connection with the acquisition of approximately $790,000. The expenses have been accounted for as operating expenses. The results of operations of
API Cryptek have been included in the Companys results of operations beginning on July 7, 2009.

Accounting
guidance requires that identifiable assets acquired and liabilities assumed be reported at fair value as of the acquisition date of a business combination. Assets and liabilities acquired were as follows:



|                                  |  |   |            |  
|--------------------------------- |  | - | ---------- | -
|Cash                              |  | $ | 2,071,270  |  
|Accounts receivable and prepaids  |  |   | 2,409,736  |  
|Inventory                         |  |   | 2,990,046  |  
|Fixed assets                      |  |   | 3,434,836  |  
|Customer related intangibles      |  |   | 508,000    |  
|Assumed current liabilities       |  |   | (3,519,194 | )
|Assumed mortgage payable          |  |   | (1,901,502 | )
|                                  |  |   |            |  
|Fair value of net assets acquired |  | $ | 5,993,192  |  
|                                  |  |   |            |  



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API Technologies Corp.

Notes to Consolidated Financial Statements



The fair value of the net assets acquired in this transaction exceeded the fair value of the purchase price. As a result, in accordance
with the guidance, the Company recognized a gain on acquisition of approximately $993,000 in the consolidated statement of operations for the year ended May 31, 2010. This gain is included in other income (expense), net.

Revenues and net loss from the date of acquisition of API Cryptek, July 7, 2009, to May 31, 2010 were approximately $22,223,000
and $(1,278,000), respectively.

Fixed assets acquired in this transaction consist of the following:



|                                     |  |   |          
|------------------------------------ |  | - | ---------
|Buildings and leasehold improvements |  | $ | 2,820,576
|Machinery and equipment              |  |   | 530,747  
|Furniture and fixtures               |  |   | 36,857   
|Vehicles                             |  |   | 46,656   
|                                     |  |   |          
|Total fixed assets acquired          |  | $ | 3,434,836
|                                     |  |   |          

b) KGC Companies

On January 20, 2010, API and three newly formed subsidiaries, the API Pennsylvania Subsidiaries, entered into an asset purchase
agreement with the KGC Companies dated January 20, 2010 pursuant to which the API Pennsylvania Subsidiaries purchased substantially all of the assets of the KGC Companies.

The KGC Companies included defense subcontractors specializing in highly engineered systems and robotics for the defense and aerospace
industries. The API Pennsylvania Subsidiaries purchased the assets of the KGC Companies for total consideration of $28,480,000, comprised of (i) $24,000,000, including $14,000,000 of cash paid at closing and a $10,000,000 short-term note (the
Sellers Note) dated January 20, 2010 issued to the KGC Companies and (ii) 3,200,000 shares of API common stock (the Shares) payable as follows: 1,000,000 Shares were issued and delivered at closing, 1,000,000
Shares are to be issued and delivered on the first anniversary of the closing and 1,200,000 Shares are to be issued and delivered on the second anniversary of the closing. The principal amount of the Sellers Note is subject to downward
adjustment in the event the value of the assets purchased is less than contemplated by the parties. The Company has issued 505,000 shares in escrow from the 2,200,000 shares remaining to be delivered, which have been accounted for as common stock
subscribed but not issued with a value of $2,373,000. The API Pennsylvania Subsidiaries may claim the escrowed shares in the event amounts become due to them under the indemnification provisions of the asset purchase agreement. The unissued shares
have been accounted for as common stock subscribed but not issued. The stock issued and to be issued was valued at $1.40 per share, the fair value of the common stock at the transaction date.

The Company has accounted for the acquisition using the purchase method of accounting in accordance with the guidance on business
combinations. The Company also incurred legal costs, reorganization charges and professional fees in connection with the acquisition of approximately $1,216,000. The expenses have been accounted for as operating expenses. The results of operations
of the API Pennsylvania Subsidiaries have been included in the Companys results of operations beginning on January 20, 2010.

Accounting guidance requires that identifiable assets acquired and liabilities assumed be reported at fair value as of the acquisition
date of a business combination. The fair values of the assets acquired and the liabilities



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API Technologies Corp.

Notes to Consolidated Financial Statements



assumed have been determined provisionally and are subject to adjustment as additional information is obtained by the Company. Assets and liabilities acquired were as follows:



|                                            |  |   |             |  
|------------------------------------------- |  | - | ----------- | -
|Accounts receivable and prepaids            |  | $ | 8,554,386   |  
|Inventory                                   |  |   | 20,271,816  |  
|Fixed assets                                |  |   | 5,490,129   |  
|Technology and Customer related intangibles |  |   | 2,585,000   |  
|Goodwill                                    |  |   | 7,330,983   |  
|Assumed current liabilities                 |  |   | (3,006,135  | )
|Assumed deferred revenue                    |  |   | (11,628,411 | )
|Assumed capital leases payable              |  |   | (1,117,768  | )
|                                            |  |   |             |  
|Fair value of net assets acquired           |  | $ | 28,480,000  |  
|                                            |  |   |             |  

The fair value of the KGC Companies exceeded the underlying fair value of all other assets acquired, thereby
giving rise to the goodwill. Technology and customer related intangibles are amortized on a straight line basis over 15 years.

The fair value of the consideration, assets acquired and liabilities assumed remain subject to potential adjustments. Material
adjustments, if any, to provisional amounts in subsequent periods, will be reflected retrospectively as required.

Revenues
and net income of API Pennsylvania Subsidiaries, from the date of acquisition January 20, 2010 to May 31, 2010, were approximately $23,236,000 and $2,895,000, respectively.

Fixed assets acquired in this transaction consist of the following:



|                                     |  |   |          
|------------------------------------ |  | - | ---------
|Buildings and leasehold improvements |  | $ | 1,958,390
|Machinery and equipment              |  |   | 3,337,661
|Furniture and fixtures               |  |   | 120,667  
|Vehicles                             |  |   | 73,411   
|                                     |  |   |          
|Total fixed assets acquired          |  | $ | 5,490,129
|                                     |  |   |          

The following unaudited pro forma summary presents the
combined results of operations as if the KGC Companies and Cryptek acquisitions described above had occurred at the beginning of the period for the years ended May 31, 2010 and May 31, 2009, respectively.



|                                                                |  |                                 |             |   |                                 |   |             |  
|--------------------------------------------------------------- |  | ------------------------------- | ----------- | - | ------------------------------- | - | ----------- | -
|                                                                |  | YearendedMay 31,2010(Pro forma) |             |   | YearEndedMay 31,2009(Pro forma) |  
|Revenues                                                        |  | $                               | 115,381,917 |   |                                 | $ | 125,793,790 |  
|Net loss from continuing operations                             |  | $                               | (2,049,267  | ) |                                 | $ | (2,084,910  | )
|Net loss                                                        |  | $                               | (7,731,131  | ) |                                 | $ | (6,566,082  | )
|Net loss from continuing operations per sharebasic and diluted |  | $                               | (0.06       | ) |                                 | $ | (0.06       | )
|Net loss per sharebasic and diluted                            |  | $                               | (0.22       | ) |                                 | $ | (0.18       | )



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



5. DISCONTINUED OPERATIONS

On February 20, 2010 the Company announced that it closed its nanotechnology research and development subsidiary, NanoOpto, which was
included in the Engineered Systems and Components segment. NanoOpto was acquired by API in 2007 and is located in Somerset, New Jersey. Subsequent to May 31, 2010, the Company sold the assets of NanoOpto (Note 25).

The operating results of NanoOpto are summarized as follows:



|                                              |  |                    |   |  |            |  
|--------------------------------------------- |  | ------------------ | - |  | ---------- | -
|                                              |  | Year ended May 31, |  
|                                              |  | 2010               |   |  | 2009       |  
|Revenue, net                                  |  | 532,605            |   |  | 276,373    |  
|Cost of revenues                              |  | 114,572            |   |  | 66,629     |  
|                                              |  |                    |   |  |            |  
|Gross Profit                                  |  | 418,033            |   |  | 209,744    |  
|General and administrative                    |  | 731,377            |   |  | 1,032,851  |  
|Research and development                      |  | 3,089,931          |   |  | 3,391,206  |  
|Selling expenses                              |  | 53,342             |   |  | 142,462    |  
|Provision for income taxes                    |  | 2,024              |   |  | 4,621      |  
|Other income                                  |  | (19,250            | ) |  |           |  
|Write-down of long-lived assets               |  | 2,242,473          |   |  |           |  
|                                              |  |                    |   |  |            |  
|Loss from discontinued operations, net of tax |  | (5,681,864         | ) |  | (4,361,396 | )
|                                              |  |                    |   |  |            |  

During fiscal 2010, the Company recorded a write-down of $2,242,473 resulting from the Companys
analysis of the net realizable value of the long-lived assets of discontinued operations. The Company initially determined the fair value of these long-lived assets using Level 3 inputs for fair value measurement purposes. A valuation report was
obtained from an independent third party, who developed the estimates using Level 3 inputs including recent sales of like or similar equipment. The write-down was adjusted following the sale of the assets described in Note 25. The Company continues
to monitor the fair value of such assets and will adjust their value until the assets have been disposed of.

The assets and
liabilities relating to NanoOpto consisted of the following:



|                                               |  |             |           |             |   |          
|---------------------------------------------- |  | ----------- | --------- | ----------- | - | ---------
|                                               |  | May 31,2010 |           | May 31,2009
|Cash                                           |  | $           | 15,593    |             | $ | 6,093    
|Accounts receivable                            |  |             |          |             |   | 7,361    
|Prepaid expenses                               |  |             | 28,579    |             |   | 53,219   
|                                               |  |             |           |             |   |          
|Current assets of discontinued operations      |  | $           | 44,172    |             | $ | 66,673   
|                                               |  |             |           |             |   |          
|Fixed assets, net                              |  | $           | 636,757   |             | $ | 3,361,065
|Intangible assets, net                         |  |             | 1,404,398 |             |   | 1,267,398
|                                               |  |             |           |             |   |          
|Long-lived assets of discontinued operations   |  | $           | 2,041,155 |             | $ | 4,628,463
|                                               |  |             |           |             |   |          
|Accounts payable and accrued expenses          |  | $           | 439,633   |             | $ | 622,131  
|                                               |  |             |           |             |   |          
|Current liabilities of discontinued operations |  | $           | 439,633   |             | $ | 622,131  
|                                               |  |             |           |             |   |          



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



6. MARKETABLE SECURITIES AND OTHER FAIR VALUE MEASUREMENTS

Marketable Securities

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



|                          |  |      |       |        |   |         |  |        |       |  |   |        
|------------------------- |  | ---- | ----- | ------ | - | ------- |  | ------ | ----- |  | - | -------
|                          |  | 2010 |       | 2009  
|                          |  | Cost |       | Market |   | Cost    |  | Market
|Shares in venture issuers |  | $    | 2,769 |        | $ | 200,474 |  | $      | 2,674 |  | $ | 129,085

The Company adopted
the accounting pronouncement on fair value measurements as it applies to its financial instruments. The accounting pronouncement defines fair value, outlines a framework for measuring fair value, and details the required disclosures about fair value
measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. Fair
value is determined by inputs, and the fair value pronouncement enables the reader of the financial statements to assess the inputs used to determine the fair value of an asset or liability by establishing a hierarchy for ranking the quality and
reliability of such inputs. Level 1 inputs include quoted market prices in an active market for identical assets or liabilities. Level 2 inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs
include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no
market data. The adoption of this statement did not have any material impact on the Companys statement of operations and balance sheet.

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.

Pursuant to accounting
requirements, 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:



|                             |  |           |         |                                             |   |           |  |                                             |         |  |   |        
|---------------------------- |  | --------- | ------- | ------------------------------------------- | - | --------- |  | ------------------------------------------- | ------- |  | - | -------
|                             |  | 2010Total |         | 2010Quoted Prices inActive Markets(Level 1) |   | 2009Total |  | 2009Quoted Prices inActive Markets(Level 1)
|Marketable equity securities |  | $         | 200,474 |                                             | $ | 200,474   |  | $                                           | 129,085 |  | $ | 129,085
|                             |  |           |         |                                             |   |           |  |                                             |         |  |   |        
|Total                        |  | $         | 200,474 |                                             | $ | 200,474   |  | $                                           | 129,085 |  | $ | 129,085
|                             |  |           |         |                                             |   |           |  |                                             |         |  |   |        

Gross unrealized holding gains amounted to $197,705
and $126,411, respectively at May 31, 2010 and 2009.



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



Other Fair Value Measurements

The following table summarizes assets which have been accounted for at fair value at May 31, along with the basis for the
determination of fair value.



|                                                           |  |           |           |                                          |   |            |  |           |           |                                           |   |            |  |   |           |  |   |  
|---------------------------------------------------------- |  | --------- | --------- | ---------------------------------------- | - | ---------- |  | --------- | --------- | ----------------------------------------- | - | ---------- |  | - | --------- |  | - | -
|                                                           |  | 2010      |           | 2009                                    
|                                                           |  | 2010Total |           | UnobservableMeasurementCriteria(Level 3) |   | Impairment |  | 2009Total |           | UnobservableMeasurementCriteria (Level 3) |   | Impairment
|Fixed assets held for sale                                 |  | $         | 931,075   |                                          | $ | 931,075    |  | $         | 324,410   |                                           | $ | 2,493,986  |  | $ | 2,493,986 |  | $ | 
|Long-lived assets held for sale of discontinued operations |  |           | 2,041,155 |                                          |   | 2,041,155  |  |           | 2,242,473 |                                           |   | 4,628,463  |  |   | *         |  |   | 
|                                                           |  |           |           |                                          |   |            |  |           |           |                                           |   |            |  |   |           |  |   |  
|Total                                                      |  | $         | 2,972,230 |                                          | $ | 2,972,230  |  | $         | 2,566,883 |                                           | $ | 7,122,449  |  | $ | 2,493,986 |  | $ | 
|                                                           |  |           |           |                                          |   |            |  |           |           |                                           |   |            |  |   |           |  |   |  



|* | Assets for discontinued operations are presented for comparative purposes and were not subject to fair value measurements at May 31, 2009. Amortization of $344,835
was recorded on these assets prior to their classification as held for sale.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following is a summary of
activity for the years ended May 31, 2010 and May 31, 2009 for assets measured at fair value based on unobservable measure criteria:



|                                               |  |                           |            |   |                                                     |   |            |  
|---------------------------------------------- |  | ------------------------- | ---------- | - | --------------------------------------------------- | - | ---------- | -
|                                               |  | Fixed Assets Heldfor Sale |            |   | Fixed Assets Held forSale of DiscontinuedOperations |  
|Balance, May 31, 2008                          |  | $                         |           |   |                                                     | $ |           |  
|Add: Classified as assets held for sale        |  |                           | 2,493,986  |   |                                                     |   |           |  
|Balance, May 31, 2009                          |  |                           | 2,493,986  |   |                                                     |   |           |  
|Add: Classified as assets held for sale        |  |                           | 703,125    |   |                                                     |   | 4,283,628  |  
|Less: Write-down of fixed assets held for sale |  |                           | (324,410   | ) |                                                     |   | (2,242,473 | )
|Less: Sales of fixed assets held for sale      |  |                           | (1,941,626 | ) |                                                     |   |           |  
|                                               |  |                           |            |   |                                                     |   |            |  
|Balance, May 31, 2010                          |  | $                         | 931,075    |   |                                                     | $ | 2,041,155  |  
|                                               |  |                           |            |   |                                                     |   |            |  

7. INVENTORIES

Inventories consisted of the following:



|                 |  |             |            |             |   |          
|---------------- |  | ----------- | ---------- | ----------- | - | ---------
|                 |  | May 31,2010 |            | May 31,2009
|Raw materials    |  | $           | 9,159,594  |             | $ | 2,580,454
|Work in progress |  |             | 18,397,270 |             |   | 1,369,842
|Finished goods   |  |             | 2,204,730  |             |   | 1,938,139
|                 |  |             |            |             |   |          
|Total            |  | $           | 29,761,594 |             | $ | 5,888,435
|                 |  |             |            |             |   |          



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



8. FIXED ASSETS

Fixed assets
consisted of the following as of May 31:



|                                     |  |      |            |                         |   |               |  |   |           
|------------------------------------ |  | ---- | ---------- | ----------------------- | - | ------------- |  | - | ----------
|                                     |  | 2010
|                                     |  | Cost |            | AccumulatedDepreciation |   | Net BookValue
|Land                                 |  | $    | 805,168    |                         | $ |              |  | $ | 805,168   
|Buildings and leasehold improvements |  |      | 5,006,894  |                         |   | 51,048        |  |   | 4,955,846 
|Computer equipment                   |  |      | 4,179,726  |                         |   | 255,120       |  |   | 3,924,606 
|Furniture and fixtures               |  |      | 513,610    |                         |   | 324,867       |  |   | 188,743   
|Machinery and equipment              |  |      | 4,837,735  |                         |   | 3,334,344     |  |   | 1,503,391 
|Vehicles                             |  |      | 151,238    |                         |   | 35,608        |  |   | 115,630   
|                                     |  |      |            |                         |   |               |  |   |           
|Fixed assets, net                    |  | $    | 15,494,371 |                         | $ | 4,000,987     |  | $ | 11,493,384
|                                     |  |      |            |                         |   |               |  |   |           
|                                     | 
|                                     |  | 2009
|                                     |  | Cost |            | AccumulatedDepreciation |   | Net BookValue
|Land                                 |  | $    | 147,875    |                         | $ |              |  | $ | 147,875   
|Buildings and leasehold improvements |  |      | 1,342,379  |                         |   | 461,201       |  |   | 881,178   
|Computer equipment                   |  |      | 275,687    |                         |   | 227,609       |  |   | 48,078    
|Furniture and fixtures               |  |      | 371,204    |                         |   | 316,196       |  |   | 55,008    
|Machinery and equipment              |  |      | 4,136,131  |                         |   | 2,823,500     |  |   | 1,312,631 
|Vehicles                             |  |      | 29,583     |                         |   | 28,361        |  |   | 1,222     
|                                     |  |      |            |                         |   |               |  |   |           
|Fixed assets, net                    |  | $    | 6,302,859  |                         | $ | 3,856,867     |  | $ | 2,445,992 
|                                     |  |      |            |                         |   |               |  |   |           

Depreciation expense amounted to $843,364 and $494,996
for the years ended May 31, 2010 and 2009, respectively. Included in these amounts are $39,455 and $6,420 of amortization of assets under capital lease for the years ended May 31, 2010 and 2009, respectively.

9. GOODWILL AND INTANGIBLE ASSETS

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



|                                             |  |      |           |      |   |          
|-------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                             |  | 2010 |           | 2009
|Goodwill not subject to amortization:        |  |      |           |      |   |          
|Beginning balance, net                       |  | $    | 1,130,906 |      | $ | 1,130,906
|Goodwill from business acquisition (note 4b) |  |      | 7,330,983 |      |   |         
|                                             |  |      |           |      |   |          
|Ending balance, net                          |  | $    | 8,461,889 |      | $ | 1,130,906
|                                             |  |      |           |      |   |          



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



|                                           |  |      |            |   |      |   |            |  
|------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                           |  | 2010 |            |   | 2009 |  
|Intangible assets subject to amortization: |  |      |            |   |      |   |            |  
|Non-compete agreements                     |  | $    | 2,215,784  |   |      | $ | 2,215,784  |  
|Less: Accumulated amortization             |  |      | (2,215,784 | ) |      |   | (2,215,784 | )
|Customer contracts                         |  |      | 3,209,000  |   |      |   | 116,000    |  
|Less: Accumulated amortization             |  |      | (178,540   | ) |      |   | (95,534    | )
|Computer software                          |  |      | 413,953    |   |      |   | 411,730    |  
|Less: Accumulated amortization             |  |      | (283,991   | ) |      |   | (210,373   | )
|Patents (A)                                |  |      |           |   |      |   |           |  
|Less: Accumulated amortization             |  |      |           |   |      |   |           |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  | $    | 3,160,422  |   |      | $ | 221,823    |  
|                                           |  |      |            |   |      |   |            |  

(A) Patents previously included in intangible assets subject to amortization have been included in
long-lived assets of discontinued operations (Note 5).

Changes in the carrying amount of Intangible assets were as follows:



|                                                     |  |   |           |  
|---------------------------------------------------- |  | - | --------- | -
|Balance, May 31, 2009                                |  | $ | 221,823   |  
|Intangible assets from Cryptek acquisition (note 4a) |  |   | 508,000   |  
|Intangible assets from KGC Companies (note 4b)       |  |   | 2,585,000 |  
|Intangible assets purchased                          |  |   | 2,223     |  
|Less: Amortization                                   |  |   | (156,624  | )
|                                                     |  |   |           |  
|Balance, May 31, 2010                                |  | $ | 3,160,422 |  
|                                                     |  |   |           |  

Amortization expense amounted to $156,624, and $339,476 for the years ended May 31, 2010 and 2009,
respectively. Amortization expense is expected to be approximately $296,000, $243,000, $206,000, $206,000 and $206,000 for the years ending May 31, 2011, 2012, 2013, 2014 and 2015, respectively.

10. BANK INDEBTEDNESS

On December 21, 2009, the Company secured a line of credit facility, which renews annually at its Emcon Emanation Control subsidiary
in Canada in the amount of $950,000 ($1,000,000 CAD). Interest on the line of credit facility is charged at a margin of 1.8% over the Royal Bank Prime Rate for Canadian borrowings or Royal Bank US Prime Base Rate for USD borrowings, which were 2.25%
and 3.75%, respectively at May 31, 2010. The facility is secured by the subsidiaries assets. As of May 31, 2010 the Company had drawn $697,654 under this facility.

The Company also has a credit facility in place for its U.K. subsidiary for approximately $360,000 (250,000 GBP). This line of credit is
tied to the prime rate in the United Kingdom and is secured by the subsidiaries assets. This facility was undrawn as of May 31, 2010.



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:



|                                      |  |             |            |             |   |          
|------------------------------------- |  | ----------- | ---------- | ----------- | - | ---------
|                                      |  | May 31,2010 |            | May 31,2009
|Accounts payable and accrued expenses |  | $           | 13,892,876 |             | $ | 2,556,404
|Wage and vacation accrual             |  |             | 2,323,024  |             |   | 830,031  
|                                      |  |             |            |             |   |          
|Total                                 |  | $           | 16,215,900 |             | $ | 3,386,435
|                                      |  |             |            |             |   |          

12. SELLERS NOTE PAYABLE

The Company was obligated under the following debt instrument:



|                                                          |  |             |            |             |   |  
|--------------------------------------------------------- |  | ----------- | ---------- | ----------- | - | -
|                                                          |  | May 31,2010 |            | May 31,2009
|Sellers Note payable, due December 31, 2010, 5% interest |  | $           | 10,000,000 |             | $ | 
|                                                          |  |             |            |             |   |  

On January 20, 2010, the API Pennsylvania
Subsidiaries issued a $10,000,000 short-term note in connection with the purchase of the assets of the KGC Companies (see Note 4b). The principal amount of the Sellers Note is subject to downward adjustment in the event the value of the assets
purchased is less than contemplated by the parties. The Sellers Note bears interest at an annual rate of five percent (5%) and matures on December 31, 2010. The Sellers Note provides for certain monthly interest payments.
Accrued interest as of May 31, 2010 was $126,027 and is included in accounts payable and accrued expenses. The entire principal balance and accrued interest is due and payable at maturity. The Sellers Note is secured by certain assets of
the KGC Companies purchased by the API Pennsylvania Subsidiaries, excluding government contracts.

13. LONG-TERM DEBT

The Company was obligated under the following debt instruments:



|                                                                                                                                                      |  |             |            |   |             |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ----------- | - | ------- | -
|                                                                                                                                                      |  | May 31,2010 |            |   | May 31,2009 |  
|Convertible promissory notes, net of discount of $185,092 and $0 at May 31, 2010 and May 31, 2009, respectively, due
June 23, 2012, 12% interest (a)  |  | $           | 3,464,908  |   |             | $ |        |  
|Secured promissory notes, net of discount of $3,101,780 and $0 at May 31, 2010 and May 31, 2009, respectively, due
January 20, 2013, 15% interest (b) |  |             | 16,898,220 |   |             |   |        |  
|Mortgage loan, due 2027, 1.35% above Barclays fixed bank rate (c)                                                                                     |  |             | 1,572,227  |   |             |   |        |  
|Capital leases payable (Note 14)                                                                                                                      |  |             | 1,072,892  |   |             |   | 18,707  |  
|Other                                                                                                                                                 |  |             |           |   |             |   | 89,748  |  
|                                                                                                                                                      |  |             |            |   |             |   |         |  
|                                                                                                                                                      |  | $           | 23,008,247 |   |             | $ | 108,455 |  
|Less: Current portion of long-term debt                                                                                                               |  |             | (289,638   | ) |             |   | (96,296 | )
|                                                                                                                                                      |  |             |            |   |             |   |         |  
|Long-term portion                                                                                                                                     |  | $           | 22,718,609 |   |             | $ | 12,159  |  
|                                                                                                                                                      |  |             |            |   |             |   |         |  



|a) | On June 23, 2009, the Company issued secured, convertible promissory notes (Convertible Notes) to a group of investors in the
aggregate principal amount of $3,650,000 (see Note 19). Interest on the convertible notes is payable at the annual rate of 12% at the end of each calendar quarter. The Convertible Notes are
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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API Technologies Corp.

Notes to Consolidated Financial Statements



| | secured by the personal property of the Company and its subsidiaries. The Convertible Notes are due on June 23, 2012.
| | ---------------------------------------------------------------------------------------------------------------------

The outstanding principal amount of the Convertible Notes and/or accrued and unpaid interest or any portion thereof are convertible at the
holders option into shares of common stock, of the Company, at a price per share equal to $0.75 per share. The Company used the proceeds of the Convertible 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 included the loan to Cryptek by Wachovia and security agreements covering substantially all of the assets of Cryptek.

On December 21, 2009, the Note and Security Agreement between the Company and the holders of the Convertible Notes was amended (the
First Amendment). The holders of the Convertible Notes agreed that the Company may incur senior secured debt in connection with any line of credit or other working capital facility, or in connection with any stock or asset acquisition.
In consideration of the holders of the Convertible Notes entering into the First Amendment, the Company agreed to issue warrants to purchase approximately 250,000 shares of the common stock of the Company (the December Warrants), pro
rata among the Convertible Notes holders, at an exercise price of $1.27 per share. The December Warrants expire June 23, 2012.

The number of shares of common stock that can be purchased upon the exercise of the December Warrants and the exercise price of the
December Warrants are subject to customary anti-dilution provisions. The Company evaluated the December Warrants for purposes of classification and determined they did not embody any of the conditions for liability classification, but rather meet
the conditions for equity classification. In addition, the Company determined that the December Warrants should be treated as a modification and not an extinguishment of debt. As a result, the discount resulting from the value of the warrants will
be amortized over the life of the Convertible Notes using the effective interest method.

The following table summarizes the
accounting for the December Warrants:



|                                 |  |                 |           |  
|-------------------------------- |  | --------------- | --------- | -
|                                 |  | January 20,2010 |          
|Warrants Fair Value              |  | $               | 223,398   |  
|Black-Scholes Model Assumptions: |  |                 |           |  
|Risk free interest               |  |                 | 1.36      | %
|Expected volatility              |  |                 | 131       | %
|Expected life                    |  |                 | 2.5 years |  
|Dividend rate                    |  |                 |          |  

Interest expense for
the year ended May 31, 2010, includes non-cash interest expense of $38,306 for the amortization of the convertible note discount using the interest method.



|b) | On January 20, 2010 and January 22, 2010, API received total cash proceeds of $20,000,000 in conjunction with the sale of Secured Promissory Notes
(Notes) with a principal amount of $20,000,000 and warrants to purchase 3,571,447 shares of common stock (Warrants) of API to various investors including certain Directors and Officers of the Company (Note 19c). Neither the
KGC Companies nor their owners were issued any Notes or Warrants.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Notes are due three years from issuance.
Interest accrues at an annual rate of 15% per annum and is payable in arrears each calendar quarter. The entire principal balance and all accrued and unpaid interest on the Notes is payable upon maturity. The Company can elect to prepay all or
a portion of the Notes anytime.



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API Technologies Corp.

Notes to Consolidated Financial Statements



If the Company elects to prepay in the first year, it must pay the investor interest that would have accrued on such prepaid amount from and after the prepayment date to January 20, 2011.
Otherwise, the Company must pay the investor an additional 2% of the prepaid amount. The Notes are secured by the assets of API and its subsidiaries pursuant to security agreements, excluding real estate. The following are permitted senior debt and
liens under the Notes; (1) working capital loans and (2) securities interests granted in connection with any acquisition by API of other companies, lines of businesses or assets, or the financing thereof.

The warrants have an exercise price of $1.40 per share and expire in five years. The number of shares of common stock that can be
purchased upon the exercise of the Warrants and the exercise price of the Warrants are subject to customary anti-dilution provisions. The Company evaluated the Warrants for purposes of classification and determined that they did not embody any of
the conditions for liability classification, but rather meet the conditions for equity classification. The discount resulting from the value of the warrants will be amortized over the life of the Notes using the effective interest method.

The following table summarizes the accounting of the Notes and Warrants:



|                                                        |  |                 |            |  
|------------------------------------------------------- |  | --------------- | ---------- | -
|                                                        |  | January 20,2010 |           
|Proceeds from issuance of promissory notes and warrants |  | $               | 20,000,000 |  
|Debt discount attributable to the issuance of warrants  |  |                 | (3,391,308 | )
|                                                        |  |                 |            |  
|Promissory note, net of discount                        |  |                 | 16,608,692 |  
|Black-Scholes Model Assumptions:                        |  |                 |            |  
|Risk free interest                                      |  |                 | 2.27       | %
|Expected volatility                                     |  |                 | 116        | %
|Expected life                                           |  |                 | 5 years    |  
|Dividend rate                                           |  |                 |           |  

Interest expense for
the year ended May 31, 2010, includes non-cash interest expense of $289,529 for the amortization of the note discount using the interest method.



|c) | A subsidiary of the Company in the United Kingdom entered into a 20 year term mortgage agreement in 2007, under which interest is charged at a margin of 1.35% over
Barclays Fixed Base Rate of 0.5% at May 31, 2010. The mortgage is secured by the subsidiaries land and building.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Future principal payments of long-term debt for the next five years excluding our capital leases (note 14) are as follows:



|           |  |        |           
|---------- |  | ------ | ----------
|Year       |  | Amount
|2011       |  | $      | 124,749   
|2012       |  |        | 3,774,749 
|2013       |  |        | 20,124,749
|2014       |  |        | 124,749   
|2015       |  |        | 124,749   
|Thereafter |  |        | 948,482   
|           |  |        |           
|           |  | $      | 25,222,227
|           |  |        |           

14. OBLIGATIONS UNDER CAPITAL LEASES

The Company is the lessee of equipment under various capital leases expiring by December 2015. 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.



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



A summary of property held under capital leases and included in Note 8, is as follows:



|                               |  |         |           |      |   |       
|------------------------------ |  | ------- | --------- | ---- | - | ------
|                               |  | May 31,
|                               |  | 2010    |           | 2009
|Equipment                      |  | $       | 1,147,855 |      | $ | 32,100
|Less: Accumulated amortization |  |         | 48,015    |      |   | 8,560 
|                               |  |         |           |      |   |       
|Equipment, net                 |  | $       | 1,099,840 |      | $ | 23,540
|                               |  |         |           |      |   |       

Obligations under capital leases, which are reported
on our balance sheet as part of long-term debt (Note 13), consist of the following:



|                                                                                                                                                                                                |  |         |           |      |   |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- | --------- | ---- | - | ------
|                                                                                                                                                                                                |  | May 31,
|                                                                                                                                                                                                |  | 2010    |           | 2009
|Equipment capital leases, with monthly lease payments of $19,721 and $866 for 2010 and 2009, respectively, including interest
ranging from approximately 6 to 8%, secured by the leased assets. |  | $       | 1,072,892 |      | $ | 18,707
|Less: Current portion                                                                                                                                                                           |  |         | 176,336   |      |   | 6,548 
|                                                                                                                                                                                                |  |         |           |      |   |       
|Obligations under capital leases, less current portion                                                                                                                                          |  | $       | 896,556   |      | $ | 12,159
|                                                                                                                                                                                                |  |         |           |      |   |       

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



|                       |  |        |          
|---------------------- |  | ------ | ---------
|Year                   |  | Amount
|2011                   |  | $      | 238,741  
|2012                   |  |        | 245,629  
|2013                   |  |        | 220,513  
|2014                   |  |        | 220,247  
|2015                   |  |        | 220,247  
|Thereafter             |  |        | 128,478  
|                       |  |        |          
|                       |  |        | 1,273,855
|Less: Imputed Interest |  |        | 200,963  
|                       |  |        |          
|                       |  | $      | 1,072,892
|                       |  |        |          

15. INCOME TAXES

The geographical sources of loss before income taxes for the years ended May 31, 2010 and 2009 were as follows:



|                                             |  |      |            |   |      |   |            |  
|-------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                             |  | 2010 |            |   | 2009 |  
|Income (loss) before income taxes (benefit): |  |      |            |   |      |   |            |  
|United States                                |  | $    | 2,453,487  |   |      | $ | (1,318,824 | )
|Discontinued operations (United States)      |  |      | (5,679,840 | ) |      |   | (4,356,775 | )
|Non-United States                            |  |      | (5,741,210 | ) |      |   | (664,630   | )
|                                             |  |      |            |   |      |   |            |  
|Total                                        |  | $    | (8,967,563 | ) |      | $ | (6,340,229 | )
|                                             |  |      |            |   |      |   |            |  



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



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



|                                        |  |      |        |      |   |       
|--------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                        |  | 2010 |        | 2009
|Current:                                |  |      |        |      |   |       
|United States                           |  | $    | 43,430 |      | $ | 3,517 
|Discontinued operations (United States) |  |      | 2,024  |      |   | 4,621 
|Non-United States                       |  |      |       |      |   | 24,922
|                                        |  |      |        |      |   |       
|                                        |  |      | 45,454 |      |   | 33,060
|                                        |  |      |        |      |   |       
|Deferred:                               |  |      |        |      |   |       
|United States                           |  |      |       |      |   |      
|Discontinued operations (United States) |  |      |       |      |   |      
|Non-United States                       |  |      |       |      |   | 66,627
|                                        |  |      |        |      |   |       
|                                        |  |      |       |      |   | 66,627
|                                        |  |      |        |      |   |       
|Income tax provision (benefit)          |  | $    | 45,454 |      | $ | 99,687
|                                        |  |      |        |      |   |       

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:



|                                          |  |       |    |  |       |   
|----------------------------------------- |  | ----- | -- |  | ----- | --
|                                          |  | 2010  |    |  | 2009  |   
|U.S. federal statutory tax rate (benefit) |  | (34.0 | )% |  | (34.0 | )%
|Non-deductible expenses                   |  | (1.4  | )  |  | (1.1  | ) 
|Change in valuation allowance             |  | 58.3  |    |  | 72.3  |   
|Other items, net                          |  | (24.3 | )  |  | (38.9 | ) 
|                                          |  |       |    |  |       |   
|Effective tax rate (benefit)              |  | (1.4  | )% |  | (1.7  | )%
|                                          |  |       |    |  |       |   

The components of deferred taxes are as follows:



|                                 |  |      |            |   |      |   |            |  
|-------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                 |  | 2010 |            |   | 2009 |  
|Future income tax assets         |  |      |            |   |      |   |            |  
|Loss carryforwards               |  | $    | 5,659,179  |   |      | $ | 3,014,324  |  
|Other                            |  |      | 21,078     |   |      |   | 19,531     |  
|Unrealized foreign exchange loss |  |      | 496,136    |   |      |   | 496,136    |  
|Marketable securities            |  |      | 40,975     |   |      |   | 52,932     |  
|Intangible assets                |  |      | 4,448      |   |      |   | 536,967    |  
|Stock based compensation         |  |      | 1,612,313  |   |      |   | 1,124,217  |  
|Inventory                        |  |      | 370,853    |   |      |   | 469,563    |  
|Capital assets                   |  |      | 252,813    |   |      |   | 90,192     |  
|                                 |  |      |            |   |      |   |            |  
|                                 |  |      | 8,454,795  |   |      |   | 5,803,862  |  
|                                 |  |      |            |   |      |   |            |  
|Future income tax liabilities    |  |      |            |   |      |   |            |  
|Capital assets                   |  |      | (233,349   | ) |      |   | (788,838   | )
|Intangibles                      |  |      |           |   |      |   |           |  
|                                 |  |      |            |   |      |   |            |  
|                                 |  |      | (233,349   | ) |      |   | (788,838   | )
|                                 |  |      |            |   |      |   |            |  
|Valuation Allowance              |  |      | (8,221,422 | ) |      |   | (5,015,000 | )
|                                 |  |      |            |   |      |   |            |  
|                                 |  | $    | 24         |   |      | $ | 24         |  
|                                 |  |      |            |   |      |   |            |  



F-28



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##### Table of Contents

API Technologies Corp.

Notes to Consolidated Financial Statements



|                                      |  |      |            |   |      |   |          |  
|------------------------------------- |  | ---- | ---------- | - | ---- | - | -------- | -
|                                      |  | 2010 |            |   | 2009 |  
|Analysis of changes in deferred taxes |  |      |            |   |      |   |          |  
|Income statement effect               |  | $    | 45,454     |   |      | $ | 66,627   |  
|Other comprehensive income effect     |  |      |           |   |      |   | (60,311  | )
|Cumulative translation adjustment     |  |      | (45,454    | ) |      |   | (97,414  | )
|                                      |  |      |            |   |      |   |          |  
|Change in deferred taxes              |  | $    |           |   |      | $ | (91,098  | )
|                                      |  |      |            |   |      |   |          |  
|                                      |  |     
|                                      |  | 2010 |            |   | 2009 |  
|Balance sheet presentation            |  |      |            |   |      |   |          |  
|Deferred income tax assetscurrent    |  | $    | 1,277,452  |   |      | $ | 186,630  |  
|Deferred income tax assetslong-term  |  |      | 257,290    |   |      |   | 627,160  |  
|Deferred income tax liabilitycurrent |  |      | (1,301,364 | ) |      |   | (24,922  | )
|Deferred tax liabilitieslong-term    |  |      | (233,354   | ) |      |   | (788,844 | )
|                                      |  |      |            |   |      |   |          |  
|Net deferred tax liabilities          |  | $    | 24         |   |      | $ | 24       |  
|                                      |  |      |            |   |      |   |          |  

At May 31, 2010, the accompanying consolidated financial statements include $2,143,000 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 $1,493,000. 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.

The valuation allowance as of May 31, 2010 totaled $4,900,000 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, 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 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 $6,289,000 to apply
against future taxable income. These losses will expire as follows: $56,000, $68,000, $3,407,000, $1,502,000 and $1,256,000 in 2012, 2017, 2028, 2029 and 2030 respectively.

As of May 31, 2010, 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



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API Technologies Corp.

Notes to Consolidated Financial Statements



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 2006-2010
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 2006-2010 remain open to examination by the Canadian Customs and Revenue Agency or other tax jurisdictions to which the Company is subject.

16. SHAREHOLDERS EQUITY

On January 20, 2010 and January 22, 2010 the Company agreed to issue Warrants to purchase 3,571,447 shares of common stock of
API to various investors in a private transaction that raised $20,000,000 in principal amount of Notes used to help finance the purchase of the assets of the KGC Companies (Note 13b). Neither the KGC Companies nor their owners were issued any Notes
or Warrants.

On January 20, 2010 the Company agreed to issue 3,200,000 shares of API common stock payable as part of the
compensation to the KGC Companies (Note 4b) or their designees. 1,000,000 shares were issued and delivered at closing, 1,000,000 shares are to be issued and delivered on the first anniversary of the closing and 1,200,000 shares are to be issued and
delivered on the second anniversary of the closing. The Company has issued 505,000 shares in escrow from the 2,200,000 shares remaining to be delivered. The API Pennsylvania Subsidiaries may claim the escrowed shares in the event amounts become due
to them under the indemnification provisions of the asset purchase agreement. The unissued shares have been accounted for as common stock subscribed but not issued.

On December 21, 2009, API issued the December Warrants to purchase approximately 250,000 shares of the common stock of API to
Convertible Note-holders (see Note 13a), at an exercise price of $1.27 per share. The December Warrants expire June 23, 2012. The December Warrants were issued in consideration for the holders of the Convertible Notes agreement that the Company
may incur senior secured debt in connection with any line of credit or working capital facility, or in connection with any stock or asset acquisition.

On October 22, 2009, API Technologies Corp., formerly known as API Nanotronics Corp., changed its name to API Technologies
Corp. The change of the Companys name was implemented by means of an amended and restated certificate of incorporation of the Company filed pursuant to Section 242 of the Delaware General Corporation Law on October 22, 2009.
The holders of the outstanding common stock of the Company approved the change in name on October 22, 2009. A conforming change was also made to the Companys by-laws to reflect the change in the Companys name. The amendment to the
by-laws to reflect the new name of the Company was approved by the board of directors of the Company at a meeting held on October 22, 2009.

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 common stock or exchangeable shares of API Nanotronics Sub, Inc. in exchange for the API common shares previously outstanding. As of May 31, 2010, (i) API 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 2,338,518 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s transfer agent was awaiting stockholder elections on 165,177 shares of API
common stock or exchangeable shares of API Nanotronics Sub, Inc. issueable with respect to the



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API Technologies Corp.

Notes to Consolidated Financial Statements



remaining API common shares. Consequently, API has not issued, but is obligated to issue, 2,503,589 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 or its affiliates.

On March 9, 2010,
the Companys Board of Directors authorized a program to repurchase approximately 10% of its common stock over the next 12 months. As of May 31, 2010, the Company repurchased and retired 408,740 of its common stock under this program for
net outlay of $568,075.

On February 9, 2009, the Company authorized a program to repurchase up to 10% of its common
stock over the next 12 months, which program expired February 8, 2010. As of May 31, 2010, the Company repurchased and retired a total of 717,822 of its common stock under this program for net outlay of $212,103.

During the year ended May 31, 2010 the Company issued 2,753,108 options related to employment arrangements (Note 17). These
option grants were valued using the Black-Scholes option-pricing model.

17. 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. On October 22, 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 8,500,000. Of the 8,500,000 shares authorized under the Equity Incentive Plan, 2,583,377 shares are available for issuance pursuant to options or as stock as of
May 31, 2010. Under the Companys Equity Incentive Plan, incentive options and non-statutory options may have a term of up to ten years 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, 2010, there was
$2,649,866 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 2011 to 2015. No stock options were issued to the KGC Companies or their owners in conjunction with the KGC
Companies asset acquisition.

During the year ended May 31, 2010 and 2009, $1,215,010 and $918,081, 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:



|                    |  |             |   |  |             |  
|------------------- |  | ----------- | - |  | ----------- | -
|                    |  | 2010        |   |  | 2009        |  
|Expected volatility |  | 110.2       | % |  | 75.1        | %
|Expected dividends  |  | 0           | % |  | 0           | %
|Expected term       |  | 3  5 years |   |  | 3  5 years |  
|Risk-free rate      |  | 2.30        | % |  | 3.14        | %



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API Technologies Corp.

Notes to Consolidated Financial Statements



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



|                                       |  |           |   |  |                              |      
|-------------------------------------- |  | --------- | - |  | ---------------------------- | -----
|                                       |  | Shares    |   |  | WeightedAverageExercisePrice
|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
|Less forfeited                         |  | (378,334  | ) |  | $                            | 1.772
|Exercised                              |  |          |   |  | $                            |     
|Issued                                 |  | 2,753,108 |   |  | $                            | 1.380
|                                       |  |           |   |  |                              |      
|Stock Options outstandingMay 31, 2010 |  | 5,916,623 |   |  | $                            | 1.427
|                                       |  |           |   |  |                              |      
|Stock Options exercisableMay 31, 2010 |  | 2,915,708 |   |  | $                            | 1.434
|                                       |  |           |   |  |                              |      

The weighted average grant price of options granted during the year ended May 31, 2010 and
May 31, 2009 was $1.38 and $2.22, respectively.



|                        |  |                                    |  |                              |       |                                     |       |                         |   |                                 |  |                              |  |                         |       |  |   |  
|----------------------- |  | ---------------------------------- |  | ---------------------------- | ----- | ----------------------------------- | ----- | ----------------------- | - | ------------------------------- |  | ---------------------------- |  | ----------------------- | ----- |  | - | -
|Options Outstanding     |  | Options Exercisable               
|Range of
Exercise Price |  | Number ofOutstandingat May 31,2010 |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingLife(Years) |       | AggregateIntrinsicValue |   | NumberExercisableat May 31,2010 |  | WeightedAverageExercisePrice |  | AggregateIntrinsicValue
|$1.30  3.00            |  | 5,861,625                          |  | $                            | 1.404 |                                     | 7.421 |                         | $ |                                |  | 2,887,165                    |  | $                       | 1.409 |  | $ | 
|$3.01  6.00            |  | 54,998                             |  | $                            | 4.035 |                                     | 6.726 |                         | $ |                                |  | 28,543                       |  | $                       | 4.035 |  | $ | 
|                        |  |                                    |  |                              |       |                                     |       |                         |   |                                 |  |                              |  |                         |       |  |   |  
|                        |  | 5,916,623                          |  |                              |       |                                     | 7.968 |                         | $ |                                |  | 2,915,708                    |  |                         |       |  | $ | 
|                        |  |                                    |  |                              |       |                                     |       |                         |   |                                 |  |                              |  |                         |       |  |   |  

The intrinsic value is calculated at the difference
between the market value as of May 31, 2010 and the exercise price of the shares. The market value as of May 31, 2010 was $1.31 as reported by the OTC Bulletin Board.

During the year ended May 31, 2010, the Company modified the expiration date of certain stock option awards (see Note 22). The
incremental fair value of these options resulting from the modification of $57,592 has been included in general and administrative expense.



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API Technologies Corp.

Notes to Consolidated Financial Statements



18. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the year ended May 31:



|                                                                       |  |      |            |      |   |      
|---------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | -----
|                                                                       |  | 2010 |            | 2009
|(a) Supplemental Cash Flow Information                                 |  |      |            |      |   |      
|Cash paid for income taxes                                             |  | $    | 30,368     |      | $ | 6,557
|Cash paid for interest                                                 |  | $    | 1,026,252  |      | $ | 5,465
|(b) Non cash transactions (note 4)                                     |  |      |            |      |   |      
|Exchange of note receivable through asset acquisition                  |  | $    | 5,000,000  |      | $ |     
|Sellers note payable issued in asset acquisition                      |  |      | 10,000,000 |      |   |     
|Common stock issued in asset acquisition                               |  |      | 2,107,000  |      |   |     
|Common stock subscribed but not issued in asset acquisition            |  |      | 2,373,000  |      |   |     
|Issuance of warrants with debt modification resulting in debt discount |  |      | 223,398    |      |   |     
|Issuance of warrants with promissory notes resulting in debt discount  |  |      | 3,391,308  |      |   |     
|Assets acquired and liabilities assumed in business acquisitions, net  |  | $    | 28,494,720 |      | $ |     

19. RELATED PARTY
TRANSACTIONS



| | (a) | Included in general and administrative expenses for the year ended May 31, 2010 are consulting fees of $90,218 (2009  $83,038) paid to an individual who
is a director and officer of the Company and rent, management fees, and office administration fees of $186,855 (2009  $187,906) paid to a corporation of which two of the directors are also directors of the Company. (See Note 21b).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | On June 23, 2009, API issued $3,650,000 of secured, convertible promissory notes to a group of investors. Three of the investors are directors of the Company, and
a fourth investor is controlled by one of those directors. In addition, on December 20, 2009 the Company agreed to issue warrants to purchase approximately 250,000 shares of the common stock of the Company, pro rata among the convertible notes
holders, at an exercise price of $1.27 per share (Note 13a).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Included in interest expenses for the year ended
May 31, 2010 are interest charges of $119,655 related to the Convertible Notes paid to certain directors of the Company.



| | (c) | On January 20, 2010, API issued $20,000,000 of secured promissory notes and warrants to purchase 3,571,447 shares of common stock of API to a group of investors
(Note 13b). Seven of the investors are, or are affiliates of, directors or officers of the Company. Neither the KGC Companies nor their owners were issued such notes or warrants.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Included in interest expenses for the year ended May 31, 2010 are interest charges of $277,253 related to the Notes paid to certain
directors and officers of the Company.



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API Technologies Corp.

Notes to Consolidated Financial Statements



20. EARNINGS (LOSS) PER SHARE OF COMMON STOCK

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



|                                |  |                    |  |           
|------------------------------- |  | ------------------ |  | ----------
|                                |  | Year ended May 31,
|                                |  | 2010               |  | 2009      
|Weighted average shares-basic   |  | 34,773,993         |  | 34,816,989
|Effect of dilutive securities   |  | *                  |  | *         
|                                |  |                    |  |           
|Weighted average sharesdiluted |  | 34,773,993         |  | 34,816,989
|                                |  |                    |  |           

Basic EPS and diluted EPS for the year ended
May 31, 2010 and 2009 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, 2010 of 4,096,787 of which, only 2,503,528 shares have been exchanged as of May 31, 2010.



|* | All outstanding options aggregating 5,916,623 incremental shares, 3,821,447 warrants and 4,866,667 shares underlying the convertible promissory notes, have been
excluded from the May 31, 2010 (all outstanding options aggregating 3,541,849 incremental shares from the May 31, 2009) computation of diluted EPS as they are anti-dilutive due to the losses generated in 2010 and 2009.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21. COMMITMENTS AND CONTINGENCIES



| | (a) | Rent
| | --- | ----

The following is a
schedule by years of approximate future minimum rental payments under operating leases that have remaining non-cancelable lease terms in excess of one year as of May 31, 2010.



|           |  |   |           
|---------- |  | - | ----------
|2010       |  | $ | 1,534,000 
|2011       |  |   | 1,468,000 
|2012       |  |   | 1,469,000 
|2013       |  |   | 1,480,000 
|2014       |  |   | 979,000   
|Thereafter |  |   | 3,521,000 
|           |  |   |           
|Total      |  | $ | 10,451,000
|           |  |   |           

The proceeding 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 $1,574,775, and $610,655 for the year ended May 31, 2010 and 2009,
respectively.



| | b) | The Company has an oral agreement for management services with Icarus Investment 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. Included in general and administrative expenses for the year ended May 31, 2010 and 2009 are $186,855 and $187,906, respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Notes to Consolidated Financial Statements



| | c) | The Company may be a party to lawsuits in the normal course of our business. Litigation can be unforeseeable, expensive, lengthy and disruptive to normal business
operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on the Companys business, operating results, or financial
condition.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22. RESTRUCTURING CHARGES RELATED TO CONSOLIDATION OF OPERATIONS

In accordance with accounting guidance for costs associated with asset exit or disposal activities, restructuring costs are recorded as
incurred. Restructuring charges for employee workforce reductions are recorded upon employee notification.

During the fiscal
year 2010 restructuring actions included charges of approximately $884,000 related to workforce reductions and other expenses related to consolidating certain parts of its operations from Ronkonkoma, N.Y. and Hauppauge, N.Y. to its new leased
facility in Windber, P.A. and from consolidating its two wholly-owned subsidiaries in Ottawa, Canada. The Company also realized impairment charges of approximately $324,000 on buildings available for sale in Ogdensburg, N.Y. and Endicott, N.Y and
incurred approximately $180,000 in lease charge commitments related to its effort to consolidate its two wholly-owned subsidiaries in Ottawa, Canada into one location. Management continues to evaluate whether other related assets have been impaired,
and has concluded that there should be no additional impairment charges as of May 31, 2010.

The Companys
consolidating efforts in order to enhance operational efficiency continues, including the winding up and relocating of business at certain locations. During fiscal 2010, the Company moved the Filtran operations into a manufacturing facility in
Ottawas High-Tech centre.

During the year ended May 31, 2010, the Company began the evaluation and consolidation
of certain parts of its operations from Ronkonkoma, N.Y. and Hauppauge, N.Y. to its new leased facility in Windber, P.A.

As
of May 31, 2010, the following table represents the details of restructuring charges:



|                                                        |  |                          |          
|------------------------------------------------------- |  | ------------------------ | ---------
|                                                        |  | WorkshareReduction 
Cost
|Balance, May 31, 2009                                   |  | $                        | 1,076,141
|Restructuring charges                                   |  |                          | 883,560  
|Write-offs                                              |  |                          | 324,410  
|                                                        |  |                          |          
|Total accumulated restructuring charges at May 31, 2010 |  |                          | 2,284,111
|Cash payments                                           |  |                          | 1,235,106
|Non-cash charges                                        |  |                          | 524,410  
|                                                        |  |                          |          
|Balance, May 31, 2010                                   |  | $                        | 524,595  
|                                                        |  |                          |          

The remaining balance at May 31, 2010 is included
in accounts payable and accrued liabilities.

On March 18, 2010, the Company accepted the resignation of Martin
Moskovits, Chief Technology Officer, effective April 2, 2010 (the Effective Date). In connection with Mr. Moskovits resignation, the Company entered into an agreement to pay Mr. Moskovits a lump sum amount of $100,000. The
Company also agreed to a five month extension of the expiration date of 233,333 options to purchase shares of common stock held by Mr. Moskovits. Those options will expire six months after the Effective Date instead of thirty days after the
Expiration Date, as provided in the original option agreements.



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Notes to Consolidated Financial Statements



23. SEGMENT INFORMATION

The Company follows the authoritative guidance on the required disclosures for segments which establish 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. The guidance also establishes standards
for related disclosures about products and services, geographic areas and major customers.

The guidance 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 principal business segments, Engineered Systems and Components and Secure Communications. Inter-segment sales are presented at their market value for disclosure purposes.



|                                                           |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|---------------------------------------------------------- |  | ------------------------------- | ---------- | - | -------------------- | - | ---------- | --------- |  | - | ------------------------- | - | ----- | - | - |  | - | ---------- | -
|Year ended May 31, 2010                                    |  | EngineeredSystems
andComponents |            |   | SecureCommunications |   |            | Corporate |  |   | Inter SegmentEliminations |   | Total |  
|Sales to external customers                                |  | $                               | 46,327,058 |   |                      | $ | 22,222,972 |           |  | $ |                          |   |       | $ |  |  | $ | 68,550,030 |  
|Inter-segment sales                                        |  |                                 |           |   |                      |   |           |           |  |   |                          |   |       |   |  |  |   |           |  
|                                                           |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Total revenue                                              |  |                                 | 46,327,058 |   |                      |   | 22,222,972 |           |  |   |                          |   |       |   |  |  |   | 68,550,030 |  
|                                                           |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Operating Income (loss) before expenses below:             |  |                                 | 3,663,121  |   |                      |   | (195,478   | )         |  |   |                          |   |       |   |  |  |   | 3,467,643  |  
|Corporate head office expenses                             |  |                                 |           |   |                      |   |           |           |  |   | 5,676,382                 |   |       |   |  |  |   | 5,676,382  |  
|Depreciation and amortization                              |  |                                 | 701,866    |   |                      |   | 294,828    |           |  |   | 3,294                     |   |       |   |  |  |   | 999,988    |  
|Other (income) expenses                                    |  |                                 | (815,659   | ) |                      |   | 111,751    |           |  |   | 782,904                   |   |       |   |  |  |   | 78,996     |  
|Income tax expense                                         |  |                                 | 34,596     |   |                      |   | 10,858     |           |  |   |                          |   |       |   |  |  |   | 45,454     |  
|                                                           |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Net income (loss) from continuing operations               |  |                                 | 3,742,318  |   |                      |   | (612,915   | )         |  |   | (6,462,580                | ) |       | $ |  |  | $ | (3,333,177 | )
|Loss from discontinued operations, net of tax              |  |                                 | (5,681,864 | ) |                      |   |           |           |  |   |                          |   |       |   |  |  |   | (5,681,864 | )
|                                                           |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Net income (loss)                                          |  | $                               | (1,939,546 | ) |                      | $ | (612,915   | )         |  | $ | (6,462,580                | ) |       | $ |  |  | $ | (9,015,041 | )
|                                                           |  |                                 |            |   |                      |   |            |           |  |   |                           |   |       |   |   |  |   |            |  
|Segment assets                                             |  | $                               | 63,641,687 |   |                      | $ | 12,350,457 |           |  | $ | 2,618,312                 |   |       | $ |  |  | $ | 78,610,456 |  
|Goodwill included in assets                                |  | $                               | 8,461,889  |   |                      | $ |           |           |  | $ |                          |   |       | $ |  |  | $ | 8,461,889  |  
|Capital expenditures                                       |  | $                               | 1,314,674  |   |                      | $ | 257,172    |           |  | $ | 52,375                    |   |       | $ |  |  | $ | 1,624,221  |  
|Impairment of fixed assets held for sale                   |  | $                               | 324,410    |   |                      | $ |           |           |  | $ |                          |   |       | $ |  |  | $ | 324,410    |  
|Impairment of long-lived assets of discontinued operations |  | $                               | 2,242,473  |   |                      | $ |           |           |  | $ |                          |   |       | $ |  |  | $ | 2,242,473  |  



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API Technologies Corp.

Notes to Consolidated Financial Statements



|                                               |  |                                 |            |   |                      |   |           |  |   |                            |   |       |   |   |  |   |            |  
|---------------------------------------------- |  | ------------------------------- | ---------- | - | -------------------- | - | --------- |  | - | -------------------------- | - | ----- | - | - |  | - | ---------- | -
|Year ended May 31, 2009                        |  | EngineeredSystems
andComponents |            |   | SecureCommunications |   | Corporate |  |   | Inter 
SegmentEliminations |   | Total |  
|Sales to external customers                    |  | $                               | 25,461,024 |   |                      | $ |          |  | $ |                           |   |       | $ |  |  | $ | 25,461,024 |  
|Inter-segment sales                            |  |                                 |           |   |                      |   |          |  |   |                           |   |       |   |  |  |   |           |  
|                                               |  |                                 |            |   |                      |   |           |  |   |                            |   |       |   |   |  |   |            |  
|Total revenue                                  |  |                                 | 25,461,024 |   |                      |   |          |  |   |                           |   |       |   |  |  |   | 25,461,024 |  
|                                               |  |                                 |            |   |                      |   |           |  |   |                            |   |       |   |   |  |   |            |  
|Operating Income (loss) before expenses below: |  |                                 | (220,710   | ) |                      |   |          |  |   |                           |   |       |   |  |  |   | (220,710   | )
|Corporate head office expenses                 |  |                                 |           |   |                      |   |          |  |   | 1,400,299                  |   |       |   |  |  |   | 1,400,299  |  
|Depreciation and amortization                  |  |                                 | 831,604    |   |                      |   |          |  |   | 2,868                      |   |       |   |  |  |   | 834,472    |  
|Other (income) expenses                        |  |                                 | (86,422    | ) |                      |   |          |  |   | (385,605                   | ) |       |   |  |  |   | (472,027   | )
|Income tax expense (benefit)                   |  |                                 | 7,958      |   |                      |   |          |  |   | 91,729                     |   |       |   |  |  |   | 99,687     |  
|                                               |  |                                 |            |   |                      |   |           |  |   |                            |   |       |   |   |  |   |            |  
|Net loss from continuing operations            |  |                                 | (973,850   | ) |                      | $ |          |  | $ | (1,109,291                 | ) |       | $ |  |  | $ | (2,083,141 | )
|Loss from discontinued operations, net of tax  |  |                                 | (4,361,396 | ) |                      |   |          |  |   |                           |   |       |   |  |  |   | (4,361,396 | )
|                                               |  |                                 |            |   |                      |   |           |  |   |                            |   |       |   |   |  |   |            |  
|Net loss                                       |  | $                               | (5,335,246 | ) |                      | $ |          |  | $ | (1,109,291                 | ) |       | $ |  |  | $ | (6,444,537 | )
|                                               |  |                                 |            |   |                      |   |           |  |   |                            |   |       |   |   |  |   |            |  
|Segment assetsas of May 31, 2009              |  | $                               | 21,507,304 |   |                      | $ |          |  | $ | 2,646,006                  |   |       | $ |  |  | $ | 24,153,310 |  
|Goodwill included in assetsas of May 31, 2009 |  | $                               | 1,130,906  |   |                      | $ |          |  | $ |                           |   |       | $ |  |  | $ | 1,130,906  |  
|Capital expenditures                           |  | $                               | 288,946    |   |                      | $ |          |  | $ | 4,717                      |   |       | $ |  |  | $ | 293,663    |  

24. 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
between 50% and 100% of certain employee contributions up to a maximum of 3% or 4% 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, 2010 and 2009, the Company incurred $387,945, and $218,181 respectively, as its obligation under the terms of the plan, charged to general and administrative expense.

25. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through August 10, 2010, the date the financial statements were issued, and up to the
time of filing of the financial statements with the Securities and Exchange Commission.

On June 15, 2010, the Company
sold the assets of its discontinued nanotechnology subsidiary for gross cash proceeds of approximately $2,300,000. The Company had previously announced the closing of its nanotechnology research and development subsidiary (see Note 5). Through the
sale of the assets the Company eliminated future commitments associated with the discontinued operations, which were estimated to be approximately $1,600,000.

On July 28, 2010, the Company sold its land and building in Hauppauge, New York for proceeds of $1,575,000. The land and building
had a net book value of approximately $654,000 and are reported as fixed assets held for sale at May 31, 2010.

On
August 5, 2010, the Company purchased certain equipment that was under capital lease by paying the outstanding capital lease obligation amount of approximately $1,003,000 related to those assets.



F-37