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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K







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

For the fiscal year ended May 31, 2008



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

For the transition period from             to

Commission file number 000-29429





API NANOTRONICS CORP.

(Exact Name of Registrant as Specified in its Charter)







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



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

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

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



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

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

Common Stock

(Title of Class)





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

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

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



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

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

State issuers revenues for its most recent fiscal year:  $30,962,046

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: $85,761,252

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

Not applicable

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

As of August 18, 2008, the Company had 522,077,355 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, 2008 are incorporated by reference into
Part III.









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TABLE OF CONTENTS



|           |  |                                                                                                 |  |     
|---------- |  | ----------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                 |  | Page
|           | 
|PART I     |  |                                                                                                
|           |  |                                                                                                
|ITEM 1     |  | DESCRIPTION OF BUSINESS                                                                         |  | 1   
|ITEM 1A    |  | RISK FACTORS                                                                                    |  | 23  
|ITEM 2     |  | DESCRIPTION OF PROPERTY                                                                         |  | 33  
|ITEM 3     |  | LEGAL PROCEEDINGS                                                                               |  | 34  
|ITEM 4     |  | SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS                                               |  | 34  
|           | 
|PART II    |  |                                                                                                
|           |  |                                                                                                
|ITEM 5     |  | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |  | 35  
|ITEM 7     |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS           |  | 36  
|ITEM 8     |  | CONSOLIDATED FINANCIAL STATEMENTS                                                               |  | 52  
|ITEM 9     |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE            |  | 52  
|ITEM 9A(T) |  | CONTROLS AND PROCEDURES                                                                         |  | 52  
|ITEM 9B    |  | OTHER INFORMATION                                                                               |  | 53  
|           | 
|PART III   |  |                                                                                                
|           |  |                                                                                                
|ITEM 10    |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                          |  | 54  
|ITEM 11    |  | EXECUTIVE COMPENSATION                                                                          |  | 54  
|ITEM 12    |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  |  | 54  
|ITEM 13    |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                       |  | 54  
|ITEM 14    |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                          |  | 54  
|           | 
|PART IV    |  |                                                                                                
|           |  |                                                                                                
|ITEM 15    |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                         |  | 55  



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PART I



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

FORWARD LOOKING
STATEMENTS

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

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

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

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

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

Historical Overview of the Company

We were
incorporated on February 2, 1999 under the laws of the State of Delaware under the name Rubincon Ventures Inc. We have not been in bankruptcy, receivership or similar proceedings since our inception. On November 6, 2006, in a business
combination that occurred under Ontario law, we combined with API Electronics Group Corp., an Ontario corporation (API), and API became our wholly-owned indirect subsidiary (the Business Combination). This Business
Combination was accomplished by our forming an Ontario subsidiary, RVI Sub, Inc. and now known as API Nanotronics Sub, Inc., which we refer to as Nanotronics Sub. API became a wholly-owned subsidiary of Nanotronics Sub pursuant to a Plan of
Arrangement approved by the Ontario Superior Court of Justice. The holders of common shares of API were given the right to receive either ten shares of our common stock, or if the shareholder elected and was a Canadian taxpayer, ten Exchangeable
Shares of Nanotronics Sub (Exchangeable Shares). Each Exchangeable Share of Nanotronics Sub is exchangeable at the option of the holder into one share of our common stock at any time during a ten-year period commencing November 6,
2006.

As a result of the Business Combination, our management and the management of Nanotronics Sub became the same as the management of
API and the members of the Board of Directors of API then constituted a majority of the members of our Board of Directors and the Board of Directors of Nanotronics Sub. In connection with the Business Combination we changed our name to API
Nanotronics Corp.



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As a result of the Business Combination with API, we are engaged in the manufacture of electronic
components and systems for the defense and communications industries. Our operations are conducted through our subsidiaries. We have eleven subsidiaries: (1) Nanotronics Sub, which holds the stock of API, (2) API, which holds the stock of
certain of our operating companies, (3) Rubincon Holdings, which was incorporated to facilitate the exchange of Exchangeable Shares, (4) API Electronics, Inc., which is a designer and manufacturer of critical elements for advanced
military, industrial, commercial, automotive and medical application, (5) Filtran Group, consisting of Filtran Limited and Filtran Inc. and which is a designer and supplier of electronic components to major producers of communications
equipment, military hardware, computer peripherals, process control equipment and instrumentation, (6) TM Systems II Inc., which supplies the defense sector with naval landing and launching equipment, flight control and signaling systems, radar
systems alteration, data communication and test equipment, as well as aircraft ground support equipment, (7) Keytronics, Inc., which is a designer and manufacturer of electronic components of major producers of communications equipment,
military hardware, computer peripherals, process control equipment and instrumentation, (8) National Hybrid Group, which consists of National Hybrid, Inc. and Pace Technology, Inc., and is a developer and manufacturer of 1553 data bus products,
solid state power controllers, opto-controllers, high density multi-chip modules and custom hybrid micro-circuits for the military/aerospace market and the industrial process control market, and (9) API Nanofabrication and Research Corporation,
which holds the assets we purchased from NanoOpto Corporation, including a clean room suitable for nanotechnology manufacture and research.

We have operations in the U.S. in New York, New Jersey and Florida and in Canada in Ontario. After the Business Combination, we moved our executive offices to the executive offices of API in Toronto, Ontario. Our operating subsidiaries are
located in Endicott, New York, Hauppauge, New York, Ogdensburg, New York, Ronkonkoma, New York, Islip, New York, Somerset, New Jersey, Largo, Florida and Ottawa, Ontario. The operation in New Jersey was related to the acquisition of certain assets
of NanoOpto Corporation on July 19, 2007. The mailing address for our executive offices is: 2300 Yonge Street, Suite 1710, Toronto, Ontario, Canada M4P 1E3. The telephone numbers of our registered office and principal place of business in
Ontario, Canada are (416) 593-6543 and (800) 606-2326.

The Company has commenced consolidating certain of its operations. At the
end of the consolidation process, the Company expects to operate in three primary manufacturing facilities, down from eight. The Company believes that this consolidation will result in reduced overhead expenses and greater overall efficiencies and
profitability.

Accounting Treatment of the Business Combination

For accounting purposes, the acquisition of API by us when we were known as Rubincon Ventures, Inc. (Rubincon) was considered a reverse acquisition, an acquisition transaction where the acquired company,
API, is considered the acquirer for accounting purposes, notwithstanding the form of the transaction. The primary reason the transaction was treated as a recapitalization by API, rather than a purchase of API by Rubincon, was because we were then a
shell company and the management team of API is now our management team. As reported in the Form 10-QSB for the quarter ended October 31, 2006 (the final quarterly filing requirement for Rubincon under its prior year-end of January 31,
2006), Rubincon had cash of approximately $4,200,000, other assets of approximately $117,000 and liabilities of approximately $187,000.

In
conjunction with this reverse acquisition, we changed our year-end from January 31 to May 31, the fiscal year-end of API. Our assets, liabilities and equity continue to be that of the operating company in the Business Combination, API, as
adjusted for the cash, other assets and liabilities of Rubincon. No additional goodwill or intangible assets were recognized on completion of the transaction. The capital structure, including the number and type of shares issued, appearing in the
consolidated balance sheet reflects that of the legal parent, Rubincon, now known as API Nanotronics Corp., including the shares issued to affect the reverse acquisition for the period after the consummation of the Plan of Arrangement and the
capital structure of API modified by the 10-for-1 exchange ratio in the Plan of Arrangement for the period prior to the consummation of the plan of arrangement.



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Rubincons Activities Prior to the Business Combination

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 other than discontinued mining operations and our assets consisted of cash 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.

From inception through December 2005, we were engaged in the exploration of mineral properties. Originally we acquired the mineral rights to a claim,
called Rubincon, located in the Zeballos mining area of British Columbia but due to the terrain of the claim, management decided to allow the claim to lapse on February 28, 2002 and no longer has any interest in the property.

Our shares were qualified and first quoted on the system of the National Association of Securities Dealers, Inc. (NASD) known
as the OTC Bulletin Board (the OTCBB) in November 2005. There was only one trade in November, 2005 and our common stock did not start trading after that until March 2006. Effective November 7, 2006 we have changed the symbol for our
common stock to APIO from RBCV.

History of API

Nanotronics Sub, a Canadian subsidiary was incorporated solely for the purpose of affecting the Business Combination. It has no operations. Nanotronics Sub is an Ontario corporation and operates under the Business
Corporations Act (Ontario). API is a wholly-owned subsidiary of Nanotronics Sub.

API was incorporated in the Province of Ontario, Canada
on May 14, 1985 under the name Shediac Bay Resources. From the time of APIs incorporation on May 14, 1985 until June 6, 2000, API was in the business of locating, acquiring, exploring, and, if warranted, developing and
exploiting, mineral properties. On July 25, 2000, API changed its name from Opus Minerals Inc. to InvestorLinks.com Inc. From June 6, 2001 through August 31, 2001, APIs primary business was that of a financial resource and
directory portal provider on the Internet through its website www.InvestorLinks.com. That business was effectively closed down prior to the end of the fiscal year ending April 30, 2001 and the assets of that business were sold during the fiscal
year ending May 31, 2002. In September 2001 API acquired API Electronics in a reverse acquisition and commenced to engage in the basis of API Electronics, the manufacture and distribution of semiconductors and microcircuits for military,
aerospace and commercial applications.

On September 10, 2001, APIs common shares began trading on the OTCBB under the symbol
APIEF. APIs trading symbol on the OTCBB was changed to AEGCF in connection with the September 15, 2004 one (1) for ten (10) common share consolidation. In connection with the Business Combination, APIs common
shares ceased to trade.

Effective May 31, 2002, API acquired the 100% of the shares of the Filtran Group of companies. The Filtran
Group of companies included Filtran Limited, Filtran Inc., Canadian Dataplex Ltd. and Tactron Communications (Canada) Limited. Canadian Dataplex Ltd., Filtran Limited and Tactron Communications (Canada) Limited were amalgamated under the name
Filtran Limited under the Business Corporations Act (Ontario) as of June 1, 2003. The Filtran Group of companies is a manufacturer of electronic components, particularly inductors, filters and transformers, for customers in the communications,
computer, instrumentation and process control industries, with manufacturing facilities in the United States and Canada.

Effective
February 6, 2003, API through its wholly-owned subsidiary TM Systems II, TM Systems acquired the assets of TM Systems, Inc. The assets purchased by TM Systems include inventory, equipment, work-in-progress, contracts, orders, files,
ledgers and furniture. TM Systems now operates out of the facilities of



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API Electronics in Hauppauge, New York and of Keytronics in Endicott, New York. TM Systems is a manufacturer of naval landing and launching equipment, flight
control and signaling systems, radar systems alteration, data communication and test equipment, and aircraft ground control equipment.

Effective March 23, 2004, API acquired the assets of Islip Transformer & Metal Co., Inc., a supplier of critical systems and components to the U.S. Department of Defense. The assets acquired included certain Department of
Defense contracts, the sellers CAGE code, the right to use the sellers name, all test fixtures, test equipment, plans, specifications and files relating to previous contracts performed, inventory and equipment.

API changed its name from API Electronics Group Inc. to API Electronics Group Corp. on September 15, 2004 in connection with the one (1) for
ten (10) Common share consolidation.

Effective August 29, 2005, API acquired certain assets of Sensonics, Inc. Sensonics is a
designer and manufacturer of electronic circuits and aircraft instrumentation.

Effective April 28, 2006, API purchased 100% of
Keytronics Inc.s shares. Keytronics is a design and manufacturing company of electrical components and equipment, specifically transformers, chokes, inductors, reactors, power supplies, power converters, battery chargers and rope cutters.

Effective November 6, 2006, API was acquired by Rubincon Ventures Inc. in the Business Combination discussed above. In that
transaction API became a wholly-owned indirect subsidiary of API Nanotronics Corp., the name that Rubincon Ventures Inc. adopted in connection with the Business Combination. The combined companies continued to engage in the historic business of API.

The acquisition of API and the purchases of the Filtran Group of companies and the assets of TM Systems was funded by APIs
predecessor and API primarily from the private sale of securities. The acquisition of certain assets of Sensonics was funded by an earn-out provision in the acquisition agreement. The acquisition of the stock of Keytronics was funded out of
APIs working capital.

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

The
acquisition of the National Hybrid Group companies was funded with cash received from Rubincon Ventures Inc. as part of the Business Combination and from a loan by a related party.

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

Business Overview of API Nanotronics Corp.

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



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Core products produced by the Company include: high-performance microcircuits for such as 1553 data bus
products, solid state power controllers, opto-couplers, high-density multi-chip modules and custom hybrid-microcircuit filters and transformers; naval aircraft landing and launching equipment; and next generation product introductions based on
nanotechnology and micro-electromechanical (MEMS) systems.

In addition to providing niche specialty products that major semiconductor
manufacturers no longer produce or do not plan on producing in the future, the Company possesses a broad range of instruments essential in nanofabrication and materials synthesis and fabrication. The Company seeks to extend its existing
customer relationships by offering state-of-the-art nanotechnology products and services.

The Companys Nanotechnology Initiative

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

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

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

We continue to seek additional opportunities in the nanotechnology industry. To this end, Dr. Moskovits continues to seek to identify nanotechnology
acquisitions for us.



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Financial Information About Segments

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



|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|------------------------------ |  | ------ | --------- | - | ------------- | - | ---------- | ----------------- |  | - | ------------------------- | - |  | ----- | -------- | - |  | - | ---------- | -
|Year Ended May 31, 2008        |  | Canada |           |   | United States |   |            | Corporate(Canada) |  |   | Inter SegmentEliminations |   |  | Total |         
|Sales to external customers    |  | $      | 9,044,846 |   |               | $ | 21,917,200 |                   |  | $ |                          |   |  | $     |         |   |  | $ | 30,962,046 |  
|Inter-segment sales            |  |        | 7,800     |   |               |   | 385,826    |                   |  |   |                           |   |  |       | (393,626 | ) |  |   |           |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Total revenue                  |  |        | 9,052,646 |   |               |   | 22,303,026 |                   |  |   |                          |   |  |       | (393,626 | ) |  |   | 30,962,046 |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Income before expenses below:  |  |        | 290,721   |   |               |   | (4,638,117 | )                 |  |   |                          |   |  |       |         |   |  |   | (4,347,396 | )
|Corporate head office expenses |  |        |          |   |               |   |           |                   |  |   | 958,896                   |   |  |       |         |   |  |   | 958,896    |  
|Depreciation and amortization  |  |        | 123,579   |   |               |   | 1,070,104  |                   |  |   | 2,757                     |   |  |       |         |   |  |   | 1,196,440  |  
|Other expense (income)         |  |        | 177,972   |   |               |   |           |                   |  |   | 101,039                   |   |  |       |         |   |  |   | 279,011    |  
|Income tax expense (benefit)   |  |        | 1,867     |   |               |   | (40,272    | )                 |  |   | (177,228                  | ) |  |       |         |   |  |   | (215,633   | )
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Net income (loss)              |  | $      | (12,697   | ) |               | $ | (5,667,949 | )                 |  | $ | (885,464                  | ) |  | $     |         |   |  | $ | (6,566,110 | )
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Segment assets                 |  | $      | 5,332,383 |   |               | $ | 22,225,793 |                   |  | $ | 1,961,120                 |   |  | $     |         |   |  | $ | 29,519,296 |  
|Goodwill included in assets    |  | $      | 863,317   |   |               | $ | 267,589    |                   |  | $ |                          |   |  | $     |         |   |  | $ | 1,130,906  |  
|Capital expenditures           |  | $      | 111,164   |   |               | $ | 1,644,080  |                   |  | $ | 5,761                     |   |  | $     |         |   |  | $ | 1,761,005  |  
|                               |  |        |           |   |              
|Year Ended May 31, 2007        |  | Canada |           |   | United States |   |            | Corporate(Canada) |  |   | Inter SegmentEliminations |   |  | Total |         
|Sales to external customers    |  | $      | 6,071,579 |   |               | $ | 14,460,431 |                   |  | $ |                          |   |  | $     |         |   |  | $ | 20,532,010 |  
|Inter-segment sales            |  |        | 8,216     |   |               |   | 389,477    |                   |  |   |                           |   |  |       | (397,693 | ) |  |   |           |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Total revenue                  |  |        | 6,079,795 |   |               |   | 14,849,908 |                   |  |   |                          |   |  |       | (397,693 | ) |  |   | 20,532,010 |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Income before expenses below:  |  |        | 156,401   |   |               |   | 587,220    |                   |  |   |                          |   |  |       |         |   |  |   | 743,621    |  
|Corporate head office expenses |  |        |          |   |               |   |           |                   |  |   | 1,418,593                 |   |  |       |         |   |  |   | 1,418,593  |  
|Depreciation and amortization  |  |        | 250,829   |   |               |   | 722,393    |                   |  |   | 9,666                     |   |  |       |         |   |  |   | 982,888    |  
|Other expense (income)         |  |        | (136,105  | ) |               |   | (3,315     | )                 |  |   | (112,711                  | ) |  |       |         |   |  |   | (252,131   | )
|Income tax expense (benefit)   |  |        |          |   |               |   | 75,774     |                   |  |   | (528,000                  | ) |  |       |         |   |  |   | (452,226   | )
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Net income (loss)              |  | $      | 41,677    |   |               | $ | (207,632   | )                 |  | $ | (787,548                  | ) |  | $     |         |   |  | $ | (953,503   | )
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Segment assets                 |  | $      | 3,907,422 |   |               | $ | 15,131,006 |                   |  | $ | 8,308,332                 |   |  | $     |         |   |  | $ | 27,346,760 |  
|Goodwill included in assets    |  | $      | 863,317   |   |               | $ | 267,589    |                   |  | $ |                          |   |  | $     |         |   |  | $ | 1,130,906  |  
|Capital expenditures           |  | $      | 38,576    |   |               | $ | 473,472    |                   |  | $ |                          |   |  | $     |         |   |  | $ | 512,048    |  

Income before expenses includes a reserve for obsolete and slow moving inventory in the amount of
$2,819,263 and $0 that was accounted for during the year ended May 31, 2008 and 2007, respectively.

b) Major Customer



|                                          |  |      |   |  |      |  
|----------------------------------------- |  | ---- | - |  | ---- | -
|                                          |  | 2008 |   |  | 2007 |  
|Revenue                                   |  |      |   |  |      |  
|U.S. Department of Defense                |  | 9    | % |  | 10   | %
|U.S. Department of Defense subcontractors |  | 70   | % |  | 67   | %



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Business OverviewNational Hybrid Group, API Electronics, Inc., the Filtran Group of Companies, TM Systems,
Keytronics and API NRC

National Hybrid Group of CompaniesOperations, Activities and Products

National Hybrid, Inc. (NHI) was founded in 1974 to respond to the military/aerospace markets critical and growing need for reliable,
high-performance microcircuits. In 1999, Pace Technology, Inc. (Pace) opened. Pace possesses a state of the art automated low-cost production facility. Prior to the acquisition by the Company, NHI and Pace (referred to as the National Hybrid Group)
were affiliated entities. National Hybrid Group has maintained a focus on designing and manufacturing increasingly complex, cost-effective, high-reliability microcircuits such as 1553 data bus products, solid state power controllers, opto-couplers,
high-density multi-chip modules and custom hybrid-microcircuits. National Hybrid Group has identified and developed products for niche opportunities in the industrial / process control market. In support of its goals and objectives, National Hybrid
Group continues to develop products that maximize its potential as a sole source supplier in the military/aerospace market.

National
Hybrid Groups expertise includes analog and digital designs as well as application specific integrated circuits and gate-array implementations. Extensive in-house simulation, prototype testing and analysis facilities allow National Hybrid
Group to develop products for both standard and custom applications with heightened reliability.

National Hybrid Group leads the avionics
industry in key military communications technologies and manufacturers state-of-the-art components. National Hybrid Group has developed the worlds smallest complete Mil-Std-1553 communications terminal. National Hybrid Group has 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.

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

National Hybrid
Group is headquartered in a 20,000 sq. ft. facility in Ronkonkoma, New York, adjacent to the Long Island MacArthur Airport. National Hybrid Groups hybrid microcircuit manufacturing capabilities in Ronkonkoma, New York are state-of-the-art.
National Hybrids Islip, New York facility is for warehousing and manufacturing. Advanced statistical engineering processes and analyses are employed by National Hybrid Group in the production process to optimize test times, improve reliability
of components and production yield.

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

National Hybrid Group has been recognized by many customers as a key supplier. Rockwell Collins named NHI a
top preferred supplier for both 2005 and 2006. In 2006, NHI was recognized as Commodity Supplier of the Year by Rockwell Collins.

National
Hybrid Groups principal markets consist of the government and military as well as commercial aerospace and industrial controls. During the year ended May 31, 2008, National Hybrid Group customers included Raytheon, Boeing, Lockheed
Martin, BAE, Honeywell and Rockwell Collins. The focus of National Hybrid Groups growth strategy is to continue to develop cost-effective products to meet the needs of these and other key customers for high performance micro-circuits.

National Hybrid Group has implemented a sales and marketing program with an in-house sales staff of three. Catalogs, brochures and data
sheets are supplemented by the website describing National Hybrid Group, its



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products and capabilities. National Hybrid Group seeks to improve its product sales in overseas markets through the increased emphasis on sales management
and improved communication with overseas sales representatives and distributors.

Principal Markets in which National Hybrid Group
Competes

National Hybrid Groups customers are located primarily in the United States. The Mil-Std-1553 micro-circuit products are
sold worldwide to a large customer base.

The geographical breakdown of revenue for National Hybrid Group (where its customers are located)
for the year ended May 31, 2008 and May 31, 2007 is as follows (000s):



|              |  |             |        |              |      |   |             |   |              |  |      |  
|------------- |  | ----------- | ------ | ------------ | ---- | - | ----------- | - | ------------ |  | ---- | -
|              |  | 2008Revenue |        | % ofRevenues |      |   | 2007Revenue |   | % ofRevenues | 
|United States |  | $           | 9,442  |              | 86.0 | % |             | $ | 3,702        |  | 86.1 | %
|Europe        |  | $           | 480    |              | 4.4  | % |             | $ | 285          |  | 6.6  | %
|Other         |  | $           | 1,060  |              | 9.6  | % |             | $ | 316          |  | 7.3  | %
|              |  |             |        |              |      |   |             |   |              |  |      |  
|Total         |  | $           | 10,982 |              | 100  | % |             | $ | 4,303        |  | 100  | %
|              |  |             |        |              |      |   |             |   |              |  |      |  

Major Customers



|                   |  |          
|------------------ |  | ---------
|BAE Systems        |  | U.S./U.K.
|Rockwell Collins   |  | U.S.     
|Eltech Electronics |  | U.S.     
|Diehl              |  | U.S.     
|Raytheon           |  | U.S.     

The volume of business provided by these customers equal approximately 56% and 50% of total sales
for the fiscal years ended May 31, 2008 and 2007, respectively and represented 20% and 105%, respectively of our consolidated sales. No single customer represents more than 25% of total sales.

Raw Materials

Raw materials required
by National Hybrid Groups business consist of primarily silicon wafers and ceramic packages. A broad market for both these commodities exists worldwide, and the prices have not been historically volatile.

Marketing Channels

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

Dependence on Patents, Licenses, Contracts and
Process

National Hybrid Group is not dependent on patents, licenses, industrial contracts, financial contracts, or new manufacturing
processes in such a manner that such dependence would be material to its business or profitability. However, National Hybrid Group does patent features of certain of the products it develops.

Research and Development

New product
research and development at National Hybrid Group relates to four main areas: (1) Application Specific Integrated Circuits (ASICS) used in our MIL-STD-1553/1760 communications products; (2) Plastic



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Packages for 1553/1760 terminals; (3) Plastic Packages for 1553/1760 Transceivers; and (4) Hermetically Sealed Optical Couplers for use in harsh
environments. Such research and development is primarily engaged in when a customer has requested a product from National Hybrid Group which National Hybrid Group does not then manufacture. Such new products are generally of the same type as
products that National Hybrid Group has produced in the past.

Material Effects of Government Regulations

Except as noted below, government regulations of the United States and the States of New York and Florida related to environmental compliance, labor
conditions, and government contracting are typical in National Hybrid Groups industry and do not have a material effect on National Hybrid Groups business.

National Hybrids quality system has been audited and its ISO 9001 (2000) certification has been renewed effective November 1, 2006. ISO certifications are granted by independent auditing organizations
such as Underwriters Laboratories. ISO certifications are recognized on a worldwide basis.

National Hybrid has been audited by the United
States Department of Defense and certified to MIL-PRF-38534. This certification is required to supply the highest reliability level microcircuits to the military market. National Hybrid is listed as a qualified Source of Supply to the United States
Defense Electronics Supply Centers (DESCs).

Backlog of Orders

National Hybrid Groups backlog as of May 31, 2008 was $6,102,736. National Hybrid Groups backlog as of May 31, 2007 was $5,333,271.

API Electronics, Inc. (API Electronics)Operations, Activities and Products

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

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

Applications for API Electronics semiconductor products include: Telecommunications, Aerospace, Military Defense Systems, Automated Test Equipment, Computing Equipment, Medical Equipment, Robotics,
Instrumentation and Automotive Systems. API Electronics currently serves a broad group of customers with products and services falling into four main categories: Hybrid Circuit, Power and Small-Signal Transistor, Varactor Tuning Diode and
Value-Added Distribution. API Electronics products facilitate the power supply in end products such as missiles, the space shuttle, F-15 and F-16 fighter planes and B-1 bombers.

API Electronics principal markets consisted of the government and military markets for approximately 79% of revenues respectively for 2008 and
2007, telecom, laboratory and commercial equipment, and other



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replacement parts for approximately 23% of revenues respectively during the fiscal year ended May 31, 2008 and 2007. API Electronics major
customers include government agencies, Departments of Defense, and large military contractors such as Honeywell, BAE Systems Controls, Deutch Relays, Litton Systems and Lockheed-Martin. Other customers include Raytheon, Northrop Grumman Litton,
Alcatel, Thales, Leitch, Ball Aerospace and the Defense Electronic Supply Center.

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



| | 1. | AmpowerPower Transistors
| | -- | -------------------------



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



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



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



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



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

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

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

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

Principal Markets in which API Electronics Competes

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

The geographical breakdown of revenue for API Electronics (where its customers are located) for the years ended May 31, 2008 and 2007 is as follows
(in 000s):



|              |  |              |       |              |     |   |              |   |              |  |     |  
|------------- |  | ------------ | ----- | ------------ | --- | - | ------------ | - | ------------ |  | --- | -
|              |  | 2008Revenues |       | % ofRevenues |     |   | 2007Revenues |   | % ofRevenues | 
|United States |  | $            | 3,635 |              | 84  | % |              | $ | 3,921        |  | 91  | %
|Canada        |  |              | 91    |              | 2   | % |              |   | 53           |  | 2   | %
|Other         |  |              | 605   |              | 14  | % |              |   | 314          |  | 7   | %
|              |  |              |       |              |     |   |              |   |              |  |     |  
|Total         |  | $            | 4,331 |              | 100 | % |              | $ | 4,288        |  | 100 | %
|              |  |              |       |              |     |   |              |   |              |  |     |  



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Major Customers



|                           |  |     
|-------------------------- |  | ----
|US Military                |  | U.S.
|Deutsch Relays             |  | U.S.
|Curtis Wright Controls     |  | U.S.
|Leach International        |  | U.S.
|Testime Technology Limited |  | U.K.

Raw Materials

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

Marketing Channels

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

Dependence on Patents, Licenses, Contracts and Processes

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

Material Effects of Government
Regulations

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

Backlog of Orders

API
Electronics backlog as of May 31, 2008 was $2,230,352. API Electronics backlog as of May 31, 2007 was $2,150,180.

Filtran Group of CompaniesOperations, Activities and Products

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

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



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

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

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

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

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

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

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

Principal Markets in which the Filtran Group Competes

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

The geographical breakdown of revenues for the Filtran Group for the years ended May 31,
2008 and 2007 is as follows (in 000s):



|               |  |              |        |              |     |   |              |   |              |  |     |  
|-------------- |  | ------------ | ------ | ------------ | --- | - | ------------ | - | ------------ |  | --- | -
|               |  | 2008Revenues |        | % ofRevenues |     |   | 2007Revenues |   | % ofRevenues | 
|United States  |  | $            | 7,503  |              | 67  | % |              | $ | 5,634        |  | 73  | %
|Canada         |  |              | 1,638  |              | 15  | % |              |   | 859          |  | 11  | %
|United Kingdom |  |              | 1,571  |              | 14  | % |              |   | 975          |  | 13  | %
|All Other      |  |              | 442    |              | 4   | % |              |   | 297          |  | 3   | %
|               |  |              |        |              |     |   |              |   |              |  |     |  
|Total          |  | $            | 11,154 |              | 100 | % |              | $ | 7,765        |  | 100 | %
|               |  |              |        |              |     |   |              |   |              |  |     |  



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

The breakdown of revenues for the Filtran Group for the years ended May 31, 2008 and
2007, respectively by industry of end users is as follows (in 000s):



|                                         |  |      |        |   |     |   |      |   |       |  |     |  
|---------------------------------------- |  | ---- | ------ | - | --- | - | ---- | - | ----- |  | --- | -
|                                         |  | 2008 |        | % |     |   | 2007 |   | %     | 
|High-end Equipment and Telecom Companies |  | $    | 3,533  |   | 32  | % |      | $ | 2,596 |  | 33  | %
|Military and Defense                     |  |      | 7,621  |   | 68  | % |      | $ | 5,169 |  | 67  | %
|                                         |  |      |        |   |     |   |      |   |       |  |     |  
|Total                                    |  | $    | 11,154 |   | 100 | % |      | $ | 7,765 |  | 100 | %
|                                         |  |      |        |   |     |   |      |   |       |  |     |  

1. High End Equipment & Telecom Companies

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

All Canadian and U.S. telecommunications equipment manufacturers are potential customers for the Filtran Group. Filtran also does business with
telecommunications companies in Europe and Asia. In previous years, high labor costs in Canada and the U.S. excluded the Filtran Group from the high volume product sales. Since 2000, the Filtran Group has established relationships to outsource the
manufacturing of certain products to companies in Asia, particularly China, and labor costs are no longer a barrier for Filtran Group to compete for these orders.

2. Military and Defense

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

Major Customers



|                                                 |  |            
|------------------------------------------------ |  | -----------
|Harris Corporation, R.F. Communications Division |  | U.S.       
|TT EMS                                           |  | U.S. & U.K.
|Ameritherm                                       |  | U.S.       
|Jabil Circuit                                    |  | U.S.       
|Whirlwind                                        |  | U.S.       

The volume of business provided to the Filtran Group by these customers equals about 70% of total
sales.

For the fiscal years ended May 31, 2008 and 2007, Harris Corporation represented approximately 46.4% and 47.6%, respectively,
of total Filtran Groups sales, which represented 16.7% and 18.0%, respectively, of our consolidated sales.



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##### Table of Contents

Raw Materials

The primary raw materials required by Filtran Groups business consist of cores, bobbins, wire, lamination, tapes (polyamide, polyfilm, masking, copper, glasscloth, antistatic), epoxy, solder tips, varnish, metal
plates, PVC insulation, diodes, and circuit boards. Filtran Groups purchasing policies require the companies to find alternate sources for materials; however, some materials have a single source supplier due to customer specifications or
unique construction requirements. Most of Filtran Groups raw material suppliers are located in the US. These materials are readily available. The lead time for ordering manufactured materials has decreased to 4 to 6 weeks from up to 24 months
during the technology boom of the late 1990s. The prices for these materials are relatively stable.

Marketing Channels

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

Dependence on Patents, Licenses, Contracts and Processes

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

Material Effects of Government Regulations

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

Backlog of Orders

Filtran Groups backlog as of May 31, 2008 was $4,745,414. Filtran Groups backlog as of May 31, 2007 was $5,095,928.

TM SystemsOperations, Activities and Products

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

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

Principal Markets in which TM Systems Competes

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



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TMs Systems customers are located primarily in the United States; however, it sells a limited
amount of products to customers in other countries.

The geographical breakdown of revenues for TM Systems (where the customers are
located) for the years ended May 31, 2008 and 2007 is as follows (in 000s):



|              |  |             |       |              |     |   |             |   |              |  |     |  
|------------- |  | ----------- | ----- | ------------ | --- | - | ----------- | - | ------------ |  | --- | -
|              |  | 2008Revenue |       | % ofRevenues |     |   | 2007Revenue |   | % ofRevenues | 
|United States |  | $           | 2,650 |              | 100 | % |             | $ | 2,482        |  | 100 | %
|Other         |  |             |      |              | 0   | % |             |   | 7            |  | 0   | %
|              |  |             |       |              |     |   |             |   |              |  |     |  
|Total         |  | $           | 2,650 |              | 100 | % |             | $ | 2,489        |  | 100 | %
|              |  |             |       |              |     |   |             |   |              |  |     |  

Major Customers



|                                       |  |     
|-------------------------------------- |  | ----
|U.S. Military                          |  | U.S.
|NASSCO (National Steel & Shipbuilders) |  | U.S.
|BAE Systems                            |  | U.S.
|NAWC (Navel, Air, Warfare Center)      |  | U.S.

For the fiscal years ended May 31, 2008 and 2007, NASSCO represented approximately 41% and
52%, respectively, of TMs sales, which represented 4% and 6%, respectively, of our total sales.

Raw Materials

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

Market
Channels

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

Dependence on Patents Licenses, Contracts and Processes

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

Material Effects of Government Regulations

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



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

U.S. and international military program sales, follow-on procurement, contract continuance, and future program
awards, upgrades and spares support are subject to: U.S. and international military budget constraints and determinations; U.S. congressional and international legislative body discretion; U.S. and international government administration policies
and priorities; changing world military threats, strategies and missions; competition from foreign manufacturers of platforms and equipment; NATO country determinations regarding participation in common programs; changes in U.S. and international
government procurement timing, strategies and practices; and the general state of world military readiness and deployment.

Backlog of
Orders

TM Systems backlog as of May 31, 2008 was $2,290,602. TM Systems backlog as of May 31, 2007 was
$3,371,158.

Keytronics, Inc.Operations, Activities and Products

The primary industries served include the military, aerospace electronics, telecommunications equipment, computers and computer peripherals, process control equipment, power supplies, test equipment, medical devices
and similar products use these products.

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

Keytronics also manufactures electronic equipment, including power supplies, battery chargers, power converters, hot blade rope cutters and a wide variety
of special purpose electronic assemblies including capacitor modules and medical electronics.

Principal Markets in which the Keytronics
Inc. Competes

Keytronics customers are located primarily in the US, however, it sells a limited amount of products to customers
in a number of other countries.

The geographical breakdown of revenues for Keytronics (where the customers are located) for the years
ended May 31, 2008 and May 31, 2007 is as follows (000s):



|              |  |             |           |              |      |   |             |   |              |  |     |  
|------------- |  | ----------- | --------- | ------------ | ---- | - | ----------- | - | ------------ |  | --- | -
|              |  | 2008Revenue |           | % ofRevenues |      |   | 2007Revenue |   | % ofRevenues | 
|United States |  | $           | 1,660,155 |              | 96.4 | % |             | $ | 1,688,113    |  | 100 | %
|Other         |  |             | 61,998    |              | 3.6  | % |             |   |             |  | 0.0 | %
|              |  |             |           |              |      |   |             |   |              |  |     |  
|Total         |  | $           | 1,722,153 |              | 100  | % |             | $ | 1,688,113    |  | 100 | %



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Major Customers



|                 |  |     
|---------------- |  | ----
|BAE Systems      |  | U.S.
|DFAS Columbus    |  | U.S.
|Lockheed Martin  |  | U.S.
|Raytheon         |  | U.S.
|Ametek Aerospace |  | U.S.

For fiscal years May 31, 2008 and 2007, the volume of business provided to Keytronics by
these customers equals about 74% and 60%, respectively of total sales, which represented 2.4% and 2.7%, respectively, of our consolidated sales. BAE Systems represents approximately 44% of Keytronics total sales.

Raw Materials

The primary raw
materials required by Keytronics business consist of cores, bobbins, wire, lamination, tapes (polyamide, polyfilm, masking, copper, glasscloth, antistatic), epoxy, solder tips, varnish, metal plates, PVC insulation, diodes, and circuit boards.
Keytronics purchasing policies require it to find alternate sources for materials; however, some materials have a single source supplier due to customer specifications or unique construction requirements. Most of Keytronics raw material
suppliers are located in the US. These materials are readily available.

Marketing Channels

Keytronics marketing channels consist primarily of the use of an in-house sales manager whose principal focus is in the US market. Keytronics does
not use any special sales methods such as installment sales.

Dependence on Patents, Licenses, Contracts and Processes

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

Material Effects of Government
Regulations

Government regulations of the United States and the State of New York related to environmental compliance, labor
conditions, and government contracting are typical in Keytronics industry and do not have a material effect on Keytronics business.

Backlog of Orders

Keytronics backlog as of May 31, 2008 was $865,500. Keytronics backlog as of
May 31, 2007 was $542,049.

API NRCOperations, Activities and Products

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



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API NRC operates a 37,000 square foot facility in Somerset, NJ that includes 20,000 square feet of clean
room space, with state of the art processing, test and packaging equipment.

Principal Markets in which API NRC Competes

API NRC customers are located worldwide although it is expected that its primary market will be in the U.S.

Dependence on Patents, Licenses, Contracts and Processes

API NRC holds 15 patents which it currently uses in its products. Such products accounted for $0 revenues for fiscal 2008. API NRC expects that the patents will provide potential licensing agreements with third
parties in the future. At this point, the Companys patents do not contribute significantly to our revenues. These patents were placed into service in the first quarter of fiscal 2009.

Products and Services

API NRC is
capable of producing a wide variety of standard and custom optical components including UV, visible and IR polarizers, IR cut filters, polarizing beam splitters/combiners, optical isolators, waveplates, retarders, trim retarders, lens arrays, WDM
filters and polarizing plastic film. API NRCs products have been successfully used in applications for optical communication, digital imaging, optical storage, projection display, medical imaging, micro fluidics, military, security and
aerospace display. In addition, API NRC offers water processing services for semiconductor and MEMS applications, including conformal coatings by atomic layer deposition, dicing, packaging laser trimming and implantation.

New Developments

API NRC introduced
a low edge shift IR Cut Filter for high performance digital applications during fiscal 2008. API NRCs cut filters are fabricated with a conformal coating atomic layer deposition (ALD) process which produces a higher quality filter with better
thickness uniformity than conventional techniques and reduces edge shift without sacrificing transmission and rejection performance. API NRCs filters are currently used in medical, security, military and consumer imaging applications.

API NRC introduced a new line of proprietary UV polarizers based on a patented nanofabricated grating design. The polarizers can be
optimized for use at a custom wavelengths. These products are targeted for UV photolithography and display application markets.

Marketing Channels

API NRC marketing consists primarily of the use of an in-house sales manager whose principal focus is in
the U.S. market. API NRC expects to expand its internal sales team during the 2009 fiscal year.



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Revenue Breakdown

Set forth below is a breakdown of the Companys revenues by business and by geographical market (where the customer is located) for the fiscal years ended May 31, 2008 and May 31, 2007.

Revenues by Category of Activity:



|                                 |  |      |            |      |   |           
|-------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                 |  | 2008 |            | 2007
|National Hybrid Group Activities |  | $    | 10,982,613 |      | $ | 4,302,591 
|API Electronics Activities       |  |      | 4,330,521  |      |   | 4,287,832 
|Filtran Group Activities         |  |      | 11,153,966 |      |   | 7,764,595 
|TM Systems Activities            |  |      | 2,650,087  |      |   | 2,488,879 
|Keytronics Activities            |  |      | 1,722,153  |      |   | 1,688,113 
|API NRC Activities               |  |      | 122,706    |      |   |          
|                                 |  |      |            |      |   |           
|Total Revenues                   |  | $    | 30,962,046 |      | $ | 20,532,010
|                                 |  |      |            |      |   |           
|                                 |  |     
|Revenues by Geographic Market:   |  |      |            |      |   |           
|                                 |  |     
|United States                    |  | $    | 25,031,882 |      | $ | 17,425,819
|Canada                           |  |      | 1,649,745  |      |   | 911,988   
|United Kingdom                   |  |      | 2,289,133  |      |   | 1,386,113 
|All Other                        |  |      | 1,991,286  |      |   | 808,090   
|                                 |  |      |            |      |   |           
|Total Revenues                   |  | $    | 30,962,046 |      | $ | 20,532,010
|                                 |  |      |            |      |   |           

Research and Development, Patents and Licenses

During the fiscal year ended May 31, 2008, the Company spent $3,453,860 (2007-$316,099) on research and development, of which $1,152,639 was spent by
the National Hybrid Group, and $2,300,842 was spent by API NRC.

In the Companys Executive Employment Agreement with
Dr. Moskovits, the Company has obligated itself to annually approve an annual research budget sufficient for Dr. Moskovits to carry out his responsibilities of staffing and managing the engineering team of the Company.

Competition

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

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

Some of the Companys current major competitors include Microsemi Corporation (NASDAQ: MSCC), Semtech
Corp. (NASDAQ: SMTC), International Rectifier Corp. (NYSE: IRF), Knox Semiconductor, Aeroflex Incorporated, and Skyworks Solutions. The Filtran Group and Keytronics have numerous and similar competitors. Some of Filtran Groups current major
competitors include Pulse Engineering, a division of



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Technitrol (NYSE:TNL), Midcom Inc., Bel Fuse, Inc. (NASDAQ:BELFA and NASDAQ:BELFB), ATC Frost Magnetics, Inc. and Halo Electronics. TM Systems also has
various competitors, including EMW, Leatherwood and S&W. The major competitors of National Hybrid Group include Data Device Corporation, Aeroflex Incorporated (NASDAQ:ARXX), Holt Integrated Circuits, GE Fanuc Embedded Systems, SBS Technologies,
Inc. (NASDAQ:SBSE) and Excalibur Systems. We or any of our subsidiaries may not be able to compete successfully in the future and competitive pressures may harm our financial condition and/or operating results.

Costs and Effects of Compliance with Environmental Laws

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

Employees

As
of May 31, 2008, the Company had approximately 336 full-time and part-time employees. None of our employees are subject to a collective bargaining agreement.

Executive Officers

The following table sets forth as of August 10, 2008, the name, age, and position of each of
our executive officers. The terms of all officers expire at the next annual meeting of the board of directors and upon the election of the successors of such officers.



|                     |  |     |  |                                                 |  |              
|-------------------- |  | --- |  | ----------------------------------------------- |  | -------------
|Name                 |  | Age |  | Position Held                                   |  | TermCommenced
|Phillip DeZwirek     |  | 70  |  | Chairman, Treasurer, and Director               |  | 2006         
|Stephen Pudles       |  | 49  |  | Chief Executive Officer                         |  | 2008         
|Thomas W. Mills      |  | 63  |  | President, Chief Operating Officer and Director |  | 2006         
|Claudio Mannarino    |  | 38  |  | Chief Financial Officer                         |  | 2006         
|Dr. Martin Moskovits |  | 65  |  | Chief Technology Officer                        |  | 2007         

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

Stephen Pudles

Mr. Pudles, age
49, became Chief Executive Officer on April 27, 2008. He brings more than 25 years of electronics industry experience to API Nanotronics. Most recently he served as President and CEO of Nu Visions Manufacturing and Executive VP of OnCore
Manufacturing. Previously, he has held senior management positions with Tanon Manufacturing, Electronic Associates, IEC and Restor Industries. He has been a member of IPCs Electronics Manufacturing Services Industry (EMSI) Council since 1988;
was an original member of the Assembly Market Research Council (AMRC) Steering Committee; and was the Chairman of the IPC Taskgroup that created the IPC-D-326 document defining the Documentation Requirements for Printed Circuit Board
Assemblies. He also serves as Secretary/Treasurer of the IPC and is chairman of the EMSI Management Council. Steve has a Masters of Science in management and a Bachelor of Engineering from Stevens Institute of Technology in Hoboken, New
Jersey.



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Phillip DeZwirek

Phillip DeZwirek, age 70, became a director of ours and our Chairman, Chief Executive Officer and Treasurer on the effective date of the Business Combination, November 6, 2006. Mr. DeZwirek has held the
positions of Chairman and Treasurer at API since May 2002 and held the position of Chief Executive Officer from May 2002 until Mr. Pudles assumed that position in April 2008. He also assumed the same positions with Nanotronics Sub and became a
director of Nanotronics Sub on the effective date of the Business Combination. Mr. DeZwirek has been a director of API since September 2001. From September 2001 until November 2001, Mr. DeZwirek was the Chief Executive Officer and
Treasurer of API. From November 2001 until May 2002, Mr. DeZwirek was the Vice-Chairman and Treasurer of API. Phillip DeZwirek was also the Chief Financial Officer of API from August 2001 until Claudio Mannarino assumed that position in 2004.
Phillip DeZwirek has been a director, Chairman of the Board and the Chief Executive Officer of CECO Environmental Corp. (CECO) since August 1979 (NASDAQ-CECE). Mr. DeZwireks principal occupations during the past five years
have been serving as Chairman of the Board and Chief Executive Officer of CECO; and serving as President of Can-Med Technology, Inc. d/b/a Green Diamond Oil Corp. (since 1990). Mr. DeZwirek has also been involved in private investment
activities for the past five years. Mr. DeZwirek is deemed to control Green Diamond.

Thomas W. Mills

Thomas W. Mills, age 63, became a director of ours and our President and Chief Operating Officer on the effective date of the Business Combination,
November 6, 2006. He has held those positions with API since August 31, 2001. Thomas W. Mills is also President and Chief Operating Officer of our wholly-owned subsidiaries, API Electronics, Inc., Nanotronics Sub, TM Systems II and
Keytronics. He also became the President of our National Hybrid subsidiary upon its acquisition in January 2007 and the Vice President and Secretary of API Nanofabrication and Research Corp. on July 17, 2007 when that subsidiary acquired the assets
of NanoOpto Corporation. He has worked within the electronics industry since 1967 and has specialized in semiconductors since 1969. His management career has spanned Production Control, Production/ Manufacturing, Quality Control/Assurance and
Program /Project Operation and Vice President of Operations. Mr. Mills, who has been with API Electronics, Inc. since 1981, holds an economics degree and has taken courses in Industrial Engineering. Mr. Mills has no other outside business
activities.

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

Claudio Mannarino, age 38, became our Chief Financial Officer and Vice President of Finance on the effective date of the Business Combination, November 6, 2006. He holds the same positions with Nanotronics Sub
and has had the same positions at API since 2004. Mr. Mannarino has over 10 years of professional accounting and finance experience. He holds a Bachelor of Commerce Degree from the University of Ottawa and is a Certified Management Accountant.

Mr. Mannarino 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.

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

Mr. Mannarino joined Filtran Group in April of 2000. From April 2000 to 2004, he was
controller and manager of human resources and IT at Filtran Group. He was named CFO and VP of Finance for API in 2004. His responsibilities include managing the financial reporting function for API, and the finance and IT departments of the Filtran
Group. Mr. Mannarino has also gained experience in business acquisitions specifically related to due diligence activities and has carried out several cost reduction initiatives at Filtran Group. Mr. Mannarino has no other outside business
activities.



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Dr. Martin Moskovits

Dr. Martin Moskovits, 65, has been our Chief Technology Officer since May 1, 2007 and the president of our API Nanofabrication and Research Corporation subsidiary since July 2007. For the five years prior to
his joining the Company, Dr. Moskovits was a professor of Physical Chemistry in the Chemistry and Biochemistry Department and Dean of the Division of Mathematical and Physical Sciences in the College of Letters and Sciences at the University of
California Santa Barbara. From March 15, 2006 until he was employed by the Company, Dr. Moskovits served as a nanotechnology consultant for us. Dr. Moskovits research expertise includes the area of nanoscience and nanotechnology with
special emphasis on nanosensors and is also known for developing porous anodic aluminum oxide as a template platform for nanotechnology. He serves as Vice Chair of the U.S. Department of Energy (DOE) Basic Energy Sciences Advisory
Committee and was a member of the DOE advisory committee on the establishment of the DOEs five nanocenters.



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

Additional Risk Factors to Consider:

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

Our Stock Market Price and Trading Volume May Be Volatile

The market for our common stock is
volatile. Our stock price subject to volatility in both price and volume arising from market expectations, announcements and press releases regarding our business, and changes in estimates and evaluations by securities analysts or other events or
factors.

Over the years, the securities markets in the United States have experienced a high level of price and volume volatility, and the
market price of securities of many companies, particularly small-capitalization companies like us, have experienced wide fluctuations which have not necessarily been related to the operations, performances, underlying asset values, or prospects of
such companies. For these reasons, our shares of common stock are subject to significant volatility resulting from purely market forces over which we will have no control. Further, the market for our common stock has been very thin. As a result, our
stockholders may be unable to sell significant quantities of common stock in the public trading markets without a significant reduction in the price of the stock.

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

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

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

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



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

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

We Do Not Expect to Pay Dividends

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

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

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

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

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

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

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

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

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



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

We Are Dependent on Key Personnel

We are dependent upon a small number of key personnel. Mr. Phillip DeZwirek was the Chairman of the Board of API prior to the Business Combination
and was instrumental in directing the growth of API. We are depending upon Mr. DeZwirek to continue to act in such capacity. Stephen Pudles, as our new Chief Executive Officer, is important to the Companys future strategy. Dr. Martin
Moskovits is our Chief Technology Officer and the President of our subsidiary, Nanofabrication and Research Corporation. Dr. Moskovits is leading our efforts in the nanotechnology field. The loss of the services of such personnel could have a
material adverse effect on our business. Our success will depend in large part on the efforts of these individuals. It is not currently proposed that there will be any long-term employment agreements or key-man insurance in respect of such key
personnel.

We May Require Additional Financing Which We May Not be Able to Obtain; Dilution

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

Nanotechnology Opportunities May Not Occur or May Not be Profitable

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

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

Failure to Maintain Adequate Internal Controls Could Adversely Affect Our Business

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



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

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

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

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 NASDAQ. In the future, we may file an
application to be quoted on the NASDAQ Capital Market 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, or recommended to the Board of Directors for determination, either by
(i) a majority of the independent directors, or (ii) a compensation committee comprised solely of independent directors, and the chief executive officer cannot be present during voting or deliberations. Compensation of our other executive
officers must be determined, or recommended to the Board of Directors either by (i) a majority of the independent directors, or (ii) a compensation committee comprised solely of independent directors. Director nominees must either be
selected, or recommended for selection by the Board of Directors either by (i) a majority of the independent directors, or (ii) a nominations committee comprised solely of independent directors. The nominations process must be set forth in
a formal written charter or a Board of Directors resolution.

In addition, the audit committee will have to be composed of at least
three (3) members, all of whom are independent as defined by the Exchange and under SEC Rule 10A-3(c), and who have not participated in the



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preparation of the financial statements of us or any subsidiary of us during the past three (3) years. One member of the audit committee must have
specified employment experience in finance or accounting. Accordingly, we would have to appoint three independent directors to serve on our audit committee and one of those audit committees members would need the required experience in finance and
accounting.

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

The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal liability. In
order to attract independent directors, we anticipate that we will need to purchase directors and officers insurance, which is costly. Consequently, our compliance with the rules necessary to have our stock listed on an Exchange could be quite
costly to us.

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

Because our success is highly dependent upon our employees, directors and consultants, we have and intend in the future to grant
to some or all of our key employees, directors and consultants options or warrants to purchase shares of our common stock as non-cash incentives. We have adopted a stock option plan for this purpose. To the extent that significant numbers of such
options may be exercised when the exercise price is below the then current market price for our common stock, the interests of the other stockholders of the company may be diluted. We have granted options to purchase over 52,602,750 shares of common
stock to directors, officers, employees and consultants.

We adopted SFAS No. 123R, Share-Based Payments
(SFAS 123R), on June 1, 2006. The impact on our financial statements of adopting SFAS 123R will depend on the level of stock-based payments we grant in the future and the value of the exercise price.

The Possibility of Goodwill Impairments Exist

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

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

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



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

The areas of the defense, semiconductor and electronic component industries in which we do
business are highly competitive. We expect intensified competition from existing competitors and new entrants. Competition is based on price, product performance, product availability, quality, reliability and customer service. Even in strong
markets, pricing pressures may emerge. For instance, competitors may attempt to gain a greater market share by lowering prices. The market for commercial products is characterized by declining selling prices. We anticipate that average selling
prices for our products will continue to decrease in future periods, although the timing and amount of these decreases cannot be predicted with any certainty. We compete in various markets with companies of various sizes, many of which are larger
and have greater financial and other resources than we have, and thus may be better able to pursue acquisition candidates and to withstand adverse economic or market conditions. In addition, companies not currently in direct competition with us may
introduce competing products in the future. We or any of our subsidiaries may not be able to compete successfully in the future and competitive pressures may harm our financial condition and/or operating results.

We Are Highly Reliant on Defense Spending

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

Our contracts with prime US Government contractors contain customary provisions permitting termination at any time, at the convenience of the US
Government or the prime contractors upon payment to us for costs incurred plus a reasonable profit. If we experience significant reductions or delays in procurements of our products by the US Government, or terminations of government contracts or
subcontracts, our operating results could be materially and adversely affected.

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

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

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

The industries in which we operate are dynamic and constantly evolving. We cannot assure that we will successfully identify new product opportunities
and develop and bring products to market in a timely and cost-effective manner, or those products or technologies developed by others will not render our products or technologies obsolete or noncompetitive. We may not be able to accomplish these
goals.



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



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



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



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



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



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



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

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

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

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

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

We provide a one-year product defect warranty from the date of sale. Historically, warranty costs have been nominal and have been
within managements expectations. The Company has accrued $108,238 and $128,238 in warranty liability as of May 31, 2008 and 2007, respectively.

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

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

Patents of third parties may have an important bearing on our ability to offer certain of our products.
Our major competitors as well as other companies and individuals may obtain and may have obtained patents related to the types of products we offer or plan to offer. We cannot assure you that we are or will be aware of all patents containing claims
that may pose a risk of infringement by our products and services. In addition, some patent applications in the United States are confidential until a patent is issued and, therefore, we cannot evaluate the extent to which technology concerning our
products and services may be covered or asserted to be covered by claims contained in pending patent applications. In general, if one or more of our products were found by a court



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to infringe patents held by others, we may be required to stop developing or marketing the products or services, to obtain licenses to develop and market the
services from the holders of the patents or to redesign the products or services in such a way as to avoid infringing those patents. An adverse ruling arising out of any intellectual property dispute could also subject us to significant liability
for damages.

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

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

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

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

Variability of Our Manufacturing Yields May Affect Our Gross Margins

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

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



| |  |  | defects in masks, which are used to transfer circuit patterns onto our wafers;
| | - |  | ------------------------------------------------------------------------------



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



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



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

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



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



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



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



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

The difficulties that may be experienced in this process include:



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



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



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



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

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

Our Inventories May Become Obsolete

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

The Company recorded an inventory reserve for obsolete and slow moving inventory for $2,819,263 and $0 for the
years ended May 31, 2008 and 2007, respectively.

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

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

Certain of Our Business Units Are Reliant One Key Customer

The Filtran Group and TM are each highly
reliant on a single key customer. For Filtran, Harris Corporation accounted for 46%, and 48% respectively, of divisional sales, which translated to 17%, and 18% respectively of the Companys total annual sales for the fiscal years ended
May 31, 2008, and 2007. For TM Systems II, NASSCO accounted for 41%, and 52%, respectively, of divisional sales, which translated into 4%, and 7% respectively of the Companys total annual sales for the fiscal years ended May 31,
2008, and 2007. If either customer should decide to purchase components from other suppliers, it could have an adverse impact on the applicable division and our revenues and net income.



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Environmental Liabilities Could Adversely Impact Our Financial Position

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

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

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

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

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

We completed the Business Combination in November, 2006. Prior to the Business Combination, API had recently expanded its
operations through strategic acquisitions, specifically, the TM Systems acquisition and the Keytronics Inc. acquisition. After the Business Combination, we acquired National Hybrid, Inc. and Pace Technologies, Inc. and the assets of NanoOpto
Corporation. We expect to continue to expand and diversify our operations with additional acquisitions. Risks are involved with this process. Some of the risks that may continue to affect our ability to integrate acquired companies include those
associated with:



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



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



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



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



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



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



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



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

For certain acquisitions, we have raised the capital required to make such acquisitions from
the sale of stock, warrants and options, 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.



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

Our executive offices
are located in leased facilities at 2300 Yonge Street, Suite 1710, Toronto, Ontario, Canada M4P 1X3. We occupy approximately 2,500 square feet at such facilities. We lease these facilities from an entity controlled by our Chairman of the Board for
an annual rental of $192,000.

We have eight manufacturing facilities located in Endicott, NY, Hauppauge, NY, Ottawa, ON, Ogdensburg, NY,
Largo, FL, Ronkonkoma, NY, Islip, NY and Somerset, NJ, where operations are under development.

API Electronics owns outright, without any
major encumbrances, a 15,000 square foot manufacturing facility in Hauppauge, New York. The productive capacity of this manufacturing facility is sufficient to meet its present needs and its needs in the foreseeable future. All of API
Electronics products are produced at this manufacturing facility, which is located at 375 Rabro Drive, Hauppauge, New York 11788.

The offices for Filtran Limited are located in Ottawa, Ontario. Filtran Limited owns the facility and there are no outstanding mortgages on the property. The facility is approximately 16,000 square feet and it is used to manufacture
electronic components comprised primarily of: transformers, filters, inductors and power supplies.

The offices for Filtran Inc. is located
in Ogdensburg, NY. Filtran Inc. The facility is approximately 16,500 square feet and it is used to manufacture electronic components comprised primarily of: transformers, filters and inductors.

TM Systems, Inc. uses the facilities of API Electronics in Hauppauge, New York and of Keytronics in Endicott, New York for its manufacturing operations.

Keytronics owns an approximately 10,500 square foot manufacturing facility in Endicott, NY. In addition, Keytronics leases another 15,000
square feet of adjoining space in Endicott, NY. The annual rent for this facility is $60,764. The leased facility is primarily used to design and manufacture electronic components.

National Hybrid Group leases a 20,000 square feet joint executive office and manufacturing facility in Ronkonkoma, NY, a 20,000 square foot warehouse and
manufacturing facility in Islip, NY and a 13,500 square foot manufacturing and testing facility in Largo, FL. The Ronkonkoma and Islip facilities are leased for annual rent of $132,000 and $50,000 respectively. National Hybrid, Inc. has the option
to buy these facilities at the end of these leases. The annual rent for facility in Largo, FL is $94,644.

API Nanofabrication and Research
Corporation (API NRC) leases a 35,800 square foot facility in Somerset, New Jersey. This space will be used for offices, warehousing and laboratory use, including a clean room for nanofabrication and research. The base rent is $268,000
for the first year with our subsidiary also being responsible for a share of expenses. The Company has guaranteed this lease.



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The Company has commenced consolidating certain of its operations. At the end of the consolidation
process, the Company expects to operate in three primary manufacturing facilities, down from eight. The Company believes that this consolidation will result in reduced overhead expenses and greater overall efficiencies and profitability. Additional
information can be found under the Subsequent Events footnote to the Consolidated Financial Statements.



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

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



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

There were no meetings of shareholders and no matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended May 31, 2008.



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PART II



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

Our common stock (the stock of Rubincon Ventures Inc.) qualified for quotation in the OTCBB under the symbol RBCV in November 2005. Effective
November 7, 2006, with our change of name, we changed our symbol and our common stock began trading under the symbol APIO. The OTCBB is operated by NASDAQ. Prior to November 2005 there was no established trading market for our common stock.
There was one trade of our common stock in November 2005 at a price of $1.20. There were no other trades until March 7, 2006. None of the shares of our subsidiaries are publicly traded.

The following table sets forth the reported high and low bid prices of our common shares for each quarter as reported by the OTC Bulletin Board for the
fiscal periods indicated (the common stock commenced trading on the OTCBB in November 2005 but only one trade was reported from November 2005 until March 7, 2006). 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.

In
November 2007, we effected a 5-for-1 stock split. The bid prices set forth below have been adjusted to give retroactive effect to the stock split.



|                          |  |                 |      |     |   |     
|------------------------- |  | --------------- | ---- | --- | - | ----
|                          |  | STOCK BID PRICE
|                          |  | High            |      | Low
|Fiscal 2008               |  |                 |      |     |   |     
|Fourth Quarter (5/31/08)  |  | $               | 0.13 |     | $ | 0.09
|Third Quarter (2/29/08)   |  | $               | 0.20 |     | $ | 0.12
|Second Quarter (11/30/07) |  | $               | 0.26 |     | $ | 0.18
|First Quarter (8/31/07)   |  | $               | 0.54 |     | $ | 0.17
|                          |  |                
|Fiscal 2007               |  |                 |      |     |   |     
|Fourth Quarter (5/31/07)  |  | $               | 0.93 |     | $ | 0.50
|Third Quarter (2/28/07)   |  | $               | 0.63 |     | $ | 0.40
|Second Quarter (11/30/06) |  | $               | 0.55 |     | $ | 0.37
|First Quarter (8/31/06)   |  | $               | 0.57 |     | $ | 0.47

Registered Holders of our Common Stock

As of August 18, 2008 we had approximately 100 stockholders of record, although there is a large number of beneficial owners.

Dividends

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

Recent Sales Of Unregistered Securities

All unregistered sales of our equity securities made during the year ended May 31, 2008 have been reported by us in our Quarterly Reports or in our Current Reports filed with the SEC during the year.



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

Business Overview of API Nanotronics Corp.

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

Core products produced by the Company include: high-performance microcircuits for such as 1553 data bus
products, solid state power controllers, opto-couplers, high-density multi-chip modules and custom hybrid-microcircuit filters and transformers; naval aircraft landing and launching equipment; and next generation product introductions based on
nanotechnology and micro-electromechanical (MEMS) systems.

In addition to providing niche specialty products that major semiconductor
manufacturers no longer produce or do not plan on producing in the future, the Company possesses a broad range of instruments essential in nanofabrication and materials synthesis and fabrication. The Company seeks to extend its existing
customer relationships by offering state-of-the-art nanotechnology products and services.

Overview

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



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



| |  |  | API Electronics, Inc. of Hauppauge, New York is a leading designer and manufacturer of power transistors, small signal transistors, tuning diodes, hybrid circuits,
resistor/capacitor networks, diodes, and other critical elements with precisely defined functional capabilities for advanced military, industrial, commercial, automotive and medical applications. API Electronics is a leading supplier of defense
electronic components to the U.S. Department of Defense and its subcontractors as well as having a strong commercial user base. In March, 2004, API Electronics purchased certain assets of Islip Transformer & Metal Co. Inc., a private
company that supplies critical systems and components to the U.S. Department of Defense. In August 2005, API Electronics purchased certain assets of Sensonics, Inc. a private company that supplies components to the U.S. Department of Defense. These
acquisitions further augmented the Companys capacity to produce in-demand components and systems for both government and corporate clients.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Filtran Group (Filtran Group) comprised of Filtran Inc. of Ogdensburg, New York and Filtran Limited of Nepean, Ontario, Canada, is a leading global
supplier of superior quality electronic components to major producers of communications equipment, military hardware, computer peripherals, process control equipment and instrumentation. In business since 1969, Filtran Group is ISO 9001:2000
registered and offers off-the-shelf and custom designed products and regularly ships components to clients in more than 34 countries. The Company acquired Filtran Group in May 2002. The acquisition broadened the Companys product offerings for
current and potential customers as well as providing synergies in the areas of engineering and technological capabilities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | TM Systems II Inc. of Hauppauge, New York (TM Systems), in business for over 30 years, supplies the defense sector with naval landing and launching
equipment, flight control and signaling systems,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | radar systems alteration, data communication and test equipment as well as aircraft ground support equipment. The Company acquired TM Systems in February
2003, thereby expanding the Companys core-military and defense-related electronics business.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Effective July 19, 2007, the Company acquired substantially all the assets of NanoOpto Corporation. NanoOpto possesses a broad range of instruments essential
in nanofabrication and materials synthesis and fabrication. The facility located in Somerset, New Jersey leased in connection with this acquisition will be the used to facilitate next generation product introductions based on nanotechnology and
micro-electromechanical (MEMS) systems.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Reorganization

On May 8, 2006 Rubincon Ventures Inc. as the Company was formerly known (Rubincon), entered into a combination agreement contemplating a
Plan of Arrangement with API Electronics Group Corp. (API). Rubincon is a Delaware corporation and API is an Ontario corporation. Rubincon formed an Ontario subsidiary, RVI Sub, Inc. now known as API Nanotronics Sub, Inc., to facilitate
the Plan of Arrangement. On November 6, 2006 Rubincon and API completed the transaction contemplated by the Plan of Arrangement. The combined companies now operate under the name API Nanotronics Corp..

Pursuant to the Canadian court approved Plan of Arrangement API Nanotronics Sub, Inc. became the sole shareholder of API, and each holder of the
2,825,406 outstanding API common shares was granted the right to receive for each API common share, 10 shares of API Nanotronics common stock, or if a Canadian shareholder elects, 10 API Nanotronics Sub, Inc. exchangeable shares. Each API
Nanotronics Sub, Inc. exchangeable share is exchangeable into one share of API Nanotronics common stock at the option of the holder. The API Nanotronics Sub, Inc. exchangeable shares may be converted into API Nanotronics common stock at the option
of API Nanotronics ten years from the date of the combination of Rubincon and API or sooner under certain circumstances. In addition, pursuant to the Plan of Arrangement, outstanding options of API were converted into options of API Nanotronics
adjusted to reflect the aforementioned ten-for-one exchange ratio.

For accounting purposes the acquisition of API by Rubincon was
considered a reverse acquisition, an acquisition transaction where the acquired company, API, is considered the acquirer for accounting purposes, notwithstanding the form of the transaction. The primary reason the transaction was treated as a
recapitalization by API rather than a purchase of API by Rubincon was because Rubincon was a shell company. As reported in its Form 10-QSB for the quarter ended October 31, 2006, (the final quarterly filing requirement for Rubincon under its
prior year end of January 31, 2006), Rubincon had cash of approximately $4,200,000, other assets of approximately $117,000 and liabilities of approximately $187,000.

In conjunction with this reverse acquisition, Rubincon changed its year-end from January 31 to May 31, the year-end of API. Assets, liabilities and equity of the Company continue to be that of the operating
company, API, as adjusted for the cash, other assets and liabilities of Rubincon. No additional goodwill or intangible assets were recognized on completion of the transaction. The capital structure, including the number and type of shares issued,
appearing in the consolidated balance sheet reflects that of the legal parent, Rubincon, now known as API Nanotronics Corp., including the shares issued to affect the reverse acquisition for the period after the consummation of the Plan of
Arrangement and the capital structure of API modified by the 10-for-1 exchange ratio in the Plan of Arrangement for the period prior to the consummation of the Plan of Arrangement.

The Companys business strategy has been to strengthen its leadership position for its components through continued emphasis on technological
advances, operational efficiencies, cost reductions, competitiveness and acquisitions.



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The Companys objectives are to seek long-term stable growth for all of its operating segments (API
Electronics, Filtran Group, TM Systems, Keytronics and National Hybrid Group) through continuous capital investment, employing todays production methods and technologies and by demanding uncompromising quality control.

Trends in Our Industry and Business

National Hybrid
Groups core business of military electronics continues to grow along with the US and international defense budgets. The Mil-Std-1553 business has been strong and the trend is for continued growth as the service life of existing military
platforms such as the US A-10, B-52, F-15, F-16 and other legacy aircraft is extended. The addition of modern electronics to these aging aircraft has increased the need for National Hybrid Group products such as the new low cost plastic ball grid
array terminal that National Hybrid Group has just introduced. The refurbishment of US Army vehicles from the conflict in Iraq has resulted in additional business in the SSPC and Hybrid product lines. Spare parts required for this refurbishment
effort have resulted in new orders for programs such as the Bradley Fighting Vehicle and the M1A2 Tank. The Company will continue to invest in capital improvements at the National Hybrid Groups Ronkonkoma, NY to allow the Company to react more
quickly and efficiently to the increased demand.

API is optimistic about market growth from various U.S. Department of
Defense (DoD) agencies, including the US Army Communications and Electronics Command (CECOM) and the Tank Automotive Command (TACOM) as part of the continuing increases in U.S. DoD military budgetary spending. Additionally,
subcontract work continues with a major U.S. defense contractor, supplying radar threat indication subsystems utilized in many military helicopter programs. API has also continued to add to its
DoD Qualified Manufacturer List (QML) product line of MIL-PRF-19500 qualified power transistor semiconductors, which are utilized on many U.S Armed Forces legacy weapons programs. API has also recently begun shipments on a newly designed
programmable hybrid timing circuit used by many military and aerospace relay manufacturers. The new design will provide both a cost savings for the customer, and a more profitable build for API due to the improved
design, manufacturing efficiencies, and material costs.

Filtran Groups main market is military subcontractors with a
strong demand for filters, power supplies, transformers and inductors. Filtran Group is pursuing growth strategies with the hiring of additional sales persons in the United States and setting up a nationwide sales representative network. Filtran
Group has focused on increasing their power supply capabilities by hiring a power supply project manager and purchasing additional power supply equipment and software to aid in the design and development of state of the art power supplies for the
aerospace, satellite military and hirel commercial custom power supplies. Filtran Group has also developed a synergistic partnership with API Electronics targeting the military relay market.

TM Systems customer base consists primarily of various U.S. government departments, including the U.S. Navy, as well as numerous domestic and
foreign corporations. The U.S. government has approved significant funds for ongoing defense and homeland security. TM Systems believes that new domestic orders should increase as a result of this development. Furthermore, foreign country demand may
also increase in response to global terror concerns. TM Systems Stabilized Glide Slope Indicator (SGSI) is an electro-hydraulic-optical landing system and designed for use on air capable and amphibious assault ships. Increasing operational
readiness will require the Navy to be independent of land-based command centers. Furthermore, political conflicts have led to a reduction of land-bases available in certain foreign countries.

Keytronics continues to supply the major military OEMs and various Department of Defense agencies with products including a wide variety of
power transformers, reactors, magnetic amplifiers, power supplies and converters, and numerous special purpose electronic assemblies including capacitor modules and medical electronics.

The Company is pursuing market opportunities and growth for innovative products based on nanotechnology and MEMS. API NRC owns a number of proprietary
technologies which address urgent market



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

Operating Revenues

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

Semiconductor Revenues

The Company currently serves a broad group of customers with the following category of semiconductor
products: Varactor tuning diodes, specialty suppressor diodes for the relay market, 1553 data bus products, power controllers, custom microelectronic hybrid circuits, small-signal transistors, silicon rectifiers, zener diodes, high-voltage diodes,
and resistor/capacitor networks. These products facilitate the power supply in end products such as missiles, the space shuttle, F-15 and F-16 fighter planes and B-1 bombers.

Magnetic & Power Supply Revenues

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

Mission Critical System Revenues

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

Operating Expenses

Operating Expenses consist of business development, selling, general and administrative expenses.

Cost of Goods Sold

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



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



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



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



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



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Selling, general and administrative expense

Selling, general and administrative expenses include:



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



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



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



| |  |  | Rent and related expenses.
| | - |  | --------------------------

Other Income
(Expense)

Other income and (expense) consists of:



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



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



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



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

Backlog

Our management uses a number of data to measure the growth of the business. A key measure for growth are sales
backlog figures:



|                           |  |              |            |      |   |           
|-------------------------- |  | ------------ | ---------- | ---- | - | ----------
|                           |  | As of May 31
|                           |  | 2008         |            | 2007
|Backlog by Segment Company |  |              |            |      |   |           
|National Hybrid Group      |  | $            | 6,102,736  |      | $ | 5,333,271 
|API Electronics            |  |              | 2,230,352  |      |   | 2,150,180 
|Filtran Group              |  |              | 4,745,414  |      |   | 5,095,928 
|TM Systems                 |  |              | 2,290,602  |      |   | 3,371,158 
|Keytronics                 |  |              | 865,500    |      |   | 542,049   
|API NRC                    |  |              | 35,750     |      |   | N/A       
|                           |  |              |            |      |   |           
|Overall                    |  | $            | 16,270,354 |      | $ | 16,492,586
|                           |  |              |            |      |   |           

The Companys backlog figures represent confirmed customer purchase orders that the Company
has not shipped at the time the figures were calculated, which have a delivery date within a 12 month period. Filtran Groups backlog figures will also be affected by the US/Canadian exchange rate.

Asset Acquisition of API Nanofabrication

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

The acquisition of these assets offered the Company a unique and powerful material processing and fabrication capabilities. These capabilities from
silicon wafer processing to the latest electronic and optical fabrication technologies based in nanoscience and MEMS. These capabilities expand the Companys abilities to better serve its current customers and to develop new electronic
products. These capabilities also open possibilities for new business based on hybrid optics. These assets and facilities will also be the centerpiece of the Companys Research and Development program.



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##### Table of Contents

Acquisition of National Hybrid Group

On January 24, 2007, the Company acquired all of the common shares of the National Hybrid Group, which consists of National Hybrid, Inc. and Pace Technology, Inc. The National Hybrid Group is a developer and
manufacturer of 1553 data bus products, solid state power controllers, opto-controllers, high density multi-chip modules and custom hybrid micro-circuit for the military/aerospace market and the industrial process control market.

Results of Operations for the Years Ended May 31, 2008 and 2007

The following discussion of results of operations is a comparison of the Companys years ended May 31, 2008 and 2007.

Operating Revenue



|                      |  |                    |            |      |   |            |  |        |  
|--------------------- |  | ------------------ | ---------- | ---- | - | ---------- |  | ------ | -
|                      |  | Year ended May 31, |           
|                      |  | 2008               |            | 2007 |   | %Change    | 
|Sales by Subsidiary   |  |                    |            |      |   |            |  |        |  
|National Hybrid Group |  | $                  | 10,982,613 |      | $ | 4,302,591  |  | +155.3 | %
|API Electronics       |  |                    | 4,330,520  |      |   | 4,287,832  |  | +1.0   | %
|Filtran Group         |  |                    | 11,153,967 |      |   | 7,764,595  |  | +43.7  | %
|TM Systems            |  |                    | 2,650,087  |      |   | 2,488,879  |  | +6.5   | %
|Keytronics            |  |                    | 1,722,153  |      |   | 1,688,113  |  | +2.0   | %
|API NRC               |  |                    | 122,706    |      |   | N/A        |  | N/A    |  
|                      |  |                    |            |      |   |            |  |        |  
|                      |  | $                  | 30,962,046 |      | $ | 20,532,010 |  | +50.8  | %
|                      |  |                    |            |      |   |            |  |        |  

The Company recorded a 50.8% increase in sales for the year ended May 31, 2008 over the same
period in 2007 on continued strong demand of the Companys product offerings. This increase occurred throughout all operating divisions, led by the Filtran Group with a 43.7% increase in organic growth plus the inclusion of National Hybrid
Group operations for the twelve months.

National Hybrid Group revenues of $10,982,613 represent the first full twelve months of revenues
the Company has recorded since it was acquired on January 24, 2007. The revenues for the year ended May 31, 2007 reflects National Hybrid Groups sales from January 25, 2007 to May 31, 2007.

API Electronics sales revenues increased by 1.0% in the year ended May 31, 2008 over the same period in 2007. The increase is attributed primarily
to an increase in mission critical systems, primarily radar indicators and counter measure control electronics for US military helicopters.

Filtran Group sales revenue increased by approximately $3.4 million or 43.7% in the year ended May 31, 2008 over the corresponding period in 2007. The increase is primarily a result of increased demand from a key military subcontract
customer.

TM Systems recorded a 6.5% increase in revenues for the year ended May 31, 2008. The increase was attributed primarily to
an increase in revenue recognized on the US Navy Stabilized Glide Scope Indicators (SGSI).

Keytronics increased revenues by 2.0% for the
year ended May 31, 2008 compared to the year ended May 31, 2007.

API NRC started design and manufacturing operations after the
acquisition of all the assets of NoC on July 19, 2007. API NRCs initial focus will be in the design and manufacturing of the optical business as it tries to take advantage of the branding NoC did on its products and processes. The Company
has initially garnered



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significant interest from customers interested in API NRCs products. This interest translated into initial orders and shipments in the year ended
May 31, 2008. The orders mainly consisted of specialized optical filters to a leading global digital imaging component manufacturer. The Company expects to capitalize on these initial orders and interest in other products as API NRC continues
to develop its product line and manufacturing process.

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

Geographical Information



|               |  |                    |            |                                                   |   |            |  |                                                   |            |  |   |          
|-------------- |  | ------------------ | ---------- | ------------------------------------------------- | - | ---------- |  | ------------------------------------------------- | ---------- |  | - | ---------
|               |  | Year ended May 31,
|               |  | 2008               |            | 2007                                             
|               |  | Revenue            |            | Capital Assets,IntangibleAssets,Goodwill andOther |   | Revenue    |  | Capital Assets,IntangibleAssets,Goodwill andOther
|United States  |  | $                  | 25,031,882 |                                                   | $ | 10,517,078 |  | $                                                 | 17,425,819 |  | $ | 6,316,025
|Canada         |  |                    | 1,649,745  |                                                   |   | 2,257,788  |  |                                                   | 911,988    |  |   | 1,960,066
|United Kingdom |  |                    | 2,289,133  |                                                   |   |           |  |                                                   | 1,386,113  |  |   |         
|All Other      |  |                    | 1,991,286  |                                                   |   |           |  |                                                   | 808,090    |  |   |         
|               |  |                    |            |                                                   |   |            |  |                                                   |            |  |   |          
|               |  | $                  | 30,962,046 |                                                   | $ | 12,774,866 |  | $                                                 | 20,532,010 |  | $ | 8,276,091
|               |  |                    |            |                                                   |   |            |  |                                                   |            |  |   |          

The Company saw United States sales increase by 43.6% from $17,425,819 for the year ended
May 31, 2007 to $25,031,882 for the year ended May 31, 2008. The increase in United States sales is largely a result of the inclusion of National Hybrid Group for a full year and increased sales of approximately $1,900,000 by the Filtran
Group in the US market. Canadian sales increased by 80.9% from $911,988 for the year ended May 31, 2007 to $1,649,745 for the year ended May 31, 2008. UK sales increased by 65.1% from $1,386,113 for the year ended May 31, 2007 to
$2,289,133 for the year ended May 31, 2008.

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



|                                          |  |                   |   |  |      |  
|----------------------------------------- |  | ----------------- | - |  | ---- | -
|                                          |  | Year endedMay 31, |  
|                                          |  | 2008              |   |  | 2007 |  
|Revenue                                   |  |                   |   |  |      |  
|U.S. Department of Defense                |  | 9                 | % |  | 10   | %
|U.S. Department of Defense subcontractors |  | 70                | % |  | 67   | %

Operating Expenses

Cost of Revenue and Gross Profit



|                                |  |                   |   |  |      |   |  |         |  
|------------------------------- |  | ----------------- | - |  | ---- | - |  | ------- | -
|                                |  | Year endedMay 31, |  
|                                |  | 2008              |   |  | 2007 |   |  | %Change |  
|Gross Profit by Segment Company |  |                   |   |  |      |   |  |         |  
|National Hybrid Group           |  | 23.5              | % |  | 27.6 | % |  | -4.1    | %
|API Electronics                 |  | -0.1              | % |  | 30.5 | % |  | -30.6   | %
|Filtran Group                   |  | 16.9              | % |  | 16.7 | % |  | 0.2     | %
|TM Systems                      |  | 31.7              | % |  | 36.4 | % |  | 4.7     | %
|Keytronics                      |  | 3.7               | % |  | 12.9 | % |  | -9.2    | %
|API NRC                         |  | 58.2              | % |  | N/A  |   |  | N/A     |  
|Overall                         |  | 17.7              | % |  | 24.4 | % |  | -6.7    | %



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The Companys overall gross profit was 17.7% for the year ended May 31, 2008, a decrease from
the 24.4% gross profit for the year ended May 31, 2007. Accordingly, the overall cost of revenue was 82.3% for the year ended May 31, 2008 compared to 75.6% for the year ended May 31, 2007. This decrease was primarily attributed to
the Companys provision for obsolete and slow moving inventory, which reduced gross profit by $2,819,263 or 9% of sales for the year ended May 31, 2008 and $0 or 0% for the year ended May 31, 2007. While the Company intends to
evaluate the need for reserves on an annual basis in the future, and adjust the reserve accordingly, the Company believes that such adjustments in the near future will not be at the level that was required for fiscal year 2008.

Breakout of Reserve for Obsolete and Slow Moving Inventory



|                                                           |      |                    |   |      |     |  
|---------------------------------------------------------- | ---- | ------------------ | - | ---- | --- | -
|                                                           |      | Year ended May 31, |  
|                                                           | 2008 |                    |   | 2007 |    
|Component of Inventory Reserve Compared to Segment Company |      |                    |   |      |     |  
|National Hybrid Group                                      |      | 9.9                | % |      | 0.0 | %
|API Electronics                                            |      | 27.6               | % |      | 0.0 | %
|Filtran Group                                              |      | 3.4                | % |      | 0.0 | %
|TM Systems                                                 |      | 0.0                | % |      | 0.0 | %
|Keytronics                                                 |      | 9.2                | % |      | 0.0 | %
|API NRC                                                    |      | 0.0                | % |      | 0.0 | %
|Overall                                                    |      | 9.1                | % |      | 0.0 | %

This total reserve attributed to the Company adoption of a reserve for obsolete and slow moving
inventory represents 9% of sales or $2,819,263. While the Company intends to evaluate the need for reserves on an annual basis in the future, and adjust the reserve accordingly, the Company believes that such adjustments in the near future will not
be at the level that was required for fiscal year 2008.

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



|                                         |  |      |            |           |      |   |      |   |            |  |      |  
|---------------------------------------- |  | ---- | ---------- | --------- | ---- | - | ---- | - | ---------- |  | ---- | -
|                                         |  | 2008 |            | % ofsales |      |   | 2007 |   | % ofsales  | 
|Materials Used                           |  | $    | 8,231,512  |           | 26.6 | % |      | $ | 5,676,259  |  | 27.6 | %
|Inventory Reserve                        |  | $    | 2,819,263  |           | 9.1  | % |      |   | N/A        |  | N/A  |  
|Manufacturing Labor                      |  | $    | 5,276,923  |           | 17.0 | % |      | $ | 3,159,774  |  | 15.4 | %
|Manufacturing Overhead                   |  | $    | 9,160,876  |           | 29.6 | % |      | $ | 6,687,658  |  | 32.6 | %
|                                         |  |      |            |           |      |   |      |   |            |  |      |  
|Cost of Sales                            |  | $    | 25,488,574 |           | 82.3 | % |      | $ | 15,523,691 |  | 75.6 | %
|                                         |  |      |            |           |      |   |      |   |            |  |      |  
|Cost of Sales before Inventory Provision |  | $    | 22,669,311 |           | 73.2 | % |      | $ | 15,523,691 |  | 75.6 | %
|                                         |  |      |            |           |      |   |      |   |            |  |      |  

As a percentage of sales, for the year ended May 31, 2008 materials and manufacturing
overhead decreased by 1.0% and 3.0% respectively compared to the year ended May 31, 2007. This was offset by a 1.6% increase in manufacturing labor and the Companys newly adopted Provision for Obsolete and Slow Moving Inventory.

Selling Expenses

Selling expenses
increased to $2,412,618 for the year ended May 31, 2008 from $1,790,436 for the year ended May 31, 2007. As a percentage of sales, selling expenses were 7.8% for the year, a decrease of 0.9% from the 8.7% posted for the year ended
May 31, 2007.

The major components of selling expenses are as follows:



|                      |  |                    |         |           |     |   |      |   |           |  |     |  
|--------------------- |  | ------------------ | ------- | --------- | --- | - | ---- | - | --------- |  | --- | -
|                      |  | Year ended May 31, |        
|                      |  | 2008               |         | % ofsales |     |   | 2007 |   | % ofsales | 
|Payroll ExpenseSales |  | $                  | 810,501 |           | 2.6 | % |      | $ | 624,611   |  | 3.0 | %
|Commissions Expense   |  | $                  | 844,547 |           | 2.7 | % |      | $ | 620,998   |  | 3.0 | %



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The overall increase in selling expenses was attributed to payroll expenses related to the inclusion of
National Hybrid Group and API NRC expenses in fiscal 2008, while fiscal year 2007 only included National Hybrid Group from January 25, 2007 (date of acquisition) to May 31, 2007.

General and Administrative Expenses

General and
administrative expenses increased to $6,109,725 for the year ended May 31, 2008 from $4,559,644 for the year ended May 31, 2007. The increase is largely a result of the inclusion of the National Hybrid Group for twelve months, which
represents an increase of approximately $950,000 and $430,000 related to the opening of the MEMS facility in Somerset, NJ.

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



|                              |  |                    |           |      |   |           |  |   |          |  
|----------------------------- |  | ------------------ | --------- | ---- | - | --------- |  | - | -------- | -
|                              |  | Year ended May 31, |          
|                              |  | 2008               |           | 2007 |   | $ Change  | 
|Officer Salary                |  | $                  | 1,419,329 |      | $ | 1,228,645 |  | $ | 190,684  |  
|Professional Services         |  | $                  | 1,243,354 |      | $ | 617,204   |  | $ | 626,150  |  
|Accounting and Administration |  | $                  | 1,273,074 |      | $ | 1,228,645 |  | $ | 44,429   |  
|Depreciation and Amortization |  | $                  | 178,869   |      | $ | 299,644   |  | $ | (120,775 | )
|Consultants                   |  | $                  | 392,718   |      | $ | 302,123   |  | $ | 90,595   |  

Officer salaries expense increased to $1,419,329 for the year ended May 31, 2008 from
$1,228,645 for the twelve months ended May 31, 2007, an increase of $190,684.

Professional services include legal, accounting, audit
and taxation services increased for the year ended May 31, 2008 to $1,243,354 from $617,204 for the year ended May 31, 2007. The increase of $626,150 is largely due to legal fees associated with two Regulation S private placements and
professional fees associated with hiring of Stephen Pudles, CEO.

Accounting and administrative salaries increased marginally from
$1,228,645 for the year ended May 31, 2007 to $1,273,074, an increase of $44,429.

Depreciation and amortization decreased for the
year ended May 31, 2008 in the amount of $120,775 to $178,869 as a result of a non-compete asset being fully amortized during the year.

Consulting expenses increased to $392,718 for the year ended May 31, 2008 from $302,123 for the year ended May 31, 2007 due to the continued implementation of internal controls to comply with Section 404 of the Sarbanes-Oxley
Act.

Research and Development Expenses

Research and development increased to $3,453,860 for the year ended May 31, 2008 from $316,099 for the year ended May 31, 2007. The increase is centered around the new operations, API NRC, whose Somerset, NJ facility provides the
Company with unique and powerful material processing and fabrication capabilities. These capabilities span from silicon wafer processing to the very latest electronic and optical fabrication technologies based in nanoscience and MEMS. We believe
these capabilities will expand the Companys abilities to better serve its current customers and to develop new electronic products and will open possibilities for new business based on hybrid optics. This facility will also be the centerpiece
of the Companys research and development program.

Research and development expenses also increased due to National Hybrid
Groups continued focus on research and development to design and produce next generation products for their entire product line including but not limited to the 1553 data bus, solid state power controller and high density multi-chip modules.



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The Company expects to increase research and development investment on a going forward basis in
anticipation that it will deliver next generation products using research conducted at the API NRC facility, impacting the wide range of current products the Company sells and generating new product possibilities.

Operating Income (Loss)

The Company posted an
operating loss for the year ended May 31, 2008 of $6,502,731 compared to a loss of $1,657,860 for the year ended May 31, 2007. The decrease in operating income is attributed to a significant increase in research and development expenses of
$3,453,860 in fiscal 2008 compared to $316,099 in 2007 and to the provision for obsolete and slow moving inventory in the amount of $2,819,263 in fiscal 2008 compared to $0 in 2007. The increased focus on research and development is central to the
Companys new strategic vision of incorporating next generation nanotechnology based technology into the design and manufacturing of existing and future product lines in the new state of the art facility in Somerset, New Jersey under the
oversight of top nanotechnology scientist and engineers.

Other (Income) And Expense

Total other expenses for the year ended May 31, 2008 amounted to $279,011 compared to other income of $252,131 for the twelve months ended
May 31, 2007.

The increase is largely attributable to interest paid on the related party note payable of $4,000,000, funds used to
acquire the assets of API NRC. Total interest expense related to the note was approximately $418,000 for the twelve months ended May 31, 2008, which was offset by interest income of approximately $75,000 compared to net interest income of
approximately $39,000 in 2007.

The Company also incurred foreign currency translation losses of $64,234 at May 31, 2008 versus a gain
of $146,850 in the twelve months ended May 31, 2007.

Income Taxes

The Company and its subsidiaries have non-capital losses of approximately $138,492 to apply against future taxable income. These losses will expire as
follows: $14,000, $55,600 and $67,814 in 2010, 2012 and 2028, respectively.

Net Income (Loss)

The Company incurred a net loss for the twelve months ended May 31, 2008 of $6,566,110 compared to a net loss of $953,503 for the twelve months ended
May 31, 2007. The increase in net loss compared to the same period in 2008 is largely attributed to an increase in research and development investment of approximately $3,140,000 and the Companys significant reserve for obsolete and slow
moving inventory amounting to approximately $2,820,000.

Liquidity and Capital Resources

Year Ended May 31, 2008 compared to the Year Ended May 31, 2007

Liquidity

At May 31, 2008, the Company held cash of $2,667,109 compared to $3,277,468 at May 31, 2007.

At May 31, 2008 the Companys working capital was sufficient to meet the Companys current requirements.



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Inventory decreased 27.1% from $10,360,869 at May 31, 2007 to $7,353,596 at May 31, 2008. This
decrease was largely due to the inclusion of the Companys reserve for obsolete and slow moving inventory in the amount of approximately $2,820,000.

Accounts receivable increased 31.1% from $3,466,028 at May 31, 2007 to $4,544,860 at May 31, 2008 due largely to an increase of 50.8% in revenues. Accounts payable increased by $148,462 to $3,867,449 at
May 31, 2008 from $3,178,987 at May 31, 2007 largely to support the increased revenues and the inclusion of API NRC operations during the twelve months ended May 31, 2008.

Long-term debt (current and long-term portion) decreased from $471,908 at May 31, 2007 to $113,851 at May 31, 2008. The decrease is a result of
payment of a $200,000 promissory payable due to the acquisition of Keytronics Inc., in April 2006, the paying off a bank loan of approximately $100,000 and a reduction in a promissory note related to the acquisition of Sensonics Inc. in August 2005.

Total assets increased to $29,519,296 at May 31, 2008 from $27,346,760 at May 31, 2007. The increase resulted primarily from the
acquisition of assets required to start the API NRC MEMS facility in Somerset, NJ.

Operating, Investing and Financing Activities

Cash used by operating activities was $1,481,367 for the twelve months ended May 31, 2008 compared to net cash provided by operations of $639,957 for
the twelve months ended May 31, 2007, a decrease of approximately $2,100,000. The change is a result of the Companys increased focus on research and development, which increased by approximately $3,140,000.

Investing activities for the twelve months ended May 31, 2008 consisted of the purchase of fixed assets and patents of $1,761,005
(2007$512,088), and the use of cash of $4,045,671 for the acquisition of all the assets of NoC (2007$0) net of proceeds from an insurance policy of $134,164.

Financing activities included net proceeds of $7,750,000 (2007-$7,923,000) from the issuance of common shares. These amounts are offset by repayments of
long term debt $357,564 (2007$6,073,395), repayment of bank indebtedness of $337,762 compared to a net advance of $122,762 and repayment of capital lease obligations of $8,164 (2007-$4,321).

Capital Resources

The Companys subsidiary API
Electronics has a working capital line of credit of $500,000. At May 31, 2008, API Electronics had borrowed $270,147 (May 31, 2007$395,147) against this line. The credit is secured by all of its assets pursuant to a general security
agreement and is guaranteed by Chief Operating Officer of the Company. The bank indebtedness is due on demand and bears interest at US prime plus 1%. The line is subject to annual renewal on April 14, 2009.

The Companys subsidiary Filtran Limited has a line of credit of approximately $1,000,000 (Cdn$1,000,000). At May 31, 2008, Filtran Limited had
borrowed $40,311 (May 31, 2007$158,375). The interest rate on any borrowed funds is charged at Canadian prime. The agreement also allows Filtran to lease capital purchases at Canadian prime plus 1% up to $33,000. The lender has a general
security agreement and a first collateral mortgage on Filtrans assets and building. The line is subject to annual renewal on May 31, 2009.

The Companys subsidiary Keytronics had a working capital line of credit for $125,000, during fiscal 2008, the Company paid down and closed the working line of credit (May 31, 2007$81,754).

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

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



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Summary of Critical Accounting Policies and Estimates

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

Principles of Consolidation

The consolidated
financial statements include the accounts of API Nanotronics, together with its wholly owned subsidiaries, API Electronics Group Corp., API Nanotronics Sub, API Electronics, TM Systems, the Filtran Group, Keytronics, the National Hybrid Group and
API Nanofabrication and Research Company. All significant inter-company transactions and balances are eliminated in consolidation.

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 such write-downs or write-offs are identified. The inventory valuation is based upon assumptions about future demand, product mix and possible alternative uses. Our
inventory balance at May 31, 2008 was $10,172,859, net of write-downs to a net realizable value of $7,353,596.

Long-Lived Assets

The Company periodically evaluates the net realizable values of long-lived assets, principally identifiable intangibles and capital assets, for potential
impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, as determined based on the estimated future undiscounted cash flows. If such assets were considered to be impaired, the
carrying value of the related assets would be reduced to their estimated fair value. Management has determined there is no impairment of long lived assets as of May 31, 2008 or May 31, 2007.

Goodwill and Intangible Assets

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

Goodwill is subject to an impairment test on at least an annual basis or upon the occurrence of certain events or circumstances. Goodwill impairment is assessed based on a comparison of the fair value of the reporting
unit to the underlying carrying value of the reporting units net assets, including goodwill. When the carrying amount of the reporting unit exceeds its fair value, the implied fair value of the reporting units goodwill is compared with
its carrying amount to measure the amount of impairment loss, if any. The entire balance of the Companys goodwill is contained in the Filtran reporting unit. Management has determined there is no impairment in goodwill as of May 31, 2008
and May 31, 2007.

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                              



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As of May 31, 2008, $962,300 of patents are included in intangible assets, which $731,621 were
acquired in conjunction with the acquisition of assets from NanoOpto Corp. The Company expects to put the patents to full use during the next fiscal year (Note 4).

Income Taxes

Income taxes are accounted for under Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Under this method, income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial reporting and tax bases of assets and liabilities and available loss carry
forwards. A valuation allowance is established to reduce tax assets if it is more likely than not that all or some portions of such deferred tax assets will not be realized.

Revenue Recognition

Contract Revenue

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

Non-Contract Revenue

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

Deferred Revenue

The Company defers revenue should payment
be received in advance of the service or product being shipped or delivered (See Contract Revenue and Non-Contract Revenue above).

Warranty

The Company provides up to a one-year product defect warranty on various products from the date of sale. Historically, warranty costs have been nominal
and have been within managements expectations. The Company has accrued $108,238, and $126,762 in warranty liability as of May 31, 2008 and 2007, respectively, which has been included in accounts payable and accrued expenses.

Stock-Based Compensation Plans

Effective June 1,
2006 the Company adopted SFAS 123R which revises SFAS 123 Accounting for Stock-Based Compensation (SFAS 123) and supersedes Accounting Principles Board Opinion 25 Accounting for Stock Issued to Employees. Under
APB 25, the Company used the intrinsic value method for employee stock options and did not record any expense because option exercise prices equaled the market value at the date of grant. SFAS 123R required that new, modified and
unvested share-based payment transactions with employees, such as grants of stock options and restricted stock, be recognized in the financial statements based on their fair value at the grant date and recognized as compensation expense over their
vesting periods. The Company has also considered the related guidance of the Security and Exchange Commission (SEC) included in Staff



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Accounting Bulletins (SAB) No. 107 and No. 110. The Company estimates the fair value of stock options as of the date of grant using the
Black-Scholes pricing model and restricted stock based on the quoted market price. The Company adopted SFAS 123R using the modified prospective method and, accordingly, prior period financial statements were not revised. The Company also follows the
guidance in EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services for equity instruments issued to consultants.

Foreign Currency Translation and Transactions

The
Companys functional currency is the United States dollars and the consolidated financial statements are stated in United States dollars, the reporting currency. Integrated operations have been translated from Canadian dollars into
United States dollars at the year-end exchange rate for monetary balance sheet items, the historical rate for shareholders equity, and the average exchange rate for the year for revenues, expenses, gains and losses. The gains or losses on
translation are included as a component of other comprehensive income (loss) for the period.

Accounting Estimates

The preparation of these consolidated financial statements in conformity with United States generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses
during the reporting periods. By their nature, these estimates are subject to uncertainty and the effect on the consolidated financial statements of changes in such estimates in future periods could be material.

Receivables and Credit Policies

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

Concentration of Credit Risk

The Company maintains cash balances, at times, with financial institutions, which are in excess of amounts insured by the Federal Deposit Insurance
Corporation (FDIC). Management monitors the soundness of these institutions and considers the Companys risk negligible.

The U.S.
Department of Defense (directly and through subcontractors) accounts for approximately 79 percent and 77 percent for 2008 and 2007, respectively, of the Companys revenue.

Earnings (Loss) per Common Share

Basic earnings (loss) per share of common stock is computed by dividing
income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share of common stock gives effect to all dilutive potential shares of common stock outstanding during the period. The
computation of diluted earnings (loss) per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings (loss) per share. (Note 19)



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Comprehensive Income (Loss)

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

Effects of Recent Accounting Pronouncements

In May 2008,
the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the Securities and Exchange Commissions approval of the
Public Company Accounting Oversight Board auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not expect SFAS 162 to have a material
effect on its consolidated financial statements.

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

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

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements. This Statement amends
ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in
the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial statements. SFAS No. 160
is effective for the Companys fiscal year beginning June 1, 2010. The Company is currently evaluating the impact of SFAS 160 on its consolidated financial statements.

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115, which will permit entities to choose to



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measure many financial instruments and certain other items at fair value. This Statement applies to all entities, including not-for-profit
organizations. Most of the provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to SFAS Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all
entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. This Statement is effective as of the beginning of an entitys first fiscal year that begins after
November 15, 2007. The Company does not expect that the adoption of SFAS No. 159 will have a significant impact on the consolidated results of operations or financial position of the Company. On February 12, 2008, the FASB delayed the
effective date for non-financial assets and liabilities to fiscal years beginning after November 15, 2008; however, the effective date for the financial assets remains intact.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to eliminate the diversity in practice that exists due to the
different definitions of fair value and the limited guidance for applying those definitions in GAAP that are dispersed among the many accounting pronouncements that require fair value measurements. This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities,
the application of this Statement will change current practice. SFAS 157 is effective in fiscal years beginning after November 15, 2007 and periods within those fiscal years. On February 12, 2008, the FASB delayed the effective date for
non-financial assets and liabilities to fiscal years beginning after November 15, 2008; however, the effective date for the financial assets remains intact. The Company does not expect the adoption of SFAS No. 157 to have a significant
impact on the consolidated results of operations or financial position of the Company.

Off-Balance Sheet Arrangements

During 2008 and 2007, the Company did not use off-balance sheet arrangements.

Shareholders Equity

As of May 31, 2008 there were 486,993,355 common shares of API Nanotronics
Corp. or equivalents issued and outstanding (not including exchangeable shares), no warrants outstanding and exercisable, and 52,602,750 stock options outstanding at exercise prices ranging from $.094 to $.400 with remaining average contractual
lives of 5.57 years.

On November 19, 2007, API Nanotronics Corp. affected a 5-for-1 stock split of its common stock. Because retained
earnings were in a deficit position, the newly issued stocks par value was capitalized from additional paid-in capital. Each stockholder of record at the close of business on November 12, 2007 received a stock dividend of four additional
shares for each outstanding share held on that date. The additional shares of common stock were distributed on November 19, 2007. All the references to number of shares presented in these financial statements have been adjusted to reflect the
post split number of shares.

During the fiscal year ended May 31, 2008, the Company accepted subscriptions for 161,999,995 shares of
its common stock, which were sold in a Regulation S, private placement to investors not located in the United States . The Company received gross proceeds of $7,750,000 and a subscription receivable of $1,550,000, which was received fully after
May 31, 2008.

During the fiscal year ended May 31, 2007, the Company accepted subscriptions for 21,251,350 shares of its common
stock, which were sold in a Regulation S private placement to investors not located in the United States for $.37 per share. The Company received gross proceeds of $7,858,750 for such shares. As of May 31, 2007, the Regulation S private
placement was closed.



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During the fiscal year ended May 31, 2007, API acquired and retired 150,000 common shares at a total
cost of $57,000.

All the above share numbers reflect the effect of the 10-for-1 conversion ratio for API Electronics Group Corp. common
shares in the Plan of Arrangement and the 5-for-1 stock split on the Companys common stock, which was effective for each stockholder of record at the close of business on November 12, 2007.



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

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



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

None.



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

Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to
ensure that information required to be disclosed in our Securities Exchange Act of 1934 (the Exchange Act) reports is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms, and
that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the
disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable
level of assurance our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures as of May 31, 2008. Based upon their evaluation and subject to the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded that as of May 31, 2008 our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that information we are required to
disclose in reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in SEC rules and forms.

Managements Annual Report on Internal Control Over Financial Reporting

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

We conducted an assessment of the effectiveness of our system of internal control
over financial reporting as of May 31, 2008. 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, 2008.

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



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Companys registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only managements report in
this annual report.

Changes in Internal Control over Financial Reporting.

During the fourth quarter of the fiscal year ended May 31, 2008, there have been no changes in the our internal control over financial reporting that
have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Inherent Limitations on
Effectiveness of Controls

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



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

Not applicable.



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PART III



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

Directors, Executive Officers and Corporate Governance

The information called for by this Item 10 of Part III of Form
10-K is incorporated by reference to the information set forth in our definitive proxy statement relating to our 2008 Annual Meeting of Stockholders (the Proxy Statement) to be filed pursuant to Regulation 14-A under the Exchange Act by
not later than September 29, 2008. Reference is also made to the information appearing in Item 1 of Part I of this Annual Report on Form 10-K under the caption Description of BusinessExecutive Officers.

Code of Ethics

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



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

The information called for
by this Item 11 of Part III of Form 10-K is incorporated by reference to our Proxy Statement, which will be filed with the Securities and Exchange Commission not later than September 29, 2008.



|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 29, 2008.



|ITEM 13. | CERTAIN RELATIONSHP 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 29, 2008.



|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 29, 2008.



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PART IV



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

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



|       |  |                                                                                                                                                                                                                                                                     
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1    |  | Certificate of Incorporation (incorporated by reference from the Companys Registration Statement on Form 10-SB filed on February 10, 2000).                                                                                                                        
|       | 
|3.2    |  | Amendment to Certificate of Incorporation dated May 20, 1999 (incorporated by reference from the Companys Form 10-KSB filed on April 27, 2006).                                                                                                                    
|       | 
|3.3    |  | Amendment to Certificate of Incorporation dated September 21, 2005 (incorporated by reference from the Companys Form 10-KSB filed on April 27, 2006).                                                                                                              
|       | 
|3.4    |  | Amendment to Certificate of Incorporation dated November 6, 2006 (incorporated by reference from Amendment No. 2 to Registration Statement on Form S-1 filed on November 6,
2006).                                                                                  
|       | 
|3.5    |  | Amendment to Certificate of Incorporation dated October 19, 2007 (incorporated by reference from the Companys Form 8-K filed on October 19, 2007).                                                                                                                 
|       | 
|3.6    |  | By-laws (incorporated by reference from the Companys Amendment No. 1 to Registration Statement on Form S-1 filed on October 27, 2006).                                                                                                                             
|       | 
|10.1   |  | Subscription Agreement with Investors in $5,000,000 Private Placement (incorporated by reference to the Companys Form 8-K filed on February 28, 2006).                                                                                                             
|       | 
|*10.2  |  | Consulting Agreement with Martin Moskovits (incorporated by reference to the Companys Form 8-K filed on March 24, 2006).                                                                                                                                           
|       | 
|*10.3  |  | Amendment to Consulting Agreement, dated June 29, 2006, among the Company, Martin Moskovits, Steven Bulwa and API Electronics Group Corp.
(incorporated by reference to the Companys Form S-1 filed on August 14, 2006).                                           
|       | 
|*10.4  |  | Compensation Arrangement between the Company and Donald A. Wright (incorporated by reference from the Companys Form 8-K filed on March 29, 2006).                                                                                                                  
|       | 
|*10.5  |  | Option Agreement between the Company and Donald A. Wright (incorporated by reference from the Companys Form 8-K filed on March 29, 2006).                                                                                                                          
|       | 
|10.6   |  | Support Agreement dated February 6, 2006 among API Nanotronics Corp. and RVI Sub, Inc. (incorporated by reference from the Companys Amendment No. 2 to Registration Statement on Form S-1
filed on February 6, 2006).                                              
|       | 
|10.7   |  | Voting and Exchange Agreement dated February 6, 2006 among API Nanotronics Corp., RVI Sub, Inc. and Equity Transfer & Trust Company. (incorporated by reference from the Companys
Amendment No. 2 to Registration Statement on Form S-1 filed on February 6, 2006).
|       | 
|10.8   |  | 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 on February 6, 2006).       
|       | 
|*10.9  |  | API Nanotronics Corp. 2006 Equity Incentive Plan (incorporated by reference from Amendment No. 1 to the Companys Form S-1 filed on October 26, 2006).                                                                                                              
|       | 
|10.11  |  | Stock Purchase Agreement, dated January 24, 2007, among the Company, the Estate of Benedict Pace, National Hybrid, Inc. and Pace Technologies, Inc. (incorporated by reference from the
Companys Form 8-K filed on January 30, 2007).                              
|       | 
|*10.12 |  | Executive Employment Agreement between the Company and Martin Moskovits dated as of February 14, 2007 (incorporated by reference from Current Report on Form 8-K filed on February 15,
2007).                                                                       



55



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|       |  |                                                                                                                                                                                                                                                                                                        
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.13 |  | Non Statutory Stock Option Agreement dated July 2, 2007 between the Company and Jonathan Pollack (incorporated by reference from the Companys Form 10-KSB filed on August 22,
2007).                                                                                                                  
|       | 
|*10.14 |  | Non Statutory Stock Option Agreement dated July 2, 2007 between the Company and Arthur Cape (incorporated by reference from the Companys Form 10-KSB filed on August 22,
2007).                                                                                                                       
|       | 
|*10.15 |  | Incentive Stock Option Agreement dated May 30, 2008 between the Company and Thomas W. Mills, Sr. (filed herewith).                                                                                                                                                                                     
|       | 
|*10.16 |  | Incentive Stock Option Agreement dated May 30, 2008 between the Company and Claudio Mannarino (filed herewith).                                                                                                                                                                                        
|       | 
|*10.17 |  | Notice and Agreement of Grant of Stock Warrant dated November 6, 2006 between the Company and Phillip DeZwirek (incorporated by reference from the
Companys Form 10-KSB filed on August 22, 2007).                                                                                                    
|       | 
|*10.18 |  | Notice and Agreement of Grant of Stock Warrant dated November 6, 2006 between the Company and Jason DeZwirek (incorporated by reference from the
Companys Form 10-KSB filed on August 22, 2007).                                                                                                      
|       | 
|*10.19 |  | Non-Statutory Stock Option Agreement, dated May 30, 2008, between the Company and Martin Moskovits (filed herewith).                                                                                                                                                                                   
|       | 
|*10.20 |  | Notice and Agreement of Grant of Stock Option, dated May 30, 2008, between the Company and Martin Moskovits (filed herewith).                                                                                                                                                                          
|       | 
|*10.21 |  | Notice and Agreement of Grant of Stock Option, dated May 30, 2008, between the Company and Martin Moskovits (filed herewith).                                                                                                                                                                          
|       | 
|*10.22 |  | 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 on June 22,
2007).
|       | 
|10.23  |  | Asset Purchase Agreement dated July 17, 2007 between API Nanofabrication and Research Corporation and NanoOpto Corporation (incorporated by reference from the Companys Form 8-K filed on
July 23, 2007).                                                                                             
|       | 
|*10.24 |  | Promissory Note of API Nanotronics Corp. in the principal amount of $4,000,000, dated as of July 18, 2007, in favor of Jason DeZwirek (incorporated by reference from the Companys
Form 10-KSB filed on August 22, 2007) (repaid May 31, 2008).                                                       
|       | 
|10.25  |  | Lease, dated July 19, 2007, between Franklin Cottontail LLC and API Nanofabrication and Research Corporation and Guaranty of Lease by API Nanotronics Corp. (incorporated by reference from the
Companys Form 10-KSB filed on August 22, 2007).                                                       
|       | 
|*10.26 |  | Executive Employment Agreement dated March 3, 2008 between API Nanotronics Corp. and Stephen Pudles (filed herewith).                                                                                                                                                                                  
|       | 
|*10.27 |  | Stock Option Agreement dated April 22, 2008, between the Company and Stephen Pudles (filed herewith).                                                                                                                                                                                                  
|       | 
|14.1   |  | Code of Ethics for the Company Directors, Officers, Employees and Agents including Principal Executive, Senior Financial Officers and Other Designated Officers (filed herewith).                                                                                                                      
|       | 
|21     |  | Subsidiaries of the Company (filed herewith).                                                                                                                                                                                                                                                          
|       | 
|23.1   |  | Consent of Withum Smith + Brown, P.C. (filed herewith).                                                                                                                                                                                                                                                
|       | 
|31.1   |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer (filed herewith).                                                                                                                                                                                                                    



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|     |  |                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------
|     | 
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith).                                     
|     | 
|32.1 |  | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith).
|     | 
|32.2 |  | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith).



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



57



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SIGNATURES

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



API NANOTRONICS CORP./S/    STEPHEN
PUDLESStephen Pudles,Chief Executive OfficerDated: August 25, 2008


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                                                |  | August 25, 2008
|Stephen Pudles, Chief Executive Officer                              |  |                
|                                                                     | 
|Principal Financial and Accounting Officer                           |  |                
|                                                                     | 
|/S/    CLAUDIO
MANNARINO                                             |  | August 25, 2008
|Claudio Mannarino Vice President-Finance and Chief Financial Officer |  |                
|                                                                     | 
|/S/    PHILLIP
DEZWIREK                                              |  | August 25, 2008
|Phillip DeZwirek                                                     |  |                
|Chairman, Director and Treasurer                                     |  |                
|                                                                     | 
|/S/    THOMAS W.
MILLS                                               |  | August 25, 2008
|Thomas W. Mills,                                                     |  |                
|President, Chief Operating Officer and Director                      |  |                
|                                                                     | 
|/S/    JASON
DEZWIREK                                                |  | August 25, 2008
|Jason DeZwirek, Director and Secretary                               |  |                
|                                                                     | 
|/S/    DONALD A.
WRIGHT                                              |  | August 25, 2008
|Donald A. Wright, Director                                           |  |                
|                                                                     | 
|/S/    ARTHUR
CAPE                                                   |  | August 25, 2008
|Arthur Cape, Director                                                |  |                
|                                                                     | 
|/S/    JONATHAN
POLLACK                                              |  | August 25, 2008
|Jonathan Pollack, Director                                           |  |                



58



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Consolidated Financial Statements



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|                                                                                                     | 
|Report of Independent Registered Public Accounting Firm                                              |  | F-2 
|                                                                                                     | 
|Consolidated Balance Sheets at May 31, 2008 and 2007                                                 |  | F-3 
|                                                                                                     | 
|Consolidated Statements of Operations for the years ended May 31, 2008 and 2007                      |  | F-4 
|                                                                                                     | 
|Consolidated Statements of Changes in Shareholders Equity for the years ended May 31, 2008 and
2007 |  | F-5 
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the years ended May 31, 2008 and 2007                      |  | F-7 
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | F-8 



F-1



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

API Nanotronics Corp.

We have audited the consolidated balance sheets of API Nanotronics Corp. as of May 31, 2008 and 2007, 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. We were not engaged to
perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of API Nanotronics Corp. as of May 31, 2008 and 2007, 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.

/s/ WithumSmith+Brown, P.C.

New Brunswick, New Jersey

August 25, 2008



F-2



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##### Table of Contents

API NANOTRONICS CORP.

Consolidated Balance Sheets



|                                                                                                                                                                   |  |             |             |   |             |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ----------- | - | ----------- | - | ---------- | -
|                                                                                                                                                                   |  | May 31,2008 |             |   | May 31,2007 |  
|Assets                                                                                                                                                             |  |             |             |   |             |   |            |  
|Current                                                                                                                                                            |  |             |             |   |             |   |            |  
|Cash and cash equivalents                                                                                                                                          |  | $           | 2,667,109   |   |             | $ | 3,277,468  |  
|Marketable securities, at fair value                                                                                                                               |  |             | 461,806     |   |             |   | 605,011    |  
|Accounts receivable, less allowance for doubtful accounts of $69,576 and $73,249 at May 31, 2008 and 2007, respectively                                            |  |             | 4,544,860   |   |             |   | 3,466,028  |  
|Inventories, net (note 2)                                                                                                                                          |  |             | 7,353,596   |   |             |   | 10,360,869 |  
|Deferred income taxes                                                                                                                                              |  |             | 790,906     |   |             |   | 63,000     |  
|Prepaid expenses and other current assets                                                                                                                          |  |             | 355,044     |   |             |   | 495,152    |  
|                                                                                                                                                                   |  |             |             |   |             |   |            |  
|                                                                                                                                                                   |  |             | 16,173,321  |   |             |   | 18,267,528 |  
|Fixed assets, net                                                                                                                                                  |  |             | 10,174,021  |   |             |   | 6,522,012  |  
|Deferred income taxes                                                                                                                                              |  |             | 571,109     |   |             |   | 803,141    |  
|Goodwill                                                                                                                                                           |  |             | 1,130,906   |   |             |   | 1,130,906  |  
|Intangible assets, net                                                                                                                                             |  |             | 1,469,939   |   |             |   | 623,173    |  
|                                                                                                                                                                   |  |             |             |   |             |   |            |  
|                                                                                                                                                                   |  | $           | 29,519,296  |   |             | $ | 27,346,760 |  
|                                                                                                                                                                   |  |             |             |   |             |   |            |  
|Liabilities and Shareholders Equity                                                                                                                               |  |             |             |   |             |   |            |  
|Current                                                                                                                                                            |  |             |             |   |             |   |            |  
|Short term borrowings                                                                                                                                              |  | $           | 310,458     |   |             | $ | 635,276    |  
|Accounts payable and accrued expenses                                                                                                                              |  |             | 3,867,449   |   |             |   | 3,178,987  |  
|Deferred income taxes                                                                                                                                              |  |             | 39,865      |   |             |   | 242,000    |  
|Current portion of long-term debt                                                                                                                                  |  |             | 113,851     |   |             |   | 404,711    |  
|Current portion of capital leases                                                                                                                                  |  |             | 6,539       |   |             |   | 10,388     |  
|                                                                                                                                                                   |  |             |             |   |             |   |            |  
|                                                                                                                                                                   |  |             | 4,338,162   |   |             |   | 4,471,362  |  
|Deferred income taxes                                                                                                                                              |  |             | 1,230,573   |   |             |   | 805,712    |  
|Long term debt, net of current portion                                                                                                                             |  |             |            |   |             |   | 67,197     |  
|Capital leases payable, net of current portion                                                                                                                     |  |             | 18,706      |   |             |   | 23,022     |  
|                                                                                                                                                                   |  |             |             |   |             |   |            |  
|                                                                                                                                                                   |  |             | 5,587,441   |   |             |   | 5,367,293  |  
|                                                                                                                                                                   |  |             |             |   |             |   |            |  
|Shareholders equity                                                                                                                                               |  |             |             |   |             |   |            |  
|Common stock, ($0.001 par value, 1,000,000,000 authorized shares 486,993,355 and 324,973,860 shares issued and outstanding at May 31,
2008 and 2007, respectively) |  |             | 486,994     |   |             |   | 324,974    |  
|Special voting stock ($0.001 par value, 1 shares authorized, issued and outstanding at May 31, 2008 and 2007)                                                      |  |             |            |   |             |   |           |  
|Additional paid-in capital                                                                                                                                         |  |             | 34,015,573  |   |             |   | 23,937,000 |  
|Subscription receivablecommon stock                                                                                                                               |  |             | (1,550,000  | ) |             |   |           |  
|Accumulated deficit                                                                                                                                                |  |             | (10,017,877 | ) |             |   | (3,451,767 | )
|Accumulated other comprehensive income:                                                                                                                            |  |             |             |   |             |   |            |  
|Currency translation adjustment                                                                                                                                    |  |             | 621,174     |   |             |   | 784,982    |  
|Unrealized gain (loss) on marketable securities, net of tax                                                                                                        |  |             | 375,991     |   |             |   | 384,278    |  
|                                                                                                                                                                   |  |             |             |   |             |   |            |  
|Total accumulated other comprehensive income                                                                                                                       |  |             | 997,165     |   |             |   | 1,169,260  |  
|                                                                                                                                                                   |  |             |             |   |             |   |            |  
|                                                                                                                                                                   |  |             | 23,931,855  |   |             |   | 21,979,467 |  
|                                                                                                                                                                   |  |             |             |   |             |   |            |  
|                                                                                                                                                                   |  | $           | 29,519,296  |   |             | $ | 27,346,760 |  
|                                                                                                                                                                   |  |             |             |   |             |   |            |  

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



F-3



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##### Table of Contents

API NANOTRONICS CORP.

Consolidated Statements of Operations



|                                                          |  |                        |             |   |                        |   |             |  
|--------------------------------------------------------- |  | ---------------------- | ----------- | - | ---------------------- | - | ----------- | -
|                                                          |  | Year EndedMay 31, 2008 |             |   | Year EndedMay 31, 2007 |  
|Revenue, net                                              |  | $                      | 30,962,046  |   |                        | $ | 20,532,010  |  
|Cost of revenues                                          |  |                        | 22,669,311  |   |                        |   | 15,523,691  |  
|Provision for obsolete and slow moving inventory (note 2) |  |                        | 2,819,263   |   |                        |   |            |  
|                                                          |  |                        |             |   |                        |   |             |  
|Gross profit                                              |  |                        | 5,473,472   |   |                        |   | 5,008,319   |  
|                                                          |  |                        |             |   |                        |   |             |  
|Operating expenses                                        |  |                        |             |   |                        |   |             |  
|General and administrative                                |  |                        | 6,109,725   |   |                        |   | 4,559,644   |  
|Research and development                                  |  |                        | 3,453,860   |   |                        |   | 316,099     |  
|Selling expenses                                          |  |                        | 2,412,618   |   |                        |   | 1,790,436   |  
|                                                          |  |                        |             |   |                        |   |             |  
|                                                          |  |                        | 11,976,203  |   |                        |   | 6,666,179   |  
|                                                          |  |                        |             |   |                        |   |             |  
|Operating (loss) income                                   |  |                        | (6,502,731  | ) |                        |   | (1,657,860  | )
|Other (income) expenses                                   |  |                        |             |   |                        |   |             |  
|Other (income) expense, net                               |  |                        |            |   |                        |   | 6,577       |  
|Interest (income) expense, net                            |  |                        | 343,245     |   |                        |   | (39,214     | )
|Realized (gain) on sale of marketable securities          |  |                        |            |   |                        |   | (72,644     | )
|(Gain) loss on foreign currency transactions              |  |                        | (64,234     | ) |                        |   | (146,850    | )
|                                                          |  |                        |             |   |                        |   |             |  
|                                                          |  |                        | 279,011     |   |                        |   | (252,131    | )
|                                                          |  |                        |             |   |                        |   |             |  
|Loss before income taxes                                  |  |                        | (6,781,742  | ) |                        |   | (1,405,729  | )
|Benefit from income taxes                                 |  |                        | (215,633    | ) |                        |   | (452,226    | )
|                                                          |  |                        |             |   |                        |   |             |  
|Net loss                                                  |  | $                      | (6,566,110  | ) |                        | $ | (953,503    | )
|                                                          |  |                        |             |   |                        |   |             |  
|                                                          |  |                       
|Loss per shareBasic                                      |  | $                      | (0.02       | ) |                        | $ | (0.00       | )
|                                                          |  |                        |             |   |                        |   |             |  
|Loss per shareDiluted                                    |  | $                      | (0.02       | ) |                        | $ | (0.00       | )
|                                                          |  |                        |             |   |                        |   |             |  
|Weighted average shares outstanding                       |  |                        |             |   |                        |   |             |  
|Basic                                                     |  |                        | 306,989,829 |   |                        |   | 261,028,695 |  
|Diluted                                                   |  |                        | 306,989,829 |   |                        |   | 261,028,695 |  

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



F-4



---

##### Table of Contents

API NANOTRONICS CORP.

Consolidated Statements of Changes in Shareholders Equity



|                                                                                                                        |  |                             |   |  |                   |         |   |                           |   |            |                                    |  |                    |   |  |                                            |            |   |                          |   |           |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | - |  | ----------------- | ------- | - | ------------------------- | - | ---------- | ---------------------------------- |  | ------------------ | - |  | ------------------------------------------ | ---------- | - | ------------------------ | - | --------- | - |  | - | ---------- | -
|                                                                                                                        |  | Commonstock-numberof shares |   |  | Commonstockamount |         |   | Additionalpaid-in capital |   |            | SubscriptionReceivable-CommonStock |  | AccumulatedDeficit |   |  | Accumulatedothercomprehensiveincome (loss) |            |   | Totalshareholdersequity |  
|Balance at May 31, 2006                                                                                                 |  | 140,883,700                 |   |  | $                 | 140,886 |   |                           | $ | 11,577,359 |                                    |  | $                  |  |  | $                                          | (2,498,264 | ) |                          | $ | 985,807   |   |  | $ | 10,205,788 |  
|Share issued upon exercise of stock options                                                                             |  | 500,000                     |   |  |                   | 500     |   |                           |   | 59,500     |                                    |  |                    |   |  |                                            |           |   |                          |   |          |   |  |   | 60,000     |  
|Shares repurchased and retired                                                                                          |  | (150,000                    | ) |  |                   | (150    | ) |                           |   | (56,850    | )                                  |  |                    |   |  |                                            |           |   |                          |   |          |   |  |   | (57,000    | )
|Adjustment of consolidation shares                                                                                      |  | 36,600                      |   |  |                   | 35      |   |                           |   | (35        | )                                  |  |                    |   |  |                                            |           |   |                          |   |          |   |  |   |           |  
|Outstanding shares of parent company prior to Plan of Arrangement(See Note 1)                                           |  | 200,033,360                 |   |  |                   | 200,033 |   |                           |   | 2,980,497  |                                    |  |                    |   |  |                                            |           |   |                          |   |          |   |  |   | 3,180,530  |  
|Stock exchanged for subsidiary exchangeable shares and stock subject to issuance in connection with Plan of Arrangement |  | (37,581,150                 | ) |  |                   | (37,581 | ) |                           |   | 37,581     |                                    |  |                    |   |  |                                            |           |   |                          |   |          |   |  |   |           |  
|Stock based compensation expense                                                                                        |  |                            |   |  |                   |        |   |                           |   | 1,497,199  |                                    |  |                    |   |  |                                            |           |   |                          |   |          |   |  |   | 1,497,199  |  
|Proceeds from Regulation S private placement                                                                            |  | 21,251,350                  |   |  |                   | 21,251  |   |                           |   | 7,841,749  |                                    |  |                    |   |  |                                            |           |   |                          |   |          |   |  |   | 7,863,000  |  
|Net loss                                                                                                                |  |                            |   |  |                   |        |   |                           |   |           |                                    |  |                    |   |  |                                            | (953,503   | ) |                          |   |           |   |  |   | (953,503   | )
|Foreign currency translation adjustment                                                                                 |  |                            |   |  |                   |        |   |                           |   |           |                                    |  |                    |   |  |                                            |           |   |                          |   | (128,182  | ) |  |   | (128,182   | )
|Unrealized gain(loss) on marketable securities- net of taxes                                                            |  |                            |   |  |                   |        |   |                           |   |           |                                    |  |                    |   |  |                                            |           |   |                          |   | 384,279   |   |  |   | 384,279    |  
|Recognized (gains) losses included in earnings                                                                          |  |                            |   |  |                   |        |   |                           |   |           |                                    |  |                    |   |  |                                            |           |   |                          |   | (72,644   | ) |  |   | (72,644    | )
|                                                                                                                        |  |                             |   |  |                   |         |   |                           |   |            |                                    |  |                    |   |  |                                            |            |   |                          |   |           |   |  |   |            |  
|Total comprehensive income (loss)                                                                                       |  |                             |   |  |                   |         |   |                           |   |            |                                    |  |                    |   |  |                                            |            |   |                          |   |           |   |  |   | 770,050    |  
|                                                                                                                        |  |                             |   |  |                   |         |   |                           |   |            |                                    |  |                    |   |  |                                            |            |   |                          |   |           |   |  |   |            |  
|Balance at May 31, 2007                                                                                                 |  | 324,973,860                 |   |  | $                 | 324,974 |   |                           | $ | 23,937,000 |                                    |  | $                  |  |  | $                                          | (3,451,767 | ) |                          | $ | 1,169,260 |   |  | $ | 21,979,467 |  
|                                                                                                                        |  |                             |   |  |                   |         |   |                           |   |            |                                    |  |                    |   |  |                                            |            |   |                          |   |           |   |  |   |            |  



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##### Table of Contents

API NANOTRONICS CORP.

Consolidated Statements of Changes in Shareholders Equitycontinued



|                                                                                                                                     |  |                             |  |                   |         |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |           |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- |  | ----------------- | ------- | ------------------------- | - | ---------- | ---------------------------------- |  | - | ------------------ | - |  | ----------------------------------- | ----------- | - | ------------------------ | - | --------- | - |  | - | ---------- | -
|                                                                                                                                     |  | Commonstock-numberof shares |  | Commonstockamount |         | Additionalpaid-in capital |   |            | SubscriptionReceivable-CommonStock |  |   | AccumulatedDeficit |   |  | Accumulatedothercomprehensiveincome |             |   | Totalstockholdersequity |  
|Balance at May 31, 2007                                                                                                              |  | 324,973,860                 |  | $                 | 324,974 |                           | $ | 23,937,000 |                                    |  | $ |                   |   |  | $                                   | (3,451,767  | ) |                          | $ | 1,169,260 |   |  | $ | 21,979,467 |  
|Stock exchanged for subsidiary exchangeable shares and stock subject to issuance in connection with plan of arrangement (see Note
8) |  | 19,500                      |  |                   | 20      |                           |   | (20        | )                                  |  |   |                    |   |  |                                     |            |   |                          |   |          |   |  |   |           |  
|Stock based compensation expense                                                                                                     |  |                            |  |                   |        |                           |   | 940,593    |                                    |  |   |                    |   |  |                                     |            |   |                          |   |          |   |  |   | 940,593    |  
|Common stock issued                                                                                                                  |  | 161,999,995                 |  |                   | 162,000 |                           |   | 9,138,000  |                                    |  |   | (1,550,000         | ) |  |                                     |            |   |                          |   |          |   |  |   | 7,750,000  |  
|Net loss for the period                                                                                                              |  |                            |  |                   |        |                           |   |           |                                    |  |   |                    |   |  |                                     | (6,566,110  | ) |                          |   |          |   |  |   | (6,566,110 | )
|Foreign currency translation adjustment                                                                                              |  |                            |  |                   |        |                           |   |           |                                    |  |   |                    |   |  |                                     |            |   |                          |   | (163,670  | ) |  |   | (163,670   | )
|Unrealized gain(loss) on marketable securities  net of taxes                                                                        |  |                            |  |                   |        |                           |   |           |                                    |  |   |                    |   |  |                                     |            |   |                          |   | (8,425    | ) |  |   | (8,425     | )
|                                                                                                                                     |  |                             |  |                   |         |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |           |   |  |   |            |  
|Total comprehensive loss                                                                                                             |  |                             |  |                   |         |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |           |   |  |   | (6,738,205 | )
|                                                                                                                                     |  |                             |  |                   |         |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |           |   |  |   |            |  
|Balance at May 31, 2008                                                                                                              |  | 486,993,355                 |  | $                 | 486,994 |                           | $ | 34,015,573 |                                    |  | $ | (1,550,000         | ) |  | $                                   | (10,017,877 | ) |                          | $ | 997,165   |   |  | $ | 23,931,855 |  
|                                                                                                                                     |  |                             |  |                   |         |                           |   |            |                                    |  |   |                    |   |  |                                     |             |   |                          |   |           |   |  |   |            |  



| | The number of shares of common stock reflects the 5:1 stock split effective November 19, 2007, which has been applied to earlier periods.
|- | -----------------------------------------------------------------------------------------------------------------------------------------

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



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##### Table of Contents

API NANOTRONICS CORP.

Consolidated Statements of Cash Flows



|                                                                                       |      |                   |            |      |  |   |            |  
|-------------------------------------------------------------------------------------- | ---- | ----------------- | ---------- | ---- |  | - | ---------- | -
|                                                                                       |      | Year endedMay 31, |           
|                                                                                       | 2008 |                   |            | 2007 | 
|Cash flows from operating activities                                                   |      |                   |            |      |  |   |            |  
|Net loss                                                                               |      | $                 | (6,566,110 | )    |  | $ | (953,503   | )
|Adjustments to reconcile net loss to net cash provided (used) by operating activities: |      |                   |            |      |  |   |            |  
|Depreciation and amortization                                                          |      |                   | 1,196,440  |      |  |   | 982,888    |  
|Provision for inventory reserve                                                        |      |                   | 2,819,263  |      |  |   |           |  
|Stock based compensation                                                               |      |                   | 940,593    |      |  |   | 1,497,199  |  
|Gain on sale of marketable securities                                                  |      |                   |           |      |  |   | (72,644    | )
|Deferred income taxes (benefit)                                                        |      |                   | (189,458   | )    |  |   | (528,000   | )
|Changes in operating assets and liabilities, excluding business acquisitions           |      |                   |            |      |  |   |            |  
|Accounts receivable                                                                    |      |                   | (835,158   | )    |  |   | (14,196    | )
|Inventories                                                                            |      |                   | 188,010    |      |  |   | (250,958   | )
|Prepaid expenses and other current assets                                              |      |                   | 132,590    |      |  |   | 87,211     |  
|Accounts payable and accrued expenses                                                  |      |                   | 832,463    |      |  |   | 11,810     |  
|Deferred revenue                                                                       |      |                   |           |      |  |   | (119,850   | )
|                                                                                       |      |                   |            |      |  |   |            |  
|Net cash provided (used) by operating activities                                       |      |                   | (1,481,367 | )    |  |   | 639,957    |  
|Cash flows from investing activities                                                   |      |                   |            |      |  |   |           |  
|Purchase of fixed assets                                                               |      |                   | (798,705   | )    |  |   | (512,088   | )
|Purchase of patents                                                                    |      |                   | (962,300   | )    |  |   |           |  
|Business acquisition, net of cash acquired                                             |      |                   |           |      |  |   | (8,789,552 | )
|Asset acquisitions                                                                     |      |                   | (4,045,671 | )    |  |   |           |  
|Proceeds from sale of marketable securities                                            |      |                   |           |      |  |   | 72,644     |  
|Proceeds from life insurance                                                           |      |                   | 134,164    |      |  |   |           |  
|                                                                                       |      |                   |            |      |  |   |            |  
|Net cash (used) by investing activities                                                |      |                   | (5,672,512 | )    |  |   | (9,228,996 | )
|Cash flows from financing activities                                                   |      |                   |            |      |  |   |            |  
|Proceeds from issuance of common shares and share application                          |      |                   | 7,750,000  |      |  |   | 7,923,000  |  
|Repurchase of common shares                                                            |      |                   |           |      |  |   | (57,000    | )
|Plan of Arrangement, cash acquired net of transaction costs                            |      |                   |           |      |  |   | 3,250,531  |  
|Short term borrowings advances (repayments), net                                       |      |                   | (337,762   | )    |  |   | 122,762    |  
|Repayment of obligationscapital lease                                                 |      |                   | (8,164     | )    |  |   | (4,321     | )
|Repayment of long term debt                                                            |      |                   | (4,357,564 | )    |  |   | (6,073,395 | )
|Net proceedslong-term debt, related party                                             |      |                   | 4,000,000  |      |  |   | 6,000,000  |  
|                                                                                       |      |                   |            |      |  |   |            |  
|Net cash provided by financing activities                                              |      |                   | 7,046,510  |      |  |   | 11,161,577 |  
|Effect of exchange rate on cash and cash equivalents                                   |      |                   | (502,990   | )    |  |   | (241,750   | )
|                                                                                       |      |                   |            |      |  |   |            |  
|Net increase (decrease) in cash and cash equivalents                                   |      |                   | (610,359   | )    |  |   | 2,330,788  |  
|Cash and cash equivalents, beginning of year                                           |      |                   | 3,277,468  |      |  |   | 946,680    |  
|                                                                                       |      |                   |            |      |  |   |            |  
|Cash and cash equivalents, end of year                                                 |      | $                 | 2,667,109  |      |  | $ | 3,277,468  |  
|                                                                                       |      |                   |            |      |  |   |            |  

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



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements

1.
NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

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

The Company manufactures and designs high
reliability semiconductor and microelectronics circuits for military, aerospace and commercial applications. The Company through acquisitions has expanded its manufacturing and design of electronic components to include filters, transformers,
inductors, high-performance microcircuits, custom hybrid microcircuits and custom power supplies for land and amphibious combat systems, mission critical information systems and technologies, shipbuilding and marine systems, and business aviation.

The creation of API Nanofabrication and Research Corp. (API NRC), and the subsequent acquisition of the assets of NanoOpto
Corp., offers the Company a unique opportunity to design and manufacture next generation products. API NRCs material processing and fabrication capabilities span from silicon wafer processing to the very latest electronic and optical
fabrication technologies based on nanoscience and MEMS. These increased capacities expand the Companys abilities to better serve its customers and to develop new electronic products. These increased capacities also open possibilities for new
business based on hybrid optics. These assets and facilities will also be the centerpiece of the Companys research and development program.

On May 8, 2006, Rubincon Ventures Inc., as API Nanotronics was formerly known (Rubincon), entered into a combination agreement contemplating a Plan of Arrangement with API Electronics Group Corp. (API). Rubincon
is a Delaware corporation and API is an Ontario corporation. Rubincon formed an Ontario subsidiary, RVI Sub, Inc., now known as API Nanotronics Sub, Inc., to facilitate the Plan of Arrangement. On November 6, 2006 Rubincon and API completed the
transaction contemplated by the Plan of Arrangement. The combined companies now operate under the name API Nanotronics Corp.

For accounting purposes, the acquisition of API by Rubincon was considered a reverse acquisition, an acquisition transaction where the acquired company, API, is considered the acquirer for accounting purposes, notwithstanding the form of
the transaction. The primary reason the transaction was treated as a recapitalization by API rather than a purchase of API by Rubincon was because Rubincon was a shell company. As reported in its Form 10-QSB for the quarter ended October 31,
2006, (the final quarterly filing requirement for Rubincon under its prior year end of January 31, 2006), Rubincon had cash of approximately $4,200,000, other assets of approximately $117,000 and liabilities of approximately $187,000.

In conjunction with this reverse acquisition, Rubincon changed its year-end from January 31 to May 31, the year-end of API.
Assets, liabilities and equity of the Company continue to be that of the operating company, API, as adjusted for the cash, other assets and liabilities of Rubincon. No additional goodwill or intangible assets were recognized on completion of the
transaction. The capital structure, including the number and type of shares issued, appearing in the consolidated balance sheet for the period reflects that of the legal parent, Rubincon, now known as API Nanotronics, including the shares issued to
affect the reverse acquisition for the period after the consummation of the Plan of Arrangement and the capital structure of API modified by the 10-for-1 exchange ratio in the Plan of Arrangement for the period prior to the consummation of the Plan
of Arrangement.



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



On November 19, 2007, API Nanotronics Corp. affected a 5-for-1 stock split of its common stock, through a common stock dividend. Since retained earnings were in a deficit position, the stocks par value was
capitalized from additional paid-in capital. Each stockholder of record at the close of business on November 12, 2007 received four additional shares for every outstanding share held on that date. All the references to number of shares
presented in these financial statements have been adjusted to reflect the post split number of shares.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Cash and Cash Equivalents

Cash and cash equivalents
consist of cash on hand, bank balances and investments in money market instruments with original maturities of three months or less.

Marketable
Securities

The Companys investments in marketable equity securities are classified as available for sale. Securities available
for sale are carried at fair value, 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 balance sheet 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. During the quarter ended May 31, 2008 the Company took a reserve for obsolete and slow moving inventory in the amount of $2,819,263. 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 leasehold improvements |  | 20 years     
|Computer equipment                   |  | 3 years      
|Furniture and fixtures               |  | 5 years      
|Machinery and equipment              |  | 5 to 10 years
|Vehicles                             |  | 3 years      
|                                     | 
|Declining balance basis              |  |              
|Electronic manufacturing equipment   |  | 5 to 10 years



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



Gains and losses on depreciable assets retired or sold are recognized in the statement of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred. As of May 31, 2008,
approximately $1,884,000 of the $2,566,000 of fixed assets acquired in conjunction with the National Hybrid Group acquisition (See Note 5) have been placed in service. The Company continues to place additional equipment in service and also expects
to sell any assets that it does not place in service.

Computer Software Developed or Obtained For Internal Use

All direct internal and external costs incurred in connection with the development stage of software for internal use are capitalized. All other costs
associated with internal use software are expensed when incurred. Amounts capitalized are included in fixed assets and are amortized on a straight-line basis over three years beginning with when such assets are placed in service.

Goodwill and Intangible Assets

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

Goodwill is subject to an impairment test on at least an annual basis or upon the occurrence of certain events or circumstances. Goodwill impairment is assessed based on a comparison of the fair value of the reporting
unit to the underlying carrying value of the reporting units net assets, including goodwill. When the carrying amount of the reporting unit exceeds its fair value, the implied fair value of the reporting units goodwill is compared with
its carrying amount to measure the amount of impairment loss, if any. The entire balance of the Companys goodwill is contained in the Filtran reporting unit. Management has determined there is no impairment in goodwill as of May 31, 2008
and May 31, 2007.

Intangible assets that have a finite life are amortized using the following basis over the following period:



|                       |  |                                        
|---------------------- |  | ---------------------------------------
|Non-compete agreements |  | Straight line over 5 years             
|Customer contracts     |  | Based on revenue earned on the contract
|Computer software      |  | 3-5 years                              
|Patents                |  | 15-20 years                            

Long Lived Assets

The Company periodically evaluates the net realizable values of long-lived assets, principally identifiable intangibles and capital assets, for potential impairment when events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable, as determined based on the estimated future undiscounted cash flows. If such assets were considered to be impaired, the carrying value of the related assets would be reduced to their
estimated fair value. Management has determined there is no impairment of long lived assets as of May 31, 2008 and May 31, 2007, respectively.

Income taxes

Income taxes are accounted for under SFAS No. 109, Accounting for Income Taxes. Under this
method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial reporting and tax bases of assets and liabilities and available net operating loss carry forwards. A
valuation allowance is established to reduce tax assets if it is more likely than not that all or some portions of such tax assets will not be realized.



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of FASB Statement No. 109. FIN 48 clarifies the
accounting for uncertainties in income taxes recognized in an enterprises financial statements. The interpretation requires that the Company determine whether it is more likely than not that a tax position will not be sustained upon
examination by the appropriate taxing authority. If a tax position does not meet the more likely than not recognition criterion, FIN 48 requires that the tax position be measured at the largest amount of benefit greater than 50 percent not likely of
being sustained upon ultimate settlement. This accounting standard became effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 as of June 1, 2007. The adoption of FIN 48 has not had a material effect on
the Companys financial condition or results of operations as the Company has determined that they have no unrecognized tax benefits.

Revenue
Recognition

Contract Revenue

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

Non-Contract Revenue

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

Deferred Revenue

The Company defers
revenue should payment be received in advance of the service or product being shipped or delivered. At May 31, 2008 and 2007 the Company had no deferred revenues.

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 $108,238 and $126,762, in warranty liability as of May 31, 2008 and May 31, 2007, respectively, which
has been included in accounts payable and accrued expenses.

Research and Development

Research and development expenses are recorded when incurred.

Stock-Based Compensation

Effective June 1, 2006 the Company adopted SFAS 123R which revises SFAS 123 Accounting
for Stock-Based Compensation (SFAS 123) and supersedes Accounting Principles Board Opinion 25 Accounting for Stock Issued to Employees. Under APB 25, the Company used the intrinsic value method for employee
stock



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



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

Financial Instruments

The fair values of financial instruments including cash and cash equivalents, marketable securities,
accounts receivable, accounts payable, and short-tem borrowings approximate their carrying values due to the short-term nature of these instruments. Unless otherwise noted, it is managements opinion that the Company is not exposed to
significant interest rate, currency or credit risks arising from its financial instruments. Marketable securities are included at fair value. The recorded value of long-term debt approximates the fair value of the debt as the terms and rates
approximate market rates.

The Company carries out a portion of transactions in foreign currencies included in the Companys cash,
marketable securities, accounts receivable, accounts payable and bank indebtedness with balances denominated in US dollars.

Foreign Currency
Translation and Transactions

The Companys functional currency is United States dollars and the consolidated financial statements
are stated in United States dollars, the reporting currency. Integrated operations have been translated from Canadian dollars into United States dollars at the year-end exchange rate for monetary balance sheet items, the historical rate
for non-monetary balance sheet items, and the average exchange rate for the year for revenues, expenses, gains and losses. Gains and losses from foreign currency transactions are included in the determination of net income or loss.

Accounting Estimates

The preparation of these
consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. By their nature, these estimates are subject to uncertainty and the effect on the
consolidated financial statements of changes in such estimates in future periods could be material.

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



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



Receivables and Credit Policies

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

Advertising Costs

Advertising costs are expensed as incurred. During the years ended May 31, 2008 and 2007, advertising expense was $292,416 and $51,454, respectively.

Concentration of Credit Risk

The Company maintains cash balances, at times, with financial institutions, which are in
excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC). Management monitors the soundness of these institutions and considers the Companys risk negligible.

The U.S. Department of Defense (directly and through subcontractors) accounts for approximately 79 percent and 77 percent for 2008 and 2007,
respectively, of the Companys revenue. One customer represented approximately 17% and 18% of revenues for the years ended May 31, 2008 and May 31, 2007, respectively. No customers represented over 10% of accounts receivable as at
May 31, 2008, and May 31, 2007.

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 19)

Comprehensive Income
(Loss)

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

Change in Presentation of Consolidated Statement of Operations

Certain deminimis items have been reclassified from Business Development Expense to Selling Expenses in the Consolidated Statement of
Operations and the prior year data has been changed to conform with this presentation.

3. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162
is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the Securities and Exchange Commissions
approval of the Public Company Accounting Oversight Board auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not expect SFAS 162 to have
a material effect on its consolidated financial statements.

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

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

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements. This Statement amends
ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in
the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined the impact, if any, that SFAS No. 160 will have on its consolidated financial statements. SFAS No. 160
is effective for the Companys fiscal year beginning June 1, 2010. The Company is currently evaluating the impact of SFAS 160 on its consolidated financial statements.

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115, which will permit entities to choose to measure many financial instruments and certain
other items at fair value. This Statement applies to all entities, including not-for-profit organizations. Most of the provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to SFAS
Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. This
Statement is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. The Company does not expect that



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



the adoption of SFAS No. 159 will have a significant impact on the consolidated results of operations or financial position of the Company. On
February 12, 2008, the FASB delayed the effective date for non-financial assets and liabilities to fiscal years beginning after November 15, 2008; however, the effective date for the financial assets remains intact.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to eliminate the diversity in practice that exists due to the
different definitions of fair value and the limited guidance for applying those definitions in GAAP that are dispersed among the many accounting pronouncements that require fair value measurements. This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities,
the application of this Statement will change current practice. SFAS 157 is effective in fiscal years beginning after November 15, 2007 and periods within those fiscal years. On February 12, 2008, the FASB delayed the effective date for
non-financial assets and liabilities to fiscal years beginning after November 15, 2008; however, the effective date for the financial assets remains intact. The Company does not expect the adoption of SFAS No. 157 to have a significant
impact on the consolidated results of operations or financial position of the Company.

4. ASSET ACQUISITIONS

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

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

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



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

The Company borrowed the $4,000,000 pursuant to a promissory note (the Note) from a
member of the Board of Directors who is also the Secretary of the Company (See Note 18). The Note has a 61 month term, requires payment of interest only until maturity and bears interest at the rate of 12% per annum. The Note is payable unless
sooner repaid on August 18, 2012. Interest payments are payable on the last day of December and June, beginning December 31, 2007. In the event a default under the Note occurs and is continuing, all amounts due thereunder, may be declared
immediately due and payable. The loan and interest was repaid as of May 31, 2008.

The Company considered the acquisition of the
assets of NoC on July 17, 2007 as an asset acquisition and not as the acquisition of an operating business because: (1) on July 2, 2007 NoC had filled articles of dissolution



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



with the Delaware Secretary of State pursuant to the resolutions of the board of directors of NoC to liquidate the business, (2) at the time of the
purchase of the NoC acquisition, NoCs limited number of employees were engaged in the shutdown of the business and not in the active conduct of the business and NoC had effectively ceased operations and (3) the Company negotiated the
purchase of the assets of NoC from an outside liquidator who had been engaged by the board of directors of NoC to liquidate the saleable assets of NoC.

5. BUSINESS ACQUISITIONS

On January 25, 2007, the Company acquired all the stock of National Hybrid, Inc. and Pace
Technology, Inc. (National Hybrid Group). The purchase price was $9,750,000 payable in cash.

The National Hybrid acquisition
added new product lines and strengthens the Companys research and manufacturing capabilities as the Company embarks on the next phase of growth in nanotechnology. The acquisition also significantly increased revenues and further solidified the
Company as a key supplier of critical electronic components to the U.S. Department of Defense and leading defense contractors.

The
National Hybrid Groups expertise includes analog and digital designs as well as application specific integrated circuits and gate-array implementations. Extensive in-house simulation, prototype testing and analysis facilities allow the
National Hybrid Group to develop products for both standard and custom applications with heightened reliability.

On January 24, 2007,
the Company borrowed $6,000,000 from Can-Med Technology, Inc. d/b/a Green Diamond Oil Corp. (the Lender) (a related party) in order to fund its purchase of the stock of the National Hybrid Group from the Estate of Benedict Pace, and to
provide the Company with additional working capital. This loan was evidenced by a promissory note (the Note) in favor of the Lender. The Note accrued interest at 12% per annum and with interest payable semi-annually. The principal
amount of the Note was due 61 months from the date on which it was made and could be prepaid at any time at the option of the Company without penalty. The loan and interest were repaid as of May 31, 2007.

The purchase price of the National Hybrid Group was satisfied through payment of cash in the amount of $9,750,000. The Company also incurred legal costs
and professional fees in connection with the acquisition of $191,310, giving a total acquisition cost of $9,941,310. The Company has accounted for the acquisition using the purchase method of accounting. The results of operations of the National
Hybrid Group have been included in the Companys results of operations beginning on January 24, 2007. In accordance with SFAS No. 141, Business Combinations the total purchase price was allocated to the National Hybrid
Groups net assets based on their estimated fair values as of January 24, 2007. During the year ended May 31, 2008 the Company changed the purchase price allocation as a result of an unrecorded account receivable. The fair values
assigned to tangible assets acquired and liabilities assumed were as follows:



|                                                |  |   |            |  
|----------------------------------------------- |  | - | ---------- | -
|Cash                                            |  | $ | 1,177,214  |  
|Current assets                                  |  |   | 7,653,021  |  
|Fixed assets in use and to be placed in service |  |   | 2,595,147  |  
|Current liabilities                             |  |   | (1,274,516 | )
|Deferred income taxes                           |  |   | (209,556   | )
|                                                |  |   |            |  
|Fair value of assets acquired                   |  | $ | 9,941,310  |  
|                                                |  |   |            |  



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



The following unaudited pro forma summary presents the combined results of operations as if the National Hybrid Group acquisition described above had occurred at the beginning of the period for the twelve months ended
May 31, 2007, respectively.



|                               |  |                                           |           
|------------------------------ |  | ----------------------------------------- | ----------
|                               |  | Twelve monthsendedMay 31, 2007(Pro forma)
|Revenues                       |  | $                                         | 29,107,969
|Net income                     |  | $                                         | 64,810    
|Net income per share  basic   |  | $                                         | 0.00      
|Net income per share  diluted |  | $                                         | 0.00      

6. MARKETABLE SECURITIES

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



|                                   |      |      |        |      |      |         |        |   |       |  |   |        
|---------------------------------- | ---- | ---- | ------ | ---- | ---- | ------- | ------ | - | ----- |  | - | -------
|                                   |      | 2008 |        | 2007
|                                   | Cost |      | Market |      | Cost |         | Market
|Shares in Canadian venture issuers |      | $    | 2,944  |      | $    | 461,806 |        | $ | 2,730 |  | $ | 605,011

Gross unrealized holding gains amounted to $458,862 and $602,281, respectively at May 31,
2008 and 2007.

7. INVENTORIES

Inventories consisted of the following as of May 31:



|                                                       |  |      |            |   |      |   |           
|------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ----------
|                                                       |  | 2008 |            |   | 2007
|Raw materials                                          |  | $    | 4,891,161  |   |      | $ | 5,199,245 
|Work in progress                                       |  |      | 2,110,371  |   |      |   | 2,573,329 
|Finished goods                                         |  |      | 3,171,327  |   |      |   | 2,588,295 
|Less: Provision for obsolete and slow moving inventory |  |      | (2,819,263 | ) |      |   |          
|                                                       |  |      |            |   |      |   |           
|Total                                                  |  | $    | 7,353,596  |   |      | $ | 10,360,869
|                                                       |  |      |            |   |      |   |           

The Company records a provision for both excess and obsolete inventory when write-downs or
write-offs are identified. During the year ended May 31, 2008 the Company took a reserve for obsolete and slow moving inventory in the amount of $2,819,263. The inventory valuation is based upon assumptions about future demand, product mix and
possible alternative uses.



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API Nanotronics Corp.

Notes to Consolidated Financial Statements



8. FIXED ASSETS

Fixed assets consisted of the following as of May 31:



|                            |  |      |            |                         |   |               |  |   |           
|--------------------------- |  | ---- | ---------- | ----------------------- | - | ------------- |  | - | ----------
|                            |  | 2008
|                            |  | Cost |            | AccumulatedDepreciation |   | Net BookValue
|Land                        |  | $    | 1,375,482  |                         | $ |              |  | $ | 1,375,482 
|Buildings                   |  |      | 3,158,358  |                         |   | 754,942       |  |   | 2,403,416 
|Computer equipment          |  |      | 310,884    |                         |   | 182,407       |  |   | 128,477   
|Furniture and fixtures      |  |      | 462,951    |                         |   | 304,827       |  |   | 158,124   
|Machinery and equipment (A) |  |      | 8,965,002  |                         |   | 2,863,277     |  |   | 6,101,725 
|Vehicles                    |  |      | 29,582     |                         |   | 22,785        |  |   | 6,797     
|                            |  |      |            |                         |   |               |  |   |           
|                            |  | $    | 14,302,259 |                         | $ | 4,128,238     |  | $ | 10,174,021
|                            |  |      |            |                         |   |               |  |   |           



|(A) | Included in machinery and equipment is approximately $682,000 of assets acquired in conjunction with the National Hybrid Group acquisition not yet placed in service.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                |  |      |            |                         |   |               |  |   |          
|------------------------------- |  | ---- | ---------- | ----------------------- | - | ------------- |  | - | ---------
|                                |  | 2007
|                                |  | Cost |            | AccumulatedDepreciation |   | Net BookValue
|Land                            |  | $    | 504,493    |                         | $ |              |  | $ | 504,493  
|Buildings                       |  |      | 3,169,234  |                         |   | 879,569       |  |   | 2,289,665
|Computer equipment and software |  |      | 546,977    |                         |   | 486,606       |  |   | 60,371   
|Furniture and fixtures          |  |      | 361,858    |                         |   | 344,751       |  |   | 17,107   
|Machinery and equipment         |  |      | 5,577,951  |                         |   | 1,927,575     |  |   | 3,650,376
|Vehicles                        |  |      | 58,290     |                         |   | 58,290        |  |   |         
|Web site development costs      |  |      | 30,826     |                         |   | 30,826        |  |   |         
|                                |  |      |            |                         |   |               |  |   |          
|                                |  | $    | 10,249,629 |                         | $ | 3,727,617     |  | $ | 6,522,012
|                                |  |      |            |                         |   |               |  |   |          

Depreciation expense amounted to $761,625 and $449,530 for the years ended May 31, 2008 and
2007, respectively. Included in these amounts are $8,386 and $20,546 of amortization of assets under capital lease for the years ended May 31, 2008 and 2007, respectively.



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



9. GOODWILL AND INTANGIBLE ASSETS

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



|                                           |  |      |            |   |      |   |            |  
|------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                           |  | 2008 |            |   | 2007 |  
|Goodwill not subject to amortization:      |  |      |            |   |      |   |            |  
|Beginning balance, net                     |  | $    | 1,130,906  |   |      | $ | 1,137,166  |  
|Effects of currency translation            |  |      |           |   |      |   | (6,260     | )
|                                           |  |      |            |   |      |   |            |  
|Ending balance, net                        |  | $    | 1,130,906  |   |      | $ | 1,130,906  |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  |     
|                                           |  | 2008 |            |   | 2007 |  
|Intangible assets subject to amortization: |  |      |            |   |      |   |            |  
|Non-compete agreements                     |  | $    | 951,100    |   |      | $ | 951,100    |  
|Less: Accumulated amortization             |  |      | (951,100   | ) |      |   | (882,350   | )
|Customer contracts                         |  |      | 1,831,784  |   |      |   | 1,831,784  |  
|Less: Accumulated amortization             |  |      | (1,558,847 | ) |      |   | (1,277,361 | )
|Software                                   |  |      | 358,952    |   |      |   |           |  
|Less: Accumulated amortization             |  |      | (124,250   | ) |      |   |           |  
|Patents                                    |  |      | 962,300    |   |      |   |           |  
|                                           |  |      |            |   |      |   |            |  
|                                           |  | $    | 1,469,939  |   |      | $ | 623,173    |  
|                                           |  |      |            |   |      |   |            |  

Amortization expense amounted to $434,815, and $533,358 for the years ended May 31, 2008 and
2007, respectively. Amortization expense is expected to be approximately $323,000, $108,000, $91,000, $104,000 and $117,000 for the years ending May 31, 2009, 2010, 2011, 2012 and 2013, respectively.

10. SHORT-TERM BORROWINGS

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



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |      |         |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 2008 |         | 2007
|The Companys wholly owned subsidiary, API Electronics has a working capital line of credit of $500,000. The credit is secured by all of
its assets pursuant to a general security agreement. The bank indebtedness is due on demand and bears interest at US prime plus 1%. The line is subject to an annual renewal provision on April 14, 2009                                                                                                                                                                  |  | $    | 270,147 |      | $ | 395,147
|The Companys wholly owned subsidiary, Filtran Limited has a working capital line of credit in the amount of $1,080,000 ($1,000,000 Cdn$)
with a major Canadian bank. The interest on any borrowed funds is charged at Canadian prime. The agreement also allows Filtran to lease an asset at Canadian prime plus 1% up to $33,000. The lender has a general security agreement and a 1st
Collateral Mortgage on Filtrans assets and building. The line is subject to an annual renewal provision on May 31, 2009 |  |      | 40,311  |      |   | 158,375
|The Companys wholly owned subsidiary, Keytronics Inc. had a working capital line of credit of $125,000. The credit line was paid in full
and closed during the fiscal year 2008                                                                                                                                                                                                                                                                                                                                   |  |      |        |      |   | 81,754 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |      |         |      |   |        
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | $    | 310,458 |      | $ | 635,276
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |      |         |      |   |        

At May 31, 2008 and 2007, the US prime rate was 5.00 and 8.25 percent per annum,
respectively, and the Canadian prime rate was 3.25 and 4.25 percent per annum, respectively.



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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



|                                      |  |      |           |      |   |          
|------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                      |  | 2008 |           | 2007
|Accounts payable and accrued expenses |  | $    | 3,086,784 |      | $ | 2,660,739
|Wage and vacation accrual             |  |      | 676,944   |      |   | 399,064  
|Audit and accounting fees             |  |      | 103,721   |      |   | 119,184  
|                                      |  |      |           |      |   |          
|Total                                 |  | $    | 3,867,449 |      | $ | 3,178,987
|                                      |  |      |           |      |   |          

12. LONG-TERM DEBT

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



|                                                                                                                                                                                                                                        |  |      |         |      |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                        |  | 2008 |         | 2007
|Promissory note, repayable based on 25% of the gross profit earned by the Company on all orders or contracts received by it on or after
August 29, 2005, for product previously manufactured or sold by Sensonics. Non-interest bearing |  | $    | 113,851 |      | $ | 160,935
|Loan payable, bearing interest of 10%, with monthly principal and interest payments of $4,467, secured by the assets of Keytronics, repayable
by March 6, 2010. Loan paid in full during fiscal year end 2008                           |  |      |        |      |   | 110,973
|Promissory note payable to former shareholders of Keytronics with a first security interest in the common stock of Keytronics, repayable by
October 27, 2007, bearing interest of 5%. Note paid in full in October 2007                 |  |      |        |      |   | 200,000
|                                                                                                                                                                                                                                        |  |      |         |      |   |        
|                                                                                                                                                                                                                                        |  |      | 113,851 |      |   | 471,908
|Less: Current Portion                                                                                                                                                                                                                   |  |      | 113,851 |      |   | 404,711
|                                                                                                                                                                                                                                        |  |      |         |      |   |        
|Long-term debt, net of current portion                                                                                                                                                                                                  |  | $    |        |      | $ | 67,197 
|                                                                                                                                                                                                                                        |  |      |         |      |   |        

13. OBLIGATIONS UNDER CAPITAL LEASES

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

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



|                               |  |         |        |      |   |       
|------------------------------ |  | ------- | ------ | ---- | - | ------
|                               |  | May 31,
|                               |  | 2008    |        | 2007
|Equipment                      |  | $       | 45,020 |      | $ | 45,020
|Less: Accumulated amortization |  |         | 16,875 |      |   | 8,489 
|                               |  |         |        |      |   |       
|Equipment, net                 |  | $       | 28,145 |      | $ | 36,531
|                               |  |         |        |      |   |       



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



Obligations under capital leases consist of the following:



|                                                                                                                                                                             |  |         |        |      |   |       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- | ------ | ---- | - | ------
|                                                                                                                                                                             |  | May 31,
|                                                                                                                                                                             |  | 2008    |        | 2007
|Equipment capital leases, with monthly lease payments of $866 and $866 for 2008 and 2009, respectively, including interest at approximately
9%, secured by the leased assets |  | $       | 25,245 |      | $ | 33,410
|Less: Current maturities                                                                                                                                                     |  |         | 6,539  |      |   | 10,388
|                                                                                                                                                                             |  |         |        |      |   |       
|Obligations under capital leases, less current maturities                                                                                                                    |  | $       | 18,706 |      | $ | 23,022
|                                                                                                                                                                             |  |         |        |      |   |       

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



|                       |  |        |       
|---------------------- |  | ------ | ------
|Year                   |  | Amount
|2008                   |  | $      | 8,454 
|2009                   |  |        | 7,808 
|2010                   |  |        | 7,808 
|2011                   |  |        | 5,856 
|2012                   |  |        |      
|                       |  |        |       
|                       |  |        | 29,926
|Less: Imputed Interest |  |        | 4,681 
|                       |  |        |       
|                       |  | $      | 25,245
|                       |  |        |       

14. INCOME TAXES

The geographical sources of income (loss) before income taxes for the years ended May 31, 2007 and 2006 were as follows:



|                                             |  |      |            |   |      |   |            |  
|-------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                             |  | 2008 |            |   | 2007 |  
|Income (loss) before income taxes (benefit): |  |      |            |   |      |   |            |  
|Unites States                                |  | $    | (5,708,220 | ) |      | $ | (281,135   | )
|Non-United States                            |  |      | (1,073,522 | ) |      |   | (1,124,594 | )
|                                             |  |      |            |   |      |   |            |  
|Total                                        |  | $    | (6,781,742 | ) |      | $ | (1,405,729 | )
|                                             |  |      |            |   |      |   |            |  

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



|                               |  |      |          |   |      |   |          |  
|------------------------------ |  | ---- | -------- | - | ---- | - | -------- | -
|                               |  | 2008 |          |   | 2007 |  
|Current:                       |  |      |          |   |      |   |          |  
|Unites States                  |  | $    | (38,119  | ) |      | $ | 75,774   |  
|Non-United States              |  |      |         |   |      |   |         |  
|                               |  |      |          |   |      |   |          |  
|                               |  |      | (38,119  | ) |      |   | 75,774   |  
|                               |  |      |          |   |      |   |          |  
|Deferred:                      |  |      |          |   |      |   |          |  
|Unites States                  |  |      |         |   |      |   |         |  
|Non-United States              |  |      | (177,514 | ) |      |   | (528,000 | )
|                               |  |      |          |   |      |   |          |  
|                               |  |      | (177,514 | ) |      |   | (528,000 | )
|                               |  |      |          |   |      |   |          |  
|Income tax provision (benefit) |  | $    | (215,633 | ) |      | $ | (452,226 | )
|                               |  |      |          |   |      |   |          |  



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



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:



|                                          |  |       |    |  |       |   
|----------------------------------------- |  | ----- | -- |  | ----- | --
|                                          |  | 2008  |    |  | 2007  |   
|U.S. federal statutory tax rate (benefit) |  | (34.0 | )% |  | (34.0 | )%
|Non-deductible expenses                   |  | 47.7  |    |  | 40.5  |   
|Change in valuation allowance             |  | (42.8 | )  |  | (41.8 | ) 
|Other items, net                          |  | 26.0  |    |  | 3.2   |   
|                                          |  |       |    |  |       |   
|Effective tax rate (benefit)              |  | (3.1  | )% |  | (32.1 | )%
|                                          |  |       |    |  |       |   

The components of deferred taxes are as follows:



|                                                              |  |      |            |   |      |   |            |  
|------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                              |  | 2008 |            |   | 2007 |  
|Future income tax assets                                      |  |      |            |   |      |   |            |  
|Loss carryforwards                                            |  | $    | 1,317,626  |   |      | $ | 47,000     |  
|Other                                                         |  |      | 75,532     |   |      |   | 58,000     |  
|Unrealized foreign exchange loss                              |  |      | 578,469    |   |      |   | 546,000    |  
|Marketable securities                                         |  |      | 79,853     |   |      |   | 218,000    |  
|Intangible assets                                             |  |      | 508,813    |   |      |   | 511,000    |  
|Stock based compensation                                      |  |      | 880,530    |   |      |   | 506,000    |  
|Inventory                                                     |  |      | 840,749    |   |      |   | 16,000     |  
|Capital assets                                                |  |      | 62,297     |   |      |   | 35,000     |  
|                                                              |  |      |            |   |      |   |            |  
|                                                              |  |      | 4,343,869  |   |      |   | 1,937,000  |  
|                                                              |  |      |            |   |      |   |            |  
|Future income tax liabilities                                 |  |      |            |   |      |   |            |  
|Capital assets                                                |  |      | (1,217,604 | ) |      |   | (1,047,712 | )
|Intangibles                                                   |  |      | (12,969    | ) |      |   |           |  
|Other                                                         |  |      | (119,718   | ) |      |   |           |  
|                                                              |  |      |            |   |      |   |            |  
|                                                              |  |      | (1,350,291 | ) |      |   | (1,047,712 | )
|                                                              |  |      |            |   |      |   |            |  
|Valuation Allowance                                           |  |      | (2,902,000 | ) |      |   | (1,070,859 | )
|                                                              |  |      |            |   |      |   |            |  
|                                                              |  | $    | 91,578     |   |      | $ | (181,571   | )
|                                                              |  |      |            |   |      |   |            |  
|                                                              |  |     
|                                                              |  | 2008 |            |   | 2007 |  
|Analysis of changes in deferred taxes                         |  |      |            |   |      |   |            |  
|Income statement effect                                       |  | $    | (177,514   | ) |      | $ | 528,000    |  
|Liabilities in connection with acquisition of National Hybrid |  |      |           |   |      |   | (206,818   | )
|Liabilities in connection with acquisition of NoC             |  |      | 243,507    |   |      |   |           |  
|Other comprehensive income effect                             |  |      | 8,425      |   |      |   | (217,000   | )
|Cumulative translation adjustment                             |  |      | 198,731    |   |      |   | 67,247     |  
|                                                              |  |      |            |   |      |   |            |  
|Change in deferred taxes                                      |  | $    | 273,149    |   |      | $ | 171,429    |  
|                                                              |  |      |            |   |      |   |            |  
|                                                              |  |     
|                                                              |  | 2008 |            |   | 2007 |  
|Balance sheet presentation                                    |  |      |            |   |      |   |            |  
|Deferred income tax assets  current                          |  | $    | 790,906    |   |      | $ | 63,000     |  
|Deferred income tax assets  long-term                        |  |      | 571,110    |   |      |   | 803,141    |  
|Deferred income tax liability  current                       |  |      | (39,865    | ) |      |   | (242,000   | )
|Deferred tax liabilities  long-term                          |  |      | (1,230,573 | ) |      |   | (805,712   | )
|                                                              |  |      |            |   |      |   |            |  
|Net deferred tax assets (liabilities)                         |  | $    | 91,578     |   |      | $ | (181,571   | )
|                                                              |  |      |            |   |      |   |            |  



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



At May 31, 2008, the accompanying consolidated financial statements include $104,000 of deferred tax assets associated with operating loss carryforwards in tax jurisdictions outside the United States and deferred
tax assets associated with operating loss carryforwards in the United States of $1,214,000. At May 31, 2007, the accompanying consolidated financial statements include $5,000 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 $42,000.

The valuation allowance as of May 31, 2008 totaled $2,902,000 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, 2007 totaled $1,070,859 which consisted principally of established reserves for deferred tax assets of foreign entities.

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

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

The Company and its
subsidiaries have net operating losses of approximately $3,544,573 to apply against future taxable income. These losses will expire as follows: $14,000, $55,600, $67,814 and $3,407,159 in 2010, 2012, 2017 and 2028 respectively.

As of May 31, 2008, the Company had no unrecognized tax benefits, and no adjustment to its financial position, results of operations or cash flows
was required. The Company does not expect that unrecognized tax benefits will increase within the next twelve months. The Company records interest and penalties related to tax matters within other expense on the accompanying Consolidated Statement
of Operations. These amounts are not material to the consolidated financial statements for the periods presented. The Companys U.S. tax returns are subject to examination by federal and state taxing authorities. The Companys Canadian tax
returns are subject to examination by federal and provincial taxing authorities.

15. SHAREHOLDERS EQUITY

On November 19, 2007, API Nanotronics Corp. affected a five-for-one stock split of its common stock. Because retained earnings were in a deficit
position, the newly issued stocks par value was capitalized from additional paid-in capital. Each stockholder of record at the close of business on November 12, 2007 received a stock dividend of four additional shares for each outstanding
share held on that date. The additional shares of common stock were distributed on November 19, 2007. All the references to number of shares presented in these financial statements have been adjusted to reflect the post split number of shares.

Pursuant to the court-approved Plan of Arrangement API Nanotronics Sub, Inc., formerly known as RVI Sub, Inc., became the sole Stockholder
of API, and each holder of API common shares was granted the right to receive for each API common share 50 shares (10 pre-split) of API Nanotronics Corp. common stock, or if an eligible Canadian shareholder elected, 50 (10 pre-split) API Nanotronics
Sub, Inc. exchangeable shares. Each



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



API Nanotronics Sub, Inc. exchangeable share is exchangeable into one share of API Nanotronics common stock at the option of the holder. All references in
the financial statements to the number of shares outstanding, per share amounts, and stock option data of the Companys common stock (other than in the calculation of Stockholders Equity) have been restated to reflect the effect of the
Plan of Arrangement for all the periods presented. Stockholders equity reflects the Plan of Arrangement by reclassifying from Common stock to Additional paid-in capital an amount equal to the par value of the shares
arising from the Plan of Arrangement. Immediately prior to the closing of the Plan of Arrangement, Rubincon had 200,033,360 shares of common stock outstanding.

In connection with the Plan of Arrangement that occurred on November 6, 2006, the Company was obligated to issue 141,270,300 shares of either API Nanotronics common stock or exchangeable shares of API Nanotronics
Sub, Inc. in exchange for the API common shares previously outstanding. As of May 31, 2008, (i) API Nanotronics had issued 103,691,650 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 35,077,750 shares of its exchangeable shares for API common shares (excluding exchangeable shares held by the Company and its affiliates and exchangeable shares subsequently exchanged for our
common stock) which exchangeable shares are the substantially equivalent to our common stock and (iii) API Nanotronics transfer agent was awaiting stockholder elections on 2,487,150 shares of API Nanotronics common stock or exchangeable
shares of API Nanotronics Sub, Inc. issueable with respect to the remaining API common shares. Consequently, API Nanotronics has not issued but is obligated to issue 37,564,900 shares of its common stock under the Plan of Arrangement either directly
for API common shares or in exchange for API Nanotronics Sub, Inc. exchangeable shares not held by API Nanotronics Corp. or its affiliates.

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

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

On October 19, 2007, at the 2007 Annual Meeting
of Stockholders of the Company, the Stockholders of the Company approved an amendment to the certificate of incorporation increasing the number of authorized shares of common stock, par value $.001, from 200,000,000 to 1,000,000,000.

During the twelve month period ended May 31, 2008, the Company accepted subscriptions for 161,999,995 shares of its common stock, which were sold in
a Regulation S, private placement to investors not located in the United States . The Company received net proceeds of $7,750,000 and a subscription receivable of $1,550,000.



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



Warrants

At May 31, 2008 and 2007 there are no warrants outstanding and exercisable.

16. STOCK BASED COMPENSATION

On October 26,
2006, the Company adopted its 2006 Equity Incentive Plan (the Equity Incentive Plan), which was approved at the 2007 Annual Meeting of Stockholders of the Company. All the prior options issued by API were carried over to this plan under
the provisions of the Plan of Arrangement. Of the 75,000,000 shares authorized under the Equity Incentive Plan, 41,750,000 shares are available for issuance pursuant to options or as stock as of May 31, 2008. Options issued by Rubincon prior to
the effective date of the Plan of Arrangement were not carried over to this plan. Under the Companys Equity Incentive Plan, options may have a term of up to ten years from the date of grant. The stock option exercise prices are equal to 100
percent of the fair market value of the underlying shares on the date the options are granted.

As of May 31, 2008, there was
$1,290,861 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 a weighted-average period of five years from the date of grant.

During the twelve months ended May 31, 2008 and 2007, $940,593 and $1,497,199, respectively, has been recognized as stock based compensation expense in general and administrative expense.

Included in total stock based compensation for the twelve months ended May 31, 2008 is $208,473 of stock based compensation expense related to
repricing of certain options that had been previously granted to employees, directors and consultants of the Company. The options were repriced to the average closing bid and ask price on the date of action on July 2, 2007. The new option
exercise price is $0.2690 per share. The other terms of the options, including the vesting schedules, remained unchanged as a result of the repricing.

On May 30, 2008, the Compensation Committee of the board of directors of the Company acted to reprice certain options that the Company had previously granted to certain employees, directors and consultants of the
Company. The options, all of which had been previously issued pursuant to the API Nanotronics Corp. 2006 Equity Incentive Plan (the Plan), were repriced to be the average of the closing bid and ask price on the date of the action by the
Compensation Committee. The new option exercise price was $0.1005 per share. The fair value of the repricing amounted to $139,012 which is included in the $940,593 total stock based compensation recognized during the year ended May 31, 2008.
The other terms of the options, including the vesting schedules, remained unchanged as a result of the repricing.

On April 22, 2008,
the Company granted stock options to the Chief Executive Officer under the Corporations 2006 Equity Incentive Plan. The Agreement contains (i) incentive options for shares of common stock, up to the amount permitted by applicable law, and
non-qualified stock options for the remainder resulting in the aggregate right to purchase up to 11,236,650 shares of the Corporations common stock (Time Based Shares), and (ii) nonqualified options to purchase up to 7,491,100
shares of the Corporations common stock (the Performance Shares). The per-share exercise price for such stock options will be the fair market value of a share of the Corporations common stock on the date of grant. The stock options
with respect to the Time Based Shares will vest in equal installments annually over a three-year period beginning with the commencement of employment with the Corporation. The fair value of the Time Based Shares amounted to $793,806
under the



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



Black-Scholes option pricing model with the following assumptions: Risk free rate4.0%, Volatility68%, Expected life10 years, Dividend
yield0%. The Company recognized $40,425 of stock based compensation expense which is included in the $940,593 total stock based compensation recognized during the year ended May 31,2008. The stock options with respect to the Performance
Shares will vest in equal installments annually over a three-year period tied to the fiscal year end of the Corporations 2009, 2010 and 2011 fiscal years upon the Corporation achieving various performance goals.

On July 2, 2007, the Compensation Committee of the Board of Directors of the Company acted to reprice certain options that the Company had
previously granted to certain employees, directors and consultants of the Company. The options, all of which had been previously issued pursuant to the API Nanotronics Corp. 2006 Equity Incentive Plan (the Plan), were repriced to be the
average of the closing bid and ask price on the date of the action by the Compensation Committee. The new option exercise price was $0.2690 per share. The other terms of the options, including the vesting schedules, remained unchanged as a result of
the repricing .

On July 19, 2007, a total of 1,000,000 options vested upon the achievement of certain milestones as defined in the
grant agreements. These options are exercisable at $0.2690 per share. The Company recognized approximately $149,200 of stock based compensation expense which is included in the $940,593 total stock based compensation recognized during the year ended
May 31, 2008.

On June 20, 2007, the Company granted stock options to purchase 125,000 shares of common stock to each of two of
its newly elected directors for an exercise price of $0.3230 per share. Under each Stock Option Agreement, the option vests and becomes exercisable with respect to 41,665 option shares on June 21, 2008, 41,665 option shares on June 21,
2009 and 41,670 option shares on June 21, 2010. The term of such options is ten years.

In accordance with the combination agreement,
as of November 6, 2006, 29,000,000 API stock options (on a post-exchange basis) were exchanged for 29,000,000 stock options of API Nanotronics. The fair value of the API Nanotronics options exceeded the fair value of the API options by $888,360
at November 6, 2006 under the Black-Scholes option pricing model with the following assumptions: Risk free rate2.50%, Volatility80%, Expected life4.17 years to 4.58 years, Dividend yield0%. The excess was expensed as
stock based compensation in general and administrative expense for the year ended May 31, 2007 and a corresponding amount was added to the additional paid-in capital as part of stockholders equity.

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:



|                    |  |               |       |  |               |      
|------------------- |  | ------------- | ----- |  | ------------- | -----
|                    |  | 2008          |       |  | 2007          |      
|Expected volatility |  | 56%           |       |  | 60  80%      |      
|Expected dividends  |  | 0%            |       |  | 0%            |      
|Expected term       |  | 5  10        | years |  | 5-10          | years
|Risk-free rate      |  | 2.50%  4.74% |       |  | 2.50%  4.44% |      



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##### Table of Contents

API Nanotronics 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, 2006 |  | 25,500,000 |   |  | $                            | 0.0928  |  
|Exercised                              |  | (500,000   | ) |  | $                            | (0.1200 | )
|Issued                                 |  | 8,000,000  |   |  | $                            | 0.3622  |  
|Outstanding options of Rubincon (A)    |  | 625,000    |   |  | $                            | 0.2000  |  
|                                       |  |            |   |  |                              |         |  
|Stock Options outstandingMay 31, 2007 |  | 33,625,000 |   |  | $                            | 0.1584  |  
|Issued                                 |  | 18,977,750 |   |  | $                            | 0.0948  |  
|Exercised                              |  |           |   |  | $                            |        |  
|                                       |  |            |   |  |                              |         |  
|Stock Options outstandingMay 31, 2008 |  | 52,602,750 |   |  | $                            | 0.0980  |  
|                                       |  |            |   |  |                              |         |  
|Stock Options exercisableMay 31, 2008 |  | 28,375,000 |   |  | $                            | 0.0980  |  
|                                       |  |            |   |  |                              |         |  



|(A) | Stock options entitling the holder to purchase 625,000 shares of common stock of the Company at an option exercise price of $0.20 per common share were issued prior to the Plan of
Arrangement and were not issued under the Equity Incentive Plan. All of these options have vested.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The weighted-average
grant date fair value of options granted during the years ended May 31, 2008 and 2007 was $0.0980 and $0.3622, respectively.



|                        |  |                                    |  |                              |        |                                     |       |                         |   |                                 |  |                              |            |                         |   |       |  |   |        
|----------------------- |  | ---------------------------------- |  | ---------------------------- | ------ | ----------------------------------- | ----- | ----------------------- | - | ------------------------------- |  | ---------------------------- | ---------- | ----------------------- | - | ----- |  | - | -------
|Options Outstanding     |  | Options Exercisable               
|Range of Exercise Price |  | Number ofOutstandingat May 31,2008 |  | WeightedAverageExercisePrice |        | WeightedAverageRemainingLife(Years) |       | AggregateIntrinsicValue |   | NumberExercisableat May 31,2008 |  | WeightedAverageExercisePrice |            | AggregateIntrinsicValue
|$ 0.0928  0.20         |  | 51,352,750                         |  | $                            | 0.0940 |                                     | 5.487 |                         | $ | 253,000                         |  | $                            | 28,175,000 |                         | $ | 0.093 |  | $ | 150,000
|$0.2000  0.40          |  | 1,250,000                          |  | $                            | 0.2690 |                                     | 8.677 |                         | $ |                                |  | $                            | 200,000    |                         | $ | 0.269 |  | $ |       
|                        |  |                                    |  |                              |        |                                     |       |                         |   |                                 |  |                              |            |                         |   |       |  |   |        
|                        |  | 52,602,750                         |  |                              |        |                                     | 5.570 |                         | $ | 253,000                         |  | $                            | 28,375,000 |                         |   |       |  | $ | 150,000
|                        |  |                                    |  |                              |        |                                     |       |                         |   |                                 |  |                              |            |                         |   |       |  |   |        

The intrinsic value is calculated at the difference between the market value as of May 31,
2008 and the exercise price of the shares. The market value as of May 31, 2008 was $0.10 as reported by the Nasdaq Stock Market.

The
summary of the status of the Companys non-vested options for the year ended May 31, 2008 is as follows:



|                        |  |                                    |  |                              |  |                         |         
|----------------------- |  | ---------------------------------- |  | ---------------------------- |  | ----------------------- | --------
|Range of Exercise Price |  | Number ofOutstandingat May 31,2008 |  | WeightedAverageExercisePrice |  | AggregateIntrinsicValue
|$0.0928  0.20          |  | 23,177,750                         |  | $0.0940                      |  | $                       | 103,000 
|$0.2000  0.40          |  | 1,050,000                          |  | $0.2690                      |  | $                       |        
|                        |  |                                    |  |                              |  |                         |         
|                        |  | 24,227,750                         |  |                              |  |                         | $103,000



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



|                         |  |            |  |                                    |     
|------------------------ |  | ---------- |  | ---------------------------------- | ----
|                         |  | Shares     |  | WeightedAverageGrantDate FairValue
|Non-vested, June 1, 2007 |  | 8,000,000  |  | $                                  | 0.10
|Granted                  |  | 18,977,750 |  | $                                  | 0.09
|Exercised                |  | 2,750,000  |  | $                                  | 0.11
|                         |  |            |  |                                    |     
|Non-vested, May 31, 2008 |  | 24,227,750 |  | $                                  | 0.10
|                         |  |            |  |                                    |     

17. SUPPLEMENTAL CASH FLOW INFORMATION



|                                                                         |  |      |         |      |   |        
|------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                                                         |  | 2008 |         | 2007
|(a) Supplemental Cash Flow Information                                   |  |      |         |      |   |        
|Cash paid for income taxes                                               |  | $    | 27,324  |      | $ | 11,867 
|                                                                         |  |      |         |      |   |        
|Cash paid for interest                                                   |  | $    | 450,123 |      | $ | 188,058
|                                                                         |  |      |         |      |   |        
|(b) Non cash transaction                                                 |  |      |         |      |   |        
|Note payable from business acquisition.                                  |  | $    |        |      | $ | 402,567
|Other long-term debt assumed in conjunction with the Plan of Arrangement |  | $    |        |      | $ | 100,000
|Business acquisition NHIadjustment to purchase price                    |  | $    | 134,164 |      | $ |       

18. RELATED PARTY TRANSACTIONS



| | (a) | Included in general and administrative expenses for the year ended May 31, 2008 are consulting fees of $94,958 (2007$80,942) paid to an individual who is a director
and officer of the Company and rent, management fees, and office administration fees of $184,646 (2007  $185,108) paid to a corporation in which two of the directors are also directors of the Company. (See Note 20(b)).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The bank debt of API Electronics Inc. is guaranteed by the President and Chief Operating Officer of the Company. The fair value of this guarantee is not significant to these
financial statements. (See Note 10).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Included in interest expenses for the twelve months ended May 31, 2008 are interest charges of $418,734 from the $4,000,000 borrowed from Jason DeZwirek, Secretary and a
director of the Company, which was used to fund the acquisition of the assets of NoC (Note 4). The loan and interest were paid in full by the Company as of May 31, 2008. Included in interest expenses for the year ended May 31, 2007 are
interest charges of $110,137 from the $6,000,000 borrowed from Can-Med Technology, Inc. d/b/a Green Diamond Oil Corp., an entity which the Companys Chairman is President of, used to fund the acquisition of the National Hybrid Group. The loan
and interest were paid in full by the Company as of May 31, 2007.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



19. EARNINGS (LOSS) PER COMMON SHARE

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



|                                  |  |             |  |            
|--------------------------------- |  | ----------- |  | -----------
|                                  |  | 2008        |  | 2007       
|Weighted-average shares-basic     |  | 306,989,829 |  | 261,028,695
|Effect of dilutive securities     |  | *           |  | *          
|                                  |  |             |  |            
|Weighted-average shares  diluted |  | 306,989,829 |  | 261,028,695
|                                  |  |             |  |            

Basic EPS and diluted EPS for the years ended May 31, 2008 and 2007 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, 2008 of 61,451,800 of which, only 37,581,150 shares have been exchanged as of May 31, 2008.



|* | All outstanding options aggregating 33,625,000 incremental shares, have been excluded from the May 31, 2008 (25,500,000 incremental shares from the May 31, 2007)
computation of diluted EPS as they are anti-dilutive due to the losses generated in 2008.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20. COMMITMENTS



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



| |  | The following is a schedule by years of approximate future minimum rental payments under operating leases that have remaining non-cancelable lease terms in excess of one year as of
May 31, 2008.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     |  |         
|---- |  | --------
|2009 |  | $274,797
|2010 |  | $283,757
|2011 |  | $292,718
|2012 |  | $301,679
|2013 |  | $101,555



| |  | 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 $729,625, and $192,951 for the years ended May 31 2008 and 2007, respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | On January 1, 2005, API entered into a renewal of an oral agreement for management services with Can-Med Technology, doing business as Green Diamond Corp. Under the terms of
the agreement, Green Diamond Corp. provides office space, office equipment and supplies, telecommunications, personnel, and management services. This obligations were assumed by the Company in connection with the consummation of the Plan of
Arrangement. Included in general and administrative expenses for the year ended May 31, 2008 are $184,686 (2007  $185,108). (See Note 18(a)).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | On February 14, 2007, the Company entered into an employment agreement (the Agreement) defining the terms and conditions of employment for the
Chief Technology Officer of the Corporation. The employment commenced on May 1, 2007. Under the terms of the Agreement, the Chief Technology Officer of the Corporation will receive an annual base salary of $375,000 and an annual discretionary
bonus that will be based upon certain performance milestones as established by the Board of Directors or the Compensation Committee of the Corporation. With respect to the termination provisions under the
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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API Nanotronics Corp.

Notes to Consolidated Financial Statements



| | Agreement, for termination without cause, the Corporation shall have the right to terminate employment on 30 days written notice. In such case, that
employment has been terminated prior to the second anniversary of the effective date of the Agreement, the Corporation shall provide the Chief Technology Officer with severance pay equal to his base salary from the date of termination until the
second anniversary of the effective date of the Agreement. Upon any termination without cause, the Chief Technology Officer shall also receive 12 months base salary and the continuation of certain benefits for a 12 month period. The same severance
arrangement applies in the case of constructive termination.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | On March 3, 2008, the Company entered into an employment agreement (the Agreement) defining the terms and conditions of employment for the Chief Executive Officer
of the Corporation. The employment commenced on April 21, 2008. Under the terms of the Agreement, the Chief Executive Officer of the Corporation will receive an annual base salary of $265,000, payment of relocation expenses of up to $100,000,
various other benefits and an annual bonus. The bonus will be 50% of the Chief Executive Officers annual salary and will be based upon certain performance milestones as established by the Board of Directors or the Compensation Committee of the
Corporation. Either the Corporation or the Chief Executive Officer may terminate the Agreement at any time without cause (i) during the first year of employment by the Corporation, the Chief Executive Officer will receive six months salary as
severance pay, (ii) during the second through fourth years of employment with the Corporation, the under the Agreement the Chief Executive Officer will receive twelve months salary as severance pay and (iii) during the period commencing on
the day after the fourth anniversary of employment by the Corporation, the Chief Executive Officer will receive eighteen months salary as severance pay.
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| |  | Additionally, upon commencement of employment, the Chief Executive Officer was granted incentive options under the Corporations 2006 Equity Incentive Plan. The Agreement
contains (i) incentive options for shares of common stock, up to the amount permitted by applicable law, and non-qualified stock options for the remainder resulting in the aggregate right to purchase up to 11,236,650 shares of the
Corporations common stock (Time Based Shares), and (ii) nonqualified options to purchase up to 7,491,100 shares of the Corporations common stock (the Performance Shares). The per-share exercise price for such stock
options will be the fair market value of a share of the Corporations common stock on the date of grant. The stock options with respect to the Time Based Shares will vest in equal installments annually over a three-year period beginning with
the commencement of employment with the Corporation. The stock options with respect to the Performance Shares will vest in equal installments annually over a three-year period tied to the fiscal year end of the Corporations 2009, 2010 and 2011
fiscal years upon the Corporation achieving various performance goals.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21. 401(k) PLAN

The Company has adopted a 401(k) deferred compensation arrangement. Under the provision of the plan, the Company is required to match 50% of employee
contributions up to a maximum of 3% of the employees eligible compensation.

Employees may contribute up to a maximum of 15% of
eligible compensation. The Company may also make discretionary contributions up to a total of 15% of eligible compensation. During the years ended May 31, 2008 and 2007, the Company incurred $186,957, and $71,969 respectively, as its obligation
under the terms of the plan, charged to general and administrative expense.



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



22. SEGMENT INFORMATION

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

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



|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|------------------------------ |  | ------ | --------- | - | ------------- | - | ---------- | ----------------- |  | - | ------------------------- | - |  | ----- | -------- | - |  | - | ---------- | -
|Year Ended May 31, 2008        |  | Canada |           |   | United States |   |            | Corporate(Canada) |  |   | Inter SegmentEliminations |   |  | Total |         
|Sales to external customers    |  | $      | 9,044,846 |   |               | $ | 21,917,200 |                   |  | $ |                          |   |  | $     |         |   |  | $ | 30,962,046 |  
|Inter-segment sales            |  |        | 7,800     |   |               |   | 385,826    |                   |  |   |                           |   |  |       | (393,626 | ) |  |   |           |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Total revenue                  |  |        | 9,052,646 |   |               |   | 22,303,026 |                   |  |   |                          |   |  |       | (393,626 | ) |  |   | 30,962,046 |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Income before expenses below:  |  |        | 290,721   |   |               |   | (4,638,117 | )                 |  |   |                          |   |  |       |         |   |  |   | (4,347,396 | )
|                               |  |        |           |   |              
|Corporate head office expenses |  |        |          |   |               |   |           |                   |  |   | 958,896                   |   |  |       |         |   |  |   | 958,896    |  
|Depreciation and amortization  |  |        | 123,579   |   |               |   | 1,070,104  |                   |  |   | 2,757                     |   |  |       |         |   |  |   | 1,196,440  |  
|Other expense (income)         |  |        | 177,972   |   |               |   |           |                   |  |   | 101,039                   |   |  |       |         |   |  |   | 279,011    |  
|                               |  |        |           |   |              
|Income tax expense (benefit)   |  |        | 1,867     |   |               |   | (40,272    | )                 |  |   | (177,228                  | ) |  |       |         |   |  |   | (215,633   | )
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Net income (loss)              |  | $      | (12,697   | ) |               | $ | (5,667,949 | )                 |  | $ | (885,464                  | ) |  | $     |         |   |  | $ | (6,566,110 | )
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Segment assets                 |  | $      | 5,332,383 |   |               | $ | 22,225,793 |                   |  | $ | 1,961,120                 |   |  | $     |         |   |  | $ | 29,519,296 |  
|Goodwill included in assets    |  | $      | 863,317   |   |               | $ | 267,589    |                   |  | $ |                          |   |  | $     |         |   |  | $ | 1,130,906  |  
|Capital expenditures           |  | $      | 111,164   |   |               | $ | 1,644,080  |                   |  | $ | 5,761                     |   |  | $     |         |   |  | $ | 1,761,005  |  
|                               |  |        |           |   |              
|Year Ended May 31, 2007        |  | Canada |           |   | United States |   |            | Corporate(Canada) |  |   | Inter SegmentEliminations |   |  | Total |         
|Sales to external customers    |  | $      | 6,071,579 |   |               | $ | 14,460,431 |                   |  | $ |                          |   |  | $     |         |   |  | $ | 20,532,010 |  
|Inter-segment sales            |  |        | 8,216     |   |               |   | 389,477    |                   |  |   |                           |   |  |       | (397,693 | ) |  |   |           |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Total revenue                  |  |        | 6,079,795 |   |               |   | 14,849,908 |                   |  |   |                          |   |  |       | (397,693 | ) |  |   | 20,532,010 |  
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Income before expenses below:  |  |        | 156,401   |   |               |   | 587,220    |                   |  |   |                          |   |  |       |         |   |  |   | 743,621    |  
|Corporate head office expenses |  |        |          |   |               |   |           |                   |  |   | 1,418,593                 |   |  |       |         |   |  |   | 1,418,593  |  
|Depreciation and amortization  |  |        | 250,829   |   |               |   | 722,393    |                   |  |   | 9,666                     |   |  |       |         |   |  |   | 982,888    |  
|Other expense (income)         |  |        | (136,105  | ) |               |   | (3,315     | )                 |  |   | (112,711                  | ) |  |       |         |   |  |   | (252,131   | )
|Income tax expense (benefit)   |  |        |          |   |               |   | 75,774     |                   |  |   | (528,000                  | ) |  |       |         |   |  |   | (452,226   | )
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Net income (loss)              |  | $      | 41,677    |   |               | $ | (207,632   | )                 |  | $ | (787,548                  | ) |  | $     |         |   |  | $ | (953,503   | )
|                               |  |        |           |   |               |   |            |                   |  |   |                           |   |  |       |          |   |  |   |            |  
|Segment assets                 |  | $      | 3,907,422 |   |               | $ | 15,131,006 |                   |  | $ | 8,308,332                 |   |  | $     |         |   |  | $ | 27,346,760 |  
|Goodwill included in assets    |  | $      | 863,317   |   |               | $ | 267,589    |                   |  | $ |                          |   |  | $     |         |   |  | $ | 1,130,906  |  
|Capital expenditures           |  | $      | 38,576    |   |               | $ | 473,472    |                   |  | $ |                          |   |  | $     |         |   |  | $ | 512,048    |  



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##### Table of Contents

API Nanotronics Corp.

Notes to Consolidated Financial Statements



Income before expenses includes a reserve for obsolete and slow moving inventory in the amount of $2,819,263 and $0 that was accounted for during the year ended May 31, 2008 and 2007, respectively.



|                         |      |                    |            |                                                   |   |            |  |                                                   |            |  |   |          
|------------------------ | ---- | ------------------ | ---------- | ------------------------------------------------- | - | ---------- |  | ------------------------------------------------- | ---------- |  | - | ---------
|                         |      | Year ended May 31,
|                         | 2008 |                    | 2007      
|Geographical Information |      | Revenue            |            | Capital Assets,IntangibleAssets,Goodwill andOther |   | Revenue    |  | Capital Assets,IntangibleAssets,Goodwill andOther
|United States            |      | $                  | 25,031,882 |                                                   | $ | 10,517,078 |  | $                                                 | 17,425,819 |  | $ | 6,316,025
|Canada                   |      |                    | 1,649,745  |                                                   |   | 2,257,788  |  |                                                   | 911,988    |  |   | 1,960,066
|United Kingdom           |      |                    | 2,289,133  |                                                   |   |           |  |                                                   | 1,386,113  |  |   |         
|All Other                |      |                    | 1,991,286  |                                                   |   |           |  |                                                   | 808,090    |  |   |         
|                         |      |                    |            |                                                   |   |            |  |                                                   |            |  |   |          
|                         |      | $                  | 30,962,046 |                                                   | $ | 12,774,866 |  | $                                                 | 20,532,010 |  | $ | 8,276,091
|                         |      |                    |            |                                                   |   |            |  |                                                   |            |  |   |          



|                                          |  |                   |   |  |      |  
|----------------------------------------- |  | ----------------- | - |  | ---- | -
|                                          |  | Year endedMay 31, |  
|                                          |  | 2008              |   |  | 2007 |  
|Major Customer Revenue:                   |  |                   |   |  |      |  
|U.S. Department of Defense                |  | 9                 | % |  | 10   | %
|U.S. Department of Defense subcontractors |  | 70                | % |  | 67   | %

23. SUBSEQUENT EVENTS

1. A special meeting of stockholders of the Company was held on Wednesday, August 20, 2008 at which the stockholders approved an amendment to the Companys certificate of incorporation to effect a reverse
stock split of the Companys common stock, par value $0.001 per share, of between a one-for-five to a one-for-fifteen reverse stock split. Only holders of record at the close of business on July 21, 2008, the record date, were entitled to
vote on the matter. The resolution leaves the final decision of whether to effect the reverse split, and at what ratio within the one-for-five and one-for-fifteen ratio, with the Board of Directors.

2. In order to enhance efficiencies, the Company has commenced consolidating its operations, including the winding up and relocating of businesses at
certain locations. The Company started, in the fourth quarter of fiscal year 2008, moving the Filtran Inc. operations in Ogdensburg, NY to the Filtran Limited facility located in Ottawa, Ontario. In addition, the Company expects to consolidate the
Pace operations with National Hybrid at Ronkonkoma, New York, and cease operations at the Largo, Florida location. The Company also expects to close and sell the Endicott NY facility and consolidate the manufacturing to both the Ottawa and
Ronkonkoma manufacturing facilities. The Company expects that these events will occur over the fiscal year 2009. The Company also anticipates, in connection with such consolidation, reducing its employee force by approximately forty to fifty people.

3. The Company engaged an auction company to sell excess machinery and equipment assets that were not in use at May 31, 2008.
The Company sold assets for approximately $788,000 in August 2008 and will hold future auctions for additional assets which have been identified for disposal. The assets were acquired in conjunction with the National Hybrid Group acquisition on
January 25, 2007.

4. During the first quarter of fiscal 2009, the Company received net proceeds of $1,550,000 for an outstanding
subscription receivable related to the Regulation S private placement to investors not located in the United States during the year ended May 31, 2008.



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