UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, DC
20549

FORM 10-K

(Mark One)

|þ |  | **ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934**      
|- |  | --------------------------------------------------------------------------------------------------------
|  |  | For the fiscal year ended March
      31, 2009OR                                                        
|  |  |                                                                                                         
|o |  | **TRANSITION REPORT PURSUANT
      TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**

For the transition period from
_______ to _______.

Commission file number 1-11056

ADVANCED PHOTONIX,
INC.®(Exact name of registrant
as specified in its charter)

|Delaware                              | 33-0325826               
|------------------------------------- | -------------------------
|(State or
      Other Jurisdiction of | (I.R.S.
      Employer   
|Incorporation
      or Organization)  | Identification
      No.)

2925 Boardwalk, Ann Arbor, Michigan
48104, (734) 864-5600(Address and
telephone number of principal executive offices)

Securities registered pursuant to
Section 12(b) of the Act:None

Securities registered pursuant to
Section 12(g) of the Act: Class A Common Stock, par value $.001 per share(Title of class)

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.     YES   ̈NOþ

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.     YES   ̈NOþ

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

Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Website, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).     YES   ̈NOþ

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

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 the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):

|Large accelerated filer o                     | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ
|--------------------------------------------- | ------------------- | ----------------------- | ---------------------------
|(Do not check if a smaller reporting company)



Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange
Act).     YES   ̈NOþ

The aggregate market value of the
voting stock held by non--affiliates of the registrant as
of September 26, 2008 was approximately $39,107,833.

Number of shares outstanding of the
registrant's Common Stock as of June 24, 2009: 24,284,726 shares of Class A
Common Stock and 31,691 shares of Class B Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy
statement to be filed pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934 in connection with the 2009 Annual Meeting of
Stockholders of registrant have been incorporated by reference into Part III of
this Form 10-K.

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ADVANCED PHOTONIX, INC.ANNUAL
REPORT ON FORM 10-KFISCAL YEAR ENDED
MARCH 31, 2009

|**TABLE OF
      CONTENTS**
|---------------------------
|                           
|                           
|                           
|Item 1.                    
|Item 1A.                   
|Item 2.                    
|Item 3.                    
|Item 4.                    
|                           
|                           
|Item 5.                    
|Item 6.                    
|Item 7.                    
|Item 7A.                   
|Item 8.                    
|Item 9.                    
|**Item
      9A(T).**      
|Item 9B.                   
|                           
|                           
|Item 10.                   
|Item 11.                   
|Item 12.                   
|Item 13.                   
|Item 14.                   
|                           
|                           
|Item 15.                   
|                           
|Signatures                 
|                           
|Ex-21.1                    
|Ex-23.1                    
|Ex-31.1                    
|Ex-31.2                    
|Ex-32.1                    
|Ex-32.2                    

2

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PART I

The information in this annual
report contains certain forward-looking statements, including statements related
to our business prospects, the markets for our products, and trends in our
business that involve risks and uncertainties. Our actual results may differ
materially from the results discussed in these forward-looking statements.
Factors that might cause such a difference include those discussed in Risk
Factors, Managements Discussion and Analysis of Financial Condition and
Results of Operations, Business and elsewhere in this annual
report.

Item 1. Business

General

Advanced Photonix, Inc.®
(the Company, we or API), was incorporated under the laws of the State of
Delaware in June 1988. The Company is engaged in the development and manufacture
of optoelectronic devices and value-added sub-systems and systems. The Company
serves a variety of global Original Equipment Manufacturers (OEMs), in a variety
of industries. The Company supports the customers from the initial concept and
design phase of the product, through testing to full-scale production. The
Company has two manufacturing facilities located in Camarillo, California and
Ann Arbor, Michigan.

Products and
Technology

Our Business

API is a leading supplier of
optoelectronic semiconductors packaged into high-speed optical receivers, custom
optoelectronic subsystems and Terahertz instrumentation, serving a variety of
global OEM markets. Our patented high-speed optical receivers include Avalanche
Photodiode technology (APD) and PIN photodiode technology based upon III-V
materials, including InP, InAlAs, and GaAs. Our optoelectronic subsystems are
based on our silicon Large Area Avalanche Photodiode (LAAPD), PIN
(positive-intrinsic-negative) photodiode, FILTRODE® detectors and LED
assemblies. Our newly emerging Terahertz sensor product line is targeted at the
industrial Non-Destructive Testing (NDT), quality control, homeland security and
military markets. Using our patented fiber coupled technology and high speed
Terahertz generation and detection sensors, we are engaged in transferring
Terahertz technology from the application development laboratory to the factory
floor.

We support the customer from the
initial concept and design of the semiconductor, hybridization of support
electronics, packaging and signal conditioning or processing from prototype
through full-scale production and validation testing. The target markets served
by us are Industrial Sensing/NDT, Military/Aerospace, Telecom, Medical and
Homeland Security.

Technology & Manufacturing
Capabilities

Our basic technologies and
manufacturing capabilities include the following:

- Optoelectronic semiconductor design and micro
  fabrication of III-V compound semiconductor (InP and GaAs) and Silicon (Si)
  devices including photodetectors and terahertz transmitters/receiver
  antenna,
- MBE growth of high-speed III-V compound
  semiconductor material including GaAs, InAlAs and InP,
- High speed semiconductor analog amplifier
  specification, evaluation and design for outside fabrication,
- Opto-electronic hybrid packaging of semiconductor
  devices combining opto-electronic devices with high-speed electronics and
  fiber optics,
- Vapor deposition and/or ion implantation for Silicon based PIN & APD
  photo-detectors,
- Terahertz (THz) systems, subsystems, transmitters and receivers, and
- Femtosecond laser pulse control and system integration.

3

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Core Products

The core product technologies used in
the majority of our products are opto-electronic semiconductor devices,
including photodiodes and antennae made of Si or III-V compound semiconductor
material and high speed semiconductor analog amplifiers. Photodiodes and
antennae sense light of varying wavelengths and intensity and convert that light
and/or Terahertz wave into electrical signals. Analog amplifiers increase the
converted electrical signals output power to a level required to communicate
with follow on electrical components. We manufacture photodiodes of varying
complexity, from basic PIN photodiode to the more sophisticated APD and antennae
that transmit and receive Terahertz signals (Transceiver). The APD is a
specialized photodiode capable of detecting very low light levels due to an
internal gain phenomenon known as avalanching. All photodiode and THz devices
are designed by our experienced engineering staff, and fabricated in
state-of-the-art clean rooms. Some of our analog amplifiers are specified and
tested by our engineering staff, designed by subcontractors and fabricated by
outside suppliers. Our products include the following:

- High Speed Optical Receivers (10Gb/s & 40Gb/s)
  which are packaged InP, InAlAs, or GaAs PIN and/or APD photodiodes with
  amplifiers
- Packaged PIN
  and APD photodiodes in Siand III-V materials
  (InP, InAlAs, GaAs)
- Packaged Si APD components, with and without
  thermo-electric coolers
- Packaged Si LAAPD components
- Packaged Si photodiodes with patented
  FILTRODE® technology integrating optical filters directly on
  photodiode chips
- Terahertz Systems & subsystems utilizing III-V
  materials for Terahertz transmitters &/or receivers

Terahertz Technology

The newest technology the Company is
pursuing is Terahertz (THz) or the Companys T-Ray® technology. THz
is a region of the electromagnetic (EM) Spectrum that is just beginning to be
explored. THz lies between microwave and infrared waves on the EM spectrum.
While microwaves and infrared waves have been explored and commercialized for
decades, THz waves are in the early stages of being explored and commercialized
due to the fact that they have historically been very difficult to generate and
detect. Recent advances in femtosecond lasers and ultra-fast semiconductor and
electro-optic devices combined with fiber-optic packaging technologies have
enabled the development of practical T-Ray® instrumentation for the
research market and as a result application/market development of THz technology
has recently accelerated. THz can be used to look through and beneath
materials with high 2-dimensional (2-D) and 3-dimensional (3-D) spatial
resolution roughly equivalent to the resolution of the human eye or better. It
can also uniquely identify the chemical composition of many hidden or subsurface
objects and has been determined to have non-ionizing radiation, which is not
harmful to humans at the power levels commonly used today. THz imaging and
spectroscopy market applications include industrial quality control through
non-destructive testing (including aerospace and pharmaceutical markets);
homeland security and defense screening of people, packages and bags for weapons
and weapons of mass destruction; medical imaging and other scientific
applications.

We have had significant Terahertz
technology and product development since 1997, resulting in over 47 patents or
patents pending to date. In 2001, we sold the first
commercialTHz product, the T-Ray® 2000 as a laboratory bench
top instrument for application development with spectroscopy and imaging
capabilities targeted at the research and development and off-line diagnostic
markets. In 2004, we sold the first T-Ray Manufacturing Inspection System
(QA1000) for on-line, real-time inspection to NASA for the space shuttle fuel
tank inspection in the Return to Flight Program. In March 2008, the Company
shipped its next generation THz imaging and spectroscopy system
(T-Ray® 4000). The T-Ray® 4000 is significantly smaller,
lighter, and more powerful than previous THz generations and incorporates
significant technological advancements. The system is 55 pounds and is the size
of a briefcase, which is a significant reduction from the 800 pound refrigerator
size QA 1000. This system is targeted at the research and industrial NDT quality
control market. The T-Ray® 4000 product will also serve as a platform
for future industrial process and quality control, homeland security and defense
applications.

4

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Markets

Our products serve customers in a
variety of global markets, typically North America, Asia, Europe and Australia.
The target markets and applications served by us are as follows:

Military:

- Space
- Defense

Industrial/NDT:

- Manufacturing
- Instrumentation
- Display

Medical:

- Diagnostic & Monitoring
- Ophthalmic Equipment
- Medical Imaging

Telecommunications:

- Telecom Equipment
- Test and Measurement

Homeland Security:

- Baggage/Cargo Scanning
- Passenger Screening

Recent Developments

The Company began consolidating
semiconductor fabrication into its Ann Arbor, Michigan facility in June 2006.
Approximately $2.3 million has been spent to date for operating expenses and
$1.9 million for capital expenditures for this consolidation. The Company
anticipates spending less than $100,000 in additional operating expense in FY
2010 to complete the re-provisioning of the previous wafer fabrication
operations in Camarillo, California to assembly and test facilities. As a
result, the Company estimates, the total consolidation operating expenses will
be $2.4 million upon completion of the project.

Raw Materials

The principal raw materials used by the
Company in the manufacture of its semiconductor components and sensor assemblies
are silicon and III-V material (InP, GaAs) wafers, chemicals, gases and metals
used in processing wafers, gold wire, solders, electronic components, high speed
specialized semiconductor amplifiers and a variety of packages and substrates,
including metal, printed circuit board, flex circuits, ceramic and plastic
packages. All of these raw materials, except high speed specialized
semiconductor amplifiers, can be obtained from several suppliers. High speed
specialized semiconductor amplifiers used in our HSOR components are typically
sole sourced. From time to time, particularly during periods of increased
industry-wide demand, silicon wafers, III-V wafers (InP, GaAs), certain metal
packages and other materials have been in short supply. However, the Company has
not been materially affected by such shortages. As is typical in the industry,
the Company allows for a significant lead-time (2 months or greater) between
order and delivery of raw materials.

5

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Research and Development

Since its inception in June 1988, the
Company has incurred material research and development (R&D) expenses, with
the intent of commercializing these investments into profitable new standard and
custom product offerings. During the fiscal years ended in 2009 and 2008,
research and development expenses amounted to $4.7 million and $4.2 million,
respectively. The Company expects that an increase in research and development
funding will be required for new projects/products as well as the continuing
development of new derivatives of the Companys current product line. The
Company has in the past, and will continue to pursue customer funded, as well as
internally funded, research and development projects when they are in support of
the Companys development objectives.

As the Company begins the new 2010
fiscal year, the following research and development projects are currently
underway:

- HSOR - next generation photodiodes and high-speed optical receivers for
  both the 40G and 100G telecommunications market,

- 40G DPSK and DQPSK long haul and metro markets
- 40G NRZ short reach market
- 100G DP-QPSK long haul and metro markets
- 100G NRZ short reach market
- Cost Reduction and performance enhancements through vertical integration
  of strategic 40G and 100G components

- THz 

- Application development utilizing the T-Ray® 4000 product
  platform for industrial quality and process control targeted at the aerospace,
  pharmaceutical and consumer product markets,
- T-Ray® 4000 cost reduction and durability initiatives for high
  volume industrial QC markets
- T-Ray® 4000 product platform research and development for
  homeland security/military markets

- Custom optoelectronics - Si PIN and APD photodiode developments to meet
  unique customer requirements, such as higher speeds, lower electrical noise,
  and unique multi-element geometries.

Environmental Regulations

The photonics industry, as well as the
semiconductor industry in general, is subject to governmental regulations for
the protection of the environment, including those relating to air and water
quality, solid and hazardous waste handling, and the promotion of occupational
safety. Various federal, state and local laws and regulations require that the
Company maintain certain environmental permits. The Company believes that it has
obtained all necessary environmental permits required to conduct its
manufacturing processes. Changes in the aforementioned laws and regulations or
the enactment of new laws, regulations or policies could require increases in
operating costs and additional capital expenditures and could possibly entail
delays or interruptions of operations.

Backlog and Customers

The Companys sales are made primarily
pursuant to standard purchase orders for delivery of products. A substantial
portion of our revenues are derived from sales to OEMs pursuant to individual
purchase orders with short lead times. However, by industry practice, orders may
be canceled or modified at any time. Accordingly, we do not believe that the
backlog of undelivered product under these purchase orders is a meaningful
indicator of our future financial performance. When customers cancel an order,
they are responsible for all finished goods, all costs, direct and indirect,
incurred by the Company, as well as a reasonable allowance for anticipated
profits. No assurance can be given that the Company will receive these amounts
after cancellation.

6

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Customers normally purchase the
Companys products and incorporate them into products that they in turn sell in
their own markets on an ongoing basis. As a result, the Companys sales are
dependent upon the success of its customers products and our future performance
is dependent upon our success in finding new customers and receiving new orders
from existing customers.

Marketing

The Company markets its products in the
United States and Canada through its own technical sales engineers and through
independent sales representatives. International sales, including Europe, the
Middle East, Far East and Asia, are conducted direct and through foreign
distributors and representatives. The Companys products are primarily sold as
components or sub-assemblies to OEMs. The Company markets its products and
capabilities through industry specific channels, including the Internet,
industry trade shows, and in print through trade journals.

Competition

In its target markets, the Company
competes with different companies in each of its product platforms; custom
optoelectronic, high-speed optical receiver and THz systems. The Company
believes that its principal competitors for sales of custom optoelectronic
products are small private companies and medium size public companies. In the
high-speed optical receiver market the Company believes that its competitors are
small private companies and medium to large size public companies. Because the
THz product offering includes developing technology applications and markets,
the Company believes the competition is mainly from small private companies and
divisions of large public companies.

Because the Company specializes in
devices requiring a high degree of engineering expertise to meet the
requirements of specific applications, it generally does not compete with other
large United States, European or Asian manufacturers of standard off the shelf
optoelectronic components or silicon photodetectors.

Proprietary
Technology

The Company utilizes proprietary design
rules and processing steps in the development and fabrication of its PIN and APD
photodiodes, THz transmitters and receivers, fiber-coupled THz
subsystems/systems, and THz applications. The Company has a significant number
of patents pending and owns the following patents and registered trademarks:

|Patent
      # | Title                                                                                                     | Issue 
|-------------- | --------------------------------------------------------------------------------------------------------- | ------
|               |                                                                                                           | Date  
|142,195        | HIGHLY-DOPED P-TYPE CONTACT FOR
      HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (US)                  | Apr-05
|660,471        | HIGHLY-DOPED P-TYPE CONTRACT
      FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (KOREA)              | Apr-06
|765,715        | HIGHLY-DOPED P-TYPE CONTACT FOR
      HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (AUSTRIA)             | Jan-04
|766,174        | ENHANCED
      PHOTODETECTOR (KOREA)                                                                      | Oct-07
|809,655        | METHOD AND APPARATUS TO MONITOR
      PHASE CHANGES IN MATTER WITH TERAHERTZ RADIATION (KOREA)            | Feb-08
|811,365        | PLANAR AVALANCHE
      PHOTODIODE (KOREA)                                                                 | Feb-08
|817,638        | FOCUSING FIBER OPTIC
      (KOREA)                                                                        | Mar-08
|934,665        | TRADEMARK
      APPLICATION FOR T-RAY TRADEMARK (MADRID PROTOCOL)                                         | Aug-07
|1,116,280      | HIGHLY-DOPED P-TYPE CONTACT FOR
      HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (EP)                  | Oct-07
|1,116,280      | HIGHLY-DOPED P-TYPE CONTACT FOR
      HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (FRANCE)              | Oct-07
|1,116,280      | HIGHLY-DOPED P-TYPE
      CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (GREAT
      BRITAIN) | Oct-07

7

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|1,116,280  | HIGHLY-DOPED P-TYPE CONTACT FOR
      HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (ITALY)                     | Oct-07 
|---------- | --------------------------------------------------------------------------------------------------------------- | -------
|DE69937406 | HIGHLY-DOPED P-TYPE CONTACT FOR
      HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (GERMANY)                   | Oct-07 
|1,230,578  | COMPACT FIBER
      PIGTAIL TERAHERTZ IMAGING SYSTEM (EP)                                                       | Aug-06 
|1,230,578  | COMPACT FIBER
      PIGTAIL TERAHERTZ IMAGING SYSTEM (AUSTRIA)                                                  | Aug-06 
|1,230,578  | COMPACT FIBER
      PIGTAIL TERAHERTZ IMAGING SYSTEM (FRANCE)                                                   | Aug-06 
|1,230,578  | COMPACT FIBER
      PIGTAIL TERAHERTZ IMAGING SYSTEM (ITALY)                                                    | Aug-06 
|1,230,578  | COMPACT FIBER
      PIGTAIL TERAHERTZ IMAGING SYSTEM (GREAT BRITAIN)                                            | Aug-06 
|1,570,306  | PRECISION FIBER
      ATTACHMENT (EP)                                                                           | Aug-08 
|1,570,306  | PRECISION FIBER
      ATTACHMENT (ITALY)                                                                        | Aug-08 
|1,570,306  | PRECISION FIBER
      ATTACHMENT (FRANCE)                                                                       | Aug-08 
|1,570,306  | PRECISION FIBER
      ATTACHMENT (GREAT BRITAIN)                                                                | Aug-08 
|AT406589   | PRECISION FIBER
      ATTACHMENT (AUSTRIA)                                                                      | Aug-08 
|DE60323261 | PRECISION FIBER
      ATTACHMENT (GERMANY)                                                                      | Aug-08 
|1,963,580  | PICOMETRIX
      TRADEMARK                                                                                      | Mar-96 
|2,345,153  | HIGHLY-DOPED P-TYPE CONTACT FOR
      HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE (CANADA)                    | Mar-04 
|4,180,824  | COMPACT FIBER
      PIGTAIL TERAHERTZ IMAGING SYSTEM (JAPAN)                                                    | Sept-08
|4,717,946  | THIN LINE JUNCTION
      PHOTODIODE (by Predecessor Co.)                                                        | Jan-88 
|4,782,382  | HIGH QUANTUM
      EFFICIENCY PHOTODIODE DEVICES (by Predecessor Co.)                                           | Nov-88 
|5,021,854  | SILICON AVALANCHE
      PHOTODIODE ARRAY                                                                        | Jun-91 
|5,057,892  | LIGHT RESPONSIVE
      AVALANCHE DIODE                                                                          | Oct-91 
|5,146,296  | DEVICES FOR
      DETECTING AND/OR IMAGING SINGLE PHOTOELECTRON                                                 | Sep-92 
|5,311,044  | AVALANCHE
      PHOTOMULTIPLIER TUBE                                                                            | May-94 
|5,477,075  | SOLID STATE
      PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE                                                 | Dec-95 
|5,757,057  | LARGE AREA AVALANCHE
      ARRAY                                                                                | May-98 
|5,801,430  | SOLID STATE
      PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE                                                 | Sep-98 
|6,005,276  | SOLID STATE
      PHOTODETECTOR WITH LIGHT RESPONSIVE REAR FACE                                                 | Dec-99 
|6,029,988  | COMPACT FIBER
      PIGTAILED TERAHERTZ IMAGING SYSTEM (GREAT BRITAIN)                                          | Aug-06 
|6,111,299  | ACTIVE LARGE AREA
      AVALANCHE PHOTODIODE ARRAY                                                              | Aug-00 
|6,262,465  | HIGHLY-DOPED P-TYPE
      CONTACT FOR HIGH-SPEED, FRONT-SIDE ILLUMINATED PHOTODIODE                             | Jul-01 
|6,320,191  | A DISPERSIVE PRECOMPENSATOR FOR
      USE IN AN ELECTROMAGNETIC RADIATION GENERATION AND DETECTION
      SYSTEM | Nov-01 
|6,816,647  | COMPACT FIBER
      PIGTAILED TERAHERTZ IMAGING SYSTEM                                                          | Nov-04 
|6,849,852  | SYSTEM AND METHOD FOR
      MONITORING CHANGES IN STATE OF MATTER WITH TERAHERTZ RADIATION                      | Feb-05 
|6,936,821  | AMPLIFIED
      PHOTOCONDUCTIVE GATE                                                                            | Aug-05 
|7,039,275  | FOCUSING FIBER
      OPTIC                                                                                      | May-06 
|7,078,741  | HIGH-SPEED ENHANCED
      RESPONSIVITY PHOTO DETECTOR                                                           | Jul-06 
|7,263,266  | PRECISION FIBER
      ATTACHMENT                                                                                | Aug-07 
|7,348,607  | PLANAR AVALANCHE
      PHOTODIODE                                                                               | Mar-08 
|7,348,608  | PLANAR AVALANCHE
      PHOTODIODE                                                                               | Mar-08 
|7,449,695  | TERAHERTZ IMAGING
      SYSTEM FOR EXAMINING ARTICLES                                                           | Nov-08 
|7,468,503  | PIN
      PHOTODETECTOR                                                                                         | Dec-08 

There can be no assurance that any
issued patents will provide the Company with significant competitive advantages,
or that challenges will not be instituted against the validity or enforceability
of any patent owned by the Company, or, if instituted, that such challenges will
not be successful. The cost of litigation to uphold the validity and to prevent
the infringement of a patent could be substantial. Furthermore, there can be no
assurance that the Companys technology will not infringe on patents or rights
owned by others, licenses to which might not be available to the Company. Based
on limited patent searches, contacts with others knowledgeable in the field of
the Companys technology, and a review of the published materials, the Company
believes that its competitors hold no patents, licenses or other rights to
technology which would preclude the Company from pursuing its intended
operations.

8

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In some cases, the Company may rely on
trade secrets to protect its innovations. There can be no assurance that trade
secrets will be established, that secrecy obligations will be honored or that
others will not independently develop similar or superior technology. To the
extent that consultants, key employees or other third parties apply
technological information independently developed by them or by others to
Company projects, disputes might arise as to the proprietary rights to such
information which may not be resolved in favor of the Company.

Employees

As of June 24, 2009 the Company had 153
full time employees (including 3 officers). Included are 33 engineering and
development personnel, 9 sales and marketing personnel, 94 operations personnel,
and 17 general and administrative personnel (including 3 officers). The Company
may, from time to time, engage personnel to perform consulting services and to
perform research and development under third party funding. In certain cases,
the cost of such personnel may be included in the direct cost of the contract
rather than in payroll expense. None of our employees are covered by a
collective bargaining agreement. We believe our relations with our employees are
good.

Item 1A. Risk Factors

Investing in our Class A Common Stock
involves a high degree of risk and uncertainty. You should carefully consider
the risks and uncertainties described below before investing in our Class A
Common Stock. Our business, prospects, financial condition and results of
operations could be adversely affected due to any of the following risks. In
that case, the value of our Class A Common Stock could decline, and you could
lose all or part of your investment.

Risks Relating to Our
Business

The overall negative economic
climate could adversely affect the liquidity and financial condition of our
customers and our business.

We believe that many factors affect our
industry, including consumer confidence in the economy, interest rates, fuel
prices and credit availability. The overall economic climate and changes in
Gross National Product growth has a direct impact on our customers and the
demand for our products. We cannot be sure that our business will not be
adversely affected as a result of an industry or the current general economic
downturn.

Our customers may reduce capital
expenditures and have difficulty satisfying liquidity needs because of the
continued turbulence in the U.S. and global economies, resulting in reduced
sales of our products and harming our financial condition and results of
operations.

Recent global market and economic
conditions have been unprecedented and challenging with tighter credit
conditions and recession in most major economies. Continued concerns about the
systemic impact of potential long-term and wide-spread recession, energy costs,
geopolitical issues, the availability and cost of credit, and the global housing
and mortgage markets have contributed to diminished expectations for western and
emerging economies. These conditions, combined with volatile oil prices,
declining business and consumer confidence and increased unemployment, have
contributed to market volatility of unprecedented levels.

As a result of these market conditions,
the cost and availability of credit has been and may continue to be adversely
affected by illiquid credit markets and wider credit spreads. Concern about the
stability of the markets generally and the strength of counterparties
specifically has led many lenders and institutional investors to reduce, and in
some cases, cease to provide credit to businesses and consumers. This turbulence
in the U.S. and international markets and economies has caused certain of our
network subsystem and system customers, as well as their network service
provider customers, to delay, reduce or cancel capital expenditures. Continued
turbulence in the U.S. and international markets and economies and prolonged
declines in business consumer spending may adversely affect our liquidity and
financial condition, and the liquidity and financial condition of our customers,
including our ability to refinance maturing liabilities and access the capital
markets to meet liquidity needs.

9

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We are dependent upon several
suppliers for a significant portion of raw materials used in the manufacturing
of our products and any significant interruption could have a material adverse
affect on our manufacturing.

The principal raw materials we use in
the manufacture of our semiconductor components and sensor assemblies are
silicon and III-IV wafers, chemicals and gases used in processing wafers, gold
wire, lead frames, specialized semiconductor amplifiers, and a variety of
packages and substrates, including metal, printed circuit board, flex circuits,
ceramic and plastic packages. All of these raw materials can be obtained from
several suppliers. High speed specialized semiconductor amplifiers used in our
HSOR components are typically sole sourced. From time to time, particularly
during periods of increased industry-wide demand, silicon wafers, specialized
semiconductor amplifiers and other materials have been in short supply. Any
significant interruption in the supply of these raw materials could have a
material adverse affect on the Company.

Customer acceptance of our products
is dependent on our ability to meet changing requirements, and any decrease in
acceptance could adversely affect our revenue.

Customer acceptance of our products is
significantly dependent on our ability to offer products that meet the changing
requirements of our customers, including telecommunication, military, medical
and industrial corporations, as well as government agencies. Any decrease in the
level of customer acceptance of our products could have a material adverse
affect on the Company.

Our inability to find new customers
and retain existing customers could have a material adverse affect on our
business.

Customers normally purchase our
products and incorporate them into products that they in turn sell in their own
markets on an ongoing basis. As a result, our sales are dependent upon the
success of our customers' products and our future performance is dependent upon
our success in finding new customers and receiving new orders from existing
customers.

In several of our markets, quality
and/or reliability of our products are a major concern for our customers, not
only upon the initial manufacture of the product, but for the life of the
product. Many of our products are used in remote locations for higher value
assembly, making servicing of our products not feasible. Any failure of the
quality and/or reliability of our products could have an adverse affect on our
business.

If our customers do not qualify our
products or if their customers do not qualify their products, our results of
operations may suffer.

Most of our customers do not purchase
our products prior to qualification of our products and satisfactory completion
of factory audits and vendor evaluation. Our existing products, as well as each
new product, must pass through varying levels of qualification with our
customers. In addition, because of the rapid technological changes in our
market, a customer may cancel or modify a design project before we begin
large-scale manufacture of the product and receive revenues from the customer.
It is unlikely that we would be able to recover the expenses for cancelled or
unutilized custom design projects. It is difficult to predict with any certainty
whether our customers will delay or terminate product qualification or the
frequency with which customers will cancel or modify their projects, but any
such delay, cancellation or modification could have a negative effect on our
results of operations.

10

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If the end user customers that purchase
systems from our customers fail to qualify or delay qualifications of any
products sold by our customers that contain our products, our business could be
harmed. The qualification and field testing of our customers systems by end
user customers is long and unpredictable. This process is not under the control
of our company or our customers, and, as a result, timing of our sales is
unpredictable. Any unanticipated delay in qualification of one of our customers
products could result in the delay or cancellation of orders from our customers
for products included in their equipment, which could harm our results of
operations.

Our sales to overseas markets expose
us to additional, unpredictable risks which could have a material adverse affect
on our business.

A growing amount of our sales are being
derived from overseas markets. These international sales are primarily focused
in Asia, Europe and the Middle East. These operations are subject to
unpredictable risks that are inherent in operating in foreign countries and
which could have a material adverse affect on our business, including the
following:

- foreign countries could change regulations or
  impose currency restrictions and other restraints;
- changes in foreign currency exchange rates and
  hyperinflation or deflation in the foreign countries in which we
  operate;
- exchange controls;
- some countries impose burdensome tariffs and
  quotas;
- political changes and economic crises may lead to
  changes in the business environment in which we operate;
- international conflict, including terrorist acts,
  could significantly impact our financial condition and results of operations;
  and
- economic downturns, political instability and war
  or civil disturbances may disrupt distribution logistics or limit sales in
  individual markets.

In addition, the Company utilizes
third-party distributors to act as our representative for the geographic region
that they have been assigned. Sales through distributors represent approximately
5% of total revenue. Significant terms and conditions of distributor agreements
include FOB source, net 30 days payment terms, with no return or exchange
rights, and no price protection. Since the product transfers title to the
distributor at the time of shipment by the Company, the products are not
considered inventory on consignment. Our success is dependent on these
distributors finding new customers and receiving new orders from existing
customers.

Customer orders and forecasts are
subject to cancellation or modification at any time which could result in higher
manufacturing costs.

Our sales are made primarily pursuant
to standard purchase orders for delivery of products. However, by industry
practice, orders may be canceled or modified at any time. When a customer
cancels an order, they are responsible for all finished goods, all costs, direct
and indirect, incurred by us, as well as a reasonable allowance for anticipated
profits. No assurance can be given that we will receive these amounts after
cancellation.

Uncertainty in customer forecasts of
their demands and other factors may lead to delays and disruptions in
manufacturing, which could result in delays in product shipments to customers
and could adversely affect our business.

Fluctuations and changes in our
customers demand are common in our industry. Such fluctuations, as well as
quality control problems experienced in our manufacturing operations may cause
us to experience delays and disruptions in our manufacturing process and overall
operations and reduce our output capacity. As a result, product shipments could
be delayed beyond the shipment schedules requested by our customers or could be
cancelled, which would negatively affect our sales, operating income, strategic
position at customers, market share and reputation. In addition, disruptions,
delays or cancellations could cause inefficient production which in turn could
result in higher manufacturing costs, lower yields and potential excess and
obsolete inventory or manufacturing equipment. In the past, we have experienced
such delays, disruptions and cancellations.

11

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The markets for many of our products
are characterized by changing technology which could cause obsolescence of our
products.

The markets for many of our products
are characterized by changing technology, new product introductions and product
enhancements, and evolving industry standards. The introduction or enhancement
of products embodying new technology or the emergence of new industry standards
could render existing products obsolete or result in short product life cycles.
Accordingly, our ability to compete is in part dependent on our ability to
continually offer enhanced and improved products.

We depend on key in-house
manufacturing capabilities and a loss of these capabilities could have an
adverse affect on our existing operations and new business
growth.

We depend on key in-house manufacturing
equipment and assembly processes. We believe that these key manufacturing and
assembly processes give us the flexibility and responsiveness to meet our
customer delivery schedule and performance specification with a custom product.
This value proposition is an important component of our offering to our
customers. A loss of these capabilities could have an adverse affect on our
existing operations and new business growth.

Changes in the spending priorities
of the federal government can materially adversely affect our business.

In FY 2009, approximately 31% of our
sales were related to products and services purchased by military contractors.
Our business depends upon continued federal government expenditures on defense,
intelligence, aerospace and other programs that we support. In FY 2009, our
sales to military contractors increased 109%. In addition, foreign military
sales are affected by U.S. government regulations, regulations by the purchasing
foreign government and political uncertainties in the U.S. and abroad. There can
be no assurance that the U.S. defense and military budget will continue to grow
or that sales of defense related items to foreign governments will continue at
present levels. In addition, the terms of defense contracts with the U.S.
government generally permit the government to terminate such contracts, with or
without cause, at any time. Any unexpected termination of a significant U.S.
government contract with a military contractor that we sell our products to
could have a material adverse affect on the Company.

Our industry is highly competitive
and fragmented, which can result in future competitors against which we cannot
compete.

We compete with a range of companies
for the custom optoelectronic requirements of customers in our target markets.
We believe that our principal competitors for sales of our products are small to
medium size companies. Because we specialize in custom high performance devices
requiring a high degree of engineering expertise to meet the requirements of
specific applications, we generally do not compete to any significant degree
with other large United States, European or Pacific Rim high volume
manufacturers of standard off the shelf optoelectronic components. We cannot
assure you that we will be able to compete successfully in our markets against
these or any future competitors.

Decreases in average selling prices
of our products may reduce operating profit and net income, particularly if we
are not able to reduce our expenses commensurately.

The market for optical components and
subsystems continues to be characterized by declining average selling prices
resulting from factors such as increased price competition among optical
component and subsystem manufacturers, excess capacity, the introduction of new
products and increased unit volumes as manufacturers continue to deploy network
and storage systems. Recently, we have observed a modest acceleration in the
decline of average selling prices. We anticipate that average selling prices
will continue to decrease in the future in response to product introductions by
our competitors or us, or in response to other factors, including price
pressures from significant customers. In order to sustain profitable operations,
we must, therefore, continue to develop and introduce new products on a timely
basis that incorporate features that can be sold at higher average selling
prices. Failure to do so could cause our sales and operating profit to
decline.

12

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In the current environment of declining
average selling prices, and especially when such declines appear to be
accelerating, we must continually seek ways to reduce our costs to maintain our
operating profit and net income. Our cost reduction efforts may not allow us to
keep pace with competitive pricing pressures. To remain competitive, we must
continually reduce the cost of manufacturing our products through design and
engineering changes. We may not be successful in redesigning our products or
delivering our products to market in a timely manner. We cannot assure you that
any redesign will result in sufficient cost reductions enabling us to reduce the
price of our products to remain competitive or maintain our operating profit and
net income.

Shifts in our product mix may result
in declines in operating income and net income.

Our gross profit margins vary among our
product platforms, and are generally higher on our HSOR and Terahertz products.
Our overall operating income has fluctuated from period to period as a result of
shifts in product mix, the introduction of new products, decreases in average
selling prices for older products and our ability to reduce product costs, and
these fluctuations are expected to continue in the future.

Environmental regulations could
increase operating costs and additional capital expenditures and delay or
interrupt operations.

The photonics industry, as well as the
semiconductor industry in general, is subject to governmental regulations for
the protection of the environment, including those relating to air and water
quality, solid and hazardous waste handling, and the promotion of occupational
safety. Various federal, state and local laws and regulations require that we
maintain certain environmental permits. We believe that we have obtained all
necessary environmental permits required to conduct our manufacturing processes.
Changes in the aforementioned laws and regulations or the enactment of new laws,
regulations or policies could require increases in operating costs and
additional capital expenditures and could possibly entail delays or
interruptions of operations.

If we are unable to protect our
intellectual property rights adequately, the value of our products could be
diminished.

Our success and ability to compete is
dependent in part on our proprietary technology. We rely on a combination of
patent, copyright, trademark and trade secret laws, as well as confidentiality
agreements and internal procedures, to establish and protect our proprietary
rights. We utilize proprietary design rules and processing steps in the
development and fabrication of our PIN photodiodes, APD photodiodes and our THz
systems and sensors. In addition, our products rely upon over 105 patents or
patents pending. There can be no assurance that any issued patents will provide
us with significant competitive advantages, or that challenges will not be
instituted against the validity or enforceability of any patent utilized by us,
or, if instituted, that such challenges will not be successful. The cost of
litigation to uphold the validity and to prevent the infringement of a patent
could be substantial and could have a material adverse affect on our operating
results. Furthermore, there can be no assurance that our PIN photodiodes, APD
photodiodes and THz technology will not infringe on patents or rights owned by
others, licenses to which might not be available to us. Based on limited patent
searches, contacts with others knowledgeable in the field of PIN photodiodes,
APD photodiodes and our THz technology, and a review of the published materials,
we believe that our competitors hold no patents, licenses or other rights to the
PIN photodiodes, APD photodiodes and our THz technology which would preclude us
from pursuing our intended operations.

13

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In some cases, we may rely on trade
secrets to protect our innovations. There can be no assurance that trade secrets
will be established, that secrecy obligations will be honored or that others
will not independently develop similar or superior technology. To the extent
that consultants, key employees or other third parties apply technological
information independently developed by them or by others to our projects,
disputes might arise as to the proprietary rights to such information which may
not be resolved in our favor.

Our failure to protect our
intellectual property may significantly harm our business.

Our success and ability to compete is
dependent in part on our proprietary technology. We rely on a combination of
patent, copyright, trademark and trade secret laws, as well as confidentiality
agreements and internal procedures, to establish and protect our proprietary
rights. Although a number of patents have been issued to us and we have obtained
a number of other patents as a result of our acquisitions, we cannot assure you
that our issued patents will be upheld if challenged by another party.
Additionally, with respect to any patent applications that we have filed, we
cannot assure you that any patents will issue as a result of these applications.
If we fail to protect our intellectual property, we may not receive any return
on the resources expended to create the intellectual property or generate any
competitive advantage based on it.

Pursuing infringers of our
intellectual property rights can be costly.

Pursuing infringers of our proprietary
rights could result in significant litigation costs, and any failure to pursue
infringers could result in our competitors utilizing our technology and offering
similar products, potentially resulting in loss of a competitive advantage and
decreased sales. Despite our efforts to protect our proprietary rights, existing
patent, copyright, trademark and trade secret laws afford only limited
protection. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States.
Protecting our intellectual property is difficult especially after our employees
or our third-party contractors end their employment or engagement. We may have
employees leave us and go to work for competitors. Attempts may be made to copy
or reverse-engineer aspects of our products or to obtain and use information
that we regard as proprietary. Accordingly, we may not be able to prevent
misappropriation of our technology or prevent others from developing similar
technology. Furthermore, policing the unauthorized use of our products is
difficult and expensive. Litigation may be necessary in the future to enforce
our intellectual property rights or to determine the validity and scope of the
proprietary rights of others. The resulting costs and diversion of resources
could significantly harm our business. If we fail to protect our intellectual
property, we may not receive any return on the resources expended to create the
intellectual property or generate any competitive advantage based on
it.

Third parties may claim we are
infringing their intellectual property rights and we could be prevented from
selling our products, or suffer significant litigation expense, even if these
claims have no merit.

Our competitive position is driven in
part by our intellectual property and other proprietary rights. Third parties,
however, may claim that we, or our products, operations or any products or
technology we obtain from other parties are infringing their intellectual
property rights, and we may be unaware of intellectual property rights of others
that may cover some of our assets, technology and products.

In addition, from time to time we
receive letters from third parties that allege we are infringing their
intellectual property and asking us to license such intellectual property, and
we review the merits of each letter. Any litigation regarding patents,
trademarks, copyrights or other intellectual property rights, even those without
merit, could be costly and time consuming, and divert our management and key
personnel from operating our business. The complexity of the technology involved
and inherent uncertainty and cost of intellectual property litigation increases
our risks. If any third-party has a meritorious or successful claim that we are
infringing its intellectual property rights, we may be forced to change our
products or manufacturing processes or enter into licensing arrangement with
third parties, which may be costly or impractical, particularly in the event we
are subject to a contractual commitment to continue supplying impacted products
to our customers. This also may require us to stop selling our products as
currently engineered, which could harm our competitive position. We also may be
subject to significant damages or injunctions that prevent the further
development and sale of certain of our products or services and may result in a
material decrease in sales.

14

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We face strong competition for
skilled workers which could result in our inability to attract and retain
necessary personnel.

Our success depends in large part on
its ability to attract and retain highly qualified scientific, technical,
management, and marketing personnel. Competition for such personnel is intense
and there can be no assurance that we will be able to attract and retain the
personnel necessary for the development and operation of our business.

We may not be able to successfully
integrate future acquisitions, which could result in our not achieving the
expected benefits of the acquisition, the disruption of our business and an
increase in our costs.

Over the past four years, we have
acquired one business and we continually explore opportunities to acquire
related businesses, some of which could be material to us. Our ability to
continue to grow may depend upon identifying and successfully acquiring
attractive companies, effectively integrating these companies, achieving cost
efficiencies and managing these businesses as part of our company.

We may not be able to effectively
integrate the acquired companies and successfully implement appropriate
operational, financial and management systems and controls to achieve the
benefits expected to result from these acquisitions. Our efforts to integrate
these businesses could be affected by a number of factors beyond our control,
such as regulatory developments, general economic conditions and increased
competition. In addition, the process of integrating these businesses could
cause the interruption of, or loss of momentum in, the activities of our
existing business. The diversion of managements attention and any delays or
difficulties encountered in connection with the integration of these businesses
could negatively impact our business and results of operations. Further, the
benefits that we anticipate from these acquisitions may not develop.

Risks Relating to Our Class A Common Stock

Our sharepricehas been volatile
in the past and may decline in the future.

Our Class A Common Stock has
experienced significant market price and volume fluctuations in the past and may
experience significant market price and volume fluctuations in the future in
response to factors such as the following, some of which are beyond our
control:

- quarterly variations in our operating
  results;
- operating results that vary from the expectations
  of securities analysts and investors;
- changes in expectations as to our future financial
  performance, including financial estimates by securities analysts and
  investors;
- announcements of technological innovations or new
  products by us or our competitors;
- announcements by us or our competitors of
  significant contracts, acquisitions, strategic partnerships, joint ventures or
  capital commitments;
- changes in the status of our intellectual property
  rights;
- announcements by third parties of significant
  claims or proceedings against us;
- additions or departures of key
  personnel;
- future sales of our ordinary
  shares;
- stock market price and volume fluctuations;
  and
- general economic conditions.

Stock markets often experience extreme
price and volume fluctuations. Market fluctuations, as well as general political
and economic conditions, such as a recession or interest rate or currency rate
fluctuations or political events or hostilities in or surrounding the United
States, could adversely affect the market price of our Class A Common
Stock.

15

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In the past, securities class action
litigation has often been brought against companies following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and divert management's attention and resources both of which could have a
material adverse affect on our business and results of operations.

Future sales of our Class A Common
Stock in the public market could lower our stock price, and conversion of our
warrants and any additional capital raised by us may dilute your ownership in
the Company.

We may sell additional shares of Class
A Common Stock in the future. In addition, holders of warrants or stock options
may exercise their warrants or stock options to purchase shares of our Class A
Common Stock. We cannot predict the size of future issuances of our Class A
Common Stock or the effect, if any, that future issuances and sales of shares of
our Class A Common Stock will have on the market price of our Class A Common
Stock. Sales of substantial amounts of our Class A Common Stock, including
shares issued in connection with the exercise of the warrants or stock options,
or the perception that such sales could occur, may adversely affect prevailing
market prices for our Class A Common Stock.

Shares eligible for public sale in
the future could decrease the price of our Class A Common Stock and reduce our
future ability to raise capital.

Sales of substantial amounts of our
Class A Common Stock in the public market could decrease the prevailing market
price of our Class A Common Stock, which would have an adverse affect on our
ability to raise equity capital in the future.

We do not intend to pay
dividends.

We have never declared or paid any cash
dividends on our Class A Common Stock. We currently intend to retain future
earnings, if any, to finance operations and expand our business and, therefore,
do not expect to pay any dividends in the foreseeable future.

Item 2. Properties

The Company leases all of its executive
offices, research, marketing and manufacturing facilities under non-cancellable
operating leases. At March 31, 2009, those leases consisted of approximately
90,100 square feet in two facilities. The lease for our facility located in
Camarillo, California was amended in December 2008 and is now leased through
February 2014. Our facility located in Ann Arbor, Michigan is comprised of the
corporate office and the Picometrix LLC manufacturing plant and is leased
through June 2011, with two five year options to renew at the current lease rate
with a CPI adjuster. In addition, the Company has the right of first refusal to
purchase the facility. The Company believes that its existing facilities are
adequate to meet its needs for the foreseeable future.

Item 3. Legal
Proceedings

None

Item 4. Submission of Matters to a
Vote of Security Holders

No matters were submitted to a vote of
our stockholders during the fourth quarter ended March 31, 2009.

16

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PART II

Item 5. Market for Registrants
Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities

The Company's Class A Common Stock is
traded on the NYSE Amex (AMEX) under the symbol "API".

Stock Performance Graph

The graph below provides an indicator
of our cumulative total stockholder return as compared with the AMEX Composite
Index and the AMEX Technology Index. The graph assumes an initial investment of
$100. The graph covers a period of time beginning in March 28, 2004, through
March 31, 2009, which represents the last trading day of the year.



At June 24, 2009, the Company had 120
holders of record for the Class A Common Stock (including shares held in street
name), representing approximately 5,000 beneficial owners of the Class A Common
Stock.

Quarterly Stock Market
Data

The following table sets forth the high
and low closing prices of the Companys Class A Common Stock by quarter for
fiscal years 2009 and 2008.

17

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|Common Stock Price         
|---------------------------
|                           
|                           
|Common Stock1              
|High                       
|Low                        
|1 Price ranges on the
AMEX.

The Company has never paid any cash
dividends on its capital stock. The Company intends to retain earnings, if any,
for use in its business and does not anticipate that any funds will be available
for the payment of cash dividends on its outstanding shares in the foreseeable
future. The holders of Common Stock will not be entitled to receive dividends in
any year until the holders of the Class A Redeemable Convertible Preferred Stock
receive an annual non-cumulative dividend preference of $.072 per share. To
date, a total of 740,000 shares of Class A Redeemable Convertible Preferred
Stock have been converted into 222,000 shares of Class A Common Stock, leaving
outstanding 40,000 shares of Class A Redeemable Convertible Preferred Stock. The
aggregate non-cumulative annual dividend preference of such Class A Redeemable
Convertible Preferred Stock is $2,880. There is no public market for the
Company's Class A Redeemable Convertible Preferred Stock or Class B Common
Stock; however, such stock is convertible into Class A Common Stock at the
option of the holder and upon transfer by the holder of the Class A Redeemable
Convertible Preferred Stock.

Item 6. Selected Financial Data

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

Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations

Forward-Looking
StatementsCertain statements
contained in this Managements Discussion and Analysis (MD&A), including,
without limitation, statements containing the words may, will, can,
anticipate, believe, plan, estimate, continue, and similar expressions
constitute forward-looking statements. These forward-looking statements
reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. You should not place undue
reliance on these forward-looking statements. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including risks described in the Risk Factors sections and elsewhere in
this filing. Except for our ongoing obligation to disclose material information
as required by federal securities laws, we do not intend to update you
concerning any future revisions to any forward-looking statements to reflect
events or circumstances occurring after the date of this report. The following
discussion should be read in conjunction with the Risk Factors as well as our
financial statements and the related notes.

Application of Critical Accounting
PoliciesApplication of our accounting
policies requires management to make certain judgments and estimates about the
amounts reflected in the financial statements. Management uses historical
experience and all available information to make these estimates and judgments,
although differing amounts could be reported if there are changes in the
assumptions and estimates. Estimates are used for, but not limited to, the
accounting for the allowance for doubtful accounts, inventory allowances,
impairment costs, depreciation and amortization, warranty costs, taxes and
contingencies. Management has identified the following accounting policies as
critical to an understanding of our financial statements and/or as areas most
dependent on management's judgments and estimates.

18

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Global Economic
ConditionsThe credit markets and the
financial services industry continue to experience a period of significant
disruption characterized by the bankruptcy, failure, collapse or sale of various
financial institutions, increased volatility in securities prices, severely
diminished liquidity and credit availability and a significant level of
intervention from the United States and other governments. Continued concerns
about the systemic impact of potential long-term or widespread recession, energy
costs, geopolitical issues, the availability and cost of credit, the global
commercial and residential real estate markets and related mortgage markets and
reduced consumer confidence have contributed to increased market volatility and
diminished expectations for most developed and emerging economies continuing
into 2009. As a result of these market conditions, the cost and availability of
credit has been and may continue to be adversely affected by illiquid credit
markets and wider credit spreads. Continued turbulence in the United States and
international markets and economies could restrict our ability to refinance our
existing indebtedness, increase our costs of borrowing, limit our access to
capital necessary to meet our liquidity needs and materially harm our operations
or our ability to implement our business strategy.

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

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

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

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

Revenue is also derived from technology
research and development contracts. We recognize revenue from these contracts as
services and/or materials are provided.

Impairment of Long-Lived
AssetsAs of March 31, 2008 and March 31,
2009, our consolidated balance sheet included $4.6 million in goodwill. Goodwill
represents the excess purchase price over amounts assigned to tangible or
identifiable intangible assets acquired and liabilities assumed from our
business acquisitions.

In accordance with SFAS No. 142,Goodwill and Other Intangible
Assets,goodwill and intangible assets that
are not subject to amortization shall be tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. The impairment test shall consist of a comparison of the fair value
of the asset with its carrying amount, as defined. SFAS 142 requires a two-step
method for determining goodwill impairment. Step one is to compare the fair
value of the reporting unit with the units carrying amount, including goodwill.
If this test indicates that the fair value is less than the carrying value, then
step two is required to compare the implied fair value of the reporting units
goodwill with the carrying amount of the reporting units goodwill. If the
carrying amount of the asset exceeds its fair value, an impairment loss shall be
recognized in an amount equal to that excess.

19

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We determine the fair value of our
single reporting unit to be equal to our market capitalization plus a control
premium. Market capitalization is determined by multiplying the shares
outstanding on the assessment date by the average market price of our common
stock over a 10-day period before and a 10-day period after each assessment
date. We use this 20-day duration to consider inherent market fluctuations that
may affect any individual closing price. We believe that our market
capitalization alone does not fully capture the fair value of our business as a
whole, or the substantial value that an acquirer would obtain from its ability
to obtain control of our business. As such, in determining fair value, we add a
control premium  which seeks to give effect to the increased consideration a
potential acquirer would be required to pay in order to gain sufficient
ownership to set policies, direct operations and make decisions related to our
company  to our market capitalization.

The Companys evaluation as of March
31, 2008 and March 31, 2009, indicated there were no impairments. As of March
31, 2008, our market capitalization, calculated as described above, was $31.8
million and our carrying value, including goodwill, was $19.7 million. Because
market capitalization significantly exceeded our carrying value, our estimate of
the control premium was not a determining factor in the outcome of step one of
the impairment assessment. For FY 2009, our market capitalization calculated as
described as above, had fallen to $17.1 million and our carrying value,
including goodwill, had decreased to $17.9 million. We applied a 25% control
premium to market capitalization to determine a fair value of $21.4 million. We
believe that including a control premium at this level is supported by recent
transaction data in our industry. Absent the inclusion of a control premium
greater than 4% for FY 2009, our carrying value would have exceeded fair value,
requiring a step two analysis which may have resulted in an impairment of
goodwill.

As evidenced above, our stock price and
control premium are significant factors in assessing our fair value for purposes
of the goodwill impairment assessment. Our stock price can be affected by, among
other things, changes in industry or market conditions, changes in our results
of operations, and changes in our forecasts or market expectations relating to
future results. Significant turmoil in the financial markets and weakness in
macroeconomic conditions globally have recently contributed to volatility in our
stock price and a significant decline in our stock price during the fourth
quarter of FY 2009. Our stock price has fluctuated from a high of $1.08 to a low
of $0.62 during the fourth quarter of FY 2009. On numerous occasions during the
fourth quarter, our stock price was high enough that our market capitalization
exceeded our carrying value without giving effect to a control premium. The
current macroeconomic environment, however, continues to be challenging and we
cannot be certain of the duration of these conditions and their potential impact
on our stock price performance. If our recent stock price decline persists and
our market capitalization remains below our carrying value for a sustained
period, it is reasonably likely that a goodwill impairment assessment prior to
the next annual review in the fourth quarter of fiscal 2010 would be necessary
and an impairment of goodwill may be recorded. A non-cash goodwill impairment
charge would have the affect of decreasing our earnings or increasing our losses
in such period. If we are required to take a substantial impairment charge, our
operating results would be materially adversely affected in such
period.

In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of
Long-lived Assets,the carrying value of
long-lived assets, including amortizable intangibles and property and equipment,
are evaluated whenever events or changes in circumstances indicate that a
potential impairment has occurred relative to a given asset or assets.
Impairment is deemed to have occurred if projected undiscounted cash flows
associated with an asset are less than the carrying value of the asset. The
estimated cash flows include managements assumptions of cash inflows and
outflows directly resulting from the use of that asset in operations. The amount
of the impairment loss recognized is equal to the excess of the carrying value
of the asset over its then estimated fair value. The Companys evaluation for
the fiscal year ended March 31, 2009, indicated there were no
impairments.

20

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Accounting for Income
TaxesIncome tax provisions are provided
for taxes currently payable or refundable, and for deferred income taxes arising
from future tax consequences of events that were recognized in the Companys
financial statements or tax returns. The effects of income taxes are measured
based on enacted tax laws and rates applicable to periods in which the
differences are expected to reverse. If necessary, a valuation allowance is
established to reduce deferred income tax assets to an amount that will more
likely than not be realized in accordance with SFAS No. 109Accounting for Income Taxes.

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

At March 31, 2009, our net deferred tax
asset before consideration of a valuation allowance was approximately $7.3
million, mainly consisting of net operating loss carry-forwards which expire at
various amounts over an approximate 20 year period. In assessing the
realizability of deferred tax assets, the Company has determined that at this
time it is more likely than not that deferred tax assets will not be realized
, primarily due to uncertainties related to its ability to utilize the net
operating loss carry-forwards before they expire based on the negative evidence
of its recent years history of losses, including tax losses in two of the last
three years and cumulative taxable losses over the past three years, outweighing
the positive evidence of taxable income projections in future years. The
ultimate realization of these deferred tax assets is dependent upon the
generation of future taxable income during those periods in which those
temporary differences become deductible or within the periods before NOL carry
forwards expire. As of both March 31, 2009 and 2008, the Company recorded a full
valuation allowance on its net deferred tax assets.

For the year ended March 31, 2009, we
incurred taxable losses that increased our net operating loss carry-forwards. In
evaluating our net deferred tax assets at March 31, 2009, we considered the
negative evidence that we had taxable losses in each of the past three years.
Because evidence such as our operating results during the most recent historical
periods is afforded more weight than forecasted results for future periods, our
recent losses and cumulative loss position during our most recent three-year
period represents sufficient negative evidence of the need for a full valuation
allowance at March 31, 2009.

InventoriesThe Companys inventories are stated at the lower of standard
cost (which approximates actual cost under the first-in, first-out method) or
market. Slow moving and obsolete inventories are reviewed throughout the year.
To calculate a reserve for obsolescence, we begin with a review of our slow
moving inventory. Any inventory, which has been slow moving within the past 12
months, is evaluated and reserved if deemed appropriate. In addition, any
residual inventory, which is customer specific and remaining on hand at the time
of contract completion, is reserved for at the standard unit cost. The complete
list of slow moving and obsolete inventory is then reviewed by the production,
engineering and/or purchasing departments to identify items that can be utilized
in the near future. These items are then excluded from the analysis and the
remaining amount of slow-moving and obsolete inventory is then reserved for.
Additionally, non-cancelable open purchase orders for parts we are obligated to
purchase where demand has been reduced may be reserved. Reserves for open
purchase orders where the market price is lower than the purchase order price
are also established. If a product that had previously been reserved for is
subsequently sold, the amount of reserve specific to that item is then reversed.

Results of Operations

Fiscal Year Ended March 31, 2009
Compared to Fiscal Year Ended March 31, 2008

RevenuesThe Company predominantly operates in one industry segment,
light and radiation detection devices that it sells to multiple markets
including telecommunications, industrial sensing/NDT, military/aerospace,
medical, and homeland security. Revenues by market consisted of the following:

|                             |  | Year ended    
|---------------------------- |  | --------------
|                             |  | March 31, 2009
|Telecommunications           |  | $             
|Industrial
      Sensing/NDT |  |               
|Military/Aerospace           |  |               
|Medical                      |  |               
|Homeland
      Security      |  |               
|Total Revenues               |  | $             

21

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The Company's revenues for FY 2009 were
$29.7 million, an increase of $6.5 million, or 28% from revenues of $23.2
million for the FY 2008. The Company had growth in four of its five markets
during FY 2009, offset by a reduction in medical market revenue as compared to
FY 2008.

Telecommunications sales were $6.0
million, an increase of $756,000 or 14% from FY 2008. This increase was the
result of increased demand for the 40G client side products. The Companys
telecommunications revenues in the fourth quarter experienced a slow down as our
customers responded to the recession by implementing inventory reduction
programs and delaying second source initiatives for the 40G line side products.
Based on customer guidance, the reduced demand was not the result of changing
underlying market demand for 40G infrastructure capacity expansion and as a
result we expect customer inventory reduction programs to be completed in the
first quarter of FY 2010 and a return to more normal growth for the balance of
the fiscal year.

Industrial Sensing/NDT market revenues
were $11.3 million in FY 2009, an increase of 12% (or $1.2 million) from FY 2008
revenues of $10.1 million. The increase was due to increased sales of
non-destructive testing equipment utilizing our proprietary terahertz
technology. The Companys Industrial Sensing/NDT revenue in the fourth quarter
experienced a slow down as our customers responded to reduced demand as the
result of the recession and our customers delayed capital expenditures which
delayed purchases of our terahertz products.

Military/Aerospace market revenues were
$9.2 million, an increase of 109% (or $4.8 million) from the comparable prior
year revenues of $4.4 million. This increase was primarily attributable to
customer orders received in the current year which had been delayed from the
prior year, as well as increased demand.

Medical market revenues decreased $1.0
million or 33% from the prior year of $3.1 million. This decrease was primarily
a result of the Companys decision to eliminate business at a customer that did
not meet its profitability criteria.

Homeland security increased 211% or
$694,000, to $1,023,000, due to an increase in a THz development contract for
the nuclear gauge replacement from the Department of Homeland Security.

Gross ProfitGross Profit was $12.9 million (or 44% of revenue), compared
to the prior year of $8.9 million (or 38% of revenue), an increase of 46%, The
improvement in gross profit was due primarily to the increased volume and
favorable product mix, combined with cost reductions achieved through our
facilities consolidation.

The Company believes that gross margins
in FY 2010 should continue to improve as a result of cost reductions from our
facilities consolidation that was completed in FY 2009, the phase out of low
margin products, increased revenue from the telecommunication market driven by
our 40G and 100G products, and increased revenue from our terahertz product
platform.

Operating
ExpensesResearch and Development
expenses (R&D) --The Companys R&D
costs increased by $458,000 (or 11%) on revenue increases of 28%. R&D
expenses were $4.7 million (16% of sales) during FY 2009 compared to $4.2
million (18% of sales) in FY 2008. The increase was attributable to the
Companys planned increased R&D spending as we continued to focus on new
opportunities in our high growth High Speed Optical Receiver and THz product
platforms. The majority of this increase was funded by increased R&D
contract revenue. The Company expects to continue to increase investment in the
next generation 40G/100G HSOR products and THz applications in FY 2010 in order
to gain HSOR market share and move THz from the laboratory to the factory floor.

22

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Sales and Marketing expenses
(S&M) The Companys S&M expenses
increased $347,000 (or 15%) to $2.7 million (9% of sales) in FY 2009 compared to
$2.3 million (10% of sales) in FY 2008. The increase was primarily attributable
to the increased compensation and travel expense related to field sales activity
necessary on a 28% increase in revenue in FY 2009. The Company has and will
continue to focus its sales and marketing activity for the growing Telecom and
Industrial/NDT markets. As a result, further increases in sales and marketing
expenses are expected in future periods.

General and Administrative expenses
(G&A) --G&A expenses increased by
$278,000 (6%) to approximately $4.9 million (16% of sales) for FY 2009 as
compared to $4.6 million (20% of sales) for FY 2008. These increases were
primarily the result of higher compensation expense, terahertz royalties, and
depreciation expense as the result the new company wide ERP system installed
during the year, offset by increased State of Michigan refund for MEGA job
creation tax credits. The ERP system was installed to improve efficiency,
standardize systems between locations and assist in simplifying Sarbanes-Oxley
Section 404 compliance. Currently, the Company is required to be compliant with
the external reporting requirements of Section 404 by the end of fiscal year
2010. External costs required to be in compliance are therefore expected to
materially increase in FY 2010.

Amortization expense was $2.1 million
in FY 2009 compared to $2.0 million in FY 2008, an increase of $118,000. This
increase was primarily the result of the Companys use of the estimated cash
flow methodology for its intangible assets in the amount of $111,000 and an
approximately $7,000 increase in patent amortization expense.

Other operating expenses decreased $1.5
million as a result of a decrease in non-recurring wafer fabrication
consolidation expenses of $1.0 million and the Wisconsin facility closure
expenses of $534,000. Wafer fabrication consolidation expenses to our Ann Arbor
facility were $300,000 in FY 2009 compared to $1.3 million in FY 2008.

The Companys evaluations of Intangible
assets and Goodwill for the year ended March 31, 2009 resulted in no impairment
adjustments. In FY 2008, the Intangible assets and Goodwill evaluation resulted
in no impairment adjustments.

Financing and Other Income
(Expense), netInterest income for FY 2009
decreased $68,000 to approximately $28,000, compared to $96,000 in FY 2008, due
primarily to lower cash balances available for short-term investment and lower
interest rates in FY 2009.

Interest expense for FY 2009 was
$405,000 as compared to $2.5 million in FY 2008, a decrease of $2.1 million.
This decrease was primarily attributable to a $1.9 million decrease in the
interest expense and amortization of the discount related to the convertible
notes which were paid off or converted to equity in Q3 2008. In addition, the
Companys interest expense was $176,000 lower on the related party notes and
other notes. This decrease was primarily due to reduced debt and lower interest
rates.

Net loss for FY 2009 was $2.0 million,
as compared to net loss of $9.6 million in FY 2008, an improvement of $7.6
million. This improvement was primarily attributable to higher gross margins of
$4.1 million, the decrease in interest expense of $2.1 million, lower provision
for income taxes of $1.2 million and lower wafer fabrication relocation and
facility closure expenses of $1.5 million, offset by higher other operating
expenses of $1.2 million. During the year ended March 31, 2008, the company
recorded a full valuation allowance on its net deferred tax assets and
recognized an income tax provision of approximately $1.2 million.

Liquidity and Capital
ResourcesAt March 31, 2009, the Company
had cash and cash equivalents of $2.1 million, an increase of $2.0 million from
$0.1 million as of March 31, 2008, primarily attributable to cash generated from
operations of $2.7 million and from investing activities of $93,000, offset by a
reduction in cash from financing activities of $759,000.

23

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Operating
ActivitiesNet cash provided by
operating activities of $2.7 million for the year ended March 31, 2009 was
primarily the result of net cash provided by operations of $1.4 million and net
cash provided by changes in operating assets and liabilities of $1.3 million.
The net cash provided by operations included a net loss of $2.0 million, offset
by net cash generated of $3.4 million from depreciation, amortization and stock
based compensation. Changes in operating assets and liabilities were primarily a
result of reduced inventories of $462,000 and increased accrued expenses of
$912,000.

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

Investing
ActivitiesNet cash provided by
investing activities was approximately $93,000 for the year ended March 31,
2009. The amount consisted of capital expenditures of approximately $722,000,
and patent expenditures of $186,000, offset by a $1.0 million lower restricted
cash balance required under a new bank loan agreement.

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

Financing ActivitiesThe Company used $759,000 of net cash
from financing activities in FY 2009, primarily to reduce debt, including a net
reduction in bank debt and capital lease obligations of $268,000 and payments to
related parties of $450,000. The net reduction in bank debt included the payoff
of the capital lease obligation of $1.9 million under the prior bank agreement,
financed primarily by the bank term loan of $1.7 million under the new bank
agreement.

On March 6, 2007, the Company and Fifth
Third Bank entered into a Revolving Line of Credit (the Loan Agreement)
providing for borrowings of up to a maximum of $2.0 million at the interest rate
equal to the prime rate. On November 13, 2007, the Loan Agreement was amended to
increase the principal amount available to $3.0 million. At March 31, 2008, the
Company did not meet the debt service coverage ratio covenant and the Loan
Agreement was subsequently amended on June 30, 2008 to reduce the principal
amount available to $2.5 million and to amend the interest rate to be equal to
prime plus 2%.

On September 25, 2008, the Company
terminated the Loan Agreement with Fifth Third Bank and established a credit
facility with The PrivateBank and Trust Company. As part of this new banking
relationship, the Company established a three year Line of Credit of $3.0
million at an interest rate of prime plus 1%, adjusted quarterly. The prime rate
at March 31, 2009 was 3.25%. The new facility contains customary
representations, warranties and financial covenants including minimum debt
service coverage ratio, Adjusted EBITDA level, and Net Worth requirements (as
defined in the agreement). The principal loan amount, is due on September 25,
2011, provided that if existing loans to the Company by the Michigan Economic
Development Corporation have not converted to equity on or before August 31,
2011, the outstanding principal shall be due on August 31, 2011. The
availability under the new facility will be determined by the calculation of a
borrowing base that includes a percentage of accounts receivable and inventory.

At March 31, 2009, the Company was in
compliance with the debt service coverage ratio and Net Worth requirements, but
was not in compliance with the Adjusted EBITDA level. The Company has received a
waiver from the bank regarding the default and entered into an amendment to the
loan agreement on May 29, 2009 effective March 31, 2009. According to the terms
of the amended loan agreement, the Adjusted EBITDA level is measured on a year
to date basis for the June 30, 2009, September 30, 2009, December 31, 2009 and
March 31, 2010 test dates and thereafter on a trailing four quarter basis. In
addition, the Debt Service Coverage ratio and the Net Worth covenants were
amended. The amended minimum Debt Service Coverage ratio is 1.0 to 1.0 for the
first quarter, 1.25 to 1.0 for the second quarter and 1.5 to 1.0 thereafter. The
amended minimum Net Worth covenant is $15.5 million and will increase by 10% of
Net Income for each fiscal year that the Company reports net income.

24

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The line of credit is guaranteed by
each of APIs wholly-owned subsidiaries and the loan is secured by a Security
Agreement among API, its subsidiaries and The PrivateBank, pursuant to which API
and its subsidiaries granted to The PrivateBank a first-priority security
interest in certain described assets. The outstanding balance as of March 31,
2009 is $1.4 million.

The Company generated net cash from
financing activities in FY 2008 of $3.0 million including increases in cash from
financing activities of $6.3 million offset by decreases in financing activities
of $3.3 million. The increase of cash resulted from the private placement of
Company Class A common stock of $4.3 million, $227,000 from the exercise of
warrants and stock options for Company common stock, net increase in the bank
line of credit of $559,000, and the net increase in the MEDC term loans of
$790,000, offset by the retirement of convertible notes of $2.4 million, and the
reduction in related parties notes payable of $550,000.

DebtAs a result of the acquisition of Picotronix, Inc. (dba Picometrix,
Inc.), the Company issued promissory notes to the stockholders of Picometrix,
(Debt to Related Parties). At March 31, 2009, the remaining balance on the notes
was $1.4 million. The notes are payable in annual installments of varying
amounts through March 2010 as amended in FY 2009. The notes bear interest at a
rate of prime plus 1.0% and are secured by all of the intellectual property of
Picometrix. API has the option of prepaying the notes without penalty.

In March 2007, API, as Lessee, entered
into a Master Equipment Lease Agreement with Fifth Third Leasing Company, as
Lessor, to finance the purchase of new manufacturing equipment up to an
aggregate of $2,300,000 (Lease). API purchased equipment under the Lease until
June 30, 2007. This lease was accounted for as a capital lease in accordance
with SFAS No. 13. On September 25, 2008, the Company retired the Master
Equipment Lease Agreement with Fifth Third Leasing Company by paying the
remaining principal amount of $1,736,000.

On September 25, 2008, the Company
established a new credit facility with The PrivateBank and Trust Company. As
part of this banking relationship, in addition to the line of credit described
above, the Company established an Equipment Installment Loan of $1.736 million
amortized over a term of four years, at an interest rate of prime plus 1%. The
principal loan amount is due on September 25, 2012, provided that if existing
loans to the Company by the Michigan Economic Development Corporation have not
converted to equity on or before August 31, 2011, the Loan shall be due on
August 31, 2011. The Company utilized the Equipment Installment loan to retire
the Master Equipment Lease Agreement with Fifth Third Leasing Company. The
balance on this term loan at March 31, 2009 was $1.6 million.

The Company was not in compliance with
the Adjusted EBITDA level requirements. The Company has received a waiver from
the bank regarding the default. Based on the amended loan covenants, the Company
anticipates that it will meet the loan covenants during FY 2010, and as a result
has classified the current and future maturities in accordance with the loan
agreement.

The Michigan Economic Development
Corporation (MEDC) entered into two loan agreements with Picometrix LLC, one in
fiscal 2004 (MEDC-loan 1) and one in fiscal 2005 (MEDC-loan 2). Both loans are
unsecured.

The MEDC-loan 1 is $1,025,000 with an
interest rate of 7%. Under the original terms of the promissory note, interest
accrued but unpaid through October 2008 would be added to then outstanding
principal balance of the note and the restated principal would be amortized over
the remaining four years (September 15, 2012). Effective September 23, 2008, the
MEDC-loan 1 of $1,025,000 was amended and restated to change the start date of
repayment of principal and interest from October 2008 to October 2009.
Commencing in October 2009, the Company will pay MEDC the restated principal and
accrued interest on any unpaid balance over the remaining three
years.

25

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MEDC-loan 2 is $1.2 million with an
interest rate of 7%. Under the original terms of the promissory notes, interest
accrued, but unpaid in the first two years of this agreement was added to the
then outstanding principal of this promissory note. During the third year of
this agreement, the Company was to pay interest on the restated principal of the
Note until October 2008, at which time the Company was to repay the restated
principal over the remaining three years (September 15, 2011). Effective January
26, 2009, the MEDC-loan 2 of $1.2 million was amended and restated to change the
start date of repayment of principal and interest from October 2008 to November
2009 and to extend the repayment period to October 2012. The current and
long-term portions included in the March 31, 2009 balance sheet have been
classified based on the terms of the January 2009 amendment.

The Company believes that current cash
levels combined with cash generated from operations, our revolving line of
credit and additional debt or equity financing will be sufficient for our 2010
fiscal year.

Summary of Contractual
Obligations and Commitments

The following table sets forth the
contractual obligations of the Company at March 31, 2009.

|Contractual Obligations            |  |       | Payments due by period | 
|---------------------------------- |  | ----- | ---------------------- | 
|                                   |  |       |                        | 
|                                   |  | Total |                        | 
|Bank line of credit                |  | $     | 1,394,000              | 
|Bank term loan                     |  |       | 1,555,000              | 
|Long-term MEDC loans               |  |       | 2,224,000              | 
|Debt to related
    parties        |  |       | 1,401,000              | 
|**Subtotal  Balance
      Sheet** |  |       | 6,574,000              | 
|Expected interest expense
      on |  |       |                        | 
|current debt
      obligations     |  |       | 744,000                | 
|Operating lease
      obligations  |  |       | 3,560,000              | 
|Purchase
      obligations         |  |       | 1,322,000              | 
|Total                              |  | $     | 12,200,000             | 

Recent Accounting
Pronouncements

In September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements ( SFAS No. 157),which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
This Statement is effective for the fiscal years beginning after November 15,
2007. However, in February 2008, the FASB issued FASB Statement of Position
(FSP) FAS No. 157-2, Effective Date of FASB Statement No. 157. This FSP
delays the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually) to
fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. The adoption of SFAS No. 157 did not have a material impact on our
consolidated financial statements.

26

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In October 2008, the FASB issued FSP
FAS No. 157-3, Determining the Fair Value of
a Financial Asset When the Market for That Is Asset Not Active (FAS No. 157-3) with an immediate effective date,
including prior periods for which financial statements have not been issued. FSP
FAS No. 157-3 clarifies the application of fair value in inactive markets and
allows for the use of managements internal assumptions about future cash flows
with appropriately risk-adjusted discount rates when relevant observable market
data does not exist. The objective of FAS No. 157 has not changed and continues
to be the determination of the price that would be received in an orderly
transaction that is not a forced liquidation or distressed sale at the
measurement date. The adoption of FSP FAS No. 157-3 did not have a material
effect on the Companys results of operations, financial position or liquidity.

In February 2007, the FASB issued SFAS
No. 159,The Fair Value Option for Financial
Assets and Financial Liabilities(SFAS No.
159), which permits entities to choose to measure many financial instruments
and certain other items at fair value. SFAS No. 159 also includes an amendment
to SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securitieswhich applies to all entities with available-for-sale and trading securities.
This Statement is effective as of the beginning of an entitys first fiscal year
that begins after November 15, 2007. The adoption of this pronouncement had no
impact on our financial statements.

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

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

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

In April 2008, the FASB issued FASB
Staff Position (FSP) No. FAS 142-3,Determination of the Useful Life of Intangible Assets(FSP No. FAS 142-3).The final FSP amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible
Assets.The FSP is intended to improve the
consistency between the useful life of an intangible asset determined under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141 (revised 2007),Business Combinations,and other US
generally accepted accounting principles. The FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The Company is currently evaluating
the impact, if any, FSP No. FAS 142-3 will have on its consolidated financial
statements.

27

---

In May 2008, the FASB issued FASB Staff
Position (FSP) No. APB 14-1. This FSP clarifies that convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) are not addressed by paragraph 12 of APB Opinion No. 14,
Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants.
Additionally, this FSP specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entitys nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. This FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The Company is in the process of evaluating the
impacts, if any, of adopting this FSP.

In June 2008, the FASB ratified the
consensus reached by the Emerging Issues Task Force, EITF Issue No. 07-5,
Determining Whether an Instrument (or an
Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 addresses how an entity should evaluate
whether an instrument is indexed to its own stock. The consensus is effective
for fiscal years (and interim periods) beginning after December 15, 2008. The
consensus must be applied to outstanding instruments as of the beginning of the
fiscal year in which the consensus is adopted and should be treated as a
cumulative-effect adjustment to the opening balance of retained earnings. Early
adoption is not permitted. The Company is in the process of evaluating the
impacts, if any, of adopting this EITF.

In June 2008, the FASB issued FASB
Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities.
This FSP provides that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
basic earnings per share pursuant to the two-class method described in SFAS No.
128, Earnings per Share. All prior period earnings per share data presented shall be
adjusted retrospectively to conform to the provisions of this FSP. This FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. Early
application is prohibited. The Company is in the process of evaluating the
impact, if any, of adopting this FSP.

In April 2009, the FASB issued FASB
Staff Position (FSP) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies.
FSP FAS 141(R)-1 provides guidance for determining the acquisition-date fair
value of assets acquired and liabilities assumed in a business combination that
arise from contingencies, and provides guidance on how to account for these
assets and liabilities subsequent to the completion of a business combination.
FSP FAS 141(R)-1 also requires increased disclosures on assets acquired and
liabilities assumed in a business combination that arise from contingencies. FSP
FAS 141(R)-1 is effective for assets or liabilities arising from contingencies
in 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. The adoption of FSP FAS 141(R)-1 will change our accounting treatment
for business combinations on a prospective basis beginning April 1,
2009.

Item 7A. Quantitative and
Qualitative Disclosures About Market Risk

At March 31, 2009, most of the
Companys interest rate exposure is linked to the prime rate, subject to certain
limitations, offset by cash investment tied to prime rate. As such, we are at
risk to the extent of changes in the prime rate and do not believe that moderate
changes in the prime rate will materially affect our operating results or
financial condition.

28

---

Item 8. Financial Statements and
Supplementary Data

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

|                                                                           |  | Page
|-------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting
    Firm                |  | 30  
|                                                                           |  |     
|Financial Statements:                                                      |  |     
|Consolidated
      Balance Sheets, as of March 31, 2009 and March 31, 2008 |  | 31  
|                                                                           |  |     
|Consolidated Statements of Operations                                      |  |     
|for the years ended March 31, 2009 and March 31, 2008                      |  | 32  
|                                                                           |  |     
|Consolidated Statements of Shareholders' Equity                            |  |     
|for the years ended March 31, 2009 and March 31, 2008                      |  | 33  
|                                                                           |  |     
|Consolidated Statements of Cash Flows                                      |  |     
|for the years ended March 31, 2009 and March 31, 2008                      |  | 34  
|                                                                           |  |     
|Notes to Consolidated Financial Statements                                 |  | 35  

29

---

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Shareholders of Advanced Photonix, Inc.Ann Arbor, Michigan

We have audited the accompanying
consolidated balance sheets of Advanced Photonix, Inc. as of March 31, 2009 and
March 31, 2008 and the related consolidated statements of operations,
shareholders equity and cash flows for the years then ended. In connection with
our audits of the financial statements, we have also audited the financial
statement schedule for the years ended March 31, 2009 and March 31, 2008
included at Item 15. These financial statements and schedule are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
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 financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements and
schedule. We believe that our 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 financial position of Advanced Photonix, Inc. at March 31, 2009 and March
31, 2008, and the results of its operations and its cash flows for the years
then ended,in conformity with accounting principles generally accepted in the United
States of America.

Also, in our opinion, the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

/s/ BDO Seidman LLPTroy, Michigan June 26, 2009

30

---

|ADVANCED
      PHOTONIX, INC.    
|---------------------------------
|CONSOLIDATED BALANCE
      SHEETS

|                                                                                                |  | March 31, 2009 |                | March 31, 2008
|----------------------------------------------------------------------------------------------- |  | -------------- | -------------- | --------------
|ASSETS                                                                                          |  |                |                |               
|Current assets:                                                                                 |  |                |                |               
|Cash and cash
      equivalents                                                                 |  | $              | 2
    ,072,000 |               
|Restricted cash                                                                                 |  |                | 500,000        |               
|Accounts receivable, net of
      allowance for doubtful accounts of $62,000 and                |  |                |                |               
|$14,000,
respectively                                                                           |  |                | 3,284,000      |               
|Inventories                                                                                     |  |                | 3,669,000      |               
|Prepaid expenses and other
      current assets                                                 |  |                | 252,000        |               
|Total current assets                                                                            |  |                | 9,777,000      |               
|                                                                                                |  |                |                |               
|Equipment and leasehold
      improvements, net                                                 |  |                | 4,322,000      |               
|Other assets                                                                                    |  |                |                |               
|Goodwill                                                                                        |  |                | 4,579,000      |               
|Intangibles, net                                                                                |  |                | 8,975,000      |               
|Certificate of
    deposit                                                                      |  |                | 278,000        |               
|Security deposits and other
      assets                                                        |  |                | 110,000        |               
|Total other assets                                                                              |  |                | 13,942,000     |               
|Total
      Assets                                                                              |  | $              | 28,041,000     |               
|                                                                                                |  |                |                |               
|LIABILITIES
      AND SHAREHOLDERS EQUITY                                                      |  |                |                |               
|Current liabilities:                                                                            |  |                |                |               
|Line of credit                                                                                  |  | $              | -              |               
|Accounts payable                                                                                |  |                | 1,356,000      |               
|Accrued compensation                                                                            |  |                | 1,037,000      |               
|Accrued interest                                                                                |  |                | 513,000        |               
|Other accrued
    expenses                                                                      |  |                | 615,000        |               
|Current portion of long-term
      debt, related parties                                        |  |                | 1,401,000      |               
|Current portion of long-term
      debt, MEDC                                                   |  |                | 353,000        |               
|Current portion of long-term
      debt, bank term loan                                         |  |                | 434,000        |               
|Current portion of long-term
      debt, capital lease obligations                              |  |                | --             |               
|Total current
      liabilities                                                                 |  |                | 5,709,000      |               
|Long-term debt, less current
      portion - MEDC                                               |  |                | 1,871,000      |               
|Long-term debt  bank line of
      credit                                                      |  |                | 1,394,000      |               
|Long-term debt, less current
      portion  bank term loan                                     |  |                | 1,121,000      |               
|Long-term debt, less current
      portion - related parties                                    |  |                | --             |               
|Long-term debt, less current
      portion - capital lease obligations                          |  |                | --             |               
|Total liabilities                                                                               |  |                | 10,095,000     |               
|                                                                                                |  |                |                |               
|Commitments and
      contingencies                                                             |  |                |                |               
|                                                                                                |  |                |                |               
|Shareholders'
      equity:                                                                     |  |                |                |               
|**Class A redeemable
      convertible preferred stock**, $.001
      par value; 780,000        |  |                |                |               
|shares authorized; 40,000
      shares outstanding                                              |  |                | --             |               
|**Class A****Common
      Stock**, $.001 par value,
      100,000,000 authorized; 2009         |  |                |                |               
|24,089,726 shares issued and
      outstanding; 2008  23,977,678 shares issued and             |  |                |                |               
|outstanding                                                                                     |  |                | 24,000         |               
|**Class B****Common
      Stock**, $.001 par value;
      4,420,113 shares authorized, 2009 and |  |                |                |               
|2008 - 31,691 issued and
      outstanding                                                      |  |                | --             |               
|Additional paid-in
      capital                                                                |  |                | 52,400,000     |               
|Accumulated deficit                                                                             |  |                | (34,478,000    | )             
|Total shareholders' equity                                                                      |  |                | 17,946,000     |               
|**Total Liabilities and Shareholders Equity**                                                  |  | $              | 28,041,000     |               

See Notes to Consolidated Financial
Statements.

31

---

|ADVANCED PHOTONIX,
      INC.                           
|--------------------------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS                   
|For the Fiscal Years Ended March
      31, 2009 and 2008

|                                                      |  | 2009 |            | 2008
|----------------------------------------------------- |  | ---- | ---------- | ----
|Sales, net                                            |  | $    | 29,675,000 |     
|Cost of products
      sold                           |  |      | 16,744,000 |     
|Gross profit                                          |  |      | 12,931,000 |     
|                                                      |  |      |            |     
|Operating expenses:                                   |  |      |            |     
|Research and development
      expenses               |  |      | 4,676,000  |     
|Sales and marketing
      expenses                    |  |      | 2,659,000  |     
|General and administrative
      expenses             |  |      | 4,871,000  |     
|Amortization expense 
      intangible assets        |  |      | 2,081,000  |     
|Dodgeville consolidation
      expenses               |  |      | --         |     
|Wafer fabrication relocation
      expenses           |  |      | 300,000    |     
|Total operating expenses                              |  |      | 14,587,000 |     
|Loss from operations                                  |  |      | (1,656,000 | )   
|                                                      |  |      |            |     
|Other income (expense):                               |  |      |            |     
|Interest income                                       |  |      | 28,000     |     
|Interest expense on bank &
      MEDC loans           |  |      | (311,000   | )   
|Interest expense related to
      convertible notes   |  |      | --         |     
|Interest expense, warrant
      discount              |  |      | --         |     
|Interest expense, related
      parties               |  |      | (94,000    | )   
|Other income
    (expense)                            |  |      | (2,000     | )   
|Total other income and (expenses)                     |  |      | (379,000   | )   
|Loss before provision (benefit) for income taxes      |  |      | (2,035,000 | )   
|                                                      |  |      |            |     
|Provision (benefit) for income taxes:                 |  |      |            |     
|Provision (benefit) for income
      taxes - deferred |  |      | --         |     
|Total provision (benefit) for income taxes            |  |      | --         |     
|Net
    loss                                          |  | $    | (2,035,000 | )   
|                                                      |  |      |            |     
|Basic and diluted loss per share                      |  | $    | (0.08      | )   
|                                                      |  |      |            |     
|Weighted average common shares outstanding            |  |      | 24,074,000 |     

See Notes to Consolidated Financial
Statements.

32

---

|ADVANCED
      PHOTONIX, INC.                           
|--------------------------------------------------------
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY         
|For the Fiscal
      Years Ended March 31, 2009 and 2008
|(In thousands, except share data)                       

|                                    |  |             |  |               |    |             |        |               |   |             |  |               |  |            |    |             |   |        |  |   |         |   |  |   |        |  
|----------------------------------- |  | ----------- |  | ------------- | -- | ----------- | ------ | ------------- | - | ----------- |  | ------------- |  | ---------- | -- | ----------- | - | ------ |  | - | ------- | - |  | - | ------ | -
|                                    |  | Class
    A |  | Class
      A |    | Class
    A |        | Class
      A |   | Class
    B |  | Class
      B |  | Additional |    |             |   |        |  |   |         |  
|                                    |  | Common      |  | Common        |    | Preferred   |        | Preferred     |   | Common      |  | Common        |  | Paid-in    |    | Accumulated |   |        |  |  
|                                    |  | Shares      |  | Amount        |    | Shares      |        | Amount        |   | Shares      |  | Amount        |  | Capital    |    | Deficit     |   | Total 
|BALANCE,                            |  |             |  |               |    |             |        |               |   |             |  |               |  |            |    |             |   |        |  |   |         |   |  |   |        |  
|MARCH 31, 2007                      |  | 19,226,006  |  | $             | 19 |             | --     |               | $ | --          |  | 31,691        |  | $          | -- |             | $ | 43,887 |  | $ | (22,815 | ) |  | $ | 21,091 |  
|Exercise of
      stock options     |  | 98,200      |  |               | -- |             | --     |               |   | --          |  | --            |  |            | -- |             |   | 76     |  |   | --      |   |  |   | 76     |  
|Reclassification of Class A         |  |             |  |               |    |             |        |               |   |             |  |               |  |            |    |             |   |        |  |   |         |   |  |   |        |  
|Redeemable
      Preferred          |  |             |  |               |    |             |        |               |   |             |  |               |  |            |    |             |   |        |  |   |         |   |  |   |        |  
|Stock to equity                     |  | --          |  |               | -- |             | 40,000 |               |   | --          |  | --            |  |            | -- |             |   | 32     |  |   | --      |   |  |   | 32     |  
|Stock based
      compensation      |  | --          |  |               | -- |             | --     |               |   | --          |  | --            |  |            | -- |             |   | 230    |  |   | --      |   |  |   | 230    |  
|Shares issued upon                  |  |             |  |               |    |             |        |               |   |             |  |               |  |            |    |             |   |        |  |   |         |   |  |   |        |  
|conversion of notes payable         |  | 1,601,323   |  |               | 2  |             | --     |               |   | --          |  | --            |  |            | -- |             |   | 3,150  |  |   | --      |   |  |   | 3,152  |  
|Warrants exercised                  |  | 86,817      |  |               | -- |             | --     |               |   | --          |  | --            |  |            | -- |             |   | 151    |  |   | --      |   |  |   | 151    |  
|Issuance of common stock            |  | 2,965,332   |  |               | 3  |             | --     |               |   | --          |  | --            |  |            | -- |             |   | 4,318  |  |   | --      |   |  |   | 4,321  |  
|Adjustment of discount on           |  |             |  |               |    |             |        |               |   |             |  |               |  |            |    |             |   |        |  |   |         |   |  |   |        |  
|convertible notes (anti-            |  |             |  |               |    |             |        |               |   |             |  |               |  |            |    |             |   |        |  |   |         |   |  |   |        |  
|dilution adjustment)                |  | --          |  |               | -- |             | --     |               |   | --          |  | --            |  |            | -- |             |   | 306    |  |   | --      |   |  |   | 306    |  
|Net loss                            |  | --          |  |               | -- |             | --     |               |   | --          |  | --            |  |            | -- |             |   | --     |  |   | (9,628  | ) |  |   | (9,628 | )
|BALANCE,                            |  |             |  |               |    |             |        |               |   |             |  |               |  |            |    |             |   |        |  |   |         |   |  |   |        |  
|MARCH 31, 2008                      |  | 23,977,678  |  | $             | 24 |             | 40,000 |               | $ | --          |  | 31,691        |  | $          | -- |             | $ | 52,150 |  | $ | (32,443 | ) |  | $ | 19,731 |  
|                                    |  |             |  |               |    |             |        |               |   |             |  |               |  |            |    |             |   |        |  |   |         |   |  |   |        |  
|Exercise of stock options           |  | 56,310      |  |               | -- |             | --     |               |   | --          |  | --            |  |            | -- |             |   | 46     |  |   | --      |   |  |   | 46     |  
|Issuance of
      restricted shares |  | 55,738      |  |               | -- |             | --     |               |   | --          |  | --            |  |            | -- |             |   | --     |  |   | --      |   |  |   | --     |  
|Stock based compensation            |  | --          |  |               | -- |             | --     |               |   | --          |  | --            |  |            | -- |             |   | 204    |  |   | --      |   |  |   | 204    |  
|Net
    loss                        |  | --          |  |               | -- |             | --     |               |   | --          |  | --            |  |            | -- |             |   | --     |  |   | (2,035  | ) |  |   | (2,035 | )
|BALANCE,                            |  |             |  |               |    |             |        |               |   |             |  |               |  |            |    |             |   |        |  |   |         |   |  |   |        |  
|MARCH 31, 2009                      |  | 24,089,726  |  | $             | 24 |             | 40,000 |               | $ | --          |  | 31,691        |  | $          | -- |             | $ | 52,400 |  | $ | (34,478 | ) |  | $ | 17,946 |  

See Notes to Consolidated Financial
Statements.

33

---

|ADVANCED PHOTONIX,
      INC.                           
|--------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS                   
|For the fiscal years ended March
      31, 2009 and 2008

|                                                                                              |  | 2009 |            | 2008
|--------------------------------------------------------------------------------------------- |  | ---- | ---------- | ----
|Cash flows from operating activities:                                                         |  |      |            |     
|Net loss                                                                                      |  | $    | (2,035,000 | )   
|Adjustment to reconcile net
      loss to net cash provided by (used in) operating activities |  |      |            |     
|Depreciation                                                                                  |  |      | 1,157,000  |     
|Amortization                                                                                  |  |      | 2,081,000  |     
|Stock based compensation expense                                                              |  |      | 204,000    |     
|Amortization, convertible note discount                                                       |  |      | --         |     
|Deferred income taxes                                                                         |  |      | --         |     
|Changes in operating assets and liabilities:                                                  |  |      |            |     
|Accounts receivable                                                                           |  |      | (82,000    | )   
|Inventories                                                                                   |  |      | 462,000    |     
|Prepaid expenses and other current assets                                                     |  |      | (57,000    | )   
|Other assets                                                                                  |  |      | (2,000     | )   
|Accounts payable                                                                              |  |      | 17,000     |     
|Accrued expenses                                                                              |  |      | 911,000    |     
|Net cash provided by (used in) operating activities                                           |  |      | 2,656,000  |     
|Cash flows from investing activities:                                                         |  |      |            |     
|Capital expenditures                                                                          |  |      | (721,000   | )   
|Change in restricted cash                                                                     |  |      | 1,000,000  |     
|Patent expenditures                                                                           |  |      | (186,000   | )   
|Net cash provided by (used in) investing activities                                           |  |      | 93,000     |     
|Cash flows
      from financing activities:                                                   |  |      |            |     
|Proceeds from capital lease financing                                                         |  |      | --         |     
|Payments on capital lease financing                                                           |  |      | (1,917,000 | )   
|Proceeds from bank term loan                                                                  |  |      | 1,736,000  |     
|Payment on bank term loan                                                                     |  |      | (181,000   | )   
|Net borrowings (repayments) on revolving line of credit                                       |  |      | 94,000     |     
|Payments of convertible note - net of conversion into common stock
      of                   |  |      | --         |     
|$3,150,000                                                                                    |  |      |            |     
|Net proceeds (repayments) from MEDC term loan                                                 |  |      | (88,000    | )   
|Net proceeds from equity financing                                                            |  |      | --         |     
|Proceeds from exercise of warrants                                                            |  |      | --         |     
|Payments on related party debt                                                                |  |      | (450,000   | )   
|Proceeds from exercise of stock options                                                       |  |      | 46,000     |     
|Net cash provided by (used in) financing activities                                           |  |      | (759,000   | )   
|Net increase (decrease) in cash and cash equivalents                                          |  |      | 1,990,000  |     
|Cash and cash
      equivalents, beginning of year                                            |  |      | 82,000     |     
|Cash and cash equivalents, end of year                                                        |  | $    | 2,072,000  |     
|                                                                                              |  |      |            |     
|Supplemental
      cash flow information:                                                     |  |      | 2009       |     
|Cash paid for interest                                                                        |  | $    | 265,000    |     
|Cash paid for
      income taxes                                                              |  | $    | 32,000     |     
|                                                                                              |  |      |            |     
|Supplemental disclosure of non-cash operating, investing and
      financing activities       |  |      |            |     
|Adjustment of
      discount on convertible notes (anti-dilution adjustment)                  |  |      | --         |     

See Notes to Consolidated Financial
Statements.

34

---

ADVANCED PHOTONIX,
INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSMarch 31, 2009 and 2008

1.The Company

Advanced Photonix, Inc.®
(the Company, we or API), was incorporated under the laws of the State of
Delaware in June 1988. The Company is engaged in the development and manufacture
of optoelectronic devices and value-added sub-systems and systems. The Company
serves a variety of global Original Equipment Manufacturers (OEMs), in a variety
of industries. The Company supports the customers from the initial concept and
design phase of the product, through testing to full-scale production. The
Company has two manufacturing facilities located in Camarillo, California and
Ann Arbor, Michigan.

2. Basis of Presentation and Summary
of Significant Accounting Policies

Principles of
Consolidation- The consolidated
financial statements include the financial statements of the Company and its
wholly-owned subsidiaries (Silicon Sensors Inc. & Picometrix LLC). All
significant inter-company balances and transactions have been eliminated in
consolidation.

ReclassificationsCertain prior year balances have been
reclassified in the consolidated financial statements to conform to the current
year presentation.

Operating Segment
Information Statement of Financial
Accounting Standards No. (SFAS) 131, Disclosures about Segments of an Enterprise and Related
Information, establishes annual and interim
reporting standards for operating segments and requires certain disclosures
about the products and services an entity provides, the material countries in
which it holds assets and reports revenue, and its major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. APIs chief operating decision makers
are its chief executive officer and chief financial officer, who review
financial information presented on a consolidated basis for purposes of
allocating resources and evaluating financial performance. API has one business
activity, and there are no segment managers who are held accountable for
operations, operating results and plans for levels or components below the
consolidated unit level, nor does API track gross margins by product, product
line or market served. Accordingly, API considers its business to be in a single
reportable segment.The Companys products are light and radiation detection devices. The
nature of the production process is similar for all product lines, and
manufacturing for the different product lines occurs in common facilities.
Generally, the same engineers with the same qualifications design and
manufacture products for all product lines. The types and class of customers are
similar across all product lines, and products are distributed through common
channels and distributor networks.

Pervasiveness of
Estimates- The preparation of
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial
Instruments The carrying value of all
financial instruments potentially subject to valuation risk (principally
consisting of cash equivalents, accounts receivable, accounts payable, and debt)
approximates fair value based upon the short term nature of these instruments,
and in the case of debt, the prevailing interest rates available to the Company.

Cash and Cash
Equivalents The Company considers all
highly liquid investments, with an original maturity of three months or less
when purchased, to be cash equivalents.

35

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Compensating Cash
Balance During FY 2009; the Company
terminated its Line of Credit loan agreement with Fifth Third Bank, which
required a compensating balance of $1.5 million and established a new Line of
Credit Agreement with The PrivateBank and Trust Company with a minimum
compensating balance requirement of $500,000. This amount has been separately
disclosed on the accompanying balance sheets as restricted cash.

Accounts
Receivable Receivables are stated at
amounts estimated by management to be the net realizable value. The allowance
for doubtful accounts is based on specific identification. Accounts receivable
are charged off when it becomes apparent, based upon age or customer
circumstances, that such amounts will not be collected.

Accounts receivable are unsecured and
the Company is at risk to the extent such amount becomes uncollectible. The
Company performs periodic credit evaluations of its customers financial
condition and generally does not require collateral. Any unanticipated change in
the customers credit worthiness or other matters affecting the collectability
of amounts due from such customers could have a material effect on the results
of operations in the period in which such changes or events occur. As of March
31, 2009, one customer comprised 10% or more of accounts receivable. As of March
31, 2008, no customer comprised 10% or more of accounts receivable.

Concentration of Credit
Risk Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist
principally of cash equivalents and trade accounts receivable. The Company
maintains cash balances at four financial institutions that are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of March 31,
2009, the Company had cash at one financial institution in excess of federally
insured amounts. As excess cash is available, the Company invests in short-term
and long-term investments, primarily consisting of Government Securities Money
Market instruments and Repurchase agreements. As of March 31, 2009 and March 31,
2008, cash deposits held at financial institutions in excess of FDIC insured
amounts were $2.0 million and $1.4 million, respectively.

Inventories Inventories, which include material, labor and
manufacturing overhead, are stated at standard cost (which approximates the
first in, first out method) or market. Slow moving and obsolete inventories are
reviewed throughout the year. To calculate a reserve for obsolescence, we begin
with a review of our slow moving inventory. Any inventory, which has been slow
moving within the past 12 months, is evaluated and reserved if deemed
appropriate. In addition, any residual inventory, which is customer specific and
remaining on hand at the time of contract completion, is reserved for at the
standard unit cost. The complete list of slow moving and obsolete inventory is
then reviewed by the production, engineering and/or purchasing departments to
identify items that can be utilized in the near future. These items are then
excluded from the analysis and the remaining amount of slow-moving and obsolete
inventory is then reserved for. Additionally, non-cancelable open purchase
orders for parts we are obligated to purchase where demand has been reduced may
be reserved. Reserves for open purchase orders where the market price is lower
than the purchase order price are also established. If a product that had
previously been reserved for is subsequently sold, the amount of reserve
specific to that item is then reversed.

Equipment and Leasehold
Improvements Equipment and leasehold
improvements are stated at cost. Depreciation and amortization are computed
using the straight-line method over the estimated useful lives of the assets, as
follows:

Leasehold
      Improvements
    Term of lease or
      useful life,whichever is
      lessMachinery and
      Equipment
    5  7
    yearsOffice
      Furniture
    3  7
    yearsComputer
      Hardware
    3  7
    yearsComputer
      Software
    3  5
    yearsAutomobiles
    5 years


36

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Patents- Patents represent costs incurred in connection with patent
applications. Such costs are amortized using the straight-line method over the
useful life of the patent once issued, or expensed immediately if any specific
application is unsuccessful.

Impairment of Long-Lived Assets
and Goodwill -In accordance with SFAS
No. 142,Goodwill and Other Intangible
Assets,goodwill andintangible assets that are
not subject to amortization shall be tested for impairment annually on March
31stfor the Company or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test shall consist of
a comparison of the fair value of the asset with its carrying amount, as
defined. SFAS 142 requires a two-step method for determining goodwill
impairment. Step one is to compare the fair value of the reporting unit with the
units carrying amount, including goodwill. If this test indicates that the fair
value is less than the carrying value, then step two is required to compare the
implied fair value of the reporting units goodwill with the carrying amount of
the reporting units goodwill. If the carrying amount of the asset exceeds its
fair value, an impairment loss shall be recognized in an amount equal to that
excess.

The Company determines the fair value
of our single reporting unit to be equal to our market capitalization plus a
control premium. Market capitalization is determined by multiplying the shares
outstanding on the assessment date by the average market price of our common
stock over a 10-day period before and a 10-day period after each assessment
date. We use this 20-day duration to consider inherent market fluctuations that
may affect any individual closing price. We believe that our market
capitalization alone does not fully capture the fair value of our business as a
whole, or the substantial value that an acquirer would obtain from its ability
to obtain control of our business. As such, in determining fair value, we add a
control premium  which seeks to give effect to the increased consideration a
potential acquirer would be required to pay in order to gain sufficient
ownership to set policies, direct operations and make decisions related to our
company  to our market capitalization.

As of March 31, 2008 our market
capitalization, calculated as described above, was $31.8 million and our
carrying value, including goodwill, was $19.7 million. Because market
capitalization significantly exceeded our carrying value, our estimate of the
control premium was not a determining factor in the outcome of step one of the
impairment assessment. As of March 31, 2009, our market capitalization
calculated as described above, had fallen to $17.1 million and our carrying
value, including goodwill, had decreased to $17.9 million. We applied a 25%
control premium to market capitalization to determine a fair value of $21.4
million. We believe that including a control premium at this level is supported
by recent transaction data in our industry. The Company's evaluation for the
fiscal year ended March 31, 2009, indicated there were no impairments. Absent
the inclusion of a control premium greater than 4% for FY 2009, our carrying
value would have exceeded fair value, requiring a step two analysis which may
have resulted in an impairment of goodwill.

In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of
Long-lived Assets,the carrying value of
long-lived assets, including amortizable intangibles and equipment and leasehold
improvements, are evaluated whenever events or changes in circumstances indicate
that a potential impairment has occurred relative to a given asset or assets.
Impairment is deemed to have occurred if projected undiscounted cash flows
associated with an asset are less than the carrying value of the asset. The
estimated cash flows include managements assumptions of cash inflows and
outflows directly resulting from the use of that asset in operations. The amount
of the impairment loss recognized is equal to the excess of the carrying value
of the asset over its then estimated fair value. The Companys evaluation for
the fiscal year ended March 31, 3009, indicated there were no impairments.

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

37

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

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

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

Revenue is also derived from technology
research and development contracts. We recognize revenue from these contracts as
the services and/or materials are provided.

Significant Customers During fiscal years ended March 31,
2009 and March 31, 2008, no single customer accounted for more than 10% of the
Companys net sales.

Product
Warranty The Company generally sells
products with a limited warranty of product quality. The Company accrues for
known warranty issues if a loss is probable and can be reasonably estimated, and
accrues for estimated incurred but unidentified issues based on historical
activity. The accruals, and the related expenses, for known issues and for
estimated incurred but unidentified issues were not significant during the
periods presented.

The following table presents the
movement in the product warranty liability for the years ended March 31, 2009
and March 31, 2008

Years
      ended March 31,2009
    2008Beginning
      balance
    $
    85,000
    
    $
    83,000Current
      period accruals
    
    76,000
    
    
    2,000Used for
      purpose intended
    
    (23,000
    )
    
    ----Ending
      balance
    $
    138,000
    
    $
    85,000


Shipping and Handling
Costs-The Companys policy is to classify shipping and handling costs as a
component of Costs of Products Sold in the Statement of Operations.

Research and Development
Costs The Company charges all research
and development costs, including costs associated with development contract
revenues, to expense when incurred. Manufacturing costs associated with the
development of a new fabrication process or a new product are expensed until
such times as these processes or products are proven through final testing and
initial acceptance by the customer. Costs related to revenues on non-recurring
engineering services billed to customers are generally classified as cost of
product sales. The Company generally retains intellectual property rights
related to paid research and development contracts.

38

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Advertising Costs Advertising costs are expensed as
incurred. Advertising expense was approximately $127,000 and $106,000 in FY 2009
and FY 2008, respectively.

Accounting for Stock Based
CompensationThe Company accounts for stock-based
incentives plans in accordance with Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment(SFAS No. 123(R)). Accordingly, the Company
estimates the fair value of stock-based awards utilizing the Black-Scholes
pricing model. The fair value of the awards is amortized as compensation expense
on a straight-line basis over the requisite service period of the award, which
is generally the vesting period.

Accounting for Income
Taxes- Income tax provisions are
provided for taxes currently payable or refundable, and for deferred income
taxes arising from future tax consequences of events that were recognized in the
Companys financial statements or tax returns. The effects of income taxes are
measured based on enacted tax laws and rates applicable to periods in which the
differences are expected to reverse. If necessary, a valuation allowance is
established to reduce deferred income tax assets to an amount that will more
likely than not be realized in accordance with SFAS No. 109Accounting for Income Taxes.

The calculation of federal income taxes
involves dealing with uncertainties in the application of complex tax
regulations. On January 1, 2007, the Company adopted FASB Interpretation No. 48Accounting for Uncertainty in Income Taxes,
an Interpretation of SFAS No. 109(FIN
48). As a result of the implementation of FIN 48, we recognize liabilities for
uncertain tax positions based on the two-step process prescribed in the
interpretation. The first step is to evaluate the tax position for recognition
by determining if the weight of available evidence indicates that it is more
likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
requires us to estimate and measure the tax benefit as the largest amount that
is more than 50% likely to be realized upon ultimate settlement. It is
inherently difficult and subjective to estimate such amounts, as we have to
determine the probability of various possible outcomes. We reevaluate these
uncertain tax positions on an annual basis. This evaluation is based on factors
including, but not limited to, changes in facts or circumstances, changes in tax
law, effectively settled issues under audit, and new audit activity. Such a
change in recognition or measurement would result in the recognition of a tax
benefit or an additional charge to the tax provision. The application of FIN 48
has not had an impact on our financial statements or results of operations and
we have taken no tax positions which would require disclosure under the new
guidance. Although the IRS is not currently examining any of our income tax
returns, tax years 2005 to 2008 remain open and are subject to
examination.

Earnings per
Share- The Company presents both basic
and diluted earnings (loss) per share (EPS) amounts. Basic EPS is calculated by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted EPS amounts are based upon the weighted
average number of common and common equivalent shares outstanding during the
period. The Company uses the treasury stock method to calculate the impact of
outstanding stock options and warrants. Common equivalent shares are excluded
from the computation in periods in which they have an anti-dilutive effect. The
total shares excluded from the computation of earnings per share for the year
ended March 31, 2009 totaled 56,000 shares, representing outstanding stock
options and warrants convertible into shares of common stock. The total shares
excluded from the computation of earnings per share for the year ended March 31,
2008 totaled 426,000 shares, representing outstanding stock options and warrants
convertible into shares of common stock.

Recent Pronouncements and Accounting
ChangesIn September 2006, the FASB issued
SFAS No. 157,Fair Value Measurements(SFAS No. 157),whichdefines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. This Statement is
effective for the fiscal years beginning after November 15, 2007. However,
inFebruary 2008,
the FASB issued FASB Statement of Position (FSP) FAS No. 157-2, Effective Date of FASB Statement No. 157.This FSP delays the effective date of SFAS No. 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually) to fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. The adoption of SFAS No. 157 did not
have a material impact on our consolidated financial statements.

39

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In October 2008, the FASB issued FSP
FAS No. 157-3, Determining the Fair Value of
a Financial Asset When the Market for That Is Asset Not Active (FAS No. 157-3) with an immediate effective date,
including prior periods for which financial statements have not been issued. FSP
FAS No. 157-3 clarifies the application of fair value in inactive markets and
allows for the use of managements internal assumptions about future cash flows
with appropriately risk-adjusted discount rates when relevant observable market
data does not exist. The objective of FAS No. 157 has not changed and continues
to be the determination of the price that would be received in an orderly
transaction that is not a forced liquidation or distressed sale at the
measurement date. The adoption of FSP FAS No. 157-3 did not have a material
effect on the Companys results of operations, financial position or liquidity.

In February 2007, the FASB issued SFAS
No. 159,The Fair Value Option for Financial
Assets and Financial Liabilities(SFAS No.
159), which permits entities to choose to measure many financial instruments
and certain other items at fair value. SFAS No. 159 also includes an amendment
to SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securitieswhich applies to all entities with available-for-sale and trading securities.
This Statement is effective as of the beginning of an entitys first fiscal year
that begins after November 15, 2007. The adoption of this pronouncement had no
impact on our financial statements.

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

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

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

In April 2008, the FASB issued FASB
Staff Position (FSP) No. FAS 142-3, ***Determination of the Useful Life of Intangible Assets*(FSP No. FAS 142-3).The final FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, ***Goodwill and Other
Intangible Assets.*The FSP is intended to
improve the consistency between the useful life of an intangible asset
determined under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141 (revised 2007),
*Business Combinations,*and other US generally accepted accounting principles. The FSP
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The Company is
currently evaluating the impact, if any, FSP No. FAS 142-3 will have on its
consolidated financial statements.

40

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In May 2008, the FASB issued FASB Staff
Position (FSP) No. APB 14-1. This FSP clarifies that convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) are not addressed by paragraph 12 of APB Opinion No. 14,
Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants.
Additionally, this FSP specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entitys nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. This FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The Company is in the process of evaluating the
impacts, if any, of adopting this FSP.

In June 2008, the FASB ratified the
consensus reached by the Emerging Issues Task Force, EITF Issue No. 07-5,
Determining Whether an Instrument (or an
Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 addresses how an entity should evaluate
whether an instrument is indexed to its own stock. The consensus is effective
for fiscal years (and interim periods) beginning after December 15, 2008. The
consensus must be applied to outstanding instruments as of the beginning of the
fiscal year in which the consensus is adopted and should be treated as a
cumulative-effect adjustment to the opening balance of retained earnings. Early
adoption is not permitted. The Company is in the process of evaluating the
impacts, if any, of adopting this EITF.

In June 2008, the FASB issued FASB
Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities.
This FSP provides that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
basic earnings per share pursuant to the two-class method described in SFAS No.
128, *Earnings per Share*. All prior period earnings per share data presented shall be
adjusted retrospectively to conform to the provisions of this FSP. This FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. Early
application is prohibited. The Company is in the process of evaluating the
impact, if any, of adopting this FSP.

In April 2009, the FASB issued FASB
Staff Position (FSP) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies.
FSP FAS 141(R)-1 provides guidance for determining the acquisition-date fair
value of assets acquired and liabilities assumed in a business combination that
arise from contingencies, and provides guidance on how to account for these
assets and liabilities subsequent to the completion of a business combination.
FSP FAS 141(R)-1 also requires increased disclosures on assets acquired and
liabilities assumed in a business combination that arise from contingencies. FSP
FAS 141(R)-1 is effective for assets or liabilities arising from contingencies
in 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. The adoption of FSP FAS  141(R)-1 will change our accounting
treatment for business combinations on a prospective basis beginning April 1,
2009.

3. Inventories

Inventories consisted of the following
at March 31:

| |                         |  | 2009 |           | 2008
| | ----------------------- |  | ---- | --------- | ----
| | Raw material            |  | $    | 3,316,000 |     
| | Work-in-process         |  |      | 808,000   |     
| | Finished products       |  |      | 392,000   |     
| | Total
      inventories |  |      | 4,516,000 |     
| | Less reserve            |  |      | (847,000  | )   
| | Inventories,
      net  |  | $    | 3,669,000 |     

41

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4. Equipment and Leasehold
Improvements

Equipment and leasehold improvements
consisted of the following at March 31:

| |                                          |  | 2009 |            | 2008
| | ---------------------------------------- |  | ---- | ---------- | ----
| | Machinery and equipment                  |  | $    | 8,117,000  |     
| | Furniture and
      fixtures             |  |      | 715,000    |     
| | Leasehold improvements                   |  |      | 969,000    |     
| | Computer
      hardware equipment        |  |      | 611,000    |     
| | Vehicles                                 |  |      | 26,000     |     
| | Capitalized
      software               |  |      | 808,000    |     
| | Total assets                             |  |      | 11,246,000 |     
| | Accumulated
      depreciation           |  |      | (7,148,000 | )   
| |                                          |  |      | 4,098,000  |     
| | Construction-in-process                  |  |      | 224,000    |     
| | Net equipment and leasehold improvements |  | $    | 4,322,000  |     

The estimated cost to complete the
construction-in-process is not considered significant.

Depreciation expense was approximately
$1.2 million for fiscal year ended March 31, 2009 and $1.1 million for fiscal
year ended March 31, 2008.

5. Intangible Assets and Goodwill

Intangible assets that have definite
lives consist of the following (in thousands):

|                    |  |              |  | March 31, 2009   |  |          | March
      31, 2008 |             
|------------------- |  | ------------ |  | ---------------- |  | -------- | -------------------- | ------------
|                    |  | **Weighted** |  | **Amortization** |  | Carrying |                      | Accumulated 
|                    |  | Average      |  | Method           |  | Value    |                      | Amortization
|                    |  | Lives        |  |                  |  |          |                      |             
|Non-Compete         |  | 3            |  | Cash Flow        |  | $        | 130                  |             
|agreement           |  |              |  |                  |  |          |                      |             
|Customer
      list |  | 15           |  | Straight         |  |          | 475                  |             
|                    |  |              |  | Line             |  |          |                      |             
|Trademarks          |  | 15           |  | Cash Flow        |  |          | 2,270                |             
|Customer            |  | 5            |  | Cash Flow        |  |          | 1,380                |             
|relationships       |  |              |  |                  |  |          |                      |             
|Technology          |  | 10           |  | Cash Flow        |  |          | 10,950               |             
|Patents             |  |              |  |                  |  |          | 502                  |             
|pending             |  |              |  |                  |  |          |                      |             
|Patents             |  | 10           |  | Straight         |  |          | 295                  |             
|                    |  |              |  | Line             |  |          |                      |             
|Total               |  |              |  |                  |  | $        | 16,002               |             
|Intangibles         |  |              |  |                  |  |          |                      |             

Amortization expense for the fiscal
year ended March 31, 2009 was approximately $2.1 million compared to $2.0
million for the year ended March 31, 2008. Patent amortization expense, included
above, was approximately $19,000 and $11,000 in FY 2009 and 2008, respectively.
The current patents held by the Company have remaining useful lives ranging from
2 years to 20 years.

42

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Assuming no impairment to the
intangible value, future amortization expense for intangible assets and patents
are as follows:

**Intangible Assets**
    
    
    **Patents (a)**2010
    $
    2,035,000
    
    2010
    $
    24,0002011
    
    1,584,000
    
    2011
    
    24,0002012
    
    1,305,000
    
    2012
    
    24,0002013
    
    1,088,000
    
    2013
    
    24,0002014
    
    901,000
    
    2014
    
    24,0002015
      & after
    
    1,357,000
    
    2015
      & after
    
    83,000Total
    $
    8,270,000
    
    Total
    $
    203,000


|a) |  | Patent pending costs of $502,000
      are not included in the chart above. These costs will be amortized
      beginning the month the patents are granted.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

6. Line of Credit

On March 6, 2007, the Company and Fifth
Third Bank entered into a Revolving Line of Credit (the Loan Agreement)
providing for borrowings of up to a maximum of $2.0 million at an interest
rate equal to the prime rate. On November 13, 2007, the Loan Agreement was
amended to increase the principal amount available to $3.0 million. At March 31,
2008, the Company did not meet the debt service coverage ratio covenant and the
Loan Agreement was subsequently amended on June 30, 2008 to reduce the principal
amount available to $2.5 million and to amend the interest rate to be equal to
prime plus 2%.

On September 25, 2008, the Company
terminated the Loan Agreement with Fifth Third Bank and established a credit
facility with The PrivateBank and Trust Company. As part of this new banking
relationship, the Company established a three year Line of Credit of $3.0
million at an interest rate of prime plus 1%, adjusted quarterly. The prime rate
at March 31, 2009 was 3.25%. The new facility contains customary
representations, warranties and financial covenants including minimum debt
service coverage ratio, Adjusted EBITDA level, and Net Worth requirements (as
defined in the agreement). The principal loan amount is due on September 25,
2011, provided that if existing loans to the Company by the Michigan Economic
Development Corporation have not converted to equity on or before August 31,
2011, the outstanding principal shall be due on August 31, 2011. The
availability under the new facility will be determined by the calculation of a
borrowing base that includes a percentage of accounts receivable and inventory.

At March 31, 2009, the Company was in
compliance with the debt service coverage ratio and Net Worth requirements, but
was not in compliance with the Adjusted EBITDA level. The Company has received a
waiver from the bank regarding the default and entered into an amendment to the
loan agreement on May 29, 2009 effective March 31, 2009. According to the terms
of the amended loan agreement, the Adjusted EBITDA level is measured on a year
to date basis for the June 30, 2009, September 30, 2009, December 31, 2009 and
March 31, 2010 test dates and thereafter on a trailing four quarter basis. In
addition, the Debt Service Coverage ratio and the Net Worth covenants were
amended. The amended minimum Debt Service Coverage ratio is 1.0 to 1.0 for the
first quarter, 1.25 to 1.0 for the second quarter and 1.5 to 1.0 thereafter. The
amended minimum Net Worth covenant is $15.5 million and will increase by 10% of
Net Income for each fiscal year that the Company reports net income.

The line of credit is guaranteed by
each of APIs wholly-owned subsidiaries and the loan is secured by a Security
Agreement among API, its subsidiaries and The PrivateBank, pursuant to which API
and its subsidiaries granted to The PrivateBank a first-priority security
interest in certain described assets. The outstanding balance as of March 31,
2009 is $1.4 million.

43

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7. Long-Term Debt and Notes Payable

Convertible Debt -During FY 2005 the Company issued $5.0 million aggregate
principal amount of its senior convertible notes (Convertible Debt
1stTranche) and during FY 2006, the Company issued an additional $5.0 million
aggregate principal amount (Convertible Debt 2ndTranche) to four institutional
investors. The notes carried an interest rate of prime plus 1% and had a
maturity date of October 2007. In connection with the placement of the
convertible notes, the Company issued detachable warrants granting the holders
the right to acquire 1,731,145 shares of the Companys common stock at $1.78 per
share for 255,246 shares and $1.744 per share for 1,475,899 shares. The warrants
and certain beneficial conversion features were valued at issuance and resulted
in an aggregate of $3.7 million of additional paid in capital and debt discount.
Approximately $4.5 million of the convertible notes were converted to common
stock in FY 2006. In October 2007, $3.150 million of the remaining aggregate
senior convertible notes were converted into 1,601,324 shares Class A Common
Stock ($1.275 million @ $1.8818 per share and $1.875 million @ $2.0297 per
share) and the balance of $2.375 million, plus interest, was retired with cash.
Total interest expense related to these convertible notes was $1.9 million in FY
2008, comprised of $1.672 million debt discount amortization and $268,000 of
cash interest expense. The Company reported no interest expense for FY 2009
related to convertible notes. As of March 31, 2009, there were warrants to
purchase 1,389,082 shares of Class A Common stock outstanding at an exercise
price of $1.744 per share, of which 694,541 will expire in April 2010 and
694,541 will expire in April 2011.

As a result of the common stock private
placement, completed on September 14, 2007(see note 11), the anti-dilution
clause of the Convertible Debt was triggered; increasing the number of
shares issuable, if converted, by 104,047 and decreasing the weighted average
conversion price to $1.99 from $2.06. In addition the number of warrants
increased by 29,500 and the exercise price of the warrants decreased to $1.7444
from $1.78. The Company recorded the intrinsic value attributable to the
additional shares and warrants issued of $306,000 as additional debt discount
with an offset to Additional Paid in Capital. In accordance with EITF 00-27, the
$306,000 was amortized to interest expense over the remaining life of the
convertible notes during FY 2008.

Master Lease Agreement -In March, 2007, API, as Lessee, entered into
a Master Equipment Lease Agreement with Fifth Third Leasing Company, as Lessor,
to finance the purchase of new manufacturing equipment up to an aggregate of
$2.3 million (Lease). API purchased equipment under the Lease until June 30,
2007. This Lease was accounted for as a capital lease in accordance with SFAS
No. 13. On September 25, 2008, the Company retired the Master Equipment Lease
Agreement by paying the remaining principal amount of $1,736,000.

Loan Agreement -On September 25, 2008, the Company established a new credit
facility with The PrivateBank and Trust Company. As part of this banking
relationship, in addition to the line of credit described in note 6, the Company
established an Equipment Installment Loan of $1.736 million amortized over a
term of four years, at an interest rate of prime plus 1%. The principal loan
amount is due on September 25, 2012, provided that if existing loans to the
Company by the Michigan Economic Development Corporation have not converted to
equity on or before August 31, 2011, the Loan shall be due on August 31, 2011.
The Company utilized the Equipment Installment loan to retire the Master
Equipment Lease Agreement with Fifth Third Leasing Company. The balance on this
term loan at March 31, 2009 was $1.6 million.

As discussed in Note 6, the Company was
not in compliance with the Adjusted EBITDA level requirements. The Company has
received a waiver from the bank regarding the default. Based on the amended loan
covenants described in Note 6, the Company anticipates that it will meet the
loan covenants during FY 2010, and as a result has classified the current and
future maturities in accordance with the loan agreement.

MEDC Loans -The Michigan Economic Development Corporation (MEDC) entered
into two loan agreements with Picometrix LLC, one in fiscal 2004 (MEDC-loan 1)
and one in fiscal 2005 (MEDC-loan 2). Both loans are unsecured.

The
MEDC-loan 1 is for $1,025,000 with an interest rate of 7%. Under the original
terms of the promissory note, interest accrued but unpaid through October 2008
would be added to then outstanding principal balance of the note and the
restated principal would be amortized over the remaining four years (September
15, 2012). Effective September 23, 2008, the MEDC-loan 1 of $1,025,000 was
amended and restated to change the start date of repayment of principal and
interest from October 2008 to October 2009. Commencing in October 2009, the
Company will pay MEDC the restated principal and accrued interest on any unpaid
balance over the remaining three years.

44

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MEDC-loan 2
is for $1.2 million with an interest rate of 7%. Under the original terms of the
promissory notes, interest accrued, but unpaid in the first two years of this
agreement was added to the then outstanding principal of this promissory note.
During the third year of this agreement, the Company was to pay interest on the
restated principal of the Note until October 2008, at which time the Company was
to repay the restated principal over the remaining three years (September 15,
2011). Effective January 26, 2009, the MEDC-loan 2 of $1.2 million was amended
and restated to change the start date of repayment of principal and interest
from October 2008 to November 2009 and to extend the repayment period to October
2012. The current and long-term portions included in the March 31, 2009 balance
sheet have been classified based on the terms of the January 2009 amendment.

Included in accrued interest at March
31, 2009 is approximately $488,000 of accrued interest that will be rolled into
the principal of the MEDC loans when the repayment periods begin as described
above.

Related Parties Debt -As a result of the acquisition of Picotronix,
Inc. (dba Picometrix, Inc.), the Company issued promissory notes to the
stockholders of Picometrix, (Debt to Related Parties) (see note 15). The notes
are payable in annual installments of varying amounts through March 2010, as
amended in FY 2009. The notes bear interest at a rate of prime plus 1.0% and are
secured by all of the intellectual property of Picometrix. API has the option of
prepaying the notes without penalty.

|**Debt Maturity Table (in
      000s)**
|----------------------------------------
|                                        
|                                        
|                                        
|Credit Line - The                       
|Private
      Bank                      
|Credit Line - Fifth                     
|Third
      Bank                        
|Term Loan  The                         
|Private
      Bank                      
|Debt to Related                         
|Parties                                 
|MEDC
      loans                        
|Capital Lease                           
|Obligation                              
|**TOTAL**                               

The Company performed an assessment of
the amendments made to its MEDC and related party loans made during FY 2009 to
determine whether the amendments constituted a substantial modification as
defined in SFAS No. 140 (Accounting for Transfer and Servicing of Financial
Assets and Extinguishments of Liabilities), and EITF 96-19 (Debtors
Accounting for a Modification or Exchange of Debt Instruments) and concluded
that no substantial modifications were made.

8.Capitalization

The Companys Certificate of
Incorporation provides for two classes of common stock, a Class A for which
100,000,000 shares are authorized for issuance and a Class B for which 4,420,113
shares are authorized for issuance. The par value of each class is $.001.
Subject to certain limited exceptions, shares of Class B Common Stock are
automatically converted into an equivalent number of Class A shares upon the
sale or transfer of the Class B Common Stock by the original holder. The holder
of each share of Class A and Class B Common Stock is entitled to one vote per
share.

45

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The Company has authorized 10,000,000
shares of Preferred Stock, of which 780,000 shares have been designated Class A
Redeemable Convertible Preferred Stock with a par value of $.001 per share. At
March 31, 2009, 40,000 shares of Class A Redeemable Convertible Preferred Stock
(Class A Preferred) were issued and outstanding. The Class A convertible
preferred stock is redeemable solely at the option of the Company and can
also be mandatorily converted by the Comapany into Class A Common Stock at a
rate of 3.33 Class A Preferred  Stock to one share of Class A Common
Stock. The Class A Preferred Stock contains a liquidation
preference of $.80 per share, or a total of $32,000 with respect to all
such shares outstanding. The Class A Preferred stockholders do not have voting
rights except as required by applicable law.

9. Stock Based Compensation

The Company has five stock equity
plans: The 1990 Incentive Stock Option and Non-Qualified Stock Option Plan, the
1991 Directors Stock Option Plan (The Directors Plan), the 1997 Employee Stock
Option Plan, the 2000 Stock Option Plan and the 2007 Equity Incentive Plan. As
of March 31, 2009, under all of our plans, there were 7,200,000 shares
authorized for issuance, with 2,209,510 shares remaining avalable for future
grant.

Options typically vest at the rate of
25% per year over four years and are exercisable up to ten years from the date
of issuance. Options granted under the Directors Plan typically vests at the
rate of 50% per year over two years. Under these plans, the option exercise
price equals the stocks market price on the date of grant. Options and
restricted stock awards may be granted to employees, officers, directors and
consultants. Under the 2007 Equity Incentive Plan, stock options typically vest
within four years from grant date and restricted stock awards typically vest
within one year.

Stock option transactions for fiscal
years 2008 and 2009 are summarized as follows:

|                                          |  | **Shares
      (000)** |   | **Weight
      Average** |  | **Weighted** |  | **Aggregate**   
|----------------------------------------- |  | ---------------------- | - | ------------------------ |  | ------------ |  | ----------------
|                                          |  |                        |   | Exercise Price           |  | Average      |  | Intrinsic       
|                                          |  |                        |   |                          |  |              |  | Term            
|                                          |  |                        |   |                          |  |              |  | (in
      years)
|Outstanding, March 31, 2007               |  | 2,540                  |   |                          |  | $1.90        |  |                 
|Exercisable,
      March 31, 2007         |  | 1,978                  |   |                          |  | $1.81        |  |                 
|                                         
|Outstanding, March 31, 2007               |  | 2,540                  |   |                          |  | $1.90        |  |                 
|Granted                                   |  | 161                    |   |                          |  | $1.87        |  |                 
|Exercised                                 |  | (98                    | ) |                          |  | $0.78        |  |                 
|Expired                                   |  | (16                    | ) |                          |  | $0.08        |  |                 
|Outstanding, March 31, 2008               |  | 2,619                  |   |                          |  | $1.92        |  |                 
|Exercisable,
      March 31, 2008         |  | 2,198                  |   |                          |  | $1.87        |  |                 
|                                         
|Outstanding, March 31, 2008               |  | 2,619                  |   |                          |  | $1.92        |  |                 
|Granted                                   |  | 292                    |   |                          |  | $1.52        |  |                 
|Exercised                                 |  | (57                    | ) |                          |  | $0.86        |  |                 
|Expired                                   |  | (108                   | ) |                          |  | $1.62        |  |                 
|Outstanding, March 31, 2009               |  | 2,746                  |   |                          |  | $1.92        |  | 5.97            
|Exercisable,
      March 31, 2009         |  | 2,374                  |   |                          |  | $1.93        |  | 5.29            
|Vested & expected to Vest, March 31, 2009 |  | 2,676                  |   |                          |  | $1.92        |  | 5.97            

46

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Information regarding stock options
outstanding as of March 31, 2009 is as follows:

|              |  |           |  | **Options
  Outstanding**
|------------- |  | --------- |  | -------------------------
|              |  | (in 000s) |  | Weighted
    Average     
|Price Range   |  | Shares    |  | Exercise Price           
|$0.50 - $1.25 |  | 755       |  | $0.75                    
|$1.50 - $2.50 |  | 1,285     |  | $1.90                    
|$2.87 - $5.34 |  | 706       |  | $3.19                    

|                    |  |                 |  | Options
    Exercisable
|------------------- |  | --------------- |  | -----------------------
|                    |  | (in
      000s) |  | Weighted
      Average 
|Price Range         |  | Shares          |  | Exercise Price         
|$0.50 - $1.25       |  | 755             |  | $0.75                  
|$1.50 -
      $2.50 |  | 953             |  | $1.98                  
|$2.87 - $5.34       |  | 666             |  | $3.21                  

The intrinsic value of options
exercised in fiscal years 2009 and 2008 was approximately $48,000 and $116,000,
respectively.

During FY 2009, restricted shares
were issued to certain individuals. The restricted share transactions are
summarized below.

|                         | Shares (000) |   | Weighted
      Average
|------------------------ | ------------ | - | ----------------------
|                         |              |   |                       
|                         |              |   |                       
|Unvested, March 31, 2008 | --           |   |                       
|Granted                  | 56           |   |                       
|Vested                   | (27          | ) |                       
|Expired                  | --           |   |                       
|Unvested, March 31, 2009 | 29           |   |                       

The total fair value of restricted
shares vesting during FY 2009 was $17,000.

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

- The time period that stock-based awards are expected to remain outstanding
  has been determined based on the average of the original award period and the
  remaining vesting period in accordance with the SECs short-cut approach
  pursuant to SAB No. 107, *Disclosure about Fair
  Value of Financial Statements*. As additional
  evidence develops from the Companys stock trading history, the expected term
  assumption will be refined to capture the relevant
  trends.
- The future volatility of the Companys stock has been estimated based on
  the weekly stock price from the acquisition date of Picometrix LLC (May 2,
  2005) to the date of the latest stock grant. As additional evidence develops,
  the future volatility estimate will be refined to capture the relevant
  trends.
- A dividend yield of zero has been assumed for awards issued for the years
  ended March 31, 2009 and March 31, 2008, based on the Companys actual past
  experience and the fact that Company does not anticipate paying a dividend on
  its shares in the near future.
- The Company has based its risk-free interest rate assumption for awards
  issued during the years ended March 31, 2009 and March 31, 2008 on the implied
  yield available on U.S. Treasury issues with an equivalent expected
  term.
- The forfeiture rate for awards issued during the years ended March 31,
  2009 and March 31, 2008 were approximately 18.7% and was based on the
  Companys actual historical forfeiture trend.

47

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**Year**EndedMarch 31,
      2009
    ****
    March 31,
      2008Option Plan Shares:Expected term (in years)
    6.3
    
    6.3Volatility
    42.5%
    
    49.8%Expected dividend
    0%
    
    0%Risk-free interest rate
    2.2%
    
    4.4%Weighted-average grant date fair value
    $ .71
    
    $ 1.09


Under the provisions of SFAS No.
123(R), the Company recorded $204,000 and $230,000 of stock compensation expense
in our consolidated statements of operations for the years ended March 31, 2009
and March 31, 2008, respectively.

The table below lists the
classification of the Stock Based Compensation Expense for the years ended March
31, 2009 and March 31, 2008.

2009
    
    2008Cost of products
      sold
    
    $
    12,000
    
    $
    15,000Research and
      development expense
    
    
    48,000
    
    
    58,000General and
      administrative expense
    
    
    117,000
    
    
    143,000Sales and marketing
      expense
    
    
    27,000
    
    
    14,000Total Stock Based
      Compensation
    
    $
    204,000
    
    $
    230,000


At March 31, 2009, the total
stock-based compensation expense related to unvested stock awards granted to
employees and directors under the Companys stock plans but not yet recognized
was approximately $229,000. This expense will be amortized on a straight-line
basis over a weighted-average period of approximately 2.1 years and will be
adjusted for subsequent changes in estimated forfeitures.

10. Wafer Fabrication consolidation
and Dodgeville closure

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

48

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The Company estimates its total wafer
fabrication consolidation expense to complete the consolidation will be
approximately $2.4 million, of which $2.3 million has been incurred through the
end of FY 2009. Projected costs consist of labor and associated expense of $1.1
million, travel and relocation costs of $169,000, accelerated depreciation
expense on de-commissioned assets of $150,000 and supplies, consulting and other
related costs of $854,000. The balance expected to be incurred through the
remainder of the project is estimated to be approximately $100,000 to
re-provision the California clean room into a hybrid assembly area. In
accordance with SFAS No. 146,Accounting for
Cost Activities Associated with Exit or Disposal Activities,all costs associated with the consolidation are recorded as
expenses when incurred. Upon completion of the wafer fabrication consolidation,
the Company expects cost reduction through elimination of duplicate expenditures
and yield improvements as well as an increase in new product development
capability.

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

11. Equity

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

The schedule below shows the
outstanding warrants at March 31, 2008 and March 31, 2009, more fully described
in Note 7 and the paragraph above:

Warrants Outstanding &
      ExercisableShares
    Shares
    Exercise
    Remaining2008
    2009
    Price
    Life (in yrs)(000s)
    (000s)
    
    at
      3/31/09Convertible Note 
      1st Tranche
    695
    695
    $1.744
    1.1Convertible Note 
      2nd Tranche
    695
    695
    $1.744
    2.1Private
      Placement
    741
    741
    $1.85
    3.5Total
    2,131
    2,131


During FY 2009, there was no activity
regarding warrants outstanding and exercisable. During FY 2008, 87,000 warrants
were exercised at an aggregate price of $151,000.

The exercise price for the warrants
related to both tranches of convertible notes is subject to adjustment, based on
a formula contained in the convertible note agreement, if common stock is issued
in the future below the $1.744 exercise price. Such adjustments cannot reduce
the exercise price below a $1.70 without obtaining shareholder approval.

49

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12. Foreign Sales

In FY 2009 and FY 2008, the Company had
export sales of approximately $5.4 million and $3.5 million, respectively, made
primarily to customers in North America, Asia and Europe.All foreign sales are
denominated in U.S. dollars. Sales to specific countries, stated as a percentage
of total sales, consist of the following:

2009
    
    2008Canada
    5
    %
    
    1
    %Germany
    1
    %
    
    3
    %Poland
    1
    %
    
    --Israel
    2
    %
    
    --Japan
    --
    
    
    1
    %United
      Kingdom
    5
    %
    
    7
    %All other countries
    4
    %
    
    3
    %Total export sales
    18
    %
    
    15
    %


13. Employees Retirement Plan

The Company maintains a 401(k) Plan
which is qualified under the Internal Revenue Code. All full-time employees are
eligible to participate in the Plan after six months of full time employment.
Employees may make voluntary contributions to the Plan, which is matched by the
Company at the rate of $1.00 for every $1.00 of employee contribution up to 3%
of wages, and $.50 for every $1.00 of employee contributions on the next 2% of
wages, subject to certain limitations. Employer contributions are fully vested
when earned. The Company contributions and administration costs recognized as
expense were approximately $279,000 and $272,000 in FY 2009 and 2008,
respectively.

Effective April 1, 2009, the Company
matched portion of the 401K program was suspended through March 31, 2010 due to
the unstable economic environment the country is currently experiencing. The
matching program will be re-instituted when economic conditions improve.

14.Income Taxes

At March 31, 2009, the Company had net
operating loss carry forwards (NOLs) of approximately $21.0 million for Federal
income tax purposes and $5.4 million for state income tax purposes that expire
at various dates through fiscal year 2029. The tax laws related to the
utilization of loss carry forwards are complex and the amount of the Companys
loss carry forward that will ultimately be available to offset future taxable
income may be subject to annual limitations under IRC Section 382 resulting from
changes in the ownership of the Companys common stock.

The Company performed an analysis to
determine whether an ownership change under Section 382 of the Internal Revenue
Code had occurred. The effect of an ownership change would be the imposition of
an annual limitation on the use of the net operating loss carry forwards
attributable to periods before the change. As of March 31, 2009, the Company
believes there are no limitations on the use of these Federal NOLs.

At March 31, 2009, our net deferred tax
asset before consideration of a valuation allowance was approximately $7.3
million, mainly consisting of net operating loss carry-forwards which expire at
various amounts over an approximate 20 year period. In assessing the
realizability of deferred tax assets, the Company has determined that at this
time it is more likely than not that deferred tax assets will not be realized
, primarily due to uncertainties related to its ability to utilize the net
operating loss carry-forwards before they expire based on the negative evidence
of its recent years history of losses, including tax losses in two of the last
three years and cumulative taxable losses over the past three years, outweighing
the positive evidence of taxable income projections in future years. The
ultimate realization of these deferred tax assets is dependent upon the
generation of future taxable income during those periods in which those
temporary differences become deductible or within the periods before NOL carry
forwards expire. As of both March 31, 2009 and 2008, the Company recorded a full
valuation allowance on its net deferred tax.

50

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Below are reconciliations between the
provisions for income taxes compared with the amounts at the United States
federal statutory rate:

Years
      Ended
    
    March 31, 2009
    
    March 31, 2008Federal income tax at statutory rates
    
    $
    (692,000
    )
    
    $
    (2,857,000
    )State income
      taxes, net of federal benefit
    
    
    20,000
    
    
    
    (110,000
    )Expiration of NOL carry-forwards
    
    
    1,300,000
    
    
    
    757,000Change in
      valuation allowance
    
    
    (559,000
    )
    
    
    3,331,000Change in R&D credit carry-forwards
    
    
    (137,000
    )
    
    
    (29,000
    )Permanent items
    
    
    82,000
    
    
    
    298,000Other
    
    
    (14,000
    )
    
    
    (165,000
    )Effective
      federal income tax
    
    $
    --
    
    
    $
    (1,225,000
    )


The Companys net deferred tax assets
(liabilities) consisted of the following components, for fiscal years 2009 and
2008:

2009
    
    2008Sec. 263A adjustment
    
    $
    57,000
    
    
    $
    62,000Inventory
      reserve
    
    
    314,000
    
    
    
    372,000Utility accruals
    
    
    3,000
    
    
    
    4,000Warranty
      reserve
    
    
    55,000
    
    
    
    34,000Accounts receivable allowance
    
    
    22,000
    
    
    
    5,000Accrued
      vacation
    
    
    120,000
    
    
    
    88,000Charitable contributions
    
    
    15,000
    
    
    
    14,000NOL
      Carryforwards
    
    
    7,716,000
    
    
    
    9,018,000Basis difference of intangibles
    
    
    (2,172,000
    )
    
    
    (2,854,000
    )Basis difference
      of equipement
    
    
    (748,000
    )
    
    
    (631,000
    )R&D credits
    
    
    1,561,000
    
    
    
    1,390,000Goodwill
      amortization
    
    
    322,000
    
    
    
    322,000California Mfg. credit
    
    
    39,000
    
    
    
    39,000AMT
      credit
    
    
    1,000
    
    
    
    1,000Total
    
    $
    7,305,000
    
    
    $
    7,864 ,000Valuation
      allowance
    
    
    (7,305,000
    )
    
    
    (7,864,000
    )Net deferred tax asset
    
    **$**
    0
    
    
    $
    0


At March 31, 2009 the Company had net
operating loss carry forwards for federal tax of approximately $21 million that
expire between 2010 and 2029, and approximately $5.4 million for California
state tax that expire between 2014 and 2020.

At March 31, 2009 the Companys Federal
R&D tax credit carry forwards totaled approximately $1.5 million. These will
expire annually at March 31 over the next twenty (20) years.

51

---

15. Related Party Transactions

The Companys only significant related
party transactions relate to the payment of principal and interest on Debt to
Related Parties as disclosed in note 7. The Company and the note holders entered
into amendments to the Notes to extend the due date for the third installment
under each of the Notes (in the aggregate amount of $900,000) to December 1,
2008 from the original agreement payment date of May 1, 2008. In November 2008,
a further amendment provided that the $1,850,500 aggregate principal balance of
the Notes would be payable in three installments as follows:

December 1, 2008
    $
    450,000April 1,
      2009
    $
    450,000November 2, 2009
    $
    950,500


In April 2009, a further amendment
revised the payment schedule for the fourth and fifth installments as follows:

December 1, 2009
    $
    450,000March 1,
      2010
    $
    950,500


On March 31, 2009, the remaining
balance on the notes was $1.4 million. The Company paid $450,000 of principal
and $94,000 in interest to the note holders in FY 2009 and $550,000 of principal
and $129,000 in interest to the note holders in FY 2008. Robin Risser and Steve
Williamson, the Companys CFO and CTO, respectively, are the note holders.

16. Commitments & Contingencies

Leases -The Company leases all of its executive offices, research,
marketing and manufacturing facilities under non-cancellable operating leases.
The lease for our facility located in Camarillo, California was amended in
December 2008 and is now leased through February 2014. The facility located in
Ann Arbor, Michigan is comprised of the corporate office and the Picometrix LLC
manufacturing plant and is leased through June 2011, with two five year options
to renew at the current lease rate with a CPI adjuster. In addition, the Company
has the right of first refusal to purchase the facility. Minimum future lease
payments under all non-cancellable operating leases are as
follows:

2010
    $
    1,101,0002011
    
    1,095,0002012
    
    575,0002013
    
    407,0002014
    
    382,000Total
    $
    3,560,000


Rent expense was approximately $1.2
million and $1.3 million in FY 2009 and 2008, respectively.

Legal- The Company is, from time to time, subject to legal and
other matters in the normal course of its business. While the results of such
matters cannot be predicted with certainty, management does not believe that the
final outcome of any pending matters will have a material effect on the
financial position and results of operations of the Company.

52

---

17. Quarterly Financial Data

The table below lists financial
information (unaudited) by quarter for each of the two fiscal years ending March
31, 2009 and 2008.

|**2009**                    |  |   | First      |   | Second |            | Third |  | Fourth |            | Total Year
|--------------------------- |  | - | ---------- | - | ------ | ---------- | ----- |  | ------ | ---------- | ----------
|Net Sales                   |  | $ | 7,770,000  |   | $      | 8,188,000  |       |  | $      | 7,606,000  |           
|Cost
      of Products Sold |  |   | 4,014,000  |   |        | 4,624,000  |       |  |        | 4,329,000  |           
|Gross Profit                |  |   | 3,756,000  |   |        | 3,564,000  |       |  |        | 3,277,000  |           
|Research & Development      |  |   |            |   |        |            |       |  |        |            |           
|Expenses                    |  |   | 1,128,000  |   |        | 1,081,000  |       |  |        | 1,112,000  |           
|Selling, General &          |  |   |            |   |        |            |       |  |        |            |           
|Administrative Expenses     |  |   | 2,389,000  |   |        | 2,708,000  |       |  |        | 2,415,000  |           
|Net Income (Loss)           |  | $ | 147,000    |   | $      | (326,000   | )     |  | $      | (359,000   | )         
|Basic Income (Loss) per     |  |   |            |   |        |            |       |  |        |            |           
|Common Share                |  | $ | 0.01       |   | $      | (0.01      | )     |  | $      | (0.01      | )         
|Diluted Income (Loss) per   |  |   |            |   |        |            |       |  |        |            |           
|Common Share                |  | $ | 0.01       |   | $      | (0.01      | )     |  | $      | (0.01      | )         
|Weighted Average Common     |  |   |            |   |        |            |       |  |        |            |           
|Shares Outstanding          |  |   | 24,010,000 |   |        | 24,060,000 |       |  |        | 24,109,000 |           
|                            |  |   |            |   |        |            |       |  |        |            |           
|2008                        |  |   |            |   |        |            |       |  |        |            |           
|Net Sales                   |  | $ | 6,145,000  |   | $      | 6,529,000  |       |  | $      | 5,306,000  |           
|Cost
      of Products Sold |  |   | 3,675,000  |   |        | 3,784,000  |       |  |        | 3,431,000  |           
|Gross Profit                |  |   | 2,470,000  |   |        | 2,745,000  |       |  |        | 1,875,000  |           
|Research & Development      |  |   |            |   |        |            |       |  |        |            |           
|Expenses                    |  |   | 896,000    |   |        | 1,016,000  |       |  |        | 1,034,000  |           
|Selling, General &          |  |   |            |   |        |            |       |  |        |            |           
|Administrative Expenses     |  |   | 2,650,000  |   |        | 2,497,000  |       |  |        | 3,117,000  |           
|Net
      Income (Loss)     |  | $ | (1,906,000 | ) | $      | (1,857,000 | )     |  | $      | (2,726,000 | )         
|Basic Income (Loss) per     |  |   |            |   |        |            |       |  |        |            |           
|Common Share                |  | $ | (0.10      | ) | $      | (0.09      | )     |  | $      | (0.11      | )         
|Diluted Income (Loss) per   |  |   |            |   |        |            |       |  |        |            |           
|Common
      Share          |  | $ | (0.10      | ) | $      | (0.09      | )     |  | $      | (0.11      | )         
|Weighted Average Common     |  |   |            |   |        |            |       |  |        |            |           
|Shares Outstanding          |  |   | 19,258,000 |   |        | 19,906,000 |       |  |        | 23,804,000 |           

|Item 9.                                   | CHANGES IN AND DISAGREEMENTS WITH
      ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                          | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Item 9A(T). CONTROLS AND
      PROCEDURES
|                                         
|                                          | **Disclosure
      Controls**
      Our Chief Executive Officer and
      Chief Financial Officer (the Certifying Officers) are responsible for
      establishing and maintaining disclosure controls and procedures for the
      Company. The Certifying Officers have designed such disclosure controls
      and procedures to ensure that material information is made known to them,
      particularly during the period in which this report was prepared. The
      Certifying Officers have evaluated the effectiveness of the Company's
      disclosure controls and procedures (as such term is defined in Exchange
      Act Rules 13a-15(e) and 15d-15(e) (the Rules) under the Securities
      Exchange Act of 1934 (or Exchange Act)) as of the end of the period
      covered by this Annual Report and believe that the Company's disclosure
      controls and procedures are effective based on the required
      evaluation.
|                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                          | Managements Report on
      Internal Control Over Financial Reporting
      Our management is responsible for
      establishing and maintaining adequate internal control over financial
      reporting, as such term is defined in Rule 13a-15(f) under the Exchange
      Act. Under the supervision and with the participation of our management,
      including the Certifying Officers, we conducted an evaluation of the
      effectiveness of our internal control over financial reporting as of March
      31, 2009 based on the criteria set forth inInternal Control  Integrated Frameworkissued by the Committee of Sponsoring Organization of the Treadway
      Commission. Based on our evaluation under the criteria set forth inInternal Control  Integrated
      Framework, our management concluded
      that our internal control over financial reporting was effective as of
      March 31, 2009.                    

53

---

|             | This Annual Report does not
      include an attestation report of our independent registered public
      accounting firm regarding internal control over financial reporting. We
      were not required to have, nor have we engaged our independent registered
      public accounting firm to perform, an audit on our internal control over
      financial reporting pursuant to the rules of the Securities and Exchange
      Commission that permit us to provide only managements report in this
      Annual Report.
      Changes in Internal Controls
      During our most recent fiscal
      quarter, there has not occurred any change in our internal control over
      financial reporting (as such term is defined in Rules 13a-15(f) and
      15d-15(f) under the Exchange Act) that has materially affected, or is
      reasonably likely to materially affect, our internal control over
      financial reporting.
|------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|**Item 9B.** | **OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

PART III

In accordance with General Instruction
G (3), and except for certain of the information called for by Items 10 and 12
which is set forth below, the information called for by Items 10 through 13 of
Part III is incorporated by reference from the Companys definitive proxy
statement (Proxy Statement) to be filed pursuant to Regulation 14A promulgated
under the Securities Exchange Act of 1934 in connection with the Companys 2009
Annual Meeting of Stockholders.

|**Item 10.** | **DIRECTORS AND EXECUTIVE
      OFFICERS AND CORPORATE GOVERNANCE**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             | **Code of Ethics --**The Company has adopted a Code of Ethics for
      Senior Financial Officers, pursuant to the Sarbanes-Oxley Act of 2002. The
      Code of Ethics is published on the Company's web site,
      www.advancedphotonix.com on the Investor Relations page. The Company will
      also provide a copy of the Code of Ethics to any person without charge
      upon his or her request. Any such request should be directed to our
      Secretary at 2925 Boardwalk, Ann Arbor, Michigan 48104. The Company
      intends to make all required disclosures concerning any amendments to or
      waivers from the Code of Ethics on its website.
      The response to the remainder of
      this item is incorporated by reference from the Companys Proxy
      Statement.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|**Item 11.** | EXECUTIVE
      COMPENSATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             | The response to this item is
      incorporated by reference from the Companys Proxy Statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

54

---

|**Item 12.** | SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
      The following table sets forth,
      as of March 31, 2009, the aggregated information pertaining to all
      securities authorized for issuance under the Companys equity compensation
      plans:
|------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | Number of         | Weighted-        | Number    
|------------------------- | ----------------- | ---------------- | ----------
|                          | Securities to be  | average exercise | of        
|                          | issued upon       | price of         | securities
|Plan
      Category       | exercise of       | outstanding      | remaining 
|                          | outstanding       | options,         | available 
|                          | options, warrants | warrants and     | for future
|                          | and
      rights  | rights           | issuance  
|****Equity compensation   |                   |                  |           
|****plans approved by     |                   | **2,374,040**    |           
|****shareholders          |                   |                  |           
|                          |                   |                  |           
|****Equity compensation   |                   |                  |           
|****plans not approved by |                   | -                |           
|****shareholders          |                   |                  |           
|****Total                 |                   | 2,374,040        |           
|                          |                   |                  |           

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

|                   |                                                                                                                  
|------------------ | -----------------------------------------------------------------------------------------------------------------
|                   | The response to the remainder of
      this item is incorporated by reference from the Companys Proxy Statement.
|                   |                                                                                                                  
|**Item 13.**       | **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**                        
|                   |                                                                                                                  
|                   | The response to this item is
      incorporated by reference from the Companys Proxy Statement.                 
|                   |                                                                                                                  
|**Item
      14.** | **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**                                                                 
|                   |                                                                                                                  
|                   | The response to this item is
      incorporated by reference from the Companys Proxy Statement.                 

55

---

PART IV



|**Item 15.** | **EXHIBITS AND FINANCIAL STATEMENT
      SCHEDULES**                                                                                                                                                                                                                                                                                                                                                                    
|------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |                                                                                                                                                                                                                                                                                                                                                                                                                         
|             | The following is a list of the financial
      statements, schedules and exhibits filed herewith.
      (1) Financial Statements: No
      financial statements have been filed with this Form 10-K other than those
      listed in Item 8.
      (2) Financial Statement
      Schedules: The following additional financial statement schedule is
      furnished herewith pursuant to the requirements of Form 10-K.

SCHEDULE IIADVANCED PHOTONIX,
INC.

Valuation and Qualifying Accounts

|                                       |                      |           | Additions          |            |                      |           |  
|-------------------------------------- | -------------------- | --------- | ------------------ | ---------- | -------------------- | --------- | -
|                                       |                      |           | Charged to         | Charged to |                      |           |  
|                                       | March
      31, 2008 | Expense   | Other
    Accounts | Deductions | March
      31, 2009
|Allowance for
      doubtful accounts  | $                    | 14,000    | $                  | 48,000     | $                    | --        | $
|Inventory
      reserves               | $                    | 984,000   | $                  | 263,000    | $                    | --        | $
|Warranty
      reserves                | $                    | 85,000    | $                  | 76,000     | $                    | --        | $
|Deferred tax
      valuation allowance | $                    | 7,864,000 | $                  | --         | $                    | --        | $
|                                       |                      |           |                    |            |                      |           |  
|                                       |                      |           |                    |            |                      |           |  
|                                       |                      |           | **Additions**      |            |                      |           |  
|                                       |                      |           | Charged to         | Charged to |                      |           |  
|                                       | March
      31, 2007 | Expense   | Other
    Accounts | Deductions | March
      31, 2008
|Allowance for
      doubtful accounts  | $                    | 51,000    | $                  | 9,000      | $                    | --        | $
|Inventory
      reserves               | $                    | 924,000   | $                  | 363,000    | $                    | --        | $
|Warranty
      reserves                | $                    | 83,000    | $                  | 2,000      | $                    | --        | $
|Deferred tax
      valuation allowance | $                    | 4,533,000 | $                  | 1,225,000  | $                    | 2,106,000 | $

All other
schedules for which provisions are made in the applicable accounting regulations
of the Securities and Exchange Commission are not required under the related
instructions, or are disclosed in the accompanying consolidated financial
statements, or are inapplicable and, therefore, have been omitted.

(3) Exhibits: The following is a list of the exhibits filed as part of
this Form 10-K.

|Exhibit |  |                                                                                                                                                                                                                                                                                                   
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description                                                                                                                                                                                                                                                                                       
|2.1     |  | Stock Purchase Agreement dated
      December 21, 2004 between Advanced Photonix, Inc. and Photonic Detectors,
      Inc.  incorporated by reference to Exhibit 2.1 to the Registrants Form
      8-K, filed on December 23, 2004                                                               
|        | 
|2.2     |  | Agreement and Plan of Merger
      between Advanced Photonix, Inc. and Michigan Acquisition Sub, LLC,
      Picotronix, Inc., Robin Risser and Steven Williamson, dated March 8, 2005
       incorporated by reference to Exhibit 2.1 to the Registrants Form 8-K,
      filed on March 14, 2005

56

---

|3.1   | Certificate of Incorporation of the Registrant, as amended -
      incorporated by reference to Exhibit 3.1 to the Registrant's Registration
      Statement on Form S-1, filed on November 23, 1990                                                                                       
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                            
|3.1.1 | Amendment to Certificate of Incorporation of the Registrant, dated
      October 29, 1992- incorporated by reference to the Registrant's March 31,
      1996 Annual Report on Form 10-K                                                                                                   
|     
|3.1.2 | Amendment to Certificate of Incorporation of the Registrant, dated
      September 9, 1992- incorporated by reference to the Registrant's March 31,
      1996 Annual Report on Form 10-K                                                                                                  
|     
|3.2   | By-laws of the Registrant, as amended  incorporated by reference
      to Exhibit 3.(ii) to the Registrants Form 8-K as filed with the
      Securities and Exchange Commission on June 8, 2005                                                                                          
|     
|4.1   | Rights Agreement, by and between the Company and Continental Stock
      Transfer and Trust Company, as amended  incorporated by reference to
      Exhibit 4.1 to the Registrants Form 8- K, filed on February 9,
      2005                                                            
|     
|10.1  | Advanced Photonix, Inc. 1991 Special Directors Stock Option Plan 
      incorporated by reference to Exhibit 10.9 to the Registrant's March 31,
      1991 Annual Report on Form 10-K                                                                                                     
|     
|10.2  | Advanced Photonix, Inc. 1990 Incentive Stock Option and
      Non-Qualified Stock Option Plan  incorporated by reference to
      Exhibit No. 10.11 to the Registrant's Registration Statement on Form S-1,
      filed with the Securities and Exchange Commission on November 23,
  1990
|      |                                                                                                                                                                                                                                                                                            
|10.3  | Advanced Photonix, Inc. 1997 Employee Stock Option Plan 
      incorporated by reference to Exhibit 10.13 to the Registrants March 30,
      1997 Annual Report on Form 10-K                                                                                                             
|     
|10.4  | Amendment No. 1 to 1997 Employee Stock Option Plan of Advanced
      Photonix, Inc.  incorporated by reference to Exhibit 10.14 to the
      Registrants December 28, 1997 Quarterly Report on Form 10-Q                                                                                 
|     
|10.5  | Advanced Photonix, Inc. 2000 Stock Option Plan, as amended 
      incorporated by reference to Exhibit 99.1 to the Registrant's Form 8-K,
      filed on November 19, 2004                                                                                                                
|     
|10.6  | Advanced Photonix, Inc. 2007 Equity Incentive Plan  incorporated
      by reference to the Registrants Exhibit A to the Proxy Statement relating
      to its 2007 Annual Meeting of Stockholders, as filed July 16, 2007 on Form
      14A                                              
|     
|10.7  | Form of Director Restricted Stock Agreement under the 2007 Equity
      Incentive Plan -- incorporated by reference to Exhibit 4.4 to the
      Registrant's Form S-8 on Registration Statement No.333-147012,
      filed on October 30, 2007                                             
|     
|10.8  | Form of Employee Restricted Stock Agreement under the 2007 Equity
      Incentive Plan -- incorporated by reference to Exhibit 4. to the
      Registrant's Form S-8 on Registration Statement No.333-147012,
      filed on October 30, 2007                                              
|     
|10.9  | Form of Employee Stock Option Agreement under the 2007 Equity
      Incentive Plan -- incorporated by reference to Exhibit 4.6 to the
      Registrant's Form S-8 on Registration Statement No.333-147012,
      filed on October 30, 2007                                                 

57

---

|10.10 | Advanced Photonix, Inc. Executive Incentive Compensation Plan --
      incorporated by reference to Exhibit 10.1 to the Registrants December 28,
      2007 Quarterly Report on Form 10-Q                                                                                                                                                                                                                    
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                                                               
|10.11 | Lease
      Agreement dated February 23, 1998 between Advanced Photonix, Inc. and High
      Tech No. 1, Ltd. - incorporated by reference to Exhibit 10.9 to the
      Registrant's March 29, 1998 Annual Report on Form 10-K                                                                                                                                                                                 
|     
|10.12 | Form
      of Indemnification Agreement provided to Directors and Principal Officers
      of Advanced Photonix, Inc. - incorporated by reference to Exhibit 10.15 to
      the Registrants December 28, 1997 Quarterly Report on Form 10-Q                                                                                                                                                                  
|     
|10.13 | Securities Purchase Agreement, Registration Rights Agreement,
      Senior Subordinated Convertible Note, Warrant to Purchase Class A Common
      Stock, and Additional Investment Right dated October 12, 2004 between
      Advanced Photonix, Inc. and private investors  incorporated by reference
      to Exhibits 10.13 through 10.13.4 to the Registrants Form 8-K, filed on
      October 12, 2004
|     
|10.14 | Letters of Agreement amending the Securities Purchase Agreement and
      Warrant to Purchase Class A Common Stock, dated March 9, 2005, between
      Advanced Photonix, Inc. and private investors  incorporated by reference
      to Exhibits 10.2 through 10.5 to the Registrants Form 8-K, filed on March
      14, 2005                                                                              
|     
|10.15 | Promissory Note between Picotronix, Inc. and Advanced Photonix,
      Inc., dated March 10, 2005  incorporated by reference to Exhibit 10.1 to
      the Registrants Form 8-K, filed on March 14, 2005                                                                                                                                                                                                      
|     
|10.16 | Secured Promissory Note between Advanced Photonix, Inc. and Robin
      Risser, dated May 2, 2005  incorporated by reference to Exhibit 10.1 to
      the Registrants Form 8-K, filed on May 6, 2005                                                                                                                                                                                                        
|     
|10.17 | Amendment dated May 1, 2008 to Secured Promissory Note dated May 2,
      2005 by and between Advanced Photonix, Inc. and Robin Risser incorporated
      by reference to Exhibit 10.1 to the Registrants Form 8-K, filed on May 2,
      2008                                                                                                                                                               
|     
|10.18 | Second
      Amendment dated November 26, 2008 to Secured Promissory Note dated May 2,
      2005 by and between Advanced Photonix, Inc. and Robin Risser 
      incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K,
      filed on December 1, 2008                                                                                                                                     
|     
|10.19 | Secured Promissory Note between Advanced Photonix, Inc. and Steven
      Williamson, dated May 2, 2005  incorporated by reference to Exhibit 10.2
      to the Registrants Form 8-K, filed on May 6, 2005                                                                                                                                                                                                   
|     
|10.20 | Amendment dated May 1, 2008 to Secured Promissory Note dated May 2,
      2005 by and between Advanced Photonix, Inc. and Steven Williamson 
      incorporated by reference to Exhibit 10.2 to the Registrants Form 8-K,
      filed on March 2, 2008                                                                                                                                                      
|     
|10.21 | Second
      Amendment dated November 26, 2008 to Secured Promissory Note dated May 2,
      2005 by and between Advanced Photonix, Inc. and Steven Williamson 
      incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K,
      filed on December 1, 2008                                                                                                                                
|     
|10.22 | Convertible Loan Agreement dated September 15, 2004 between
      Picometrix, LLC and the Michigan Economic Development Corporation 
      incorporated by reference to Exhibit 10.2 to the Registrants Form 8-K,
      filed on October 30, 2008                                                                                                                                                           

58

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|10.23 | First
      Amendment to Convertible Loan Agreement dated December 2, 2004 between
      Picometrix, LLC and the Michigan Economic Development Corporation 
      incorporated by reference to Exhibit 10.3 to the Registrants Form 8-K,
      filed on October 30, 2008                
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                           
|10.24 | Second
      Amendment to Convertible Loan Agreement dated March 17, 2005 between
      Picometrix, LLC and the Michigan Economic Development Corporation 
      incorporated by reference to Exhibit 10.4 to the Registrants Form 8-K,
      filed on October 30, 2008                 
|     
|10.25 | Second
      Amended and Restated Promissory Note dated September 23, 2008 by
      Picometrix, LLC  incorporated by reference to Exhibit 10.1 to the
      Registrants Form 8-K, filed on October 30, 2008                                                                             
|     
|10.26 | Loan
      Agreement, dated September 15, 2005, between Picometrix, LLC and the
      Michigan Economic Development Corporation  incorporated by reference to
      Exhibit 10.1 to the Registrants Form 8-K, filed on September 16,
      2005                                         
|     
|10.27 | Amended and Restated Promissory Note dated January 26, 2009 by
      Picometrix, LLC  incorporated by reference to Exhibit 10.1 to the
      Registrants Form 8-K, filed on January 30, 2009                                                                                            
|     
|10.28 | Loan
      Agreement between Advanced Photonix, Inc. and Fifth Third Bank, dated
      March 6, 2007  incorporated by reference to Exhibit 10.1 to the
      Registrants Form 8-K, filed on March 9, 2007                                                                               
|     
|10.29 | Promissory Note by Advanced Photonix, Inc. in favor of Fifth Third
      Bank, for $2,000,000 dated March 6, 2007  incorporated by reference to
      Exhibit 10.2 to the Registrants Form 8-K, filed on March 9, 2007                                                                  
|     
|10.30 | Security Agreement among Advanced Photonix, Inc., Silicon Sensors,
      Inc., Picometrix, LLC, and Fifth Third Bank  incorporated by reference to
      Exhibit 10.3 to the Registrants Form 8-K, filed on March 9, 2007                                                               
|     
|10.31 | Master
      Equipment Lease Agreement between Advanced Photonix, Inc. and Fifth Third
      Leasing Company dated March 6, 2007  incorporated by reference to Exhibit
      10.4 to the Registrants Form 8-K, filed on March 9, 2007                                                   
|     
|10.32 | Interim Funding Schedule between Advanced Photonix and Fifth Third
      Leasing Company  incorporated by reference to Exhibit 10.5 to the
      Registrants Form 8-K, filed on March 9, 2007                                                                                           
|     
|10.33 | First
      Amendment dated November 13, 2007 between Advanced Photonix, Inc. and
      Fifth Third Bank to that certain Business Loan Agreement dated as of March
      6, 2007  incorporated by reference to Exhibit 10.4 to the Registrants
      Form 10-Q/A, filed on June 17, 2008
|     
|10.34 | Loan
      Agreement dated September 25, 2008 between Advanced Photonix, Inc. and The
      PrivateBank and Trust Company  incorporated by reference to Exhibit 10.1
      to the Registrants Form 8-K, filed on September 29, 2008                                                     
|     
|10.35 | Promissory Note (Term Loan  Prime) dated September 25, 2008 by
      Advanced Photonix, Inc. in favor of The PrivateBank and Trust Company 
      incorporated by reference to Exhibit 10.2 to the Registrants Form 8-K,
      filed on September 29, 2008                             
|     
|10.36 | Promissory Note (Line of Credit  Prime) dated September 25, 2008
      by Advanced Photonix, Inc. in favor of The PrivateBank and Trust Company 
      incorporated by reference to Exhibit 10.3 to the Registrants Form 8-K,
      filed on September 29, 2008                        
|     
|10.37 | Continuing Security Agreement dated September 25, 2008 between
      Advanced Photonix, Inc. and The PrivateBank and Trust Company 
      incorporated by reference to Exhibit 10.4 to the Registrants Form 8-K,
      filed on September 29, 2008                                      

59

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|10.38 | Continuing Guaranty dated September 25, 2008 by Picometrix, LLC and
      Silicon Sensors, Inc. for the benefit of The PrivateBank and Trust Company
       incorporated by reference to Exhibit 10.5 to the Registrants Form 8-K,
      filed on September 29, 2008
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                       
|10.39 | Form
      of Patent, Trademark and Security Agreement between Advanced Photonix,
      Inc. and The PrivateBank and Trust Company  incorporated by reference to
      Exhibit 10.6 to the Registrants Form 8-K, filed on September 29,
      2008                  
|     
|10.40 | Form
      of Third Party Subscription Agreement, dated August 31, 2007 
      incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K,
      filed on September 7, 2007                                                                              
|     
|10.41 | Form
      of Insiders Subscription Agreement, dated August 31, 2007  incorporated
      by reference to Exhibit 10.2 to the Registrants Form 8-K, filed on
      September 7, 2007                                                                                 
|     
|10.42 | Form
      of 2007 Series Warrant to Purchase Class A Common Stock, dated August 31,
      2007  incorporated by reference to Exhibit 10.3 to the Registrants Form
      8-K, filed on September 7, 2007                                                            
|     
|10.43 | Form
      of Registration Rights Agreement, dated August 31, 2007  incorporated by
      reference to Exhibit 10.4 to the Registrants Form 8-K, filed on September
      7, 2007                                                                                   
|     
|10.44 | Insider Side Letter regarding the Warrant Exercise Price, dated
      August 31, 2007  incorporated by reference to Exhibit 10.5 to the
      Registrants Form 8-K, filed on September 7, 2007                                                                      
|     
|10.45 | Insider Side Letter regarding the Registration Rights Agreement,
      dated August 31, 2007  incorporated by reference to Exhibit 10.6 to the
      Registrants Form 8-K, filed on September 7, 2007                                                               
|     
|10.46 | Form
      of Third Party Subscription Agreement, dated September 14, 2007 
      incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K,
      filed on September 19, 2007                                                                          
|     
|10.47 | Advanced Photonix, Inc. Executive Incentive Compensation Plan
      (amended and restated as of March 6, 2009)                                                                                                                                                        
|     
|21.1  | List
      of Subsidiaries of Registrant                                                                                                                                                                                                                              
|     
|23.1  | Consent of BDO Seidman, LLP                                                                                                                                                                                                                                           
|     
|31.1  | Certification of the Registrants Chairman, Chief Executive Officer
      and Director pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002                                                                                                                
|     
|31.2  | Certification of the Registrants Chairman, Chief Financial Officer
      and Director pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002                                                                                                                
|     
|32.1  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                          
|     
|32.2  | Certification pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002                                                                                                                                        

60

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SIGNATURES

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

ADVANCED PHOTONIX, INC.

By:
    /s/ Richard KurtzChief
      Executive President


Date: June 29, 2009

Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the dates
indicated.

|Signature                  |  | Title                                       |  | Date               
|-------------------------- |  | ------------------------------------------- |  | -------------------
|/s/ Richard D. Kurtz       |  | Chairman of the
      Board, President, and |  | June 29,
      2009
|Richard D.
      Kurtz     |  | Chief Executive
      Officer               |  |                    
|                           |  |                                             |  |                    
|/s/ Robin Risser           |  | Chief Financial
      Officer and Director  |  | June 29,
      2009
|Robin
      Risser         |  |                                             |  |                    
|                           |  |                                             |  |                    
|/s/ M. Scott Farese        |  | Director                                    |  | June 29,
      2009
|M. Scott
      Farese      |  |                                             |  |                    
|                           |  |                                             |  |                    
|/s/ Lance Brewer           |  | Director                                    |  | June 29,
      2009
|Lance
      Brewer         |  |                                             |  |                    
|                           |  |                                             |  |                    
|/s/ Donald Pastor          |  | Director                                    |  | June 29,
      2009
|Donald
      Pastor        |  |                                             |  |                    
|                           |  |                                             |  |                    
|/s/ Stephen P. Soltwedel   |  | Director                                    |  | June 29,
      2009
|Stephen P.
      Soltwedel |  |                                             |  |                    

61

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