Document:

Exhibit
      10.3

    

    PROMISSORY
      NOTE 

    (Line
      of Credit-Prime)

     

    
      	
              $3,000,000

            	
              Chicago,
                Illinois

            
	 	 
	
              Maturity
                Date: September 25, 2011

            	
              Dated:
                September 25, 2008

            

    

    

    FOR
      VALUE RECEIVED on
      or
      before the Maturity Date stated above (or such earlier Maturity Date as may
      apply in accordance with the provisions of the Loan Agreement referred to
      below), the undersigned (hereinafter referred to as “Borrower”), promises to pay
      to the order of The PrivateBank and Trust Company, an Illinois banking
      corporation (hereinafter referred to as “Lender”), at its offices located at 70
      W. Madison Street, Chicago, Illinois 60602, or at such other place as Lender
      may
      designate in writing, the principal sum of Three Million and 00/100 Dollars
      ($3,000,000), or so much as has been advanced and not repaid pursuant to the
      Loan Agreement and this Note, plus interest as hereinafter provided, in lawful
      money of the United States. This Note is entered into pursuant to the terms
      of
      the Loan Agreement. Capitalized terms in this Note and not otherwise defined
      herein shall have the meanings given to them in the Loan Agreement.

     

    The
      unpaid principal balance outstanding from time to time under this Note shall
      bear interest at the Prime-based Rate. Interest shall be calculated on the
      basis
      of a 360 day year for the actual number of days elapsed. The Prime-based Rate
      shall be adjusted on the effective date of each change in the Prime Rate.

     

    This
      Note
      shall be repaid by consecutive monthly installments of interest, commencing
      on
      the third day of November, 2008 and continuing on the first Business Day of
      each
      month thereafter. The unpaid principal balance and all accrued interest thereon
      shall be due and payable in full on the Maturity Date (or earlier upon
      acceleration). This is a Note under which amounts repaid may be readvanced,
      pursuant to the terms of the Loan Agreement and this Note.

     

    If
      any
      payment of principal or interest hereunder is not paid within ten (10) Business
      Days from the date same is due, then, at the option of Lender, in addition
      to
      all other sums due hereunder, the Borrower shall pay a late charge equal to
      the
      greater of: (a) $250 or (b) one cent (1¢) per dollar ($1.00) for each such
      payment that is delinquent ten (10) Business Days or more.

     

    The
      sums
      advanced hereunder shall be charged to a loan account in Borrower’s name on
      Lender’s books (the “Loan Account”), and Lender shall credit to such account the
      amount of each repayment hereunder. Lender shall render Borrower, from time
      to
      time or upon Borrower’s request, a statement of account setting forth the
      Borrower’s loan balance in said Loan Account which shall be presumed to be
      correct and accepted by and binding upon Borrower, unless Lender receives a
      written statement of exceptions within ten (10) Business Days after such
      statement has been rendered to Borrower. Such statement of account shall be
      prima facie evidence of the loan and advance owing to Lender by Borrower
      hereunder.

     

    Any
      payment made by mail will be deemed tendered and received only upon actual
      receipt (time being of the essence), at the address of Lender designated for
      such payment whether or not Lender has authorized payment by mail or any other
      manner. Borrower hereby expressly assumes all risk of loss or liability
      resulting from non-delivery or delay in delivery of any payment transmitted
      by
      mail or in any other manner.

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    No
      delay
      or failure of Lender in exercising any right, remedy, power or privilege
      hereunder shall affect such right, remedy, power or privilege, nor shall any
      single or partial exercise thereof preclude the exercise of any other right,
      remedy, power or privilege. No delay or failure of Lender at any time to demand
      strict adherence to the terms of this Note shall be deemed to constitute a
      course of conduct inconsistent with the Lender’s right at any time, before or
      after any Event of Default, to demand strict adherence to the terms of this
      Note.

     

    At
      any
      time and from time to time, Borrower may prepay the principal balance of the
      Note in whole or in part before the original due date of that principal. There
      shall be no prepayment premium or penalty in the event of such prepayment,
      except as otherwise provided in any interest rate protection or swap agreement
      now or hereafter entered into by Borrower with Lender or any affiliate of
      Lender.

     

    Nothing
      herein contained, nor any transaction relating thereto, or hereto, shall be
      construed or so operate as to require the Borrower to pay, or be charged,
      interest at a greater rate than the maximum allowed by the applicable law
      relating to this Note. Should any interest or other charges, charged, paid
      or
      payable by the Borrower in connection with this Note, or any other document
      delivered in connection herewith, result in the charging, compensation, payment
      or earning of interest in
      excess
      of the
      maximum allowed by the applicable law as aforesaid, then any and all such excess
      shall be and the same is hereby waived by the Lender, and any and all such
      excess paid shall be automatically credited against and in reduction of the
      principal due under this Note. If Lender shall reasonably determine that the
      Prime-based Rate (together with all other charges or payments related hereto
      that may be deemed interest) stipulated under this Note is or may be usurious
      or
      otherwise limited by law, the unpaid balance of this Note, with accrued interest
      at the highest rate then permitted to be charged by stipulation in writing
      between Lender and Borrower, at the option of Lender, shall immediately become
      due and payable.

     

    If
      an
      Event of Default, as set forth in the Loan Agreement, occurs, the entire unpaid
      principal balance and all accrued interest shall at the sole option of Lender
      be
      immediately due and payable, together with (to the extent permitted under
      applicable law) the costs, attorneys’ and outside consultants’ fees, which, in
      each case, are reasonably incurred by Lender in collecting or enforcing payment,
      and the outstanding principal amount hereof shall bear interest at the Default
      Rate.

     

    Borrower
      hereby grants to Lender a security interest in Lender’s own indebtedness or
      liability to Borrower, if any, however evidenced, including a security interest
      in all of Borrower’s bank deposits, instruments, negotiable documents and
      chattel paper which at any time are in the possession or control of Lender,
      as
      further security for repayment of the Indebtedness of the Borrower; and the
      Borrower hereby grants to Lender all rights and privileges afforded a secured
      party under the Michigan Uniform Commercial Code.

     

    All
      payments other than prepayments and scheduled payments paid hereunder shall,
      at
      option of Lender, first be applied against accrued interest, and the balance
      against principal. Acceptance by Lender of any payment in an amount less than
      the amount then due shall be deemed an acceptance on account only, and the
      failure to pay the entire amount then due shall be and continue to be an Event
      of Default.

     

    Borrower
      hereby waives presentment for payment, demand, notice of non-payment (except
      such notice, if any, as required under the Loan Agreement) notice of protest
      and
      protest of this Note, diligence in collection or bringing suit. The liability
      of
      Borrower shall be absolute and unconditional, without regard to the liability
      of
      any other party hereto.

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    This
      Note
      is secured by, and executed pursuant to, the Loan Agreement and the other Loan
      Documents therein described. Reference is hereby made to said Loan Agreement
      and
      Loan Documents for additional terms relating to the transaction giving rise
      to
      this instrument, the security given for this instrument and additional terms
      and
      conditions under which this instrument matures, accelerates or may be prepaid.
      Borrower’s obligations hereunder are cross-collateralized and cross-defaulted
      with all other indebtedness owing to Lender by Borrower. 

     

    DEFINITIONS

     

    As
      used
      in this Note, the following terms shall have the given meaning:

     

    “Applicable
      Margin” shall mean one percent (1%); provided, however, upon receipt by Lender
      of Borrower’s audited financial statements for the 2009 fiscal year, the
      Applicable Margin shall decrease to zero percent (0%) if and only if Borrower’s
      Adjusted EBITDA (as defined in the Loan Agreement) is equal to or greater than
      Five Million Dollars ($5,000,000).

     

    “Default
      Rate” shall mean an annual rate of interest equal to the lesser of (i) three
      percent (3.0%) per annum in excess of the Prime-based Rate or (ii) the highest
      rate of interest permitted by applicable law to be charged for unpaid monetary
      obligations.

     

    “Loan
      Agreement” shall mean that certain Loan Agreement dated September 25, 2008 by
      and between Borrower and Lender, as may be amended, restated or replaced from
      time to time.

     

    “Prime-based
      Rate” shall mean the Prime Rate plus the Applicable Margin.

     

    “Prime
      Rate” shall mean the fluctuating rate of interest publicly announced by the
      Lender at its principal place of business from time to time as being its prime
      rate of interest thereafter in effect, with each change in the Prime Rate
      automatically and without notice changing the rate then in effect. The Prime
      Rate is not necessarily the lowest rate of interest which may be available
      from
      the Lender on fluctuating rate loans.

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    Signature
      Page to Promissory Note (Line of Credit-Prime)

    dated
      September 25, 2008

    

    
      	 	
              BORROWER:

            
	 	 
	 	
              ADVANCED
                PHOTONIX, INC.

            
	 	 
	
              Address:

            	 
	 	 
	
              2925
                Boardwalk

            	
              By:
                /s/ Richard D. Kurtz

            
	
              Ann
                Arbor, Michigan 48104

            	
               

            
	 	
              Its:
                CEO and President 

            

    

    

    
      	
              By:
                /s/ Robin F. Risser

            
	 
	
              Its:
                Chief Financial Officer

            

    

    
      
        
        

      

      
        4Exhibit
      10.4

    

    Continuing
      Security Agreement

     

    
      
        

      

    Advanced
      Photonix, Inc. (the “Debtor”) 

    

    Taxpayer
      ID. No.:_________________________    

    

    If
      a registered organization, State Organization No.: 2164577.
      State
      of Organization: Delaware.

    

      
        	
                Debtor’s Address:

              	
                2925 Boardwalk

              	               	
                Ann Arbor

              	
                Michigan

              	
                48104

              	 
	 	
                Street

              	 	
                City

              	
                State

              	
                Zip Code

              	 

      

    (1)        Grant
      of Security Interest.
      The
      Debtor grants to The PrivateBank and Trust Company (the “Lender”), whose address
      is 70 W. Madison Street, Chicago, Illinois 60602, a continuing security interest
      in the Collateral, as defined below, to secure the payment and performance
      of
      all of the Liabilities (as defined below) of the Debtor and all Liabilities
      of
      ________N/A  ,
      (the
“Borrower”).

    

    “Liabilities,”
      as used in this agreement, means all obligations, indebtedness and liabilities
      of the Debtor and/or the Borrower to the Lender and/or any of the Lender’s
      subsidiaries, affiliates or successors, now existing or later arising,
      including, without limitation, all loans, advances, interest, costs, overdraft
      indebtedness, credit card indebtedness, lease obligations, management and
      services fees or obligations relating to any interest rate, currency or
      commodity swap agreement, cap or collar agreement, and any other agreement
      or
      arrangement designated to protect against fluctuations in interest rates,
      currency exchange rates or commodity prices, all monetary obligations incurred
      or accrued during the pendency of any Bankruptcy, insolvency, receivership
      or
      other similar proceedings, regardless of whether allowed or allowable in such
      proceeding, and all renewals, extensions, modifications, consolidations or
      substitutions of any of the foregoing, whether the Debtor or the Borrower may
      be
      liable jointly with others or individually liable as a debtor, maker, co-maker,
      drawer, endorser, guarantor, surety or otherwise, and whether voluntarily or
      involuntarily incurred, due or not due, absolute or contingent, direct or
      indirect, known or unknown, liquidated or unliquidated. Liabilities also include
      all interest, costs, expenses, and reasonable attorneys’ fees accruing to, or
      incurred in either collecting any of the Liabilities of the Debtor or the
      Borrower or protecting, maintaining, or liquidating any collateral for any
      of
      the Liabilities, including the Collateral. 

    

    (2)    Description
      of Collateral.“Collateral,”
      as used in this agreement, means all personal property of Debtor including,
      without limitation, all of the property set forth in this Section 2 which Debtor
      now or later owns or has an interest in, wherever located. Notwithstanding
      the
      foregoing, “Collateral” as used in this agreement excludes all property deemed
“Collateral” under that certain form of Patent, Trademark and Copyright
      Securities Agreement attached as Exhibit A to that certain Loan Agreement (the
      “Loan Agreement”), dated as of September 25, 2008, between Debtor and
      Lender.

    

    (a) all
      of
      the Debtor’s Accounts, Chattel Paper, Deposit Accounts, Documents, Equipment,
      Farm Products, Fixtures, Goods, General Intangibles, Instruments, Inventory,
      Investment Property, Letter of Credit Rights (whether or not given in support
      of
      Accounts), Software, as defined below (words and phrases used herein and not
      otherwise specifically defined herein shall have the respective meanings
      assigned to such terms as such terms are defined in the Uniform Commercial
      Code
      of the State of Michigan, as in effect from time to time (the “UCC”)), present
      and future, including but not limited to any items listed on Schedule 1 attached
      hereto, if any; 

    

    (b) all
      present and future insurance claims relating to any of the above; 

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    (c) all
      Goods, Instruments (including, without limit, promissory notes), Documents
      (including, without limit, negotiable Documents), policies and certificates
      of
      insurance, Deposit Accounts, and money or other property (except real property
      which is not a fixture) which are now or later in possession of Lender, or
      as to
      which Lender now or later controls possession by documents or otherwise;
      and

    

    (d) all
      present and future books, records, and data of the Debtor relating to any of
      the
      above; and

    

    (e) all
      present and future accessions, additions and attachments to, proceeds, parts,
      products, replacement, substitutions, Supporting Obligations and rights arising
      out of, any of the above, including but not limited to stock rights,
      subscription rights, interest, distributions, dividends, stock dividends, stock
      splits, or liquidating dividends, renewals, all cash and Accounts, insurance
      policies and proceeds, arising from the sale, rent, lease, casualty loss or
      other disposition of any of the above and cash and other property which were
      proceeds of any of the above and are recovered by a bankruptcy trustee or
      otherwise as a preferential transfer by Debtor.

    

    Where
      the
      Collateral is in the possession of the Lender, the Debtor agrees to deliver
      to
      the Lender any property which represents an increase in the Collateral or
      profits or proceeds of the Collateral. 

    

    (3)  
        Collateral
      Definitions. 

    

    (a) “Accounts”
      means
      all
      of the Debtor’s “accounts,” (including without limit “health-care insurance
      receivables”) as defined in Article 9 of the UCC. Also included are (i) any
      right to a refund of taxes paid at any time to any governmental entity, (ii)
      contract rights, and (iii) commercial tort claims. 

    

    (b) “Chattel
      Paper”
      means
      all of the Debtor’s “chattel paper” (including without limit “electronic chattel
      paper” and “tangible chattel paper”) as such terms are defined in Article 9 of
      the UCC.

    

    (c) “Deposit
      Accounts”
      means
      all of the Debtor’s “deposit accounts,” as defined in Article 9 of the UCC.

    

    (d) “Documents”
      means
      all of the Debtor’s “documents,” “documents of title” or a “warehouse receipts,”
as such terms are defined in the UCC. 

    

    (e) “Equipment”
      means
      (i) all of the Debtor’s “equipment,” as defined in Article 9 of the UCC, and
      (ii) any Documents issued with respect to any of Debtor’s “equipment” (as
      defined in the UCC). Without limiting the security interest granted, the Debtor
      represents and warrants that Debtor’s Equipment is presently located at 2925
      Boardwalk, Ann Arbor, Michigan 48104 and the locations listed on the attached
      Schedule of Collateral Locations.

    

    (f) “Farm
      Products”
      means
      all of the Debtor’s “farm products,” as defined in Article 9 of the UCC. The
      Debtor will provide the Lender with a written list of the buyers, commission
      merchants or selling agents to or through whom it may sell any Farm Products,
      in
      form acceptable to the Lender. The Debtor will keep this list current by notice
      to the Lender at least seven (7) days prior to any sale. In this paragraph
      the
      terms “buyers,” “commission merchants,” and “selling agents” have the meanings
      given to them in the Federal Food Security Act of 1985, as amended, and in
      the
      UCC, as applicable. 

    

    (g) “Fixtures”
      means
      all of the Debtor’s “fixtures,” as defined in Article 9 of the UCC.

    

    (h) “General
      Intangibles”
      means
      all of the Debtor’s “general intangibles,” (including without limit “payment
      intangibles”) as such terms are defined in Article 9 of the UCC.

    

    (i) “Goods”
      means
      all of the Debtor’s “goods,” as defined in Article 9 of the UCC.

    

    (j) “Instruments”
      means
      all of the Debtor’s “instruments,” as defined in Article 9 of the
      UCC

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    (k) “Inventory”
      means
      (i)
      all of the Debtor’s “inventory,” as defined in Article 9 of the UCC, and (ii)
      any Documents issued with respect to any of Debtor’s “inventory” (as defined in
      the UCC). Without limiting the security interest granted, Debtor represents
      and
      warrants that the Debtor’s Inventory is presently located at 2925 Boardwalk, Ann
      Arbor, Michigan 48104 and the locations listed on the attached Schedule of
      Collateral Locations.

    

    (l) “Investment
      Property”
      means
      all of the Debtor’s “investment property,” as defined in Article 9 of the UCC,
      including, without limit, securities, securities accounts, security
      entitlements, and financial assets. 

    

    (m) “Letter
      of Credit Rights”
      means
      all of the Debtor’s “letter of credit rights,” as defined in Article 9 of the
      UCC. 

    

    (n) “Software”
      means
      all of the Debtor’s “software,” as defined in Article 9 of the UCC.

    

    (4)    
Representations,
      Warranties, and Covenants. The
      Debtor represents and warrants to and covenants with the Lender that:

    

    (a) Its
      chief
      executive office is at the address shown above on page 1; 

    

    (b) (i)
      The
      Debtor’s name as it appears in this agreement is identical to the name of the
      Debtor appearing in the Debtor’s organizational documents, as amended, including
      any trust documents; and (ii) both the Taxpayer I.D. No. and the State
      Organization No., if any, shown above are correct; 

    

    (c) If
      Debtor
      is not a natural person, (i) that it is duly organized, existing and in good
      standing pursuant to the laws under which it is organized; and (ii) that the
      execution and delivery of this agreement and the performance of the obligations
      it imposes (A) are within its powers and have been duly authorized by all
      necessary action of its governing body; (B) do not contravene the terms of
      its
      articles of incorporation or articles of organization, its by-laws, or any
      partnership agreement, operating agreement or other agreement governing its
      affairs;

    

    (d) The
      execution and delivery of this agreement and the performance of the obligations
      it imposes do not violate any law, conflict with any agreement by which it
      is
      bound, or require the consent or approval of any governmental authority or
      any
      third party; 

    

    (e) This
      agreement is a valid and binding agreement, enforceable according to its
      terms;

    

    (f) All
      balance sheets, profit and loss statement, and other financial statements
      furnished to the Lender are accurate and fairly reflect the financial condition
      of the organizations and persons to which they apply on their effective dates,
      including contingent liabilities of every type, which financial condition has
      not changed materially and adversely since those dates;

    

    (g) It
      will
      pay its Liabilities to the Lender; 

    

    (h) It
      is or
      will become the owner of the Collateral free from any liens, encumbrances or
      security interests, except for Permitted Liens (as defined in the Loan Agreement
      dated September 25, 2008 between Debtor and Lender, as it may be amended or
      modified from time to time), and will defend the Collateral against all claims
      and demands of all persons at any time claiming any interest in it;

    

    (i) No
      person, other than Lender, has possession or control of the Collateral (as
      defined in the UCC);

    

    (j) It
      will
      keep the Collateral free of liens, encumbrances and other security interests
      except for this security interest and Permitted Liens, maintain it in good
      repair (ordinary wear and tear excepted), not use it illegally, and exhibit
      it
      to the Lender on demand;

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

       

    

    (k) It
      will
      protect the Collateral from loss, damage, or deterioration from any cause
      (ordinary wear and tear excepted). At its own expense, the Debtor will maintain
      comprehensive casualty insurance and other insurance as may be reasonably
      required by Lender on the Collateral against such risks, in such amounts, with
      such deductibles and with such companies as may be reasonably satisfactory
      to
      the Lender, and provide the Lender with proof of insurance acceptable to the
      Lender. Each insurance policy shall contain a lender’s loss payable endorsement
      satisfactory to the Lender and a prohibition against cancellation or amendment
      of the policy or removal of the Lender as loss payee without at least 30 days
      prior written notice to the Lender. In all events, the amounts of such insurance
      coverages shall conform to prudent business practices and shall be in such
      minimum amounts that the Debtor will not be deemed a co-insurer. If Debtor
      fails
      to maintain such insurance, Lender has the option (but not the obligation)
      to do
      so and Debtor agrees to repay all amounts so expended by Lender immediately
      upon
      demand, together with interest at the highest lawful default rate which could
      be
      charged by Lender on any of the Liabilities;

    

    (l) It
      will
      not sell or offer to sell, lease, license or otherwise transfer the Collateral,
      nor change the location of the Collateral, without the written consent of the
      Lender, except for sale of Inventory in the ordinary course of business;

    

    (m) It
      will
      pay promptly when due all taxes and assessments upon the Collateral, or for
      its
      use or operation. If Debtor fails to pay any of these taxes, assessments, or
      other charges in the time provided above, Lender has the option (but not the
      obligation) to do so and Debtor agrees to repay all amounts so expended by
      Lender immediately upon demand, together with interest at the highest lawful
      default rate which could be charged by Lender on any of the
      Liabilities;

    

    (n) No
      financing statement covering all or any part of the Collateral or any proceeds
      is on file in any public office, unless in connection with Permitted Liens
      or
      the Lender has approved that filing. Debtor irrevocably authorizes Lender to
      file one or more financing statements in form reasonably satisfactory to the
      Debtor and Lender and will pay the cost of filing them in all public offices
      where filing is deemed by the Lender to be necessary or desirable. In addition,
      the Debtor shall execute and deliver, or cause to be executed and delivered,
      such other documents as the Lender may from time to time reasonably request
      to
      perfect or to further evidence the security interest created in the Collateral
      by this agreement, including, without limitation: (i) any certificates of title
      to the Collateral with the security interest of the Lender noted thereon or
      executed applications for such certificates of title in form satisfactory to
      the
      Lender; (ii) any assignments of claims under government contracts which are
      included as part of the Collateral, together with any notices and related
      documents as the Lender may from time to time request; (iii) any assignment
      of
      any specific account receivable as the Lender may from time to time request;
      (iv) a notice of security interest and a control agreement with respect to
      any
      Collateral, all in form and substance satisfactory to the Lender; (v) a notice
      to and acknowledgment from any bailee or other person in possession of any
      Collateral, all in form and substance satisfactory to the Lender; and (vi)
      any
      consent to the assignment of proceeds of any letter of credit, all in form
      and
      substance satisfactory to the Lender; 

    

    (o) Lender
      has no obligation to acquire or perfect any lien on or security interest in
      any
      asset(s), whether real property or personal property, to secure payment of
      the
      Liabilities, and Debtor is not relying upon assets in which the Lender may
      have
      a lien or security interest for payment of the Liabilities.

    

    (p) It
      will
      not, without at least fifteen (15) days prior written notice to the Lender,
      change (i) the Debtor’s name, (ii) the Debtor’s business organization, (iii) the
      jurisdiction under which the Debtor’s business organization is formed or
      organized, or (iv) the address of the Debtor’s chief executive office or
      principal residence or of any additional places of the Debtor’s business;

    

    (q) It
      will
      provide any information that Lender may reasonably request, and will permit
      Lender upon prior notice to inspect and copy its books and records during normal
      business hours; 

    

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

       

    

    (r) It
      will
      allow the Lender or the Lender’s representative, upon not less than three (3)
      business days notice (which notice shall not be required following the
      occurrence of an Event of Default) to enter and remain upon all premises where
      Collateral is kept or may be located and inspect the Collateral during normal
      business hours provided that Lender’s representatives shall use good faith
      efforts not to interfere with the normal operations of Debtor;

    

    (s) It
      will
      allow the Lender to take such actions in its own name or in Debtor’s name as
      Lender, in its sole discretion, deems necessary or appropriate to establish
      exclusive control (as defined in the UCC) over any Collateral of such nature
      where control perfects the Lender’s security interest.

    

    (t) The
      Lender shall have the right now and at any time in the future, in its sole
      and
      absolute discretion and without notice to the Debtor, to (i) prepare, file,
      and
      sign the Debtor’s name on any proof of claim in bankruptcy or similar document
      against any owner of the Collateral and (ii) prepare, file, and sign the
      Debtor’s name on any notice of lien, assignment or satisfaction of lien, or
      similar document in connection with the Collateral. The Debtor authorizes the
      Lender to file financing statements containing any collateral description which
      reasonably describes the Collateral in which a security interest is granted
      under this agreement.

    

    (5)  
        Accounts. 

    

    (a) Debtor
      will, in the usual course of its business and at its own cost and expense,
      on
      the Lender’s behalf but not as the Lender’s agent, demand and receive and use
      its best efforts to collect all moneys due or to become due on the Accounts.
      Until an Event of Default (as defined in the Loan Agreement) and the Lender
      gives notice to Debtor to the contrary, it may use the funds collected in its
      business. Upon an Event of Default and upon receipt of notice from the Lender,
      the Debtor agrees that all sums of money it receives on account of or in payment
      or settlement of the Accounts shall be held by it as trustee for the Lender
      without commingling with any of its funds, and shall immediately be delivered
      to
      the Lender with endorsement to the Lender’s order of any check or similar
      instrument. If Lender notifies Debtor that the Liabilities are on a remittance
      basis, Debtor shall notify its account debtors that all electronic payments
      on
      any Account shall be made directly to an account at Lender designated by and
      under the exclusive control of Lender, and all other payments on the Accounts
      shall be made directly to a post office box designated by and under the
      exclusive control of Lender. Lender shall apply received payments against the
      Liabilities in such order and manner as Lender elects, in its sole discretion.
      All notices required in this paragraph will be immediately effective when sent.
      Such notices need not be given prior to the Lender taking action. It is agreed
      that, at any time the Lender elects after an Event of Default, it shall be
      entitled, in its own name or in the name of the Debtor or otherwise, but at
      the
      expense and cost of the Debtor, to collect, demand, receive, sue for or
      compromise any and all Accounts, and to give good and sufficient releases,
      to
      endorse any checks, drafts or other orders for the payment of money payable
      to
      the Debtor in payment and, in its discretion, to file any claims or take any
      action or proceeding which the Lender may deem necessary or advisable. It is
      expressly understood and agreed, however, that the Lender shall not be required
      or obligated in any manner to make any demand or to make any inquiry as to
      the
      nature or sufficiency of any payment received by it or to present or file any
      claim or take any other action to collect or enforce the payment of any amounts
      which may have been assigned to it or to which it may be entitled at any time
      or
      times. 

    

    (b) Upon
      an
      Event of Default, the Debtor appoints the Lender or the Lender’s designee as the
      Debtor’s attorney-in-fact to do all things with reference to the Collateral as
      provided for in this section including without limitation (1) to receive, open
      and dispose of mail addressed to the Debtor, (2) to sign the Debtor’s name on
      any invoice or bill of lading relating to any Collateral, on assignments and
      verifications of account and on notices to the Debtor’s customers, and (3) to do
      all things necessary to carry out this agreement. The Debtor ratifies and
      approves all acts of the Lender as attorney-in-fact. 

    

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

       

    

    (c) The
      Lender shall not be liable for any act or omission, nor any error of judgment
      or
      mistake of fact or law, for any loss or damage which Debtor may suffer as a
      result of Lender’s processing of items or its exercise of any other rights or
      remedies under this Agreement, other than such acts, omissions, errors or
      mistakes resulting from the gross negligence or willful misconduct of Lender
      or
      its affiliates, subsidiaries, employees or representatives. Except as caused
      by
      Lenders’ or its affiliates’, subsidiaries’, employees’ or representatives’ gross
      negligence or willful misconduct, Debtor agrees to indemnify and hold Lender
      harmless from and against any third party claims, demands or actions, and all
      related expenses or liabilities, including, without limitation, attorneys fees
      and causes of action whatsoever. This power being coupled with an interest
      is
      irrevocable until the Liabilities have been fully satisfied.

     

    (d) Immediately
      upon the Debtor’s receipt of any Collateral consisting of Instruments, Chattel
      Paper or Documents (“Special Collateral”), the Debtor shall mark the Special
      Collateral to show that it is subject to the Lender’s security interest and
      shall deliver the original to the Lender together with appropriate endorsements
      and other specific evidence of assignment in form and substance satisfactory
      to
      the Lender. 

    

    (6)  
        Additional
      Covenants.

    

    (a) If
      any
      monies become available to the Lender that it can apply to any Liabilities
      (such
      Liabilities being referred to in this paragraph as the “Debt”), the Lender may
      apply them to Debt not secured by this agreement. 

    

    (b) Without
      notice to or the consent of the Debtor, the Lender may (i) take any action
      it
      chooses against any Borrower, against any collateral for the Debt, or against
      any other person liable for the Debt; (ii) release any Borrower or any other
      person liable for the Debt, release any collateral for the Debt, and neglect
      to
      perfect any interest in any such collateral; (iii) forbear or agree to forbear
      from exercising any rights or remedies, including any right of setoff, that
      it
      has against the Borrower, any other person liable for the Debt, or any other
      collateral for the Debt; (iv) extend to any Borrower additional Debt to be
      secured by this agreement; or (v) renew, extend, modify or amend any Debt,
      and
      deal with any Borrower or any other person liable for the Debt as it chooses.
      

    

    (c) None
      of
      the Debtor’s obligations under this agreement shall be affected by (i) any act
      or omission of the Lender; (ii) the voluntary or involuntary liquidation, sale
      or other disposition of all or substantially all of the assets of any Borrower,
      (iii) any receivership, insolvency, bankruptcy, reorganization or other similar
      proceedings affecting any Borrower or any of its assets; or (iv) any change
      in
      the composition or structure of any Borrower or any Debtor, including a merger
      or consolidation with any other entity. 

    

    (d) The
      Lender’s rights under this section and this agreement are unconditional and
      absolute, regardless of the unenforceability of any provision of any agreement
      between any Borrower and the Lender, or the existence of any defense, setoff
      or
      counterclaim that any Borrower may be able to assert against the Lender.

    

    (e) Debtor
      waives all rights of subrogation, contribution, reimbursement, indemnity,
      exoneration, implied contract, recourse to security, setoff and any other claim
      (as that term is defined in the federal Bankruptcy Code, as amended from time
      to
      time) that it may have or acquire in the future against any Borrower, any other
      person liable for the Debt, or any collateral for the Debt, because of the
      existence of this agreement, the Debtor’s performance under this agreement, or
      the Lender’s availing itself of any rights or remedies under this
      agreement.

    

    (f) If
      any
      payment to the Lender on any Debt is wholly or partially invalidated, set aside,
      declared fraudulent or required to be repaid under any bankruptcy or insolvency
      act or code, under any state or federal law, or under common law or equitable
      principles, then this agreement shall remain in full force and effect or be
      reinstated, as the case may be, until payment in full to the Lender of the
      repaid amounts, and of the Debt. If this agreement must be reinstated, the
      Debtor agrees to execute and deliver to the Lender new agreements and financing
      statements, if necessary, in form and substance acceptable to the Lender,
      covering the Collateral. 

    

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

       

    

    (7)  
        Default/Remedies. 

    

    (a) If
      (i)
      after expiration of any applicable grace period, any of the Liabilities are
      not
      paid, when due, whether upon demand or at maturity, whether by acceleration
      or
      otherwise, (ii) any warranty, representation, covenant, financial statement,
      or
      other information made, given or furnished to Lender by or on behalf of
      Borrower, Debtor, or any guarantor of any of the Liabilities (“Guarantor”) shall
      be, or shall prove to have been, false or materially misleading when made,
      given, or furnished; (iii) any substantial loss, theft, damage or destruction
      to
      or of any Collateral, or the issuance or filing of any attachment, levy,
      garnishment or the commencement of any proceeding in connection with any
      Collateral or of any other judicial process of, upon or in respect of Borrower,
      Debtor, any Guarantor, or any Collateral, (iv) unless otherwise expressly
      permitted under the Loan Agreement, there shall occur any sale or other
      disposition by Borrower, Debtor, or any Guarantor of any substantial portion
      of
      its assets or property or voluntary suspension of the transaction of business
      by
      Borrower, Debtor, or any Guarantor, or death, dissolution, termination of
      existence, merger, consolidation, insolvency, business failure, or assignment
      for the benefit of creditors of or by Borrower, Debtor, or any Guarantor; or
      commencement of any proceedings under any state or federal bankruptcy or
      insolvency laws or laws for the relief of debtors by or against Borrower,
      Debtor, or any Guarantor; or the appointment of a receiver, trustee, court
      appointee, sequestrator or otherwise, for all or any part of the property of
      Borrower, Debtor, or any Guarantor, (v) Lender deems the margin of Collateral
      insufficient or itself insecure, in good faith believing that the prospect
      of
      payment of the Indebtedness or performance of this Agreement is impaired or
      shall fear deterioration, removal, or waste of Collateral; or (vi) if an Event
      of Default occurs under the Loan Agreement or a default (after giving effect
      to
      any applicable grace period) by anyone occurs under the terms of any agreement
      related to any of the Liabilities, then the Lender shall have the rights and
      remedies provided by law or this agreement, including but not limited to, the
      right to require the Debtor to assemble the Collateral and make it available
      to
      the Lender at a place to be designated by the Lender which is reasonably
      convenient to both parties, the right to take possession of the Collateral
      with
      or without demand and with or without process of law, the right to sell and
      dispose of it, with or without process of law, and distribute the proceeds
      according to law and any other rights and remedies available to secured parties
      under the UCC and other applicable laws. Should an Event of Default occur,
      the
      Debtor will pay to the Lender all costs reasonably incurred by the Lender for
      the purpose of enforcing its rights hereunder, to the extent not prohibited
      by
      law, including, without limitation: costs of foreclosure; costs of obtaining
      money damages; and a reasonable fee for the services of internal and outside
      attorneys employed or engaged by the Lender for any purpose related to this
      agreement (but without duplication of cost for the same services), including,
      without limitation, consultation, drafting documents, sending notices or
      instituting, prosecuting or defending litigation or any proceeding, all such
      costs shall bear interest at the highest per annum rate applicable to any of
      the
      Liabilities, but not in excess of the maximum rate permitted by
      law.

    

    (b) Debtor
      agrees that upon an Event of Default the Lender may dispose of any of the
      Collateral in its then present condition, that the Lender has no duty to repair
      or clean the Collateral prior to sale, and that the disposal of the Collateral
      in its present condition or without repair or clean-up shall not affect the
      commercial reasonableness of such sale or disposition. The Lender’s compliance
      with any applicable state or federal law requirements in connection with the
      disposition of the Collateral will not adversely affect the commercial
      reasonableness of any sale of the Collateral. The Lender may disclaim warranties
      of title, possession, quiet enjoyment, and the like, and Debtor agrees that
      any
      such action shall not affect the commercial reasonableness of the sale. In
      connection with the right of the Lender to take possession of the Collateral,
      the Lender may take possession of any other items of property in or on the
      Collateral at the time of taking possession, and hold them for the Debtor
      without liability on the part of the Lender. Debtor expressly agrees that Lender
      may enter upon the premises where the Collateral is believed to be located
      without any obligation of payment to the Debtor, and that the Lender may,
      without cost, use any and all of Debtor’s “equipment” (as defined in the UCC) in
      the manufacturing or processing of any “inventory” (as defined in the UCC) or in
      growing, raising, cultivating, caring for, harvesting, loading and
      transportation of any of the Collateral that constitutes “farm products” (as
      defined in the UCC). If there is any statutory requirement for notice, that
      requirement shall be met if the Lender sends notice to the Debtor at least
      ten
      (10) days prior to the date of sale, disposition, or other event giving rise
      to
      the required notice, and such notice shall be deemed commercially reasonable.
      The Debtor is liable for any deficiency remaining after disposition of the
      Collateral. 

    

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    (c) The
      proceeds of any sale or other disposition of Collateral authorized by this
      agreement shall be applied by Lender first upon all expenses authorized by
      the
      UCC and all reasonable attorneys fees and legal expenses incurred by Lender;
      then the balance of the proceeds of the sale or other disposition shall be
      applied to the payment of interest on the Liabilities, then to the payment
      of
      principal on Liabilities, then any remaining proceeds shall be paid over to
      Debtor or to such other person(s) as may be entitled to it under applicable
      law.
      Debtor shall remain liable for any deficiency, which shall be due to Lender
      immediately upon demand. Debtor agrees that Lender shall be under no obligation
      to accept any noncash proceeds in connection with any sale or disposition of
      Collateral unless failure to do so would be commercially unreasonable. If Lender
      agrees in its sole discretion to accept noncash proceeds (unless the failure
      to
      do so would be commercially unreasonable), Lender may ascribe any commercially
      reasonable value to such proceeds. Without limiting the foregoing, Lender may
      also apply any discount factor in determining the present value of proceeds
      to
      be received in the future or may elect to apply proceeds to be received in
      the
      future only as and when such proceeds are actually received in cash by
      Lender.

    

    (8)  
        Miscellaneous.
      

    

    (a) Where
      the
      Collateral is located at, used in or attached to a facility not owned by the
      Debtor, the Debtor will use commercially reasonable efforts (which shall not
      be
      deemed to require Debtor to pay the applicable lessor or other applicable party
      to obtain the applicable subordination other than reimbursement of such parties’
out of pocket expenses) to obtain from the lessor, or other appropriate party,
      a
      consent to the granting of this security interest and a subordination of the
      lessor’s interest in any of the Collateral, in form acceptable to the Lender.

    

    (b) At
      its
      option the Lender may, but shall be under no duty or obligation to, discharge
      taxes, liens, security interests or other encumbrances at any time levied or
      placed on the Collateral, pay for insurance on the Collateral, and pay for
      the
      maintenance and preservation of the Collateral, and the Debtor agrees to
      reimburse the Lender on demand for any payment made or expense incurred by
      the
      Lender, with interest at the maximum legal rate. 

    

    (c) No
      delay
      on the part of Lender in the exercise of any right or remedy shall operate
      as a
      waiver, no single or partial exercise by the Lender of any right or remedy
      shall
      preclude any other exercise of it or the exercise of any other right or remedy,
      and no waiver or indulgence by the Lender of any default shall be effective
      unless in writing and signed by an authorized officer of the Lender, nor shall
      a
      waiver on one occasion be construed as a waiver of that right on any future
      occasion or a waiver of any other right. 

    

    (d) The
      Lender shall not be required to marshal any present or future collateral
      security (including this agreement and the Collateral) for the Liabilities
      or
      any of them or to resort to such collateral security or other assurances of
      payment in any particular order. To the extent that it lawfully may, the Debtor
      hereby agrees that it will not invoke any law relating to the marshaling of
      collateral which might cause delay in or impede the enforcement of the Lender's
      rights under this agreement or under any other instrument creating or evidencing
      any of the Liabilities or under which any of the Liabilities is outstanding
      or
      by which any of the Liabilities is secured or payment thereof is otherwise
      assured, and, to the extent allowed by applicable law, the Debtor irrevocably
      waives the benefits of all such laws.

    

    (e) If
      any
      provision of this agreement is invalid, it shall be ineffective only to the
      extent of its invalidity, and the remaining provisions shall be valid and
      effective. 

    

    (f) Notice
      from one party to another relating to this agreement shall be deemed effective
      if made in writing (including telecommunications) and delivered to the
      recipient’s address, telex number or telecopier number set forth above by any of
      the following means: (i) hand delivery, (ii) registered or certified mail,
      postage prepaid, with return receipt requested, (iii) first class or express
      mail, postage prepaid, (iv) Federal Express or like overnight courier service
      or
      (v) telecopy, telex or other wire transmission with request for assurance of
      receipt in a manner typical with respect to communications of that type. Notice
      made in accordance with this section shall be deemed delivered on receipt if
      delivered by hand or wire transmission, on the third business day after mailing
      if mailed by first class, registered or certified mail, or on the next business
      day after mailing or deposit with an overnight courier service if delivered
      by
      express mail or overnight courier. 

    

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

       

    

    (g) To
      the
      extent that any of the Liabilities is payable upon demand, nothing contained
      in
      this agreement shall modify the terms and conditions of those Liabilities nor
      shall anything stated in this agreement prevent Lender from making demand,
      with
      or without notice and with or without reason, and whether or not a default
      has
      occurred, for immediate payment of any or all of those Liabilities at any
      time.

    

    (h) All
      rights of the Lender shall inure to the benefit of the Lender’s successors and
      assigns; and all obligations of the Debtor shall bind the Debtor’s heirs,
      executors, administrators, successors and assigns. If there is more than one
      Debtor, their obligations are joint and several. 

    

    (i) The
      Debtor shall pay or reimburse the Lender for all reasonable costs, fees and
      expenses incurred by the Lender or for which the Lender becomes obligated in
      connection with the enforcement of this agreement, including reasonable
      attorneys' fees of counsel to the Lender, which shall also include attorneys'
      fees and time charges of attorneys who may be employees of the Lender of any
      of
      it subsidiaries or affiliates, plus costs and expenses of such attorneys or
      of
      the Lender; search fees, costs and expenses; and all taxes payable in connection
      with this agreement. The Debtor shall pay any and all stamp and other taxes,
      UCC
      search fees, filing fees and other costs and expenses in connection with the
      execution and delivery of this agreement to be delivered hereunder, and agrees
      to save and hold the Lender harmless from and against any and all liabilities
      with respect to or resulting from any delay in paying or omission to pay such
      costs and expenses. That portion of the Liabilities consisting of costs,
      expenses or advances to be reimbursed by the Debtor to the Lender pursuant
      to
      this Agreement which are not paid on or prior to the date hereof shall be
      payable by the Debtor to the Lender on demand. If at any time or times hereafter
      the Lender: (i) employs counsel for advice or other representation (A) with
      respect to this agreement, (B) to represent the Lender in any litigation,
      contest, dispute, suit or proceeding or to commence, defend, or intervene or
      to
      take any other action in or with respect to any litigation, contest, dispute,
      suit, or proceeding (whether instituted by the Lender, the Debtor, or any other
      party) in any way or respect relating to this agreement, or (C) to enforce
      any
      rights of the Lender against the Debtor or any other party under of this
      agreement; (ii) takes any action to protect, collect, sell, liquidate, or
      otherwise dispose of any of the Collateral; and/or (iii) attempts to or enforces
      any of the Lender's rights or remedies under this agreement, the reasonable
      costs and expenses incurred by the Lender in any manner or way with respect
      to
      the foregoing, shall be part of the Liabilities, payable by the Debtor to the
      Lender on demand.

    

    (j) A
      carbon,
      photographic or other reproduction of this agreement is sufficient, and can
      be
      filed as a financing statement, The Lender is irrevocably appointed the Debtor’s
      attorney-in-fact to execute any financing statement on Debtor’s behalf covering
      the Collateral. 

    

    (k) The
      terms
      and provisions of this security agreement shall be governed by Michigan law.
      

    

    (9)   
 Information
      Sharing.
      The
      Lender may provide, without any limitation whatsoever, any information or
      knowledge the Lender may have about the undersigned or any matter relating
      to
      this agreement and any related documents to any of its subsidiaries or
      affiliates or their successors, or to any one or more purchasers or potential
      purchasers of this agreement or any related documents, and the undersigned
      waives any right to privacy the undersigned may have with respect to such
      matters. The Debtor agrees that the Lender may at any time sell, assign or
      transfer one or more interests or participations in all or any part of its
      rights or obligations in this agreement to one or more purchasers whether or
      not
      related to the Lender. 

    

    (10)  
         WAIVER
      OF JURY TRIAL. THE
      LENDER AND THE DEBTOR, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT
      WITH COUNSEL, KNOWINGLY AND VOLUNTARILY AND FOR THEIR MUTUAL BENEFIT WAIVE
      ANY
      RIGHT EITHER OF THEM HAVE TO A TRIAL BY JURY IN ANY PROCEEDING (WHETHER SOUNDING
      IN CONTRACT OR TORT) WHICH IS IN ANY WAY CONNECTED WITH THIS OR ANY RELATED
      AGREEMENT, OR THE RELATIONSHIP ESTABLISHED UNDER THEM. THIS PROVISION MAY ONLY
      BE MODIFIED IN A WRITTEN INSTRUMENT EXECUTED BY LENDER AND THE DEBTOR.

    

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    

      
        	
                Dated:  September
                  25, 2008

              	
                Debtor:

              
	 	 	 
	 	 	
                ADVANCED
                  PHOTONIX, INC.

              
	 	 	 
	 	 	
                By:

              	
                /s/
                  Richard D. Kurtz

              	
              
	 	 	
                SIGNATURE
                  OF

              
	 	 	 
	 	 	
                Its:

              	
                CEO
                  and President

              	
              
	 	 	
                TITLE
                  (If applicable)

              

      

    

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    SCHEDULE
      OF COLLATERAL LOCATIONS

    

    
      	 	
              1.

            	
              1240
                Avenida Acaso

            

      	         	 	
              Camarillo, California 93012 

              (Ventura County)

            

       

    

    
      	 	
              2.

            	
              Bell
                Electronics

            

      	 	 	
              No.
                8 Carmelray Industrial Park 1

              Canlubang,
                Calamba, Laguna, 4217
                Philippines 

            

    

    

      
        
          
          

        

        
          11

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