Continuing Security Agreement

Advanced Photonix, Inc. (the “Debtor”)

Taxpayer ID. No.:_________________________     

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

(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

(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;

(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;

(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 en