DEBT CONVERSIONAGREEMENT

     This Debt Conversion Agreement (this “Agreement”) is entered into as of May 12, 2010 (the “Signing Date”) by and among Picometrix, LLC (formerly known as Picotronix, Inc. doing business as Picometrix, Inc.), a Delaware limited liability company whose address is 2925 Boardwalk Drive, Ann Arbor, Michigan 48104 (the “Company”), Advanced Photonix, Inc., a Delaware corporation, whose address is 2925 Boardwalk Drive, Ann Arbor, Michigan 48104 (“API”), and the Michigan Economic Development Corporation, a public body corporate, whose address is 300 North Washington Square, Lansing, Michigan 48913 (the “MEDC”). The Company, API and the MEDC may be referred to individually as “Party” or collectively as “Parties.”

     WHEREAS, pursuant to that certain Loan Agreement dated as of September 15, 2004 (the “2004 Loan Agreement”) by and between the Company and the MEDC, the MEDC made available to the Company a line of credit up to an aggregate principal amount of One Million Twenty Four Thousand Five Hundred Twenty Six Dollars ($1,024,526) pursuant to a Promissory Note (Line of Credit) dated as of September 15, 2004 (the “2004 Note”), as amended. The 2004 Loan Agreement and 2004 Note are collectively referred to as “2004 Loan Documents”;

     WHEREAS, upon the Closing Date, the MEDC and the Company desire to execute and deliver to each other an Amendment Three to the 2004 Loan Documents (“Amendment Three”), the Company desires to execute and deliver to the MEDC the Third Amended and Restated Promissory Note made part of Amendment Three (the “New Note”), and API desires to execute and deliver to the MEDC an unconditional and irrevocable Guaranty of the payment and performance obligations of the Company under this Agreement and the 2004 Loan Documents, as amended, (the “Guaranty Agreement”);

     WHEREAS, in addition to the execution and delivery of Amendment Three by the MEDC and the Company, the execution and delivery of the New Note to the MEDC by the Company, and the execution and delivery of the Guaranty Agreement by API to the MEDC, the MEDC and the Company, agree to convert, upon the Closing Date, the accrued and unpaid interest owing as of November 30, 2009 under the 2004 Note, in the amount of Three Hundred Twenty Four Thousand Six Hundred Sixty Nine and 20/100 Dollars ($324,669.20) (the “Interest Indebtedness”), into unregistered shares of Class A Common Stock of API at the price per share of Fifty Four Cents ($.54) (the “Conversion”);

     WHEREAS, as a result of the Conversion, the Class A Common Stock of API shall be issued to the MEDC, and the MEDC shall have the rights, privileges and preferences of a holder of Class A Common Stock of API in accordance with the API’s Certificate of Incorporation, as amended, a copy of which is attached as EXHIBIT A (“API’S Articles”);

     WHEREAS, the MEDC will have certain contractual rights and obligations with respect to its Class A Common Stock identical to those that are applicable to the holders of Class A Common Stock of API;

     WHEREAS, the Class A Common Stock of API to be issued pursuant to this Agreement will not be registered under and have not been registered under the Securities Act of 1933, as amended (the “Securities Act”).

     NOW THEREFORE, in consideration of the foregoing, and of the terms and conditions set forth in this Agreement, the Parties agree as follows:

     1. Execution and Delivery of Loan Documents. On the Closing Date, the Parties (as applicable) shall cooperate, and sign and deliver (a) Amendment Three, substantially in the form attached hereto as Exhibit B, (b) the New Note, substantially in the form attached to Amendment Three, and (c) the Guaranty Agreement, substantially in the form attached hereto as Exhibit C and all other documents reasonably necessary to effectuate the transactions contemplated therein.

     2. Conversion of Interest Indebtedness. On the Closing Date, the Company and API shall cause the Interest Indebtedness to be converted into Six Hundred One Thousand Two Hundred Thirty Nine (601,239) validly issued, fully paid and non-assessable unregistered Class A Common Stock of API (“Shares”). The Shares represent the equivalent of the conversion of the Interest Indebtedness divided by the price per share of Fifty Four Cents ($.54) of the Class A Common Stock of API, rounded down to the nearest whole share. On the Closing Date, API shall issue the Shares to the MEDC, and upon issuance of the Shares to the MEDC, the Interest Indebtedness shall be deemed cancelled and extinguished in its entirety.

          (a) The closing of the transactions contemplated hereby (the “Closing”) shall occur as soon as practicable, but no later than ten (10) business days (unless otherwise agreed to in writing by the Parties or terminated as provided under Section 8), after the date the MEDC has received from API, written notification, and copies, of both of the: (a) approval from NYSE Amex of the listing application submitted by API in connection with the Conversion (the “Approval”) and (b) consent (the “Bank Consent”) from The PrivateBank and Trust Company (the “Bank”) as required under that certain Loan Agreement, dated September 25, 2008, between API and the Bank.

          (b) The Company and API shall each within ten (10) business days after the Signing Date (unless otherwise agreed in writing by the Parties) take or cause to be taken such actions as may be required to request the Approval and the Bank Consent, and provide copies of the requests to the MEDC as soon as practical thereafter, but in no event later than five (5) business days thereafter. The Company and API shall thereafter use commercially reasonable efforts to cooperate to obtain the Approval and the Bank Consent, and the MEDC shall use commercially reasonable efforts to cooperate with the Company and API to provide additional information reasonably requested by the Company or API in their pursuit to obtain the Approval and Bank Consent. API shall promptly deliver to the MEDC copies of the Approval and the Bank Consent upon its receipt thereof.

          (c) Written notifications and copies required to be delivered by API to the MEDC under this Section 3 may be delivered by facsimile or by e-mail to the MEDC, to the attention of Linda R. Asciutto, fax: (517) 241- 5968, or ***@***, or to such other persons, fax numbers or e-mail addresses as may be provided.

     4. Grant of Put Option. In addition to any other provisions in API’s Articles, API grants and conveys to the MEDC the further right, to the extent permitted by Michigan Law, but not the obligation, (the “Put Option”) to sell back to API the Shares received by the MEDC pursuant to this Agreement (including without limitation, appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization of such stock) (collectively, the “MEDC Equity Interest”) in accordance with the following:

          (a) Definitions:

               (i) “Trigger Event” means any one or more of the following:

                    (1) when either the Company or API, or both, relocate substantially all of their respective current Michigan employees (exclusive of sales staff) or current Michigan operations outside of Michigan; or

                    (2) with respect to the Company or API, the occurrence of an event listed in MCL 125.2008c(4) for which grants or loans shall not be used.

               (ii) “Qualified Appraiser” means an independent appraiser qualified in valuing equity interests in companies selected by the MEDC and reasonably acceptable to API.

          (b) Exercise of Option. At any time during the one hundred twenty (120) calendar day period after notice of a Trigger Event (the “Exercise Period”), the MEDC shall have the option to exercise the Put Option by providing notice of this election to API (the “Notice of Option Exercise”). The Exercise Period shall not commence until API has provided written notice in reasonable detail of the facts and circumstances of the Trigger Event to the MEDC. In addition, the Exercise Period shall be extended indefinitely if API fails to provide information reasonably necessary for the MEDC to exercise its Put Option. The closing date for the sale of the MEDC Equity Interest to API shall be on a date mutually acceptable to the MEDC and API but in no event later than sixty (60) calendar days after API’s receipt of the Notice of Option Exercise (the “Put Closing Date”). In the event that the Put Option is not exercised during the Exercise Period, the Put Option shall immediately terminate and be of no further force and effect.

          (c) Purchase Price. The purchase price for the MEDC Equity Interest (the “Option Price”) shall be the Fair Market Value (as defined in this section) of the MEDC Equity Interest on the Put Closing Date. The “Fair Market Value” of the MEDC Equity Interest shall mean: (a) the average of the closing price of API’s Class A Common Stock traded on the NYSE Amex or any other then applicable public trading exchange during the seven (7) trading days immediately preceding the date of the Trigger Event; or (b) if subparagraph (a) does not apply, the Fair Market Value of the MEDC Equity Interest shall be as determined by a written appraisal of API obtained by API within the twelve (12) month period up to and including the Trigger Event from a qualified appraiser that the MEDC reasonably agrees qualifies for purposes of such valuation, a copy of which appraisal API provides to the MEDC; (c) if neither of subparagraphs (a) or (b) apply, the value of the MEDC Equity Interest shall be as established in an “arms-length” transaction between API and any unrelated third party in connection with the most recent equity investment in API occurring within the six (6) month period up to and including the Trigger Event; and (d) if none of subparagraphs (a), (b) or (c) apply, the Fair Market Value of the MEDC Equity Interest shall be determined by appraisal of API by a Qualified Appraiser, taking into account any and all discounts and premiums appropriate in the judgment of the Qualified Appraiser. Any fees or expenses incurred in connection with the appraisal under subsection (d) shall be borne and paid by the MEDC.

          (d) API’s Deliverables. On the Put Closing Date and upon API’s receipt of the deliverables set forth in Section 4(e), API shall: (a) deliver the Option Price (either by check or wire transfer as selected by the MEDC); and (b) execute and deliver to the MEDC such other documents and instruments as may be reasonably requested by the MEDC and its legal counsel (“API Deliverables”).

          (e) MEDC’s Deliverables. On the Put Closing Date, the MEDC shall: (a) execute and deliver to API a document, mutually agreeable to API and the MEDC, selling the MEDC Equity Interest to API, free and clear of all liens, claims and encumbrances; (b) deliver to API all original certificates evidencing the MEDC Equity Interest; and (c) execute and deliver to API such other documents and instruments as may be reasonably requested by API and its legal counsel.

          (f) Survival. This Section 4 shall survive the Closing; provided however, that if the MEDC Equity Interest is listed on a national securities exchange and can be sold without restriction under Rule 144 and any other applicable rule or regulation as promulgated under the Securities Act, as amended (“Securities Act’) this Section 4 shall have no further effect.

     5. Annual Progress Reports. For so long as MEDC holds stock of API, the Company and API shall on or before September 30 of each calendar year, cause submission of an annual progress report in the manner set forth for other reports due under the 2004 Loan Agreement, containing the following information:

          (a) The entity that has received funding, the amount received and the type of funding;

          (b) The number of new patents, copyrights, or trademarks applied for and issued by the Company and API;

          (c) The number of new start-up businesses created by the Company and API;

          (d) The number of new jobs created and projected new job growth of the Company and API;

          (e) Amounts of other funds received or leveraged so the Portfolio Manager can determine the amount the Company and API has leveraged from other sources for the project;

          (f) Money or other revenues or property returned by the Company and API to the investment fund;

          (g) The total number of new licensing agreements by institution and the number of new licensing agreements entered into by the Company and API with Michigan firms; and

          (h) Products commercialized by the Company and API.

     6. Company and API Representations and Warranties. As of the Signing Date and the Closing Date (unless otherwise specified below), the Company and API, jointly and severally, represent and warrant:

          (a) Organization. Each of the Company and API are duly organized, validly existing, and in good standing under the laws of the State of Delaware, and each are duly qualified and in good standing under the laws of the State of Michigan. Each has the organized power and authority to enter into and perform their respective obligations under this Agreement. The Company and API each have their respective principal offices and business operations and employees located within the State of Michigan. The sole member of the Company is API.

          (b) Authority. The execution, delivery and performance by the Company and API of this Agreement will not violate any material provision of law or any provision of the Company’s Certificate of Formation or operating agreement, or of API’s Articles or bylaws, or result in the breach of or constitute a default or require any consent (other than the Bank Consent) under, or result in the creation of any lien, charge, restriction, claim or encumbrance upon, any property or assets of the Company or API under any indenture or other agreement or instrument to which the Company or API is a party, or constitute a violation of any law, rule, regulation, order, judgment, or decree (including any federal and state securities laws and regulations and the rules and regulations of the NYSE Amex) by which the Company or API or either of its properties may be bound or affected. This Agreement is valid, binding, and enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, moratorium, reorganization or other laws or affecting the enforcement of creditors’ rights generally or by general principles of equity. API’s Articles have not been altered or amended, and API shall not alter or amend API’s Articles without the prior written approval of the MEDC if such alteration or amendment adversely affects MEDC in a manner different than the other holders of API’s Class A Common Stock.

          (c) Consents. All action on the part of the Company and API, their respective officers, directors, and managers, members, and shareholders necessary for the authorization, execution, delivery and performance of the Company and API under this Agreement have been taken by the Company and API, respectively. None of API’s Class A Common Stock is subject to any preemptive or similar rights held by other holders of any equity interest in API. Subject to the Approval, API is not in violation of the listing requirements of the NYSE Amex and has no knowledge of any facts which would reasonably lead to delisting or suspension of its common stock in the foreseeable future.

          (d) SEC Documents; Financial Statements. During the two (2) years prior to the Signing Date, API has filed, and for the period from and after the Signing Date through the Closing Date, and for so long as the MEDC Equity Interest is not free of restriction from transfer under Rule 144 and any other applicable rule or regulation as promulgated under the Securities Act, API shall file, all reports, schedules, forms, statements and other documents (“SEC Documents”) required to be filed by it with the Securities and Exchange Commission (“SEC”) pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (“1934 Act”). All SEC Documents filed have complied, and all SEC Documents to be filed as required hereunder shall comply, in all material respects with the requirements of the 1934 Act, and the rules and regulations of the SEC.

          (e) Full Disclosure. There are no undisclosed facts, which materially adversely affect or, to the best of the Company’s or API’s knowledge, are likely to materially adversely affect the properties, business, or condition (financial or otherwise) of the Company or API or the ability of the Company or API to perform their respective obligations under this Agreement.

          (f) Litigation or Other Proceedings. To the knowledge of the Company and API, and their respective officers, directors, and managers, except as otherwise publicly reported by API to the SEC under the 1934 Act, there are no suits or proceedings pending or threatened against the Company or API, before any court, governmental commission, board, bureau, or other administrative agency or tribunal, which, if resolved against the Company or API, as applicable, would have a material adverse effect on the financial condition or business of the Company or API or impair the Company’s or API’s ability to perform their respective obligations under this Agreement.

          (g) Compliance with Laws. To their respective knowledge, neither the Company or API are in violation of any laws, ordinances, regulations, rules, orders, judgments, decrees or other requirements imposed by any governmental authority to which either are subject and neither has failed to obtain any licenses, permits or other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective business, profits, properties or condition (financial or otherwise).

          (h) Capitalization; Fully Paid Stock; Taxes. The authorized capital stock of API is set forth in API’s Articles. The issued and outstanding shares of the stock, options (including granted and outstanding and remaining reserved options) warrants, and other convertible securities of API (not including the Shares to be issued to the MEDC under this Agreement) are set forth in API’s latest public filing required by the SEC to include such information. The securities to be issued with respect to the Shares and delivered in connection with the Conversion shall, at the time of such delivery, be validly issued and outstanding, fully paid and non-assessable, and free of restriction on transfer other than as provided by Rule 144 of the Securities Act. API will pay, when due and payable, all federal and state stamp, original issue or similar taxes, if any, which are payable in respect of the issuance of the Shares or certificates.

     7. Limited Transferability. MEDC acknowledges that the Shares have not been registered under the Securities Act and may be transferred only pursuant to an effective registration under the Securities Act or an exemption from the registration requirements of the Securities Act, and otherwise in compliance with applicable state securities laws. The certificate evidencing the Shares shall bear an appropriate legend with respect to any such restrictions on transfer.

          (a) As of the Signing Date and the Closing Date, the MEDC represents and warrants:

               (i) Organization. The MEDC is a public body corporate formed under an Interlocal agreement pursuant to the Urban Cooperation Act of 1967, as amended, primarily to promote economic development in the State of Michigan. The MEDC has the power and authority to enter into and perform its obligations under this Agreement.

               (ii) Consent. All consents and approvals necessary from any governmental authority as a condition to the execution and delivery of this Agreement by the MEDC or the performance of any of its obligations under this Agreement have been obtained by the MEDC.

     8. Investment Representations of MEDC. As of the Signing Date and the Closing Date (unless otherwise specified below), MEDC represents and warrants to the Company that:

          (a) the Shares to be acquired by MEDC will be acquired for investment for MEDC’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that MEDC has no present intention of selling, granting any participation in, or otherwise distributing the same;

          (b) MEDC does not presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Shares acquired under this Agreement;