Good day everyone and welcome to Advanced Photonix fourth quarter and year end earnings conference call. Today’s conference is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. Richard Moyer of Cameron Associates.

Thank you. Before we start I would just like to remind everyone that this conference call contains forward-looking statements. All forward-looking statements involve known and unknown risks including without limitation the risks detailed in the company’s filings and reports with the Securities and Exchange Commission. Such statements are only predictions and actual results may differ materially from those projected. Please see our press release from today and our periodic reports filed with the Securities and Exchange Commission for our full statement of such risk factors. On today’s call we’ll hear first from Rob Risser, CFO of Advanced Photonix and then Rick Kurtz will discuss the business of company. Let’s first turn it over to Rob. Go ahead Rob.

Thank you Dick. Thank all of you for joining us this afternoon. I’d like to review just briefly a few financial highlights from our fourth quarter 2008 and fiscal year end. Then I’ll turn the call over to Rick for an update on business activities. This past year marked a year of transition for API from cost reduction and product development the past few years to revenue and profit growth as we entered fiscal 2009. The company’s revenues were essentially flat for fiscal 2008 in line with revised third quarter guidance. Revenues were $23.2 million a slight decrease of 1.6% from prior year revenues of $23.6 million. This decrease was primarily the result of delays in telecommunication and defense product shipments from fiscal 2008 and pushed into fiscal 2009. Telecommunication sales of $5.3 million, a decrease of $501,000 or 8.6% from 2007. This decrease was the result of suspension of shipments of our 10 gauge APD receiver products due to a product redesign driven by new market requirements or specifications combined with the delay in the production ramp of our 40 gig products due to customer supply chain delivery issues. At the end of our fourth quarter our customers release their product into the market and as a result we started shipping production volumes of our 4 GHz product offerings. Industrial testing and non [inaudible] market revenues were flat at $10 million in fiscal 2008, a slight decrease of less than 1% from 2007. Revenues would have been approximately $1 million higher had the company not closed our Wisconsin facility. As a result of closing our Wisconsin facility the company decided not to transfer the low value added contract manufacturing part and experienced manufacturing delays during the transfer of production from the Wisconsin facility to our California facility. Aerospace market…

Thank you Rob. Good afternoon everyone and thank you for joining us on the call today. This past year marked a year of transition for API, one from cost reduction and product development for the past few years to revenue and profitable growth as we enter FY09. Fiscal 2008 was a year of some success, unexpected surprises and delays but overall making substantial progress in positioning API for growth in our three product platforms. Our plan had called for the completion of cost reduction and product development initiatives during the first half of the year that would drive revenue growth and profit building in the second half of the year. Cost reduction savings were to come through the closing of our Wisconsin facility and the consolidation and upgrade of our three wafer fabrication facilities into one located in Ann Arbor, Michigan. Revenue growth was to come from investment and product development within two of our product platforms serving high growth markets; high speed optic receivers for the telecommunication market and terahertz instrumentation for the industrial quality control market. In addition we needed programs to strengthen our balance sheet and increase our institutional shareholder base. While the year was full of accomplishments moving us toward these goals we also had a few set backs. We made substantial progress in our cost cutting consolidation efforts. However, it took longer and cost more than we had originally estimated. Whether these cost cutting initiatives were largely completed during fiscal 2008 we still need to complete the closing of our California fabrication clean room in FY09. Product development of our next generation client side 40 gig high speed optic receivers were completed during the year. However, delays from our customers experiencing in introducing their products to the market had an effect of delaying our revenue…

(Operator Instructions) The first question comes from the line of John Daley – [IND].

Listen, I have 2-3 little fast questions. Will it be profitable for this fiscal year, 2009?

Yes.

I thought so. I don’t see how we could not be. So your feeling is we would definitely be profitable unless there is a catastrophe?

Yes.

Could I ask you, do you think the 25% is kind of low-balling your increase in sales?

I don’t want to be accused of sand bagging, John, really.

Could we say 30%?

One of the things we want to make sure we do is we don’t miss the mark again for unexplained recurrences. Now this year we thought we would grow by that number and we thought it was very realistic. We got caught unawares and so we are not going to make that same mistake twice. As a result we are saying 25%. We have pretty good visibility the first six months of the year so we still are very, very confident of that number.

Myself I am looking more towards 30 and above. How many HSOR’s have sold in the quarter that just ended today?

That’s a tough one to answer because again we just started ramping. We have an idea of what the number is and we are very pleased about it but we don’t have an absolute number today. We can get into that after we have cleared our first quarter.

When are you going to do the first quarter? Some time in August?

Unfortunately we have got the 45 days; we have always used 45 days, so August 12 is probably going to be the next conference call.

One more question. What is the actual number of employees you have today?

It varies a little bit because we do have a lot of temp employees. We bring a lot in on a temporary basis and we go through a 90-day review period. I think direct employees the last count was 146 or thereabouts and then we have somewhere between 20 or so temporary employees that are funneling through or evaluating.

How many did you have last year at this time?

Probably about the same amount, even with the…I’d have to check. I think about the same amount. I think we are down…

Counting temp employees we are down 15 from last year.

That just happened with the consolidation of Wisconsin obviously…and with the leveraging of overhead is going to come this year.

So you shut that down and you got rid of some employees but you kept maintaining actually the same number which means you increased in both places I would assume?

No, we haven’t maintained…when you count temporary employees to temporary employees we are down by about 15 to 17 employees.

But that just, again, comes from the consolidation.

The next question comes from the line of Mike Haymaker – No Company Given.

My first question is around the de-leveraging of the balance sheet as opposed to the forecasted increase and advances around cost of sales and R&D and that kind of stuff. Is that going to wash each other out or are we going to come out ahead on that?

Well we come out substantially ahead. When you look at the balance sheet we will eliminate approximately $2 million worth of interest expense and of course our non-recurring expenses for the wafer fabrication and the closure of the Dodgeville facility are about $1.8 million this year and we are forecasting that those non-recurring expenses will be eliminated in FY09. However we will have about $400,000 of those expenses in FY09. So we will pick up about $1.4 million in these non-recurring expenses and another $2 million in interest expense from this so you are talking $3.4 million.

And that will start in the first quarter?

Yes.

So that should be a nice push for us I would think.

Yes.

I think I noticed you had borrowed about $1.3 million. I was curious if you could just give us an explanation of what that was for?

We typically as volumes ramp a little bit we typically draw on our lines for working capital and that moves up and down during the month. So, we borrowed $1.3 million on our working capital line of credit. Usually that is based on receivables and inventory findings. That fluctuates constantly throughout the year.

As you become more profitable then we won’t have to worry about burning through cash or anything like that?

Right. Our cash burn last year…2/3 of our cash burn came from these non-recurring activities and 1/3 came from the lower profit margin we had one the mix of products without those in revenue but the latter has been eliminated going forward and so we are feeling like we are EBITDA and cash positive.

On the Sandia Labs sale, we were wondering if you could just give us a little more color on what that is about and what areas are going to be doing research with the T-Ray 4000 and…

We, especially with government labs they are pretty secretive, so they don’t tell us everything they are going to do and the things they do tell us they are going to do we are under non-disclosure obligations. So, I just look at the things that Sandia historically does and you probably can get some pretty good guesses.

Can you say anything about a sense of timing on when something commercial might come out the other end of that?

It is hard to tell on that. We view…we have two markets really for the T-Ray 4000. One is the research and development market where they are working on applications. The others are industrial kind of quality control markets where we are actively engaged with the customer on developing their applications for deployment along the line of quality control. Sandia falls into the former, the R&D market, working on applications. However we don’t have a direct involvement on what those are and so it is very difficult for us to predict when that might turn into any kind of a volume application.

For any resulting intellectual property would you have some right to use it or would it be Sandia’s only?

If we weren’t involved at all and they were just using our piece of equipment they would have that right for that application although obviously they would need to use our equipment in those cases. But we would not have any rights to their intellectual property. When we…new intellectual property that would be developed they solely were developing that or intellectual property where we jointly develop it with people and we do that in many cases also, we do have rights.

I thought that was the case for Sandia. It sounds like it is not.

No it is not.

They are doing their own thing with it?

They are doing their own thing.

Did you sell one to Rice University as well?

Well we have gotten an order, yes. That is right. That is Dan Middleman of Rice University who is one of the authors that kind of wrote the book on terahertz.

Can you tell us anything about what that looks like?

Well Rice University is a leader. Dan Middleman was infinitely involved in the development of terahertz technology while at Roosevelt Laboratories and then started his own application development program as he transitioned to Rice University. So he is very active and prolific in the field, one of the premier names in the academic circles. We are involved in having a lot of relationships with Dan, full relationships on application development.

So potentially it could be an application that might come out that you would have some property rights to?

Yes.

You talked about ramping up production for the T-Ray in FY09. Can you give us a sense for what kind of capacity you want to get to?

Overall our goal is to try to get to a target of somewhere between 8-12 systems on an annual basis this fiscal year. So that is kind of our goal that we have set for ourselves and we have been pretty pleased with the initial response on the orders from the R&D facilities out there. So we think that is a [inaudible] but again we’ll have to wait until later in the year to confirm it.

Our capacity, as we have talked previously in the current facility that we have we believe we would have capacity…physical capacity not manpower capacity right now for about 50 other units before we would have to have physical facilities.

So if there is a commercial application that pops up this year you could do about 50 without having to expand?

That’s right.

On the beta gauge outlook can you give us any sense for what will happen in FY09 in terms of the beta gauge contract?

I think the thing to look at on the beta gauge is we have got the window to complete the development of that. Beta gauge is what I refer to as a simplified version of the 4000 because they are only looking for a couple of different capabilities that the 4000 has. So that going in and building that first commercial box and then trying to establish the price point that makes it marketable because again beta gauge has a much lower price point today but has longer total operating cost because it includes the security disposal and potential hazard that it is because it is a radioactive gauge that is another aspect. So I would expect we would be nearing the completion of the project I think it actually runs over to next fiscal year. So we probably won’t have any definitive answers on that until 2010.

To add to that a little bit this is really a market development phase for us. The product development phase is really more of a cost reduction phase. So this year I would look more for our market development with industry partners.

I’m sorry, so what comes first? Product development or market development?

Market development. You can use the T-Ray 4000 to develop the market but you can’t really exploit it until you have got the reduced cost of production.

Again, the T-Ray 4000 can do it, it just is very pricey to do it or you can demonstrate how you can do it with it or how you can replace it but you can’t actually sell any units until you actually go through that commercialization. So you have to develop the market. You have to get somebody interested whether it be Honeywell or ADB out there that says that they want to partner with us.

So I wouldn’t expect substantial sales revenue from beta gauge application in FY09.

So FY09 is for market development and then product development would be 2010?

No, product development would also be in FY09.

So we can actually see some revenue from it in 2010?

Right. That would be it.

The next question comes from the line of Matthew Kempler – Potomac Capital.

I wanted to go over a couple of pieces here. The first is when we talk about last year and the shortfalls we had it was tied to production delays from clients or order delays from clients, their own issues, and then your own manufacturing delays that you consolidated in both facilities. I want to get an idea of how close we are to being able to fire on all cylinders at this point? If you can review again…just break it down by product side, what products are now fully being ordered and what products we are still waiting for to be fully released and then on the manufacturing side where are you fully capable and where are we still waiting to be fully developed?

Let me break it out into two areas. First of all I think you will start to see us firing on all cylinders out of the gate as we say. Secondly as far as each product platform I’ll start with the California, our opto solutions group is just starting so it still has some more work to do relative to the consolidation on the microfab but they have very strong backlog in revenue so they are positioned very good. Once we do the closure with microfab it will help us with the gross margin aspect more than anything. When you talk about the high speed optic receiver, the release of the 40 gig product into production now from a customer point of view has been very rewarding. Again we thought it was going to happen six months ago and it has happened now so we are very excited about that. We really haven’t seen a large increase in the 10 gig area but right now all our focus is on trying to make as many 40 gig’s as we can get out the door in time. Then with the terahertz we are very pleased with the revenues and orders we have received in the first quarter from all the R&D houses and we expect that to continue. So again I think you’ll see from our perspective we know the first half is going to be very strong for us and as we get through closer to the second quarter we will be able to see into the third quarter and fourth quarter even more clearly.

I just wanted to touch on your visibility because we started off last year with a pretty robust growth forecast and the business came in flat. I know a lot of that was out of your control and some of it was within your control. Now this year we have another nice robust forecast for the year. What is your visibility even into the first half?

We have a great standby product line so the opto solutions we actually have a very strong backlog. The lead times are longer associated with that custom business and a lot of our customers are military who give us yearly contracts. So as a result we have excellent visibility on that product platform.

Versus your own budget for this year? 70% visibility or more?

I’d say more like 80%.

We are pretty confident. So we are pretty high on that one. Now on the high speed optic receivers again we’ve got great clarity through the first two quarters but because of the short lead time and everybody is trying to manage that supply chain so tightly with regards to delivery the clarity we have really drops off after that fifth and sixth month for us. So we have to wait until it rolls over to get that clarity.

We have good visibility in terms of design wins in those sectors but not in terms of backlog, Matt. But in terms of the first half of the fiscal year for all three product platforms we have got good visibility and our guidance is not rear end loaded. That 25% revenue guidance.

That’s probably an important consideration. I did mention on the conference call before this that this is not a hockey stick for us. This is supposed to be the first half versus the second half being just slightly better in the second half. Not a lot. So we’re really expecting this not to be a hockey stick and saying what is going to happen next quarter, next quarter? We’ll start seeing that very quickly.

You said you expect about $[inaudible] of additional consolidation expense in fiscal 2009. Did that already happen in June or is that in the June quarter or is that ongoing?

That is ongoing. A fraction of that happened in the June quarter and it is all related to the shut down of the California facility.

So we will continue to experience that. Again, our goal is to try to get the California facility shut down by the end of the calendar year and then 100% of the production out of Ann Arbor.

So you should see somewhere in 1/3 of that number in the first quarter.

By the end of calendar 2008 you expect to be fully consolidated and at full production in your new facilities?

Yes. Right now we are at full production in the new facility for both the terahertz, the high speed optical receivers and the products that were semi conductors manufactured in Wisconsin. So the only thing that isn’t yet manufactured here in microfab are the semi-conductors that are being manufactured in California and that process is now part way through the transition. Once it is completed we parallel things for about two months and then we shut down the California operation and go live. So we think those duplicate costs for the fiscal year will amount to about $400,000 spread roughly equally between the first and second quarters.

Tagging on to that I guess the company’s target of approaching a 50% gross margin this year. Walk us through the components of that in a little bit more detail. How much of that is from just pure ramp of terahertz revenue and high speed optical receiver revenue…how much of that is from actual cost reduction?

I don’t have the exact numbers right in front of me Matt but obviously I have a pretty good idea. I’ll say about half of it. Could be slightly more comes from product mix of those more technology oriented products, the high speed optical receivers and terahertz. However, we do get a reasonable amount now flowing through as the result of our cost reduction with the closure of the Wisconsin facility. We have really not seen anything yet from the wafer fab consolidation because we haven’t really eliminated any of those expenses in California for the second micro fabrication facility.

But you are targeting getting close to 50% before getting that?

Yes, real soon.

Will we see substantial gross margin improvement in the June quarter?

Yes you will.

The last thing I wanted to touch on going back to the terahertz I think you mentioned in your comments you expected one or more of your development applications to commercialize in fiscal 2009? I was hoping you could elaborate a little bit on that.

That’s right. Well, we have several that we have talked about over the last year or so that we have been working on and we believe one of those will gain traction and will actually start the process of moving into the manufacturing period for quality control. Those as you recall we have spoken about pharmaceutical in the past. We have spoken about petrochemical in the past and you also have, although we’d be surprised if we actually got the design wins by the end of the fiscal year for the beta gauge replacements. Those would be three of the many or more likely candidates.

If that happens you will be going back to your capacity constraints?

If that happens we still don’t believe that because those wouldn’t necessarily be happening where we would actually be shipping those in the first half of the fiscal year. If that would happen that would be more of a second half of the fiscal year ramp up and none of the terahertz numbers we have talked about anticipates that in the guidance we have given so we have a capacity of 50 units we will be able to handle any of that capacity in this fiscal year.

The next question comes from the line of Edward Perry – No Company Given.

Your emphasizing activities in the opto solutions group and it sounds to be a lot more than just government contracts because you are doing new hires and sales and marketing. This is relatively new in the sense of the way you are emphasizing it. What do you foresee coming out of this in terms of revenue growth?

We talk about our markets that we serve and so it is a little bit more difficult to talk about specifically the different areas but the opto solutions group if you take a step back in history was comprised of a mini roll up strategy from three different companies that we had to put together to get enough revenue to start with but then we needed the next step just to start trying to create more value added in engineering skills into that group. So one of the things that we are looking at is where else can we take advantage of that relative to that custom business. Again we talk about having silicone wafer fabrication facility but we actually do other materials when we talk about that portion of business. Because again it is more of a custom business. We’ll call it low to mid volume so it is not really chasing after the cell phone market but at the same time when we could probably get to the 10,000 or 100,000 pieces annually and not really have to be forced offshore in a lot of cases. So we want to make the investments there. Now that we have got it right sized with regards to manufacturing space and facility we do want to make the investments necessary there to continue the differentiation of API in the market place by being a lean technology provider.

The markets themselves are moderate growth markets but we need to make sure we will have products available for the next design win. The design wins there last quite some time. We want to make sure we are ready for the next design wins. That is the strategy. It is not a strategy of growing at 20-30%. It is a single digit growth market that we are in there.

But it is steady revenue though.

That is correct. That is the reason it is a strong foundation for us to build upon because it is more of an annuity. It is steady. It can grow in the single digits for us and we need to make sure we can continue to feed that growth with the necessary support activities.

You mentioned you were dropping product lines. What type of lines were you talking about?

Yes. That was a contract manufacturing job that was taken that had very little content, value added content from our semi conductor point, so as a result it was just direct labor assembly. It really doesn’t fit the model that we are trying to go after today. It was something they did in Wisconsin that again we didn’t want to make the move with that manufacturing to our Camarillo facility because it would take up a lot of room and it really didn’t have the gross margin that we wanted to target.

The next question comes from the line of Mike Haymaker – No Company Given.

A couple of questions from our friend Randy who is in Mexico on vacation so he asked me to ask for him. There are two or three that are in the same bank so I’ll just try and consolidate them. Basically I think some of us are a little frustrated that some things happened with API that were we thought press worthy and we think it is always good to get some attention for the company. For instance when the T-Ray 4000 shipped to NASA and some of the other things that have happened. We are wondering if in the next fiscal year there will be a more concerted effort to communicate regularly with the market through press releases and just to try to…it sounds like the outlook is looking good for the company it might be the right time to put a little more focus on that kind of thing too.

We really do take it to heart when people ask us to talk more and talk about the company more. The difficulty that we find ourselves in is we want to make sure it is press worthy, number one. So it is a significant event. We are a publicly held company. We could get accused of over-reaching some things. So we are pretty cautious about that. At the same time we did come out with the press releases…they are governed by a couple of things. Number one we do have a lot of NDA’s that we have to be careful of so sometimes we can talk about something but we can’t name the customer, name the application so we have to be cautious of that. Secondly is $100,000 sale a good thing? Well it is but is it noteworthy? That is the reason we kind of tried to establish a threshold that if it is a couple terahertz systems or if it is a $1 million type of contract that is very noteworthy and we need to get the word out.

I guess we would think that maybe it is not always a matter of the size of the contract but if it is the first contract or a notable customer like NASA I think there are some qualitative things that could be press worthy as well. Just something maybe you guys could consider in the future.

Absolutely and we will take it to heart.

The other question was, and you alluded to this a little bit, but is there any more update or color you can give us around the Glaxco Smith Kline stuff and the oil consortium? Do you stay in touch with those things? Is there any kind of…?

Daily. So it is tough to give an update because you are talking a little bit out of school if you talk about anything because nothing is signed, sealed or delivered. We are in communication with them every day basically to try and continue to move the program along. There is more than GSK out there interested in it so we are pursuing all the pharmaceutical industry and sometimes it may not be the first guy we mention that will get it. It may be somebody else who will eventually come in with that first application.

That 25% bump in revenues next year that didn’t include a big T-Ray sale, right?

Again we’re talking about trying to get that 8-12 next year as a good target for ourselves. I don’t think anybody has sold that many units in the world so therefore as far as a single year goes I think we had 4-5 in one fell swoop originally.

We don’t have any of the applications themselves rolling out in the numbers we have given in our guidance.

But that guidance does anticipate 8-12 more units being sold next year?

Yes we are pretty comfortable with that.

Gentlemen there are no further questions at this time.

Well I don’t have anything other to add than to thank everybody for taking the time to listen to our report today. I appreciate and for our entire team we appreciate your continued support of our company. We are very focused on building shareholder value for all our shareholders. Have a great week and thank you again.

That does conclude today’s conference call. We appreciate your participation.